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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 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:
KENTEK INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 3577 22-2406249
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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2945 Wilderness Place, Boulder, CO 80301
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 440-5500
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act: COMMON STOCK, $.01 PAR
VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes [X] No [ ]
(2) Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
On September 20, 1999, the bid and ask prices of the Common Stock were
$7.968 and $8.00, respectively. The aggregate market value of the voting stock
of the Issuer held by non-affiliates based on the average bid and ask prices on
September 20, 1999 was $15,063,588.
On September 20, 1999, 4,604,152 shares of the Registrant's
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy statement to be
filed not later than 120 days after June 30, 1999, in connection with the
Registrant's 1999 Annual Meeting of stockholders is incorporated by reference
into Part III of this Form 10-K.
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KENTEK INFORMATION SYSTEMS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I.
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Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to Vote to Security Holders 15
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Consolidated Financial Data 16
Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations 17
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 20
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37
PART III.
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and Management 38
Item 13. Certain Relationships and Related Transactions 38
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39
SIGNATURES 40
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THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K WHICH ARE
NOT HISTORICAL FACTS, INCLUDING, BUT NOT LIMITED TO, STATEMENTS FOUND IN ITEM 1
- - BUSINESS, ITEM 2 - NOTICE OF SPECIAL MEETING, ITEM-3 - INDUSTRY OVERVIEW AND
KENTEK STATUS, ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ARE FORWARD-LOOKING STATEMENTS OR
DISCUSSIONS OF TRENDS WHICH BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES THAT COULD SIGNIFICANTLY IMPACT EXPECTED RESULTS. ACTUAL FUTURE
RESULTS COULD DIFFER MATERIALLY FROM THOSE DESCRIBED IN SUCH FORWARD-LOOKING
STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY ARE THE RISKS AND UNCERTAINTIES DISCUSSED IN THIS ANNUAL REPORT,
INCLUDING THE PORTIONS REFERENCED ABOVE AND THOSE DESCRIBED FROM TIME TO TIME IN
THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, SUCH AS
SIGNIFICANT COMPETITION, INTERNATIONAL OPERATIONS AND CURRENCY FLUCTUATIONS,
RATE OF INSTALLED BASE EROSION, RAPID TECHNOLOGICAL CHANGE, DEPENDENCE ON KEY
CUSTOMERS AND AVAILABILITY OF ADEQUATE SOURCES OF SUPPLY.
PART I.
ITEM 1. BUSINESS
Kentek Information Systems, Inc. ("Kentek" or the "Company") is a
supplier of heavy-duty, high reliability, mid-range, non-impact laser printers
and related consumable supplies and spare parts. The mid-range market is
characterized by printers that print 30 to 60 pages per minute ("ppm") and
30,000 to 400,000 pages per month. The Company's printers are designed primarily
for high-volume printing requirements, including production printing
applications which include printing invoices, forms, payroll, direct mail and
check imaging. The Company was incorporated under the laws of the state of
Delaware in 1981. Its principal offices are located at 2945 Wilderness Place,
Boulder, CO 80301. On April 17, 1996, the Company completed its initial public
offering ("IPO") of 2,200,000 shares of its common stock at $8 per share. The
Company received $15,623,000 in proceeds net of offering costs of $1,977,000.
The Company is the exclusive manufacturer of consumable supplies for
its printers, with the exception of toner, which is manufactured exclusively for
Kentek to its specifications. Kentek estimates that its printers have an average
useful life of approximately seven years. Over the useful life of these
printers, the consumable supplies must be replaced several times each year under
normal use conditions and, consequently, sales of consumable supplies and spare
parts typically generate revenues in excess of three times the original cost of
the printer and represent approximately 85% of the total cost of ownership of
the printer.
Kentek currently sells its products to OEMs, system integrators, and
independent supplies resellers in the mid-range market. Kentek's customers
include BancTec, IBM Global Services, Lexmark, NCR, Oce Printing Systems,
Printer Systems International, Standard Register, Tally and Unisys. The Company
believes its product offerings compete on the basis of its high printer
reliability and the low total cost of ownership of its printers and consumable
supplies.
NOTICE OF A SPECIAL MEETING
A Special Meeting of Stockholders of Kentek Information Systems, Inc.
is scheduled to be held on October 28, 1999, at 9:00 a.m. at the offices of
Cooley, Godward LLP, 2595 Canyon Boulevard, Suite 250, Boulder, Colorado 80302.
The purpose of this meeting is:
1. To consider and vote on a proposal to approve and adopt a Merger
Agreement, dated as of May 14, 1999 between Kentek and KE
Acquisition Corp., pursuant to which KE Acquisition Corp. ("KE
Acquisition") will be merged with and into Kentek (the "Merger").
Pursuant to the Merger, each share of Kentek's common stock, $0.01
par value, issued and outstanding immediately prior to the
effective time of the Merger will be converted into the right to
receive $8.29 in cash, without interest, other than shares held by
Kentek as treasury stock, shares owned by KE Acquisition Corp.,
and shares as to which appraisal rights have been validly
exercised. Philip W. Shires, Kentek's president and Chief
Executive Officer and a member of Kentek's board of directors, is
the sole stockholder, officer and director of KE Acquisition Corp.
2. To transact other business as may properly come before the special
meeting or any adjournments of postponements of the special
meeting. Management is not aware of any other business.
Any stockholder who does not wish to accept the merger consideration of
$8.29 per share and who properly demands appraisal under Delaware law will have
the right to have the fair value of his or her shares determined by the Delaware
Chancery Court. This appraisal right is subject to a number of restrictions and
technical requirements described in the proxy statement distributed to Kentek's
stockholders on September 28, 1999 ("the, Proxy Statement").
Only stockholders of record as of the close of business on September
15, 1999 will be entitled to notice of the special meeting and to vote at the
special meeting and any adjournment thereof. Any stockholder will be able to
examine a list of holders of record, for any purpose related to the special
meeting, during the 10-day period before the meeting. The list will be available
at Kentek's corporate headquarters located at 2945 Wilderness Place, Boulder,
Colorado 80301. Approval and adoption of the Merger Agreement requires the
affirmative vote by at least a majority of the outstanding shares entitled to
vote at the special meeting.
COMPETITION AND KENTEK STRATEGY CHANGE
Prior to its initial public offering in 1996, Kentek was a leading
supplier of heavy-duty, high reliability, mid-range, non-impact laser printers
and related consumable supplies and spare parts. In 1997 and 1998, however,
Kentek's printer sales, consumable supplies sales, revenues and market share
began to decline substantially as trends unfavorable to Kentek and similar
mid-range printer companies accelerated. The major trends that have had the most
negative impact on Kentek include:
o Light-duty printers have been dramatically improved. In particular, the
speed, duty-cycle, and cost-of-operation of light-duty printers have
been significantly improved.
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o The initial acquisition cost of light-duty printers has significantly
decreased.
o Distributed network printing, using the new, lower cost, and faster
light-duty printers, has grown tremendously.
o Increased competition between Xerox and Hewlett Packard ("HP") for
dominance in the office and departmental printer market has negatively
impacted the traditional mid-range printer manufacturers.
Improvement in Light Duty Printers. Historically, lower-end printers
were typically 10 to 20 ppm behind those printers that defined the mid-range
market. Lower-end printers were also rated at approximately one-half of the
monthly duty cycle (capacity of pages per month).
Printer companies specializing in the mid-range market typically were
successful in quickly introducing faster new generation printers, thus
maintaining their advantage over lower-end printers. However, over the past
three years, several product delays in the mid-range market, most notably the
delay of HP's 32 ppm printer, allowed other lower-end competitors, such as
Lexmark and Xerox, to enter the mid-range printer market. As these new market
entrants began to develop faster lower-end printers, competition for market
share increased in the mid-range printer market.
Rapid Growth of Distributed Networks. As networked offices became more
prevalent in the workplace, preference shifted from offices with one or two
centralized, bulky printers for all users, to offices with multiple printers,
each serving a small group of individuals. Because the lower-end printers that
were entering the marketplace were smaller, easier to install, and had a
considerably lower acquisition cost than traditional mid-range printers, higher
speed light duty printers quickly became the leading solution in the new
networked office environment. Although Kentek believes traditional mid-range
printers have been more cost-effective in the long-run, as measured by cost per
page where volume and print coverage are high, customers concerned with current
budget requirements and near term profitability have increasingly purchased
lower-end printers with significantly lower initial acquisition costs.
Traditional Competition. Traditionally, the Company competed with many
companies in the printer segment of its business, including Hewlett-Packard,
Hitachi/Dataproducts, QMS, Konica, Ricoh and Xerox, each of which sells
non-impact printers and has substantially greater name recognition, engineering,
manufacturing and marketing capabilities, and greater financial and personnel
resources than the Company. The Company expected increased competition from
established and emerging printer manufacturers and resellers, including Fujitsu,
Kodak and Minolta. As a result of the complexity of the printer and consumable
supplies manufacturing and distribution businesses, many of the Company's
principal customers are also current or potential competitors, including IBM,
Oce Printing Systems, Printronix and Tally. In addition, the Company's
consumable supplies products are increasingly being remanufactured by third
parties; however, the majority of customers still purchase the Company's unique
consumable supplies.
Increased Market Competition. In the mid-1990s, analog office copier
machines were slowly being replaced by both mid-range printers and new
printer/copiers ("digital copiers") with similar speeds. In response to these
trends, Xerox, the leading supplier of office copiers worldwide, began work on
digital copiers that could compete in the office sector. HP's delay in
introducing its 32 ppm printer in late 1998 permitted new light duty Xerox
products to compete in the mid-range printer market. Xerox has devoted very
substantial resources in developing new digital copiers that have taken market
share away from HP and other industry participants. Xerox's efforts have
recently culminated with the very successful introduction of a line of digital
copiers, including 40 ppm and 60 ppm digital copiers, which were developed at a
cost approaching $500 million. In addition to its substantial investment in
development costs, Xerox, as well as other industry participants, has devoted
substantial resources to extensive marketing efforts.
In comparison with Kentek's 40 ppm printer:
o Xerox's 40 ppm digital copier is priced at approximately $3,000 per
unit while Kentek's 40 ppm printer is priced at approximately $15,000
per unit; and
o Xerox's 40 ppm digital copier incorporates nearly all of the product
features of Kentek's printers.
Kentek's mid-range printers have effectively been foreclosed from
competing in the departmental printing and networked office market segments as a
result of the factors set forth above. Kentek's printers, therefore, currently
compete only in high-volume production printing applications which include
printing invoices, forms, payroll, direct mail and check imaging. For these
applications, where aggregate usage exceeds 50,000 pages per month and page
coverage (the percentage of the page covered with toner) is much higher than the
4-5% level of a standard office memo, Kentek believes its printers can provide a
more efficient and cost-effective solution than multiple low-range or light duty
mid-range printers. This is partly because the consumable supply products for
Kentek printers (individually replaceable photoconductor, toner, developer,
fuser and cleaner) have a lower cost per page than the all-in-one cartridge
designs of the new low-cost digital copiers. As the consumable supply products
for a mid-range printer constitute roughly 85% of the total cost of operation
over a printer's useful life, high print volume customers with high page
coverage requirements can materially reduce annual printing costs by using a
Kentek printer rather than a new low-cost digital copier even though the initial
acquisition cost of a Kentek printer is considerably higher.
Notwithstanding these competitive advantages, Kentek's sales of
consumable supplies and spare parts have been declining as its new printer sales
have not kept pace with the rate at which existing Kentek printers have been
taken out of service. The following table sets forth Kentek's total sales,
printer sales, printer unit sales, and consumable supplies and spare parts sales
since 1996.
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1996 1997 1998 1999
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Total sales $74,381 $56,460 $45,053 $37,173
Printer sales $18,436 $ 8,370 $ 7,041 $ 4,494
Consumable supplies and
spare parts sales $55,945 $48,090 $38,012 $32,679
Printer unit sales 3,093 1,464 671 582
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KENTEK RESTRUCTURING - KW60 DEVELOPMENT TERMINATED
The impact of the negative industry trends set forth above on Kentek
were exacerbated in November 1998 when Kentek was unable to successfully
introduce its next generation 60 ppm printer, the KW60. In November 1998, Kentek
determined that the successful development of the KW60 would require at least
two additional years and an additional $20 million of expenses. In addition,
Kentek's principal customer/prospect for the KW60 declared that it would not
wait past May 1999 for delivery of the 60 ppm printer. After considering these
factors, the negative industry trends, and Kentek's declining printer sales,
consumable supplies sales, revenues and market share, Kentek's management team
and the Board determined that it was in Kentek's best interest to halt further
development efforts on the KW60.
As a result of Kentek's decision to abandon development efforts on the
KW60, Kentek's management team and Board instituted the following restructuring
actions from November 6, 1998 through June 30, 1999:
o Kentek vacated three of the five buildings it occupied, two of which
were devoted exclusively to the development and planned manufacture of
the KW60;
o Kentek terminated 75 employees associated with the development of the
KW60, thereby reducing its headcount by approximately 58%;
o Kentek commenced the conversion of certain assets, including accounts
receivable and inventory, to cash; and
o Kentek completed a comprehensive review of its inventories and
physically disposed of certain inventories previously provided for in
its historical reserve for excess and obsolete inventories.
As a result of Kentek's abandonment of its development efforts relating
to the KW60 and the restructuring actions set forth above, Kentek reduced its
quarterly operating expenses by approximately $2.8 million, incurred a second
quarter restructuring charge of approximately $1.14 million, reduced its current
tax liability and improved its cash position.
Since November 1998, Kentek's profitability has increased as a result
of the expense reductions associated with the termination of the development and
planned manufacture of the KW60. However, Kentek continues to experience
declines in new printer sales as a result of the negative competitive trends
discussed above and the lack of a new faster mid-range printer to address
increasing performance from light duty printers. Kentek's sales of consumable
supplies and spare parts have also continued to decline as new printer sales
have not kept pace with the rate at which existing Kentek printers have been
retired from service.
Kentek believes that substantially all of its customers currently
resell the new Xerox 40 ppm printer or intend to resell the new Xerox 40 ppm
printer in the near future. In addition, Kentek anticipates its competitors will
continue to release new lower cost printers with enhanced features. As a result,
Kentek's management team anticipates that Kentek will continue to suffer
progressively greater declines in new printer sales and, as Kentek's installed
base of printers exit their useful life cycle, Kentek's sales of consumable
supplies and spare parts sales will continue to decline over the course of the
next several years.
Kentek's management team believes that continued declines in Kentek
printer sales may make the manufacture of Kentek printers economically
impractical in the near future. This belief is based on the fact that
approximately 40% of Kentek's 160 vendors require Kentek to place minimum
component orders. A key Kentek computer chip vendor, for instance, presently
requires Kentek to purchase a minimum of 1,000 of its computer chips per order
with a $275,000 set up charge. In addition, Kentek's printers are currently
assembled by a sole source third party vendor located in Japan. In August 1999,
this vendor informed Kentek that it would not continue to assemble Kentek's
printers once Kentek ordered less than 50 printer units per month. As Kentek's
printer sales continue to decline, Kentek is finding it increasingly difficult
to meet this sole source vendor's and its other vendor's minimum order
requirements. However, Kentek's management team currently intends to manufacture
printers as long as Kentek's customers order printers in economically viable
quantities, which Kentek's management team currently estimates to be
approximately 600 printers per year.
PRODUCT DEVELOPMENT TERMINATION
As a result of this competitive situation, the Company has ceased new
printer engine development work and retained key R&D personnel for product
support. The Company maintains product support centers in Boulder, Colorado for
printer engine, controller and software, and in Nagano, Japan, for printer
engine and paper handling devices. As of June 30, 1999 the Boulder facility
employed 4 full time and contract engineering staff and Nagano employed 6
full-time and contract engineering staff. The Company's R&D expenditures for
fiscal years ended June 30, 1999, 1998, 1997 were $6,606,000, $9,671,000, and
$8,601,000 respectively. Fiscal year 1999 fourth quarter R&D expenses (now
product support) were $459,000.
PROPOSED MERGER TRANSACTION
Because of the effects of the increased competition in the mid-range
printer business, and the termination of the KW60 and new printer engine
development, it was evident to the Company's Board of Directors that the Company
needed to change its plans. In November 1998, the Board, including the Company's
CEO and President, Mr. Shires, unanimously concluded that Kentek should explore
strategic transactions, including transactions that would result in the sale of
Kentek or transactions that would otherwise improve Kentek's financial outlook
or otherwise provide liquidity to Kentek's stockholders.
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The reasons for the Board's decision to explore strategic transactions
were as follows:
o Since 1996, Kentek has experienced significant declines in new printer
sales as a result of negative competitive trends affecting the
traditional mid-market printer industry and Kentek's failure to develop
a new faster mid-range printer to address increasing performance from
light duty printers. See Competition and Kentek Strategy Change.
o Since 1996, Kentek's sales of consumable supplies and spare parts have
declined as its new printer sales have not kept pace with the rate at
which existing Kentek printers have been taken out of service.
o Since 1996, Kentek's total revenues and market share have declined
significantly as a result of the declines in sales of Kentek's
printers, consumable supplies and spare parts.
o Kentek's Board believed that substantially all of Kentek's customers
currently resell the new Xerox 40 ppm printer or intend to resell the
new Xerox 40ppm printer in the near future. In addition, the Board
anticipated that Kentek's competitors would continue to release new
lower cost printers with enhanced features. As a result, the Board
believed that it was likely that Kentek would continue to suffer
progressively greater declines in new printer sales and, as Kentek's
installed base of printers exit their useful life cycle, Kentek's sales
of consumable supplies and spare parts sales would continue to
significantly decline.
BACKGROUND OF MERGER PROPOSAL
In December 1998, January 1999 and February 1999 all of the members of
the Board, including Mr. Shires, discussed the remaining alternatives for
Kentek's business. In addition, Dr. Morgan, acting on behalf of the Board, held
discussions with Janney Montgomery Scott regarding strategic alternatives
available to Kentek. Janney Montgomery Scott ultimately informed Dr. Morgan that
Kentek was not an attractive acquisition candidate as a result of Kentek's
declining sales, the negative competitive trends affecting the traditional
mid-range printer industry and Kentek's failure to develop a new faster
mid-range printer.
During the same period of time, Mr. Shires, acting as a representative
of the Board, held informal discussions with Broadview Associates regarding
strategic alternatives for Kentek. Broadview Associates informed Mr. Shires that
Kentek was not an attractive acquisition candidate as a result of Kentek's
declining sales, the negative competitive trends affecting the traditional
mid-range printer industry and Kentek's failure to develop a new faster
mid-range printer.
Neither Dr. Morgan, Mr. Shires, nor any other member of the Board
contacted any other financial advisors or investment bankers regarding strategic
alternatives for Kentek. In addition, neither Dr. Morgan, Mr. Shires, nor any
other member of the Board contacted any third parties regarding their interest
in pursuing a strategic transaction with Kentek prior to the date on which the
Special Committee instructed Dr. Morgan to contact firms in the printer industry
regarding their potential interest in acquiring Kentek.
On February 24, 1999, Dr. Morgan approached Kentek's President and
Chief Executive Officer, Philip W. Shires, to discuss alternatives for Kentek's
business. In the course of this discussion, Dr. Morgan raised the possibility of
Mr. Shires purchasing Kentek. Subsequent to the meeting, Dr. Morgan notified the
remaining members of the Board of his discussion with Mr. Shires concerning the
sale of Kentek.
On March 8, 1999, Mr. Shires notified the Board of his potential
willingness to acquire Kentek's outstanding shares at a cash price of $7.85 per
share, or at the option of each stockholder, at a cash price of $7.50 per share
and the contingent right to receive additional cash consideration.
During the next several weeks, Mr. Shires explored the feasibility of a
potential acquisition of Kentek, engaged in discussions with potential financing
sources, and retained legal counsel to assist with the formulation of a formal
proposal to acquire Kentek. During this time, Dr. Morgan consulted with Kentek's
outside legal counsel, Cooley Godward LLP, on behalf of the Board regarding the
possibility of Mr. Shires making a formal proposal to acquire Kentek.
On April 13, 1999, Mr. Shires' legal counsel transmitted to each of
Kentek's directors and to Cooley Godward LLP an initial proposal to acquire
Kentek in the form of a merger agreement. The draft merger agreement
contemplated that KE Acquisition would acquire all outstanding shares at a cash
price of $7.85 per share, or at the option of each stockholder, at a cash price
of $7.50 per share and the contingent right to receive additional cash
consideration. Subsequently, Mr. Shires orally communicated to the Board a
revised proposal which deleted the option for Kentek stockholders to receive the
all cash price of $7.85 per share.
The Board, following consultation with Kentek's outside legal counsel,
Cooley Godward LLP, unanimously determined that, in view of possible conflicts
of interest in connection with any proposal from Mr. Shires, it was advisable to
form a special committee of the Board comprised of disinterested directors (the,
"Special Committee"). At a meeting of the Board on April 21, 1999 the Board
resolved to form the Special Committee, consisting of Messrs. Morgan, Weinig and
Perreault, for the purpose of evaluating and negotiating the terms of any
potential acquisition proposal from Mr. Shires or any entity organized by him
and any related matters.
At the April 21, 1999 meeting of the Board, the members of the Special
Committee engaged in discussions regarding the retention of an investment bank
and law firm as its financial and legal advisors. The Special Committee
determined to retain Janney Montgomery Scott as financial advisor to the Special
Committee, based upon its familiarity and expertise with Kentek. Janney
Montgomery Scott had served as the managing underwriter for Kentek's initial
public offering and had also been retained by Kentek in late 1996 and early 1997
to analyze trends in the printer market and to identify potential acquisition
candidates that would strengthen Kentek's market position. The Special Committee
also determined to retain Cooley Godward LLP as its legal advisor based upon the
firm's familiarity and expertise with Kentek. Cooley Godward LLP had served as
Kentek's counsel in connection with its 1996 initial public offering and had
subsequently served as Kentek's outside legal counsel, primarily for public
company and securities law advice. In
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addition, a current partner of Cooley Godward LLP while working at a previous
law firm had served as underwriters' counsel in Kentek's initial public offering
and another partner of Cooley Godward LLP currently serves as Corporate
Secretary of Kentek.
On April 21, 1999, Kentek issued a press release indicating that it had
received a proposal from Mr. Shires to acquire the outstanding shares for a cash
price of $7.50 per share at closing plus an additional consideration in the form
of a contingent cash payment right. The press release also indicated that the
Board of Directors had formed the Special Committee of independent directors to
review the advisability of the proposal and that the Special Committee had
retained Janney Montgomery Scott to serve as independent financial advisor to
the Special Committee and Cooley Godward LLP to serve as independent legal
counsel to the Special Committee.
Between the April 21, 1999 announcement and May 7, 1999, the following events
took place.
o The Special Committee instructed Dr. Morgan to contact firms in the
printer industry on behalf of the Special Committee regarding their
potential interest in acquiring Kentek.
o Dr. Morgan contacted and had discussions with Printronix, Lexmark,
Genicom and Miami Computer Services to solicit their interest in
acquiring Kentek. These companies were contacted because they had
preexisting customer or supplier relationships with Kentek. Neither
Xerox nor HP was a current customer, and both had previously told
Kentek that they would not acquire assets that generated revenues less
than $250 million per year, or that could not quickly be brought to
those levels.
o Each of the parties contacted by Dr. Morgan declined to make an
acquisition proposal and no other parties contacted the Board, the
Special Committee, Kentek or Janney Montgomery Scott regarding their
interest in pursuing an acquisition proposal.
o Based upon discussions among the Special Committee and Janney
Montgomery Scott, the Special Committee concluded not to attempt to
contact potential financial buyers for Kentek. The Special Committee
ultimately determined that the size of the transaction, the potential
profit and potential return on investment were deemed likely to be too
small to interest an institutional financial buyer, such as a leveraged
buyout fund. In addition, the Special Committee considered that
Kentek's lack of growth prospects would be a significant deterrent for
many financial buyers. Finally, the Special Committee considered that
Broadview Associates, an investment banking firm that was engaged by
Kentek in 1995 to investigate strategic alternatives, had been unable
to locate any financial or strategic buyers that were interested in
acquiring Kentek prior to its initial public offering in 1996.
o Cooley Godward LLP negotiated the terms of the proposed merger
agreement with Mr. Shires' counsel. In particular, Cooley Godward LLP
and Mr. Shires' counsel negotiated open issues relating to the price
per share, the structure and timing of the merger consideration, the
feasibility of contingent value rights, the necessity of a voting
agreement and the scope of break up fees.
o Janney Montgomery Scott met with Kentek officers to prepare its
financial analysis of the proposed acquisition.
o Dr. Morgan updated the Special Committee, Janney Montgomery Scott and
Cooley Godward LLP regarding his discussions with potential acquirers.
o Mr. Shires, on his own behalf and on behalf of KE Acquisition,
contacted each of Kentek's four largest stockholders regarding the
possibility of including a contingent payment right in the proposed
merger consideration. At the time that Mr. Shires engaged in
discussions with Kentek's four largest stockholders, such stockholders
beneficially owned an aggregate of 3,004,930 shares, or approximately
65.26% of Kentek's shares of common stock. As of the date of the Proxy
statement, such stockholders own approximately 64.67% of the shares
entitled to vote at the special meeting.
Mr. Shires' discussions with Kentek's four largest stockholders can be
summarized as follows.
o James H. Simons - Mr. Shires and Mr. Simons, a member of Kentek's
Board, participated in a telephone conference during the last week of
April 1999 regarding the desirability of including a contingent payment
right in the merger consideration. At the time of the telephone
conference between Mr. Simons and Mr. Shires, Mr. Simons beneficially
owned approximately 23.17% of Kentek's common stock. During the course
of their conversation, Mr. Simons indicated to Mr. Shires that he
favored receiving a portion of the merger consideration as a contingent
payment right. In particular, Mr. Simons indicated to Mr. Shires that
he believed that the proposed payment of $7.50 per share together with
a contingent payment right was worth more to Kentek's stockholders than
a fixed payment of $7.85 per share. Subsequently, Mr. Simons determined
that the payment of $7.50 per share together with a contingent payment
right was not as valuable as a fixed payment of $8.29 per share.
o Khronos Capital Limited - Mr. Shires and I. Jimmy Mayer, the principal
of Khronos Capital Limited, participated in a telephone conference
during the last week of April 1999 regarding the desirability of
including a contingent payment right in the merger consideration. At
the time of the telephone conference between Mr. Mayer and Mr. Shires,
Mr. Mayer beneficially owned approximately 13.03% of Kentek's common
stock. During the course of their conversation, Mr. Mayer indicated to
Mr. Shires that he favored receiving a fixed payment per share at the
closing of the Merger as opposed to a lower fixed payment per share
together with a contingent payment right. Mr. Mayer noted that he
preferred a fixed payment per share at the closing of the Merger
because the full amount of the Merger Consideration could be reinvested
in other financial opportunities at that time. In addition, Mr. Mayer
noted that the proposed contingent payment right was undesirable
because it was speculative and potentially difficult for Khronos
Capital Limited to manage with respect to its investors on a
going-forward basis. Mr. Mayer was a member of Kentek's Board until his
resignation in January 1998.
o Wellington Management Company, LLP - Mr. Shires and Sandy Green, a
principal of Wellington Management Company, LLP,
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met in person during the last week of April 1999 at a financial
conference in Vail, Colorado. At that time, Wellington Management
Company, LLP beneficially owned approximately 14.73% of Kentek's common
stock. During the course of their meeting, Mr. Shires and Mr. Green
discussed the desirability of including a contingent payment right in
the merger consideration. Mr. Green indicated to Mr. Shires that he
favored receiving a fixed payment per share as opposed to a lower fixed
payment per share together with a contingent payment right. Mr. Green
based his belief on the fact that the proposed contingent payment right
was speculative, subject to contingencies, difficult to value and
difficult for Wellington Management Company to manage with respect to
its investors on a going-forward basis.
o ROI Capital Management, Inc. - Mr. Shires and Mark Boyer, a principal
of ROI Capital Management, Inc., participated in a telephone conference
during the last week of April 1999 regarding the desirability of
including a contingent payment right in the merger consideration. At
the time of the telephone conference between Mr. Boyer and Mr. Shires,
ROI Capital Management, Inc. beneficially owned approximately 14.34% of
Kentek's common stock. During the course of their conversation, Mr.
Boyer indicated to Mr. Shires that he favored receiving a fixed payment
per share as opposed to a lower fixed payment per share together with a
contingent payment right. Mr. Boyer based his belief on the fact that
the proposed contingent payment right was speculative, subject to
contingencies, difficult to value and difficult for ROI Capital
Management to manage with respect to its investors on a going-forward
basis.
No members of the Board, other than Mr. Shires and Mr. Simons,
participated in the discussions regarding the desirability of the proposed
contingent payment right. In addition, no member of the Board, including Mr.
Shires, discussed any other aspects of the proposed merger transaction or any
alternative transactions with Kentek's four largest stockholders or their
affiliates (excluding Mr. Simons). Accordingly, with the exception of Mr.
Simons, Kentek's largest stockholders and their affiliates did not participate
in any aspect of the negotiations between the Special Committee, the Board and
Mr. Shires that ultimately led to Mr. Shires' offer of $8.29 per share. Mr.
Simons participated in such negotiations as a member of the Board.
During the course of Mr. Shires discussions with the individuals set
forth above, each of the individuals indicated that they intended to vote in
favor of the proposed merger transaction, regardless of the structure of the
merger consideration. Kentek and Mr. Shires did not, however, solicit such
individuals or stockholders to vote in favor of the Merger or any other
transaction involving Kentek. None of the stockholders set forth above or their
affiliates are subject to voting agreements or are otherwise required to vote in
favor of the Merger.
On May 7, 1999, the Special Committee met telephonically. Janney
Montgomery Scott and Cooley Godward LLP participated in the May 7, 1999 meeting.
Dr. Morgan updated the Special Committee and its advisors about discussions with
potential acquirors. The Special Committee discussed the proposed terms of Mr.
Shires' proposal, particularly the valuation of the contingent cash payment
right contained in Mr. Shires' proposal. The Special Committee also discussed
whether it was likely that proposals from potential acquirors might be received.
The Special Committee instructed Cooley Godward LLP to proceed with the
negotiation of the proposed merger agreement which had been received from Mr.
Shires' counsel.
Between May 7, 1999 and May 10, 1999, Kentek's counsel and Mr. Shires'
counsel continued to discuss open issues relating to the proposed merger
agreement. In particular, Mr. Shires' counsel and Kentek's counsel discussed the
circumstances under which a break up fee, in the amount of actual expenses
incurred by Mr. Shires in connection with the transaction, would be payable to
Mr. Shires.
On May 10, 1999, the full Board met in New York City. Janney Montgomery
Scott attended this meeting in person, and Cooley Godward LLP participated via
telephone. During the course of the meeting, the following actions took place.
o The Board members discussed the status of Mr. Shires' proposal,
including the proposed structure of the merger consideration and Mr.
Shires' valuation of the contingent payment right.
o The Board members agreed that the full amount of the merger
consideration would be paid upon the consummation of the transaction.
This agreement resulted from the Board's determination that the
contingent right was less desirable given that the value of the right
was speculative and subject to contingencies.
o Janney Montgomery Scott presented its preliminary analysis of the
fairness of the proposed merger to the Public Stockholders from a
financial point of view. Based on the financial analyses prepared for
the Board and the Special Committee, Janney Montgomery Scott indicated
that the $7.85 per share price proposed by Mr. Shires was within the
range of fair values for Kentek's common stock. However, Janney
Montgomery Scott noted that the $7.85 per share price was at the lower
end of Kentek's valuation range and that a higher price would increase
the fairness of the proposed merger to the Public Stockholders.
o The Board members discussed the proposed merger consideration. In light
of Janney Montgomery Scott's preliminary analysis of the Merger, the
disinterested members of the Board and the Special Committee
unanimously determined to attempt to negotiate a higher price than the
$7.85 per share merger consideration proposed by Mr. Shires. In
particular, the disinterested members of the Board and the Special
Committee informed Mr. Shires that they believed he should pay
approximately $8.25 per share. The disinterested members of the Board
and the Special Committee based their beliefs on the range of fair
values established by Janney Montgomery Scott's financial analysis and
the trading values of Kentek's common stock on the Nasdaq National
Market. Specifically, the disinterested members of the Board and the
Special Committee represented a fair value because it represented a:
o premium value to Kentek's stockholders as compared to the $7.93
midpoint of Janney Montgomery Scott's Buyout Analysis;
o 32.6% premium over the average closing price for the shares on the
Nasdaq National Market for the six month trading period ended April
21, 1999, the day before Kentek announced it had received KE
Acquisition's and Mr. Shires' initial proposal; and
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o 19.5% premium over the closing price for the shares of Kentek's
common stock on April 21, 1999.
In addition, Mr. Simons suggested to the disinterested members of the
Board and the Special Committee that the merger consideration should
reflect an additional payment to account for the fact that the proposed
merger would likely close three to four months after the execution of a
merger agreement. The disinterested members of the Board and the
Special Committee unanimously concurred with Mr. Simons and determined
that an increase of $0.04 per share represented a reasonable additional
payment per share. Thereafter, the disinterested members of the Board
and the Special Committee informed Mr. Shires that they believed $8.29
per share represented the fair value of Kentek's shares. In response,
Mr. Shires indicated that $8.29 per share was too high of a price per
share given that it was at the higher end of Janney Montgomery Scott's
projected range of fair values. After further negotiation, however, Mr.
Shires agreed to pay $8.29 per share and noted that he would not, under
any circumstances, pay more than $8.29 per share because he believed
that a higher price did not offer a potential rate of return that would
justify the level of risk assumed in connection with the acquisition of
Kentek.
o Mr. Shires furnished the Special Committee and its advisers with a
commitment letter from US Bank regarding the financing for the proposed
transaction.
o Cooley Godward LLP reported on the status of the negotiations on the
form of definitive merger agreement.
o The Board, Janney Montgomery Scott and Cooley Godward LLP discussed the
following in relation to the proposed merger agreement:
o Lack of Potential Buyers. No party other than KE Acquisition and
Mr. Shires has shown interest in acquiring Kentek despite the
following factors:
- Broadview Associates, an investment banking firm engaged by
Kentek in 1995 to investigate strategic alternatives, was
unable to locate any financial or strategic buyers that were
interested in acquiring Kentek prior to its initial public
offering in 1996;
- At the request of and on behalf of the Special Committee, Dr.
Morgan contacted substantially all of Kentek's competitors, as
well as certain other companies that had been contacted in 1995
in connection with the attempted sale of Kentek prior to its
initial public offering, concerning their interest in pursuing
a strategic or financial transaction.
- Kentek did not enter into a merger agreement with KE
Acquisition until 23 days after the public announcement of Mr.
Shires' indication of interest in Kentek, providing ample time
for interested parties to indicate their interest in Kentek;
and
o Liquidity. Holders of significant blocks of Kentek common stock are
not able to effectively sell their shares into the available market
as the typical daily trading volume of Kentek's common stock in
recent years has been low. During the six month trading period
ended April 21, 1999, the average daily trading volume of Kentek
common stock was 6,517 shares. Given that Kentek's Public
Stockholders currently hold approximately 4,542,652 shares of
Kentek common stock, approximately 0.0014% of Kentek's common stock
is traded on any given day. Accordingly, Kentek's larger
stockholders are unable to sell a material portion of their shares,
other than at prices significantly below the Merger Consideration.
In addition, Kentek believes significant sales would likely
decrease the trading price of Kentek's common stock.
o No Voting Agreement. The proposed agreement did not require any of
Kentek's major stockholders to vote in favor of the proposed merger
and the related transactions.
o Modest Termination Fees. The proposed agreement did not require the
payment of termination fees in excess of the reasonable expenses
incurred by KE Acquisition in connection with the preparation and
negotiation of the proposed merger agreement.
o Fiduciary Outs. The proposed agreement provided that the Board
and/or the Special Committee could authorize Kentek to engage in
discussions or negotiations concerning an unsolicited Acquisition
Proposal (and may furnish information and cooperate in this regard)
subsequent to the execution of the proposed merger agreement. This
action could be taken if the Board and/or the Special Committee
determined in the exercise of its fiduciary duties that the action
was in the best interests of Kentek stockholders. An "Acquisition
Proposal" was defined as any proposal or offer with respect to:
- a tender or exchange offer, a merger, consolidation or other
business combination involving Kentek or any of its
subsidiaries, including a merger of equals involving Kentek;
- the acquisition of an equity interest in Kentek representing in
excess of 33% of the power to vote for the election of a
majority of directors of Kentek, or
- the acquisition of assets of Kentek or its subsidiaries,
including stock of one or more subsidiaries of Kentek,
representing 33% or more of the consolidated assets of Kentek,
in each case by any person other than KE Acquisition.
In addition, the proposed agreement provided that following receipt
of an Acquisition Proposal that was financially superior to the
proposed merger, as determined in good faith by the Board, the
Board could withdraw, modify or not make a
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recommendation in favor of the proposed merger. This action could
be taken if the Board concluded in good faith that the action was
necessary in order to act in a manner that is consistent with its
fiduciary obligations under applicable law.
o Confidentiality. Pursuant to the terms of the proposed agreement,
Kentek could not engage in negotiations with, or disclose any
nonpublic information to, any person unless it received from the
person an executed confidentiality agreement on terms and
conditions deemed by the Board to be appropriate and in Kentek's
best interest.
o Notification of Acquisition Proposals. Kentek would be required to
promptly notify KE Acquisition of the receipt of any Acquisition
Proposal not less than two business days prior to entering into any
agreement in connection with the Acquisition Proposal. Any notice
would be required to include the identity of the person or group
making the Acquisition Proposal and the material terms and
conditions of the Acquisition Proposal. Kentek could not enter into
a definitive agreement in connection with an Acquisition Proposal
unless at least five business days had passed since Kentek
initially notified KE Acquisition of an inquiry or proposal
relating to an Acquisition Proposal. Within the two-business day or
five-business day periods referred to above, if any, KE Acquisition
could propose an improved transaction. The two and five-business
day waiting periods would not required if the Board or the Special
Committee decided that the waiting periods conflicted with the
exercise of the Board's fiduciary obligations to its stockholders.
o Termination Provisions. Kentek could terminate the proposed
agreement at any time if:
- the Board determined in good faith that an Acquisition Proposal
was financially superior to the proposed merger and was
reasonably capable of being financed, and
- Kentek entered into a definitive agreement to effect the
financially superior Acquisition Proposal, and Kentek complied
with the covenants set forth below under "Certain Provisions of
the Merger Agreement--Covenants."
If the Merger Agreement was validly terminated, none of its
provisions would survive, except for miscellaneous provisions
relating to confidentiality, expenses, governing law, jurisdiction,
waiver of a jury trial, and other matters. Termination would be
without any liability on the part of any party, unless the party is
in willful breach of a provision of the proposed agreement.
o Price. The proposed price of $8.29 per share constituted a 32.6%
premium over the average closing price for the shares on the Nasdaq
National Market for the six month trading period ended April 21,
1999, the day before Kentek announced it had received KE
Acquisition's initial proposal. In addition, the proposed price
constituted a 19.5% premium over the closing price for the shares
on April 21, 1999.
Following the May 10, 1999 meeting, Cooley Godward LLP negotiated with
Mr. Shires' counsel the final terms of a merger agreement reflecting the revised
proposal. Copies of the final merger agreement, the final financial presentation
material of Janney Montgomery Scott, and a draft of Janney Montgomery Scott's
fairness opinion were distributed to all members of the Board.
The Special Committee and the Board next met on May 14, 1999
telephonically. Janney Montgomery Scott and Cooley Godward LLP participated in
the May 14, 1999 meetings. The Special Committee reviewed with counsel a draft
of the Merger Agreement in final form. Janney Montgomery Scott provided a
detailed financial analysis of Kentek and the pending proposal to the Special
Committee and advised the Special Committee that, in its opinion, as of that
date, the $8.29 price was fair, from a financial point of view, to the
stockholders of Kentek other than KE Acquisition. A discussion with and
questions to Janney Montgomery Scott by the Special Committee followed. The
Special Committee then concluded, after also considering Kentek's prospects of
increasing stockholder value as a public company, that in the circumstances then
existing, the $8.29 per share offer was, for stockholders other than KE
Acquisition, preferable to continuing to hold shares in the public company. The
Special Committee then unanimously determined to approve the Merger Agreement
and declare that the Merger Agreement was advisable and fair to and in the best
interests of the stockholders of Kentek other than KE Acquisition, and approved
resolutions recommending that the Board approve the Merger Agreement and cause
Kentek to execute and deliver the Merger Agreement. Immediately thereafter, the
entire Board unanimously resolved to approve the Merger Agreement. Subsequent to
the Board meeting, on May 14, 1999, Kentek and KE Acquisition entered into the
Merger Agreement.
Kentek issued a press release on the morning of May 14, 1999 announcing
the execution of the Merger Agreement.
In connection with the preparation of the Proxy Statement, the Special
Committee and the Board met telephonically on August 13, 1999 and September 10,
1999. Janney Montgomery Scott and Cooley Godward LLP participated in the August
13, 1999 and September 10, 1999 meetings. At each of the meetings, Janney
Montgomery Scott provided supplemental financial analyses of Kentek and the
transactions contemplated by the Merger Agreement. Janney Montgomery Scott
advised the Special Committee and the Board that its supplemental financial
analyses did not change in any material respect its prior opinion that, as of
that date, the $8.29 price was fair, from a financial point of view, to the
stockholders of Kentek other than KE Acquisition. Janney Montgomery Scott also
reported that it had performed updates to its May 14, 1999 analysis and that no
circumstances had come to its attention that would cause Janney Montgomery Scott
to change its opinion as to the fairness of the Merger from a financial point of
view. At each meeting, discussions with and questions to Janney Montgomery Scott
by the Special Committee followed. The Special Committee then concluded, in each
case, based on Janney Montgomery Scott's supplemental financial presentations
and oral updates of its written opinion, that the proposed merger transaction
was still fair to and in the best interests of the stockholders of Kentek other
than KE Acquisition. In addition, the entire Board unanimously determined at
each meeting that the Merger remained fair to and in the best interest of
Kentek's Public Stockholders.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
On May 14, 1999, the Special Committee unanimously determined that the
Merger, the Merger Agreement and the transactions contemplated by the Merger
Agreement are fair to and in the best interests of the Public Stockholders, and
recommended that the Board
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and the stockholders of Kentek approve and adopt the Merger, the Merger
Agreement and the transactions contemplated by the Merger Agreement.
On May 14, 1999, the Board, on the unanimous recommendation of the
Special Committee, unanimously determined that the Merger, the Merger Agreement
and the transactions contemplated by the Merger Agreement are fair to and in the
best interests of the Public Stockholders, and recommended that the stockholders
of Kentek approve and adopt the Merger, the Merger Agreement and the
transactions contemplated by the Merger Agreement. Prior to participating in the
determinations and recommendations of the Board, Mr. Shires, who is the sole,
stockholder, director and officer of KE Acquisition, identified his affiliations
with KE Acquisition and noted that as a result of the affiliations he had a
direct conflict of interest.
In response to comments received from the Securities and Exchange
Commission, the Board and the Special Committee asked Janney Montgomery Scott to
prepare supplemental financial analyses of the Merger. The Board and the Special
Committee requested the supplemental analyses because the Board and the Special
Committee believed that the supplemental analyses would provide additional
relevant data regarding the fairness of the Merger to the Public Stockholders.
On August 13, 1999, Janney Montgomery Scott presented its first
supplemental financial analysis to the Special Committee and the Board and
orally confirmed its prior opinion to the Special Committee and the Board that,
as of that date, the Merger was fair, from a financial point of view, to the
Public Stockholders.
On August 13, 1999, after reviewing Janney Montgomery Scott's first
supplemental financial analysis, the Board and the Special Committee unanimously
reaffirmed their determinations that the Merger, the Merger Agreement and the
transactions contemplated by the Merger Agreement are fair to and in the best
interests of the Public Stockholders.
On September 10, 1999, Janney Montgomery Scott presented its second
supplemental financial analysis to the Special Committee and the Board and
orally confirmed its prior opinion to the Special Committee and the Board that,
as of that date, the Merger was fair, from a financial point of view, to the
Public Stockholders.
On September 10, 1999, after reviewing Janney Montgomery Scott's second
supplemental financial analysis, the Board and the Special Committee unanimously
reaffirmed their determinations that the Merger, the Merger Agreement and the
transactions contemplated by the Merger Agreement are fair to and in the best
interests of the Public Stockholders.
The Special Committee and the Board have not revoked or modified their
May 14, 1999 determinations that the Merger, the Merger Agreement and the
transactions contemplated by the Merger Agreement are fair to and in the best
interests of the Public Stockholders.
OPINION OF FINANCIAL ADVISOR TO THE BOARD AND THE SPECIAL COMMITTEE
The Special Committee and the Board retained Janney Montgomery Scott as
their financial advisor to review the Merger and to render an opinion as to the
fairness, from a financial point of view, of the Merger to the Public
Stockholders. As described in the Proxy Statement, Janney Montgomery Scott's
opinion, dated May 14, 1999, as orally confirmed on August 13, 1999 and
September 10, 1999, together with the related presentations to the Special
Committee and the Board, were only two of many factors taken into consideration
by the Special Committee and the Board in making their determinations to approve
the Merger and the Merger Agreement.
Janney Montgomery Scott is a nationally recognized investment banking
firm and, as part of its investment banking activities, is regularly engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and valuations for corporate and other purposes.
Pursuant to the terms of Janney Montgomery Scott's engagement, Kentek
paid Janney Montgomery Scott $25,000 upon commencement of the engagement and
agreed to pay Janney Montgomery Scott an additional $100,000 upon the closing of
the Merger. In addition, Kentek has agreed to reimburse Janney Montgomery Scott
for its out-of-pocket expenses, and to indemnify Janney Montgomery Scott against
certain liabilities, or to contribute to payments Janney Montgomery Scott may be
required to make in respect thereof.
On May 14, 1999, Janney Montgomery Scott delivered its financial
analysis of the Merger to the Special Committee and the Board. At the same time,
Janney Montgomery Scott delivered its written opinion to the Special Committee
and the Board that, as of the date of the opinion, and based upon and subject to
certain matters stated in the opinion, the Merger was fair, from a financial
point of view, to the Public Stockholders.
Thereafter, in response to comments received from the Securities and
Exchange Commission, the Special Committee and the Board asked Janney Montgomery
Scott to prepare two supplemental financial analyses of the Merger. The Special
Committee and the Board requested the supplemental analyses because the Board
and the Special Committee believed that the supplemental analyses would provide
additional relevant data regarding the fairness of the Merger to the Public
Stockholders. On August 13, 1999, Janney Montgomery Scott presented its first
supplemental financial analysis to the Special Committee and the Board and
orally confirmed its prior opinion to the Special Committee and the Board that,
as of that date, the Merger was fair, from a financial point of view, to the
Public Stockholders. On September 10, 1999, Janney Montgomery Scott presented
its second supplemental financial analysis to the Special Committee and the
Board and orally confirmed its prior opinion to the Special Committee and the
Board that, as of that date, the Merger was fair, from a financial point of
view, to the Public Stockholders.
On September 27, 1999, the SEC completed its review of the Proxy
Statement, and approved the mailing of the Proxy Statement to Kentek's
stockholders.
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INDUSTRY OVERVIEW AND KENTEK STATUS
The market for non-impact printers can be segmented based upon users'
need for speed (ppm), duty cycle (capacity of pages per month), functionality
(network connectivity, forms and fonts, and paper handling features) and cost of
ownership (average cost per page over the life of a printer). The average cost
per page takes into account the initial purchase price, the cost of consumable
supplies and maintenance costs. At present, non-impact printers generally can be
divided into the following market segments:
Low-Range. This market segment, defined by printing speeds of less than
30 ppm, is appropriate for personal/desktop applications and small workgroup
applications. Personal/desktop printing for small and home offices typically
requires a relatively inexpensive dot-matrix, ink-jet or non-impact printer that
is connected to a single personal computer. Small workgroup printing
environments generally serve several personal computers or a small local area
network. The Company believes that the primary selection criteria for low-range
printers are print speed and initial acquisition price.
Mid-Range. This market segment has broadened over the last 36 months
and includes printers produced by Kentek. Historically, it included printers
with speeds of 30 to 60 ppm, that provided enhanced features such as continuous
operation and higher duty cycle. The past two years has seen the introduction of
light duty, higher speed machines from companies such as Hewlett Packard,
Lexmark and Xerox. Targeted for the requirements of the average networked office
environment, these printers typically have many features in common with copiers
- - including stapling, collating and duty cycles up to 200,000 pages per month.
These printers are often referred to as digital copiers or "mopiers". Kentek's
printers currently compete in the heavy-duty portion of the mid-range market
segment.
For many business applications, when aggregate usage exceeds 50,000
pages per month and/or page coverage (the percentage of the page covered with
toner) is higher than 4-5% (a standard office memo), a high-output, mid-range
printer can provide a more efficient and cost-effective solution than multiple
low-range printers or multiple light duty mid-range printers. Additionally, a
single, heavy-duty mid-range printer can offer a lower cost of ownership than
multiple low-range printers while providing the convenience of higher speed,
high print quality and enhanced features such as duplex printing, advanced paper
handling and larger memory capacity for storing fonts and customized forms.
Heavy-duty mid-range printers can run continuously and hold sufficient paper and
consumables to require only infrequent operator attention.
The consumable supply products for a mid-range printer are a
significant cost to the end-user over the life of the printer and are roughly
85% of the total cost of operation over the printer's useful life. The
consumable supply products include the photoconductor, toner, developer, fuser
and cleaner. End-users typically purchase consumable supply products from the
company that sold them the printer. As one moves from the low-range printer
market to the mid-range and high-range markets, the revenues generated by sales
of consumable supplies over the life of a printer increasingly exceed the
revenues generated by the initial printer sale.
High-Range. This market segment, defined by printing speeds of 60 ppm
or greater, provides higher duty cycle than the other categories. High-range
printer applications include very high volume applications such as direct mail,
public utility invoices and credit card statements.
PRINCIPAL PRODUCTS
The Company's objective has been to provide a complete printer
hardware, software and consumable supplies package that enables Kentek's
customers to easily install Kentek printers within their systems and to meet the
end-user's ongoing supplies needs. Kentek's printers are designed to provide
high print quality, ease of use and reliable operation under the conditions of
continuous use found in production system, print-on-demand and network
environments. The Company's printers typically have a usable life of seven
years.
The following descriptions illustrate the principal features of
Kentek's K30/K30D, K31/K31D, K40D and K40DX printers. All printers in the
Company's current line have a rated duty cycle of at least 300,000 pages per
month and interface with IBM, HP, DEC and UNIX platforms through serial,
parallel or network interfaces.
K30 Printer/K30D Printer. The K30/K30D incorporates the Company's
standard design features, including a straight paper path and LED array
printhead. The K30 is capable of full page graphics printing at 300 dots per
inch ("dpi"). The standard K30 configuration includes a Motorola 68020
microprocessor and 8 megabytes of RAM. An optional controller contains an Intel
i860 microprocessor and up to 16 megabytes of RAM. The K30 includes two internal
floppy disk drives and offers an optional 540 megabyte hard disk drive. The K30
includes standard dual cassette input trays containing a total of 800 sheets and
an output tray. The K30D printer offers the duplex printing feature, printing on
both sides of the paper. The K30 and K30D, 30 ppm printers, were introduced in
July 1992.
K31 Printer/K31D Printer. The K31/K31D duplex offers the same standard
features as the K30/K30D and incorporates the RIGS controller. Standard features
of the K31 and K31D included a 25 MHz IDT 3081 RISC (MIPS R3000 compatible)
microprocessor with an internal floating point co-processor and 12 megabytes to
64 megabytes of RAM, full graphics printing at 300 dpi, one floppy disk drive, a
540 megabyte or larger internal hard disk and dual cassette input trays
containing a total of 800 sheets and an output tray. Available as an option is a
50 MHz IDT 3081 RISC microprocessor to accelerate complex graphics. The K31 and
K31D, 30 ppm printers, were introduced in September 1995.
K40D Printer. The K40D also incorporates the features of straight paper
path, LED array printhead and dual component toner process. Standard features of
the K40D model also include a 25 MHz IDT 3081 RISC (MIPS R3000 compatible)
microprocessor with an internal floating point co-processor and 12 to 64
megabytes of RAM, full graphics printing at 300 dpi, 400,000 pages per month
duty cycle, one floppy disk drive a 540 megabyte or larger internal hard disk,
and dual cassette input trays containing a total of 800 sheets and an output
tray. Available as an option is a 50 MHz IDT 3081 RISC microprocessor to
accelerate complex graphics. The K40D, a 40 ppm duplex printer, was introduced
in November 1994.
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K40DX Printer. An extension of the K40D, the K40DX includes the
features of straight paper path, LED array printhead and dual component toner
process. Standard features of the K40DX model also include a 133 MHz Pentium
processor with an internal floating point co-processor and 16 to 128 megabytes
of RAM, full graphics printing at 600 dpi, multi-active ports, 400K per month
duty cycle, one floppy disk drive, a 1.2 gigabyte or larger internal hard disk,
and dual cassette input trays containing a total of 800 sheets and an output
tray. Available as an option is electronic collation. The K40DX duplex printer
was introduced in May of 1998.
K40DXE Printer. The K40DXE was introduced to customers in the first
half of 1999. An extension of the K40DX, the K40DXE is a 40 ppm printer designed
to have superior print registration (image registration from top of page within
1 millimeter) and the ability handle a wide variety of paper stocks and weights.
In conjunction with the K40DXE, the Company introduced a high capacity media
feeder capable of feeding a similar variety of paper stocks and weights. The
Company believes this product combination will help it penetrate the forms
market.
Available as options on all of Kentek's printers are 1,200 and 2,500
sheet input feeders; 1,400 and 3,500 sheet output stackers; and printer
cabinets.
Kentek also designs and develops proprietary printer controller
hardware and software to manage the complex tasks associated with communicating
with multiple host computers over a network and coordinating complex print jobs
at high speed. Kentek's printers generally include a printer controller (image
generation system or IGS controller) and a machine controller (printer control
logic or PCL controller), each with its associated software. In 1994, Kentek
invented a proprietary RISC-based Image Generation System ("RIGS") architecture
that is used on the K31/K31D and K40D printers. The RIGS architecture uses
higher speed microprocessors, expanded RAM and enhanced ASICs designed to speed
complex text and graphics manipulation. Kentek controllers come standard with HP
PCL5e, HPGL printer control language emulations and TIFF image decompression.
Phoenix Page Postscript (TM) is available as a printer control language option.
SIGS Controller. In May 1998, Kentek introduced its SIGS controller
system, for use on its K40DX printer. The SIGS controller uses an Intel
Pentium(R) processor and an industry standard motherboard with 32 to 128 MB of
RAM, permitting a quick and straightforward upgrade path as faster processors
become available. In addition, the board incorporates a PCI Bus permitting the
addition of industry standard connectivity add-on cards. The controller uses a
Kentek developed PCI BUS compatible multi-function card to interface with the
machine controller. Also, the SIGS controller is based on the Lynx operating
system and Xionic's intelligent peripheral systems software, Postscript Level
II, TIFF and PCL5e, all industry standards. The Company believes that the use of
such standards lowers its cost and reduces the time to market when compared to
products with a more proprietary design.
Consumables. The Company is the exclusive manufacturer of consumable
supplies for its printers, with the exception of toner, which is manufactured
exclusively for Kentek to its specifications. The Company's consumable products
are subject to re-manufacturing or recycling by others. Although the Company
believes it has not historically lost a substantial amount of revenue to
recycling or re-manufacturing competition, there is no assurance that the
Company will not be materially and adversely effected by such competition in the
future.
CUSTOMERS, MARKETING AND SUPPORT
The Company will continue to distribute its printers exclusively
through sales to OEM customers and system integrators so long as it is
economically practical (estimated to be 600 units per year). In fiscal 1999 net
sales to each of Lexmark, Tally and Oce Printing Systems constituted greater
than 10% of the Company's total net sales. Financial information regarding sales
to principal customers is presented in Note 8 of the notes to the consolidated
financial statements which appear elsewhere in this Form 10-K. The loss or
decline of sales to Lexmark, Tally or Oce Printing Systems could have a material
adverse affect on the Company's business, results of operations and financial
condition.
Kentek supports its customers through an array of sales literature,
technical support and joint sales. The Company identifies commercial niches
where there is a strong need for the high reliability, high duty cycle and
continuous operation features of Kentek printers, and concentrates its sales
efforts in community banking, direct mail, healthcare, insurance, forms
producers and MICR (magnetic ink character recognition).
Consumable supply products for Kentek's printers, excluding toner, are
manufactured exclusively by Kentek and distributed principally through its
customers. In addition, certain consumable supplies are distributed through
third party resellers. Customers sell these consumable supply products and spare
parts directly to their customers through resellers of their computer systems,
or to independent supplies resellers for sale to such customers. The Company
also sells its products directly to supplies distributors, where such sales do
not adversely affect the Company's OEM customers. The Company purchases toner
manufactured exclusively to Kentek's specifications by outside suppliers.
Kentek's consumable supply products used in IBM-branded products
manufactured by Kentek are sold through Lexmark pursuant to an exclusive
relationship with the Company under which Lexmark is required to purchase its
requirements of consumable supply products for IBM-branded printers only from
Kentek. Under the terms of an agreement between IBM and Lexmark, IBM may begin
selling consumable supply products for IBM-branded printers after March 2002. In
order to do so, IBM would be required to purchase such consumable supplies from
Lexmark for resale by IBM or to incur engineering, tooling and manufacturing
costs to enter the business of supplying consumables for its customers.
As of June 30, 1999, the Company's sales and marketing organization
consists of eight persons. The Company complements its field sales support with
in-house technical sales personnel and a product support department to provide
technical training and product support to its customers. Financial information
about foreign and domestic sales, operating income and assets is presented in
Note 13 of the notes to consolidated financial statements, which appear
elsewhere in this Form 10-K.
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<PAGE> 14
The Company provides a two-year warranty against defects in the
Company's printer products. The Company warrants its consumable supply products
against manufacturing defects with an industry standard "out-of-box" warranty.
Use of consumable supply products not manufactured or approved by Kentek voids
the user's warranty for both the printer and the consumable supply products. The
Company believes that its commitment to quality has resulted in low warranty
expense. In each of the fiscal years ended June 30, 1999, 1998, and 1997, the
Company incurred warranty expenses of $204,954, $247,751 and $300,883
respectively.
MANUFACTURING AND SOURCES OF SUPPLY
The Company operates manufacturing facilities in Boulder, Colorado and
in Nagano, Japan. The Boulder, Colorado facility manufactures the
photoconductor, developer, fuser, and cleaner consumable supply products. The
Company manufactures high capacity sheet feeders and output stackers in its
facility in Nagano, Japan. The Company designs and engineers its printer engines
and supervises their assembly under contract with the Nagano Japan Radio
Corporation. The Company purchases toner manufactured exclusively to Kentek's
specifications by outside suppliers.
The Company procures all of its component parts from outside suppliers
including proprietary components associated with the production of both the
printer products and the consumable supply products. Although the Company
generally purchases from multiple vendors, certain of the Company's parts and
components are obtained entirely or substantially from a single source. The
Company owns all of the unique tooling and mask work used for production of
these parts. The tools for producing component parts of the printer engines
reside with component suppliers in Japan, while tooling designed and produced
for manufacturing the components of the consumable supply products are located
mostly in the United States. The Company employs proprietary ASICs in its
controller products and relies on contract manufacturers to assemble its printed
circuit boards. The Company currently sources over 70% of its piece-part volume
and approximately 50% of the cost of the components for its consumable supplies
in the United States. The Company believes that this has reduced its
manufacturing costs and also reduced its exposure to currency fluctuation.
The Company has significant operations in Japan, where certain
components of its printers are sourced, designed and manufactured. Operating
expenses and production costs related to Kentek's Japanese operations are
subject to fluctuations in the dollar-yen exchange rate. The Company mitigates a
portion of its currency fluctuation risk through a contractual risk sharing
provision included in certain of its customer agreements that provides for
adjustment of sales price in accordance with fluctuations in exchange rates.
BACKLOG
Aggregate backlog as of June 30, 1999 was approximately $4.4 million,
compared to approximately $6.4 million as of June 30, 1998.
Backlog consists of customer orders, the majority of which are
scheduled for shipment within three weeks following the order date. The Company
also receives orders for immediate shipment, which may not be reflected in
backlog at any given time. Purchasers of standard products may generally cancel
or reschedule orders without significant penalty, and, accordingly, the
Company's backlog at any time is not necessarily indicative of future sales.
While the Company has operated historically with a 45 to 60 day backlog of
orders, results of operations for a given quarter are significantly dependent on
orders booked and shipped during that quarter, and increasingly becoming more
dependent on orders received during the month.
PROPRIETARY RIGHTS
The Company regards much of its hardware and software as proprietary
and relies on a combination of patent, copyright, trademark and trade secret
laws, employee and third-party non-disclosure agreements, and other methods to
protect its products and technology. As of June 30, 1998, the Company had 25
U.S. patents, 12 German patents and 11 United Kingdom patents, all of which will
expire in the period between July 2003 and September 2008. There can be no
assurance, however, that the patents held by the Company will protect the
Company's technology or provide meaningful competitive advantage. In addition,
there can be no assurance that measures taken by the Company to protect its
products and technology will be adequate or that the Company's competitors will
not independently develop technologies that are substantially equivalent or
superior to the Company's technologies. In addition, the Company has not applied
for patents in Japan. Moreover, the laws of some foreign countries may not
protect the Company's proprietary rights to the same extent as the laws of the
United States. Other companies may assert patent, copyright or other
intellectual property rights against the Company. If such a claim were made
against the Company, there can be no assurance that the Company would be able to
obtain a license to use such technology if necessary or that such license could
be obtained on terms that would not have a material adverse effect on the
Company's business, and financial statements. Should the Company's products be
found to infringe a third party's protected technology, the Company could be
required to pay damages to the infringed party or be enjoined from manufacturing
and selling such products. The Company could also incur substantial costs to
redesign its products or to defend any legal action taken against it.
EMPLOYEES
As a result of the competitive factors mentioned in Competition and
Product Strategy Change, the Company restructured and as of June 30, 1999 the
Company had a total of 111 employees including 90 full-time and 21 part time on
contract. Of the 111 employees, 83 are located in the United States and 28 in
Japan. The Company's employees are not represented by any union, and the Company
believes that its relationship with its employees is good.
ITEM 2. PROPERTIES
Kentek leases its main facilities in Boulder, Colorado and Nagano,
Japan. In Boulder, the Company leases three buildings, an approximately
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<PAGE> 15
30,000 square foot facility for $32,678 per month for sales, marketing, product
support and general and administrative purposes, and approximately 42,000 square
foot facility for $22,325 per month for consumables manufacturing, recycling and
warehousing. The Company is sub-leasing another 13,800 square foot facility
which was originally leased for future manufacturing of the KW60 printer. The
monthly rent for the sub-leased facility is $12,167 and the Company's lease on
this facility is up on October 31, 2000. The Company vacated three facilities in
Boulder, Colorado since January of 1999 as part of the termination of new
printer engine development and the restructuring of the Company. In Nagano, the
Company leases a total of approximately 23,500 square feet at four separate
sites for manufacturing and warehousing. The Company also leases office space
for sales offices in Allen Park, Michigan, Melbourne, Florida, and has closed
its sales office in Gorinchem, The Netherlands. Management believes that the
Company has adequate facilities for the conduct of current and future
operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any significant claims or litigation.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the Registrant's fiscal year ended June 30, 1999.
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PART II.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY & RELATED STOCKHOLDER MATTERS
MARKET PRICE AND DIVIDEND INFORMATION
The Company's Common Stock began trading publicly on the NASDAQ
National Market under the ticker symbol KNTK on April 17, 1996. Prior to that
date, there was no public market for the Common Stock. As of June 30, 1999,
4,604,152 shares of Common Stock were outstanding and the Company had
approximately 60 holders of record of the Common Stock. The table below sets
forth the per share quarterly high and low closing prices of the Company's
Common Stock as reported on the NASDAQ National Market. Cash dividends of $.02
per share for each of the three quarters ended September 30, 1998, December 31,
1998 and March 31, 1999 were declared and paid in 1999. It is anticipated that
the Company will not continue to declare quarterly dividends.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 6/30/99 HIGH LOW
------------------------- ---- ---
<S> <C> <C>
1st Quarter $8.66 $6.00
2nd Quarter 6.63 5.38
3rd Quarter 6.75 5.88
4th Quarter 7.88 6.31
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 6/30/98 HIGH LOW
------------------------- ---- ---
<S> <C> <C>
1st Quarter $10.38 $6.75
2nd Quarter 9.38 6.25
3rd Quarter 8.88 6.75
4th Quarter 9.38 7.88
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 6/30/97
-------------------------
<S> <C> <C>
1st Quarter $10.75 $4.25
2nd Quarter 6.50 4.38
3rd Quarter 7.38 5.63
4th Quarter 8.25 6.19
</TABLE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SUMMARY OF OPERATIONS
The selected financial data set forth below should be read in
conjunction with the Company's Consolidated Financial Statements and Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
INCOME STATEMENT DATA: (amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $37,173 $45,053 $56,460 $74,381 $70,192
Operating income 3,668 4,243 7,249 13,277 6,406
Net income 4,916 4,977 4,761 13,102 5,035
PER SHARE DATA: (a)
Net income per basic share $ 0.94 $ 0.70 $ 0.70 $ 6.59 $ 6.02
Net income per diluted share 0.88 0.70 0.69 2.45 1.02
Weighted average shares:
Basic 5,205 7,068 6,849 1,987 836
Diluted 5,613 7,143 6,924 5,344(b) 4,934(c)
Cash dividends declared $ .06 $ 0.08 $ 0.08 $ 0.00 $ 0.00
</TABLE>
(a) Net income per share data have been retroactively restated to give effect
for the adoption of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share".
(b) Weighted average shares have been calculated based on the average market
price per share from the date of the IPO to year-end.
(c) Weighted average shares have been calculated based on Management's estimate
of the market value per share prior to the IPO.
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital $44,486 $53,128 $48,061 $42,860 $25,506
Total assets 51,582 61,472 57,652 60,245 39,711
Long-term debt -- -- -- 115 6,651
Total liabilities 5,273 5,755 6,991 14,078 17,027
Total stockholders' equity 46,308 55,717 50,661 46,167 22,684
</TABLE>
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Registrant's Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Form 10-K.
OVERVIEW
The Company sells mid-range, non-impact printers and related consumable
supplies and spare parts. Since 1985, more than 84,000 printers have been sold
and, as a result, the sale of consumable supplies and spare parts represents a
majority of the Company's net sales. From 1985 to 1991, the Company sold its
printers, consumable supplies and spare parts exclusively to IBM. After 1991,
the Company sought to reduce its dependence on IBM by expanding its marketing
efforts to other OEMs. In 1995, IBM formally announced its intention to buy a
competitor's line of mid-range printers. Beginning in 1997 and 1998 with the
introduction of new mid-range printers by HP, Lexmark, and particularly Xerox,
the sales of Kentek printers have declined significantly as each of Kentek's
customers have added the Xerox N40 based engine to its product line. Sales of
consumable supplies and spare parts have continued to decrease as older printers
are taken out of service, thus reducing the installed base of customers who
purchase consumable supplies and spare parts. New printer sales since 1997 have
not been adequate to cover the decline in installed base of the older printers.
OPERATING RESULTS
COMPARISON OF FISCAL YEAR 1999 TO FISCAL YEAR 1998
Total Net Sales. Total net sales decreased 17.5% from $45,053,000 in
fiscal 1998 to $37,173,000 in fiscal 1999. Printer sales constituted 12.1% and
15.6%, respectively, of total net sales in fiscal 1999 and 1998. Consumable
supplies and spare parts constituted 87.9% and 84.4%, respectively, of total net
sales in fiscal 1999 and 1998.
Printer Sales. Printer sales revenue decreased by 36.2% from $7,041,000
in fiscal 1998 to $4,494,000 in fiscal 1999. This decrease is due primarily to
increased competition in the printer market from new low cost mid-range printers
from HP, Lexmark and particularly Xerox.
Consumable Supplies and Spare Parts Sales. Sales of consumable supplies
and spare parts decreased by 14.0% from $38,012,000 in fiscal 1998 to
$32,679,000 in fiscal 1999. This decrease was due primarily to a declining IBM
printer installed base, which resulted in lower consumable supply and spare
parts sales. In addition, sales of printers to non-IBM customers declined from
previous years due to the increased mid-range competition and were insufficient
to replace old non-IBM printers being retired from the installed base.
Gross Profit. Gross profit decreased by 13.3% from $22,729,000 in
fiscal 1998 to $19,703,000 in fiscal 1999. The gross margin increased from 50.4%
to 53.0% in the same period. The continuing 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 during the first six months of the fiscal
year and the purchase of yen forward contracts at favorable exchange rates
during the last six months of the fiscal year also contributed to the improved
gross margin. The decrease in gross profit was due to reduced sales due to
increased mid-range competition, and erosion from the installed base of printers
exceeding new unit placements, thus contributing further to the declines in
sales of consumable supplies and spare parts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 13.3% from $8,815,000 in fiscal 1998 to
$8,287,000 in fiscal 1999. The decrease was a result of lower headcount due to
the termination of the Company's KW60 printer project and a lower accrual for
profit sharing, offset by an increase in sales and marketing expenses. See Note
4 to the Consolidated Financial Statements for a further discussion of the KW60
project.
Research and Development Expense. Research and development expenses
decreased by 31.7% from $9,671,000 in fiscal 1998 to $6,606,000 in fiscal 1999.
This decrease was due to the termination of the KW60 printer project in November
1998, which resulted in a significant reduction in headcount and other
development expenses. The Company terminated the KW60 because the development
effort was significantly behind schedule and in the Company's estimation, would
have required an additional two years and approximately $20,000,000 in
development costs to complete. These factors together with the loss of a key
customer prospect convinced the Company that the KW60 was unlikely to generate
sufficient future profits to warrant continued investment. The Company
anticipates research and development expenses will become product support
expenses and will continue at much reduced levels in future periods. See page 5
for further discussion of the KW60 program.
Restructuring Charge. On November 6, 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
non-cancelable operating lease costs included in the restructuring charge
relates to two buildings located in Boulder, Colorado. All activities in the
buildings ceased as of the restructuring date, and the Company vacated this
building in January 1999 when the lease terminated. The lease for the second
building was entered into to house the KW60 manufacturing operations that had
not commenced prior to the date of restructuring. The Company halted all
activity, which consisted primarily of completing certain leasehold
improvements, and started to identify potential sublease candidates. The Company
included the remaining obligations for these two leases less an estimate for
sublease income. (See Note 4 of the Notes to the Consolidated Financial
Statements.)
Other Income, Net. Interest income and other income decreased from
$3,314,000 in fiscal 1998 to $2,208,000 in fiscal 1999. This decrease was due
primarily to a loss of $712,000 reflecting recognition of reduced salvage value
for fully depreciated tooling at the Company's Japanese subsidiary; and the
recognition of a loss of $322,000 on the disposal of fixed assets.
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<PAGE> 18
Income Tax Expense. Income tax expense for fiscal 1998 was $2,580,000
compared to $960,000 for fiscal 1999. During fiscal 1999, the Company filed
amended prior year tax returns, primarily related to research and development
credits, which resulted in a refund of approximately $1,200,000. In addition, in
fiscal 1999 the Company disposed of obsolete inventory and recognized a loss on
its investment in its European subsidiary. The effective tax rate for fiscal
1998 was 34.1% compared to 16.3% in fiscal 1999. A reconciliation of the income
tax rates to the federal statutory rate is presented in Note 8 of the Notes to
Consolidated Financial Statements appearing elsewhere in this Form 10-K.
COMPARISON OF FISCAL YEAR 1998 TO FISCAL YEAR 1997
Total Net Sales. Total net sales decreased 20.2% from $56,460,000 in
fiscal 1997 to $45,053,000 in fiscal 1998. Printer sales constituted 15.6% and
14.8%, respectively, of total net sales in fiscal 1998 and 1997. Consumable
supplies and spare parts constituted 84.4% and 85.2%, respectively, of total net
sales in fiscal 1998 and 1997.
Printer Sales. Printer sales revenue decreased by 15.9% from $8,370,000
in fiscal 1997 to $7,041,000 in fiscal 1998. This decrease is due primarily to
increased competition in the printer market.
Consumable Supplies and Spare Parts Sales. Sales of consumable supplies
and spare parts decreased by 20.6% from $48,090,000 in fiscal 1997 to
$38,012,000 in fiscal 1998. This decrease was due to a declining IBM printer
installed base which resulted in lower consumable supply sales as well as an
increase in market competition by third party remanufacturers of consumable
supplies.
Gross Profit. Gross profit decreased by 12.6% from $26,017,000 in
fiscal 1997 to $22,729,000 in fiscal 1998. The gross margin increased from 46.1%
to 50.4% 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 13.3% from $10,167,000 in fiscal 1997 to
$8,815,000 in fiscal 1998. The decrease was a result of the closing of the
Haster facility in Japan, a decrease in sales and marketing expense and lower
legal expenses due to settlement of all pending litigation.
Research and Development Expense. Research and development expenses
increased by 12.4% from $8,601,000 in fiscal 1997 to $9,671,000 in fiscal 1998.
Fiscal 1998 includes a significantly higher level of expenses associated with
the development of prototype KW60 printers and an increase in salary expense of
approximately $575,000.
Other Income, Net. Other income increased from $1,377,000 in fiscal
1997 to $3,314,000 in fiscal 1998. This increase reflects a one-time book loss
of $932,000 related to the sale of the Tama property in Japan recorded in fiscal
1997. The remaining increase of approximately $1,000,000 reflects better
performance of investments and marketable securities as well as more cash
available to invest and a reduction of debt obligations.
Income Tax Expense. Income tax expense for fiscal 1997 was $3,865,000
compared to $2,580,000 for fiscal 1998. Income tax expense for fiscal 1997
included one-time tax expense of $378,000 related to the sale of the Tama
property in Japan. During fiscal 1998, the Company filed amended prior year tax
returns which resulted in a substantial refund. The effective tax rate for
fiscal 1997 was 44.8% compared to 34.1% in fiscal 1998. A reconciliation of the
income tax rates to the federal statutory rate is presented in Note 8 of the
Notes to Consolidated Financial Statements appearing elsewhere in this Form
10-K.
INTERNATIONAL SALES
Direct sales to customers not located in the United States represented
4.1%, 7.2% and 6.0% of the Company's total net sales in fiscal years 1999, 1998
and 1997, respectively. Substantially all of the sales made by the Company in
international markets are priced in dollars to eliminate currency risk. The
Company's international sales are concentrated in Europe. The Company closed its
European sales office located in Gorinchem, Netherlands in March of 1999 and
supports European customers from Boulder, Colorado.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations historically through internally
generated cash, investing, subordinated debt and equity financing, and bank
borrowings.
Changes in cash and cash equivalents during fiscal 1999 resulted in a
net increase of $13,616,000 as compared to a decrease of $1,869,000 during
fiscal 1998. In fiscal 1999, the Company generated net cash from operations of
$22,751,000. The major sources of operational cash were $4,916,000 from net
income, $11,968,000 from the sale of trading securities, $1,909,000 from a
reduction in inventories and $738,000 from increased receivables collections.
Also, in fiscal 1999, the Company generated $5,204,000 from investing
activities, including $7,326,000 from the sale of available-for-sale securities
offset by $2,165,000 in equipment purchases. Additionally, in fiscal 1999, the
Company used $15,179,000 to purchase treasury stock.
At June 30, 1999, the value of Kentek's cash and securities was
$36,976,000. Payment for certain significant obligations subsequent to June 30,
1999 is imminent. Accordingly, approximately $2,974,800 of Kentek's cash balance
will be used in a very short period of time to satisfy certain liabilities and
commitments, including:
o $1,364,000 for estimated income taxes currently payable (including
fiscal 2000 first quarter estimated tax payments);
o 600,000 for operating and purchase commitments of Kentek's Japanese
subsidiary;
o 661,000 for costs associated with the Merger, and
18
<PAGE> 19
o 349,800 for year-end bonuses paid to employees.
After adjusting Kentek's June 30, 1999 cash and securities balances for
these obligations and commitments, the value of the cash and securities held by
Kentek would have approximated $34,001,200, or $7.38 per issued and outstanding
share. This adjusted value represents a $339,800 decrease in the amount of cash
and securities held by Kentek as of March 31, 1999. Given that KE Acquisition
Corp. and Mr. Shires intend to finance a substantial portion of the Merger
Consideration from cash and securities held by Kentek, as of June 30, 1999 (as
adjusted), approximately $7.38 per share of the Merger consideration will be
financed with the cash and securities held by Kentek and approximately $0.91 of
the Merger consideration will be financed by KE Acquisition Corp. and Mr.
Shires.
The Company currently has a $5,000,000 unsecured line of credit with US
Bank that expires in November 1999. The line-of-credit agreement provides for
interest at LIBOR plus 2%. As of June 30, 1999, the Company had no outstanding
borrowings under this credit facility. If the Merger is approved by the
stockholders at the October 28, 1999 special meeting of the stockholders, all of
the Company's current cash and cash equivalents, marketable securities and
investments in limited partnerships will be used to fund the Merger.
In order to provide the funding for the Merger and to provide funding
for operations after completion of the Merger, KE Acquisition and Mr. Shires
have obtained a commitment letter from US Bank to finance up to $6,000,000 at
the bank's prime rate. The financing includes up to $4,000,000 in the form of a
term loan to be repaid in twenty-four equal monthly installments commencing from
the date of borrowing, and up to $2,000,000 in the form of a revolving line of
credit on which any outstanding principal will be due no later than November 30,
2000. KE Acquisition must meet certain financial ratio requirements under the
terms of the commitment letter.
TREASURY STOCK
Prior to February 24, 1999, the Board authorized the repurchase of
shares of the Company's common stock. The Company's repurchases of shares of
common stock were 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 June 30, 1999, the Company had repurchased
2,589,750 shares of its common stock at an aggregate cost of $15,179,084.
Repurchases of stock have been suspended since February 24, 1999 pending
approval by the Company's stockholders of its merger with KE Acquisition Corp.
See Item 2.
As of June 30, 1999, the Company had recorded a net deferred tax asset
totaling $1,838,000, with $693,000 classified as non-current as a result of the
nature of the temporary differences. The non-current portion is attributable to
property and equipment. At June 30, 1998, the Company had recorded a $2,773,000
net deferred tax asset. The Company had determined that it is more likely than
not that it will have sufficient taxable income in future periods to realize the
corresponding tax benefit resulting from the deferred tax asset.
Financial information about income taxes is presented in Note 8 of the
Notes to Consolidated Financial Statements which appear elsewhere in this Form
10-K.
The Company believes that cash flows provided by operating activities,
together with its bank line, will be sufficient to meet the Company's cash
requirements for at least twelve months from the date of this Form 10-K.
Since the first quarter of fiscal 1997, the Company has paid a
quarterly cash dividend to holders of its Common Stock equal to $.02 per share.
The Company presently has discontinued this dividend policy with the dividend of
the March 31, 1999 quarter due to the proposed merger.
YEAR 2000 COMPLIANCE
The Company has completed and tested conversion from the existing
accounting and finance software to programs that are year 2000 compliant.
Maintenance or modification costs associated with making all other internal
computer systems year 2000 compliant will be expensed as incurred. As the
Company implements solutions to the year 2000 issue, in some circumstances it
may determine that replacing existing systems, hardware, or equipment may be
more efficient and also provide additional functionality. Replacement of these
systems would be capitalized and would reduce the estimated expenses associated
with the year 2000 issue. The Company has completed its assessment of the
readiness of external entities, such as vendors and suppliers, which interface
with the Company and believes the Company will not incur any interruption in the
flow of materials due to year 2000. In addition, the Company has purchased and
is scheduled to receive adequate supplies of raw material inventory and printers
to satisfy all of the January 2000 requirements by December 31, 1999.
The Company believes it has adequate supplies 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.
The Company's contingency plans, if year 2000 modifications do not work
or are not ready by year 2000, relies significantly on manual procedures and
record keeping. All files will be adequately backed up as of December 31, 1999
and will be available for downloading into any spreadsheet package to facilitate
manual record keeping. Adequate hard copy reports of balances and transactions
as of December 31, 1999 will also be available to provide a complete manual
system of accounting, inventory control, shipping and receiving if required.
Subsequent to year 2000, manual systems will continue to be in place to mitigate
the risk of lost information due to any unforeseen interruptions that may occur
as a result of year 2000 issues arising after January 1, 2000. The Company's
business operating system, PRMS, has been tested both in the U.S. and in Japan
and is believed to be compliant.
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
19
<PAGE> 20
K40DX printer has a real-time clock and is believed to be year 2000 compliant.
Based on management's assessment, no material product distribution or warranty
claims are expected. Management believes that the Company will not incur any
significant product expenses related to year 2000 compliance.
Management believes that its efforts will result in year 2000
compliance. Kentek has incurred no incremental material costs associated with
year 2000 compliance, as the majority of the costs have occurred as a result of
normal upgrade procedures. The Company does not expect the future costs
associated with these procedures to be material. However, the impact on business
operations or failure by the Company to achieve compliance or failure by
external entities which the Company cannot control, such as vendors, to achieve
compliance, could be material to the Company's financial condition and results
of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The accounting
provisions for qualifying hedges allow gains and losses recognized in the income
statement related to a hedged item to be offset by a related derivative's gains
and losses, and requires the Company to formally document, designate, and assess
the effectiveness of transactions that qualify for hedge accounting. The Company
is not required to adopt this statement until July 2001, as amended by SFAS No.
137, "Accounting for Derivatives Instruments and Hedging Activities Deferral of
the Effective Date of SFAS No. 133. The Company has not determined the impact
that adopting this statement will have on its financial statements. However,
when adopted this Statement could increase volatility in reported earnings and
other comprehensive income of the Company.
In January 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance on the accounting for computer software costs. In April 1998,
the AICPA issued SOP No. 98-5, "Reporting on the Costs of Start-up Activities."
This SOP provides guidance on the accounting for the cost of start-up
activities. The Company is not required to adopt these statements until July
2000 and does not expect the adoption of these standards to result in material
changes to previously reported amounts or disclosures.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
relate primarily to the Company's investment portfolio of cash equivalents and
marketable securities. The stated objectives of the Company's investment
guidelines are: safety of principal; liquidity; maximization of yield; and
diversification of risk. The Company places 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, tax exempt state and municipal
obligations and investment limited partnerships. The investment portfolio
includes only those securities with active secondary resale markets to ensure
portfolio liquidity.
The Company has investments in cash and cash equivalents in the amount
of $29,963,000 as well as investments in two limited partnerships in the amount
of $7,000,000 that are subject to market and interest rate risk.
FOREIGN CURRENCY RISK
The Company has operations in Japan, and as a result, operating
expenses are dependent on dollar-yen exchange rates. The Company has purchased
Japanese Yen forward contracts to minimize the effect of fluctuating foreign
currencies on its reported income, generally over the ensuing three months. The
forward contracts do not qualify as hedges for financial reporting purposes and
are reported in the financial statements net of changes in forward rates that
are reflected in income. Although the volatility of income over the period
covered by such contracts is reduced, increased volatility may be reported
during interim periods. The Company monitors credit ratings and concentration of
risk for the counter parties that it enters into forward contracts with on a
continuing basis and such agreements have not historically subjected the Company
to significant credit risk. As of June 30, 1999, the Company did not have any
foreign currency forward contracts outstanding.
Based on the Company's overall currency rate exposure at June 30, 1999,
a 10% change in currency rates would not have a material effect on the financial
position, results of operations or cash flows of the Company. See Note 14 of the
Notes to Consolidated Financial Statements.
20
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report 22
Consolidated Balance Sheets as of June 30, 1999 and 1998 23
Consolidated Statements of Income for the Years Ended June 30, 1999, 1998 and 1997 24
Consolidated Statements of Comprehensive Income 25
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1999, 1998 and 1997 26
Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997 27
Notes to Consolidated Financial Statements 28
Financial Statement Schedule II - Consolidated Valuation and Qualifying Accounts 37
</TABLE>
21
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Kentek Information Systems, Inc.
Boulder, Colorado
We have audited the accompanying consolidated balance sheets of Kentek
Information Systems, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of income, comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
1999. Our audits also included the financial statement schedules listed in the
Index at Item 8. These financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Kentek Information Systems, Inc.
and subsidiaries as of June 30, 1999 and 1998, and the results of their
operations and cash flows for each of the three years in the period ended June
30, 1999 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Denver, Colorado
October 1, 1999
22
<PAGE> 23
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND 1998
(THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30
----------------------
1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 29,963 $ 16,347
Marketable securities (Note 2) 13 19,308
Investment in limited partnership (Note 2) 7,000 7,000
Accounts receivable, less allowance for doubtful
accounts of $295 and $490 4,558 5,297
Inventories (Note 3) 5,816 7,725
Deferred income taxes (Note 8) 1,145 2,000
Other 676 701
-------- --------
Total current assets 49,171 58,378
-------- --------
Property and equipment:
Land and buildings 111 96
Tooling 11,213 9,749
Furniture, fixtures and equipment 4,480 5,927
Leasehold improvements 587 541
-------- --------
Total property and equipment 16,391 16,313
Less accumulated depreciation and amortization (14,927) (14,519)
-------- --------
Property and equipment, net 1,464 1,794
-------- --------
Deposits and other (Note 8) 947 1,300
-------- --------
Total assets $ 51,582 $ 61,472
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,097 $ 2,200
Accrued expenses:
Income taxes 30 180
Bonus 347 539
Other 2,768 2,331
-------- --------
Total current liabilities 5,242 5,250
Other 32 505
-------- --------
Total liabilities 5,274 5,755
-------- --------
Commitments and contingencies (Notes 10 and 12)
Stockholders' equity (Note 6):
Common stock, $.01 par--shares authorized, 12,000;
shares issued and outstanding, 4,604 and 7,137 72 71
Additional paid-in capital 45,195 44,821
Retained earnings 16,280 11,813
Accumulated other comprehensive income (60) (988)
Treasury stock, at cost (15,179) --
-------- --------
Total stockholders' equity 46,308 55,717
-------- --------
Total liabilities and stockholders' equity $ 51,582 $ 61,472
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net sales (Note 9):
Printers $ 4,494 $ 7,041 $ 8,370
Consumable supplies and spare parts 32,679 38,012 48,090
------- ------- -------
Total 37,173 45,053 56,460
Cost of sales 17,517 22,324 30,443
------- ------- -------
Gross profit 19,656 22,729 26,017
------- ------- -------
Operating expenses:
Selling, general and administrative 8,276 8,815 10,167
Research and development 6,570 9,671 8,601
Restructuring charge (Note 4) 1,142 -- --
------- ------- -------
Total operating expenses 15,988 18,486 18,768
------- ------- -------
Operating income 3,668 4,243 7,249
Other income, net (Note 11) 2,208 3,314 1,377
------- ------- -------
Income before income taxes 5,876 7,557 8,626
Income tax expense (Note 8) 960 2,580 3,865
------- ------- -------
Net income 4,916 $ 4,977 $ 4,761
======= ======= =======
Net income per share:
Basic $ 0.94 $ 0.70 $ 0.70
======= ======= =======
Diluted $ 0.88 $ 0.70 $ 0.69
======= ======= =======
Weighted average shares:
Basic 5,205 7,068 6,849
======= ======= =======
Diluted 5,613 7,143 6,924
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
--------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net income $ 4,916 $ 4,977 $ 4,761
Other comprehensive income:
Currency translation adjustment 928 (235) (204)
------- ------- -------
Comprehensive income $ 5,844 $ 4,742 $ 4,557
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
COMMON STOCK PAID-IN RETAINED TRANSLATION TREASURY
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
-------- -------- ---------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1996 6,825 $ 68 $ 43,463 $ 3,185 $ (549) $ -- $ 46,167
Comprehensive income -- -- -- 4,761 (204) -- 4,557
Exercise of stock options 104 1 482 -- -- -- 483
Dividends paid -- -- -- (546) -- -- (546)
-------- -------- -------- -------- -------- -------- --------
Balance June 30, 1997 6,929 69 43,945 7,400 (753) -- 50,661
Comprehensive income -- -- -- 4,977 (235) -- 4,742
Exercise of stock options 208 2 876 -- -- -- 878
Dividends paid -- -- -- (564) -- -- (564)
-------- -------- -------- -------- -------- -------- --------
Balance June 30, 1998 7,137 71 44,821 11,813 (988) -- 55,717
Comprehensive income -- -- -- 4,916 928 -- 5,844
Exercise of Stock Options 57 1 374 -- -- -- 375
Dividends paid -- -- -- (449) -- -- (449)
Repurchase of shares (2,590) -- -- -- -- (15,179) (15,179)
Balance June 30, 1999 4,604 $ 72 $ 45,195 $ 16,280 $ (60) $(15,179) $ 46,308
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 27
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,916 $ 4,977 $ 4,761
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,322 1,278 1,281
Loss on disposal of property and equipment 1,438 38 777
Deferred income tax expense 935 565 318
Unrealized gains on forward exchange contracts and
trading securities -- (500) (159)
Realized and unrealized gains on available-for-sale
securities -- (1,558) (1,345)
Restructure charge, net of cash payments 462 -- --
Changes in operating assets and liabilities:
Trading securities, net 11,968 (3,254) (8,000)
Accounts receivable 738 916 885
Inventories 1,909 2,008 3,794
Other current assets 25 28 (429)
Other assets (19) (8) 758
Accounts payable and accrued expenses (943) (351) (1,937)
-------- -------- --------
Net cash provided by operating activities 22,751 4,139 704
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of available-for-sale securities -- (10,786) (13,237)
Investments in limited partnerships -- (7,000) --
Purchase of equipment (2,165) (1,226) (1,062)
Proceeds from sale of available-for-sale securities 7,326 13,233 6,367
Proceeds from sale of equipment 43 3 4,928
-------- -------- --------
Net cash provided by (used in) investing activities 5,204 (5,776) (3,004)
-------- -------- --------
FINANCING ACTIVITIES:
Principal payments of long-term debt and capital lease obligations -- -- (5,150)
Proceeds from issuance of common stock 375 878 483
Dividends paid (449) (564) (546)
Purchase of treasury stock (15,179) -- --
-------- -------- --------
Net cash provided by (used in) financing activities (15,253) 314 (5,213)
-------- -------- --------
Effect of exchange rate changes on cash 914 (546) (263)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 13,616 (1,869) (7,776)
Cash and cash equivalents, beginning of year 16,347 18,216 25,992
-------- -------- --------
Cash and cash equivalents, end of year $ 29,963 $ 16,347 $ 18,216
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 4 $ 7 $ 25
Income taxes 683 2,392 5,304
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 28
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Kentek Information Systems, Inc. (the "Company") is a supplier of
mid-range, non-impact laser printers and related consumable supplies and spare
parts. The Company was incorporated under the laws of the State of Delaware in
1981. The Company's operations in the United States ("U.S.") consist of
manufacturing facilities in Boulder, Colorado, which are used to manufacture the
consumable supply products. The Company's subsidiary, Nippon Kentek Kaisha Ltd.,
a Delaware corporation ("Nippon Kentek"), is engaged in manufacturing-related
activities in Japan. The Company designs and engineers its printer engines and
supervises their assembly under contract with a Japanese company. The Company
distributes its printers, consumable supplies and spare parts exclusively
through sales to OEM customers and systems integrators.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary, Nippon
Kentek. All significant intercompany balances and transactions have been
eliminated in consolidation.
Foreign Currency Translation - Assets and liabilities of subsidiaries
whose functional currency is deemed to be other than the U.S. dollar are
translated at year-end rates of exchange and revenues and expenses are
translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in the currency translation adjustments
component of stockholders' equity. Currency transaction gains and losses are
recognized in income currently.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In addition, significant estimates are included in the accompanying
financial statements related to reserves for inventory obsolescence,
uncollectible accounts receivable and warranty reserves which are based upon
historical and developing trends, aging of items, and other information deemed
pertinent to estimate collectibility and realizability. It is possible that
these reserves may change within a year, and the effect of the change could be
material to the consolidated financial statements.
Cash Equivalents - The Company considers cash, money market accounts
and all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Marketable Securities - Management has determined that the Company's
marketable securities portfolio consists of both available-for-sale and trading
securities.
Marketable securities classified as available-for-sale are available to
support current operations and to take advantage of other investment
opportunities. These securities are stated at fair value based upon market
quotations. Unrealized gains and losses on available-for-sale securities were
not significant. Realized gains and losses are included in other income, net.
Marketable securities classified as trading securities are carried at
fair value based upon market quotations. Net realized and unrealized gains and
losses on trading securities are included in other income, net.
Concentrations of Credit Risk - The Company's financial instruments
that are exposed to concentrations of credit risk consist primarily of cash and
cash equivalent balances in excess of the insurance provided by federal
insurance authorities, marketable securities and accounts receivable.
The Company's cash equivalents are placed with a major financial
institution and are primarily invested in investment grade commercial paper with
an average original maturity of three months or less and money market accounts.
The Company's marketable securities consist of commercial paper and various
equity securities. The exposure to loss resulting from the concentrations of
credit risk with respect to accounts receivable is limited due to generally
short payment terms and the customers' dispersion across geographic areas. The
Company performs ongoing credit evaluation of its customers' financial condition
and generally requires no collateral from its customers.
Inventories - Inventories are valued at the lower of cost (determined
primarily by the weighted moving average method) or market.
Property, Equipment and Depreciation - Property and equipment are
stated at cost. Depreciation is computed by the straight-line method over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Tooling 3
Furniture, fixtures and equipment 3-7
Leasehold improvements Term of Lease
</TABLE>
Impairment of Long-lived Assets - Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, as determined based on
estimated future cash flows on an undiscounted basis.
28
<PAGE> 29
Income Taxes - The Company accounts for income taxes in accordance with
the Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement basis and the income
tax basis of assets and liabilities that will result in taxable or deductible
amounts in the future. Such deferred income tax computations are based on
enacted tax laws and rates applicable to the years in which the differences are
expected to affect taxable income.
Stock Option Plans - The Company accounts for stock-based compensation
to employees and directors using the intrinsic value method in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25") and has adopted the disclosure only provisions of
SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123").
Net Income Per Share - During 1998, the Company adopted SFAS No. 128,
"Earnings Per Share". SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and supersedes APB Opinion No. 15 and its
related interpretations. All prior periods presented have been restated in
accordance with SFAS No. 128. SFAS No. 128 replaces the presentation of primary
EPS with a presentation of basic EPS, which excludes dilution, and requires dual
presentation of basic and diluted EPS for all entities with complex capital
structures. Diluted EPS is computed similarly to fully diluted EPS pursuant to
APB Opinion No. 15. Stock options were omitted from the denominator because they
were antidilutive and were not material. A reconciliation of the numerator and
denominator used in the calculation of basic and diluted earnings per share is
presented below.
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
FOR THE YEAR ENDED JUNE 30, 1999
Net income $4,916
======
Basic net income per share
Income available to
Common stockholders $4,916 5,205 $0.94
====== =====
Effect of stock options 408
------
Diluted net income per share $4,916 5,613 $0.88
====== ====== =====
FOR THE YEAR ENDED JUNE 30, 1998
Net income $4,977
======
Basic net income per share
Income available to
Common stockholders $4,977 7,068 $0.70
====== =====
Effect of stock options 75
------
Diluted net income per share $4,977 7,143 $0.70
====== ====== =====
FOR THE YEAR ENDED JUNE 30, 1997
Net income $4,761
======
Basic net income per share
Income available to
Common stockholders $4,761 6,849 $0.70
====== =====
Effect of stock options 75
------
Diluted net income per share $4,761 6,924 $0.69
====== ====== =====
</TABLE>
Revenue Recognition and Product Warranty - Sales of printers,
consumable supplies and spare parts are recorded upon shipment to customers. The
Company warrants its printers against defects in design, materials and
workmanship for two years. A provision for estimated future costs relating to
warranty expense is recorded when products are shipped.
Research and Development - Costs incurred in connection with research
and development activities are expensed as incurred.
New Accounting Pronouncements- Other Comprehensive Income - Effective
July 1, 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," (SFAS No. 130") which establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of SFAS No. 130 had no impact on the Company's net income
or stockholders' equity. SFAS No. 130 requires the Company's currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in accumulated other comprehensive income.
Prior year amounts have been reclassified to conform to the requirements of SFAS
No. 130.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133
29
<PAGE> 30
establishes accounting and reporting standards requiring that all derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The accounting provisions for qualifying
hedges allow gains and losses recognized related to a hedged item in the income
statement to be offset by related derivative's gains and losses, and requires
the Company to formally document, designate, and assess the effectiveness of
transactions that qualify for hedge accounting. The Company is not required to
adopt this statement until July 2001, as amended by SFAS No. 137, "Accounting
for Derivative Instrument and Hedging Activities Deferral of the Effective Date
of SFAS No. 133". The Company has not determined its method or timing of
adopting this statement or the impact on its financial statements. However, when
adopted this statement could increase volatility in reported earnings and other
comprehensive income of the Company.
In January 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance on the accounting for computer software costs. In April 1998,
the AICPA issued SOP No. 98-5, "Reporting on the Costs of Start-up Activities."
This SOP provides guidance on the accounting for the cost of start-up
activities. The Company is not required to adopt these statements until July
2000 and does not expect the adoption of these standards to result in material
changes to previously reported amounts or disclosures.
Reclassifications - Certain prior year amounts have been reclassified
to conform with the current year presentation.
2. INVESTMENTS
Marketable Securities - The Company accounts for its investments in
marketable securities in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires an entity to
categorize its investments as held-to-maturity, available-for-sale, or trading
securities, according to the use of investment, and to record unrealized gains
and losses in net income or as separate component of stockholders' equity,
depending on the investment's classification. Management determines the proper
classifications of investments in obligations with fixed maturities and
marketable equity securities at the time of purchase and reevaluates such
designations as of each balance sheet date. As of June 30, 1999 and 1998,
available-for-sale and trading securities consisted of the following:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(THOUSANDS)
<S> <C> <C> <C> <C>
JUNE 30, 1999
Available-for-sale securities
Bank and corporate debt $ -- $ -- $ -- $ --
Trading securities
Equity 13 -- -- 13
------- ------- ------- -------
Total $ 13 $ -- $ -- $ 13
======= ======= ======= =======
JUNE 30, 1998
Available-for-sale securities
Bank and corporate debt $ 7,326 $ -- $ -- $ 7,326
Trading securities
Equity 11,549 433 -- 11,982
------- ------- ------- -------
Total $18,875 $ 433 $ -- $19,308
======= ======= ======= =======
</TABLE>
As of June 30, 1998, securities classified as available-for-sale had
contractual maturity dates ranging from July 1998 to April 2029, the cost for
these securities approximated their fair value. During 1999 and 1998, proceeds
from sales of available-for-sale securities approximated $7,326,000 and
$13,233,000, respectively. The Company uses the specific identification method
to determine cost for available-for-sale securities. Gross unrealized gains and
losses on sales of available-for-sale securities were not material in 1999 and
1998. Net unrealized holding gains on trading securities of $-0- and $433,000
have been included in net income for 1999 and 1998, respectively.
Investments in Limited Partnerships - As of June 30, 1999 and 1998, the
Company has investments in two limited partnerships. The first investment of
$3,000,000 was made in June 1998 in the HCM High Yield Opportunity Fund, LP
("HCM"). The prospectus for HCM indicates that HCM's investment objective is to
provide investors with risk-adjusted rates of return through a portfolio
structured to generally have the following characteristics: low volatility;
short duration (generally less than 2 years); and an overall high degree of
liquidity in the underlying securities. The partnership will attempt to achieve
these objectives through a two-pronged investment strategy: an emphasis on
non-investment grade fixed income financial instruments (including bonds and
bank loans) that, in HCM's judgement, are likely (i) to be repurchased by the
issuer at a premium within twelve to eighteen months as a result of the
occurrence of a corporate event such as an IPO, asset sale, merger or
refinancing and (ii) active trading of the portfolio. Withdrawals from the
partnership may be made quarterly with 30 days notice. The second investment of
$4,000,000 was also made in June 1998 in Cerberus, LP ("CLP"). The
30
<PAGE> 31
prospectus for CLP indicates that CLP invests in publicly traded and private
debt, trade claims, large and middle market bank loans, distressed real estate
and public and private equity, including post bankruptcy equity. To control
risk, assets are broadly diversified among 60 or more positions. Withdrawals
from the fund may be made each June 30 and December 31 with 90 days notice. The
Company accounts for the investments in limited partnerships at cost. Based on
information provided by HCM's and CLP's General Partners, the Company's
proportionate share in the fair value of each partnership as of June 30, 1999
and 1998 approximated the Company's carrying value for each investment.
3. INVENTORIES
Inventories consist of the following net of allowance:
<TABLE>
<CAPTION>
JUNE 30
-----------------
1999 1998
------ ------
(THOUSANDS)
<S> <C> <C>
Finished printers, consumable supplies and spare parts $3,275 $4,072
Raw materials 2,541 3,653
------ ------
$5,816 $7,725
====== ======
</TABLE>
4. RESTRUCTURING
On November 6, 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 non-cancelable
operating lease costs included in the restructuring charge relates to two
buildings located in Boulder, Colorado. All activities in the buildings ceased
as of the restructuring date, and the Company vacated this building in January
1999 when the lease terminated. The lease for the second building was entered
into to house the KW60 manufacturing operations that had not commenced prior to
the date of restructuring. The Company halted all activity, which consisted
primarily of completing certain leasehold improvements, and started to identify
potential sublease candidates. The Company included the remaining obligations
for these two leases less an estimate for sublease income. The following table
summarizes the costs associated with the restructuring charge:
<TABLE>
<CAPTION>
SEVERANCE AND OTHER WRITE-OFF OF NON-CANCELABLE TOTAL RESTRUCTURING
TERMINATION BENEFITS LONG-LIVED ASSETS OPERATING LEASES CHARGE
(thousands)
<S> <C> <C> <C> <C>
Initial reserve $ 542 $ 446 $ 154 $ 1,142
Utilized through June 30, 1999 (542) (446) (138) (1,126)
------- ------- ------- -------
Balance $ -- $ -- $ 16 $ 16
======= ======= ======= =======
</TABLE>
5. REVOLVING CREDIT AGREEMENT
The Company currently has a $5,000,000 unsecured line of credit with US
Bank that expires in November 1999. The line-of-credit agreement provides for
interest at LIBOR plus 2%. As of June 30, 1999, the Company had no outstanding
borrowings under this credit facility. If the Merger is approved by the
stockholders at the October 28, 1999 special meeting of the stockholders, all of
the Company's current cash and cash equivalents, marketable securities and
investments in limited partnerships will be used to fund the Merger.
6. CAPITAL STOCK
Prior February 24, 1999, the Board 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 June 30, 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. (See Note 15.)
During 1999, 1998 and 1997, the Company declared and paid cash
dividends per common share equal to $0.06, $0.08 and $0.08 respectively.
7. STOCK OPTION PLAN
The Company currently has one stock option plan, the 1992 Stock Option
Plan ("the Plan"). The Plan provides for the grant of incentive stock options to
officers, directors, and employees of the Company. The Company has reserved
1,250,000 shares of its authorized common stock for stock options for issuance
in connection with the plan. The Plan provides for the grant of stock options,
including incentive stock options and non-statutory stock options. At June 30,
1999, there were 282,374 shares available for future stock option grants. The
following table summarizes information on stock option activity for the Plan:
31
<PAGE> 32
<TABLE>
<CAPTION>
EXERCISE PRICE WEIGHTED AVERAGE
NUMBER OF SHARES PER SHARE EXERCISE PRICE PER SHARE
---------------- -------------- ------------------------
<S> <C> <C> <C>
Outstanding at
June 30, 1996 681,002 $3.24 - $8.38 $5.43
Granted 117,000 $6.00 - $7.88 $6.48
Exercised (104,817) $3.24 - $6.49 $4.61
Canceled and expired (45,772) $3.24 - $8.38 $6.61
--------
Outstanding at
June 30, 1997 647,413 $3.24 - $7.88 $5.67
Granted 109,500 $7.94 - $9.50 $8.68
Exercised (207,890) $3.24 - $6.49 $4.22
Canceled and expired (37,878) $3.24 - $6.63 $5.72
--------
Outstanding at
June 30, 1998 511,145 $3.24 - $9.50 $6.90
Granted 289,950 $6.81 $6.81
Exercised (57,666) $6.49 - $6.63 $6.49
Canceled and expired (230,319) $3.24 - $9.50 $7.18
--------
Outstanding at
June 30, 1999 513,110 $3.24 - $8.00 $6.62
======== ============= =====
</TABLE>
Options issued to officers and employees under the Plan vest
proportionately over three years on each of the first, second, and third
anniversary dates of the option grant date and expire in five years. Options
granted subsequent to July 1, 1997 have a ten-year life. Options issued to
directors under the Plan vest 100% six months after the grant date and expire in
ten years.
The Company accounts for stock options issued to officers, directors and
employees using the intrinsic value method prescribed
by APB No. 25 and has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation expense has been recognized for options issued
under the Plan. Had compensation expense for the Plan been determined based on
the fair value at the grant date of awards under those plans consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net income - as reported $4,916,000 $4,977,000 $4,761,000
Net income - pro forma 4,324,000 4,511,000 4,437,000
Net income per share - as reported
Basic $0.94 $0.70 $0.70
Diluted 0.88 0.70 0.69
Net income per share - pro forma
Basic $0.83 $0.64 $0.65
Diluted 0.77 0.64 0.64
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model. The following assumptions
used for grants in 1999, 1998 and 1997; risk-free interest rate of 6.257% in
1999, 5.20% in 1998, and 6.00% in 1997; annual dividend of $.08; expected life
of five years; and expected volatility of 43.70% in 1999, 53.21% in 1998 and
57.00% in 1997. The outstanding stock options at June 30, 1999 have a weighted
average remaining contractual life of 6.9 years. The weighted average fair value
of options granted in 1999, 1998 and 1997 were $2.91, $4.27 and $3.16,
respectively.
The following table summarizes information about stock options outstanding
under the Plan as of June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE EXERCISE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE PRICE
EXERCISE PRICES AT JUNE 30, 1999 CONTRACTUAL LIFE PRICE AT JUNE 30, 1999 EXERCISABLE
- --------------- ---------------- ---------------- -------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
N/A 0 1 year $ .00 N/A $ .00
6.49 132,427 2 years 6.49 132,427 6.49
6.49 to 6.63 10,000 3 years 6.63 10,000 6.63
3.24 to 8.81 12,942 4 years 3.24 12,942 3.24
3.24 to 8.81 1,848 5 years 3.24 1,848 3.24
3.24 to 8.81 6,009 6 years 6.49 6,009 6.49
3.24 to 8.81 63,264 7 years 6.49 63,264 6.49
5.64 to 8.81 55,849 8 years 6.75 36,860 6.75
5.64 to 8.81 27,000 9 years 8.00 8,910 8.00
6.81 203,771 10 years 6.81 0 0
-------------- ------- -------- ----- ------- -----
$3.24 to $8.81 513,110 $6.63 272,260 $6.40
============== ======= ===== ======= =====
</TABLE>
32
<PAGE> 33
8. TAXES ON INCOME
Taxes on income consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
--------------------------------------
1999 1998 1997
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Current expense:
Federal $ 12 $1,670 $3,072
State 13 345 475
Foreign -- -- --
------ ------ ------
25 2,015 3,547
------ ------
Deferred expense
Federal 748 454 215
State 187 111 103
------ ------ ------
935 565 318
Reduction in valuation allowance -- -- --
------ ------ ------
935 565 318
------ ------ ------
Income tax expense $ 960 $2,580 $3,865
====== ====== ======
</TABLE>
The components of the net deferred tax asset are shown below:
<TABLE>
<CAPTION>
JUNE 30
---------------------------
1999 1998
------- -------
(THOUSANDS)
<S> <C> <C>
Inventories $ 1,042 $ 1,426
Accrued expenses and other (2) 397
Property and equipment 693 773
Accounts receivable allowance 105 177
------- -------
Net deferred tax asset 1,838 2,773
Less current deferred tax asset 1,145 2,000
------- -------
Non-current deferred tax asset $ 693 $ 773
======= =======
</TABLE>
The net deferred tax asset of $1,838,000 at June 30, 1999 is realizable
as the Company has determined, based on several recurring periods of profitable
operations, 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 net deferred tax asset. Management plans to re-evaluate the positive and
negative evidence to this effect on a quarterly basis and make appropriate
adjustments to the deferred tax asset. Components of the net deferred tax asset,
other than property and equipment, primarily reverse annually. The non-current
portion, which is included in deposits and other assets, is attributable to
property and equipment.
The net deferred tax asset at June 30, 1998 was $2,773,000. The current
portion of $2,000,000 is a result of temporary differences that primarily
reverse annually. The remaining non-current portion of $773,000 is attributable
to property and equipment.
A reconciliation of the Company's effective tax rates to the federal
statutory rate is shown below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------------------
1999 1998 1997
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Federal and state income tax computed at statutory rates $ 2,079 $ 2,887 $ 3,217
Research and development credits (980) (366) --
Other permanent differences, net (139) 59 648
------- ------- -------
Tax expense $ 960 $ 2,580 $ 3,865
======= ======= =======
</TABLE>
The Company's 1999 current income tax provision was reduced by certain
non-recurring adjustments, primarily related to research and development credits
that were included in the amended tax returns.
9. SALES TO PRINCIPAL CUSTOMERS
Transactions
Sales to customers and their affiliates which were 10% or more of total
net sales are shown below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Customer A 22% 28% 34%
Customer B 21 18 14
Customer C -- -- 2
Customer D 17 18 15
</TABLE>
33
<PAGE> 34
10. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Operating Leases
The Company leases office and warehouse space under operating leases
expiring at various dates through the year 2003. Rent expense for the years
ended June 30, 1999, 1998 and 1997 was $680,000, $983,000 and $928,000. Future
minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, (THOUSANDS)
-----------
<S> <C>
2000 $ 676
2001 571
2002 274
2003 207
------
$1,728
======
</TABLE>
Employment Agreement
On April 1, 1989, the Company entered into an Employment Agreement with
its President and Chief Executive Officer. The Employment Agreement, as amended,
provides for an annual salary of $252,000, an annual bonus equal to 1.5% of the
Company's pre-tax profits for each fiscal year and automobile allowance of $800
per month. The Employment Agreement can be terminated by the Company by written
notice at any time and in such event, the President and Chief Executive Officer
is entitled to a monthly severance payment equal to his then current monthly
salary for a period of six months after such termination. In addition, the
President and Chief Executive Officer is obligated not to solicit any employees
to leave employment of the Company for a period of three years after termination
of his employment. For the years ended June 30, 1999, 1998 and 1997, bonuses of
approximately $112,500, $113,000 and $129,000 were recorded.
Profit-Sharing Plan
The Company has a savings and profit sharing plan, which allows
participants to make contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code. The Company matches 50% of employee
contributions up to 6% of the employee's salary. The Company's contributions are
vested 20% per year beginning with the second year of service. During the years
ended June 30, 1999, 1998 and 1997, the Company's contributions to the plan were
$119,000, $118,000 and $73,000.
Related Party Transactions
The Chairman of the Board of Directors provides consulting services to
the Company. Consulting expense for these services for the years ended June 30,
1999, 1998 and 1997 was approximately $75,000, $79,000 and $81,000.
11. OTHER INCOME, NET
Other income, net consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
---------------------------------
1999 1998 1997
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Investment income $ 3,369 $ 3,189 $ 2,000
Foreign currency exchange gain 37 67 --
Interest expense (4) (7) (96)
Loss on sale of fixed assets (1,438) (38) (777)
Miscellaneous 244 103 250
------- ------- -------
Other income, net $ 2,208 $ 3,314 $ 1,377
======= ======= =======
</TABLE>
12. CONTINGENCIES
The Company is involved with certain claims and disputes incidental to its
business. The Company currently believes that the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
13. SEGMENT INFORMATION
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments.
The Company's operations are conducted in one business segment, mid-range,
non-impact laser printers and related consumable
34
<PAGE> 35
supplies and spare parts. The Company's production facilities are located in the
U.S. and Japan. Export sales from U.S. based operations, primarily to Germany,
approximated $2,309,000, $3,254,000 and $3,415,000 in 1999, 1998 and 1997,
respectively. Intercompany sales are transacted at established transfer prices
and the related profits are eliminated in consolidation. General corporate
assets included in U.S. based operations primarily consist of cash and cash
equivalents, marketable securities and other investments. These assets
approximated $36,976,000, $42,655,000 and $34,590,000 in 1999, 1998 and 1997,
respectively. During the years ended June 30, 1999, 1998 and 1997 the Company
had foreign and domestic sales, operating income, identifiable assets,
depreciation and amortization, and capital expenditures as shown below:
<TABLE>
<CAPTION>
U.S. JAPAN EUROPE CONSOLIDATING TOTAL
-------- -------- -------- ------------- --------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999
Net sales $ 37,173 $ 10,197 $ -- $(10,197) $ 37,173
Operating income (expense) 5,212 (1,544) -- -- 3,668
Identifiable assets 53,705 2,958 -- (5,081) 51,582
Depreciation and amortization 1,129 193 -- -- 1,322
Capital expenditures 1,572 593 -- -- 2,165
1998
Net sales $ 45,053 $ 13,389 $ -- (13,389) $ 45,053
Operating income (expense) 5,438 (1,080) (115) 4,243
Identifiable assets 62,330 4,009 49 (4,916) 61,472
Depreciation and amortization 1,168 104 6 -- 1,278
Capital expenditures 970 256 -- -- 1,226
1997
Net sales $ 56,460 $ 17,015 $ -- (17,015) $ 56,460
Operating income (expense) 9,899 (2,683) 33 -- 7,249
Identifiable assets 57,859 3,195 211 (3,613) 57,652
Depreciation and amortization 1,237 36 8 -- 1,281
Capital expenditures 882 180 -- -- 1,062
</TABLE>
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Foreign Exchange Risk Management
The Company has operations in Japan, and as a result, operating
expenses are dependent on dollar-yen exchange rates. The Company has purchased
Japanese yen forward contracts to minimize the effect of fluctuating foreign
currencies on its reported income, generally over the ensuing three months. The
forward contracts do not qualify as hedges for financial reporting purposes and
are reported in the financial statements net of changes in forward rates that
are reflected in income. Although the volatility of income over the period
covered by such contracts is reduced, increased volatility may be reported
during interim periods. The Company monitors the credit ratings and
concentration of risk for the counterparties that it enters into forward
contracts with on a continuing basis and such arrangements have not historically
subjected the Company to significant credit risk. As of June 30, 1999, the
Company did not have any foreign currency forward contracts outstanding. At June
30, 1998, outstanding Japanese yen contractual amounts were as follows:
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT GAINS LOSSES
(THOUSANDS)
<S> <C> <C> <C>
Japanese yen forward contracts $ 2,748 $ 67 $ --
</TABLE>
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair
value due to the short-term maturities of these instruments. The fair value of
marketable securities was estimated based on quoted market prices as of
year-end. The estimated fair values of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
1999 1998
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(THOUSANDS)
<S> <C> <C> <C> <C>
Nonderivatives:
Cash and cash equivalents $29,963 $29,963 $16,347 $16,347
Marketable securities 13 13 19,308 19,308
Investments in limited partnerships 7,000 7,000 7,000 7,000
Derivatives:
Japanese yen forward contracts -- -- 67 67
</TABLE>
35
<PAGE> 36
15. 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.
The Company's Board of Directors formed a Special Committee of
independent directors to review the advisability of this proposal. The Committee
is chaired by the Company'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 the Company. Under the
terms of the merger agreement, each shareholder would receive, at closing, $8.29
in cash for each share of the Company's common stock.
The Board of Directors of the Company, acting on the unanimous
recommendation of the Special Committee of independent directors, unanimously
approved the transaction and recommended that the stockholders of the Company
approve and adopt the agreement and merger. The transaction is subject to the
approval of the Company's stockholders, financing, any applicable regulatory
approvals and certain other conditions.
On September 27, 1999, the SEC completed its review of the Proxy
Statement, and approved the mailing of the Proxy Statement to Kentek's
stockholders. The date for the Special Meeting of Stockholders to consider and
vote on the proposal to approve and adopt the Merger Agreement between the
Company and KE Acquisition Corp. has been set for October 28, 1999 at the
offices of Cooley Godward LLP, 2595 Canyon Boulevard, Boulder, Colorado 80302.
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.
36
<PAGE> 37
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended June 30, 1999:
Allowance for doubtful accounts $ 490 $ 37 $ 232 $ 295
Allowance for inventory 3,238 638 1,486 2,390
------ ------ ------ ------
$3,728 $ 675 $1,718 $2,685
====== ====== ====== ======
Year Ended June 30, 1998:
Allowance for doubtful accounts $ 653 $ 165 $ 328 $ 490
Allowance for inventory 4,145 279 1,186 3,238
------ ------ ------ ------
$4,798 $ 444 $1,514 $3,728
====== ====== ====== ======
Year Ended June 30, 1997:
Allowance for doubtful accounts $ 627 $ 138 $ 112 $ 653
Allowance for inventory 3,548 1,023 426 4,145
------ ------ ------ ------
$4,175 $1,161 $ 538 $4,798
====== ====== ====== ======
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes to report.
37
<PAGE> 38
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers is set forth
in the Annual Proxy Statement under the heading "Directors and Executive
Officers", which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the
Annual Proxy Statement under the heading "Executive Compensation", which
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial
owners and management is set forth in the Annual Proxy Statement under the
heading "Security Ownership of Certain Beneficial Owners and Management", which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions
is set forth in the Annual Proxy Statement under the heading "Certain
Relationships and Related Transactions", which information is incorporated
herein by reference.
38
<PAGE> 39
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K.
1. Financial Statements: The financial statements of the Company are
included in Part II, Item 8 of this report. See Index to Financial
Statements on Page 20.
2. Financial Statement Schedules: Financial statement schedules
required under the related instructions are applicable for the
period ended June 30, 1999, 1998 and 1997, and are therefore
included in Item 8.
3. Exhibits: The exhibits which are filed with this Report or which
are incorporated herein by reference are set forth in the Exhibit
Index below.
(b) Reports on Form 8-K filed during the fourth quarter of fiscal year 1999 -
May 17, 1999 relating to the Merger.
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C> <C>
2.1++ -- Merger Agreement dated as of May 14, 1999 between Kentek
Information Systems, Inc. and KE Acquisition Corp.
3(i).1+ -- Amended and Restated Certificate of Incorporation of the
Registrant.
3(ii).1+ -- Bylaws of the Registrant.
4.1+ -- Reference is made to Exhibits 3(i).1 and 3(ii).1.
4.2+ -- Specimen Stock Certificate.
10.1+ -- Form of Indemnity Agreement entered into between the
Registrant and its directors and executive officers.
10.2+ -- Common Stock Registration Rights Agreement, dated as of
October 5, 1984, as amended.
10.3+ -- Series A Convertible Preferred Stock Purchase Agreement,
dated as of October 5, 1984, as amended.
10.4+* -- Amended and Restated 1992 Stock Option Plan of the
Registrant (the "Option Plan").
10.5+ -- Form of Option granted to persons other than non-employee
directors under the Option Plan.
10.6+ -- Form of Option granted to non-employee directors under the
Option Plan.
10.7+* -- Employment Agreement between the Registrant and Philip W.
Shires, dated April 1, 1989.
10.8+ -- Lease Agreement between the Registrant and Security
Connecticut Life Insurance Company, dated September 20,
1990, as amended.
10.9+ -- Lease Agreement between the Registrant and Pine Property
Limited Partnership, dated July 15, 1992, as amended.
10.10+ -- Lease Agreement between the Registrant and BFN Company,
dated September 28, 1994.
10.11+ -- Agreement on Bank Transactions and translation between
Nippon Kentek Kaisha, Ltd. and The Dai-Ichi Kangyo Bank,
Limited, dated as of July 2, 1984.
10.12+ -- Agreement on Purchase or Negotiation of Bills and
translation between Nippon Kentek Kaisha, Limited and The
Dai-Ichi Kangyo Bank, Limited, dated as of July 2, 1984.
10.12(a)+ -- Security Agreement between the Registrant and the Dai-Ichi
Kangyo Bank, Limited, dated as of July 2, 1992, as amended.
10.12(b)+ -- Guaranty between the Registrant and The Dai-Ichi Kangyo
Bank, Limited, dated as of July 2, 1992.
10.13+ -- Credit and Security Agreement between the Registrant and
Colorado National Bank, dated as of November 2, 1994, as
amended.
10.15+ -- Sales/Purchase Contract between Nippon Kentek Kaisha
Limited and Kao Corporation, dated October 1, 1991.
10.16+ -- Letter Agreement between the Registrant and Lexmark
International, Inc., dated May 10, 1993, as amended.
10.17+ -- Addendum Agreement between the Registrant and Lexmark
International, Inc., dated November 17, 1994.
10.18+ -- Agreement between the Company and Hewlett-Packard Company,
dated March 22, 1994.
10.19+ -- Purchase Agreement between the Company and Siemens Nixdorf
Printing Systems, LP, dated February 3, 1992, as amended.
10.20+ -- Purchase Agreement between the Company and Standard
Register Corporation, dated February 4, 1997.
10.21+ -- Lease Agreement between the Registrant and Avalon
Investment Company, dated March 31, 1997.
21.1+ -- List of subsidiaries of the Registrant.
27.1 -- Financial Data Schedules-Fiscal years ended 1997, 1998 and
1999
27.2+ -- Financial Data Schedules-Quarters 1, 2 and 3 of fiscal 1998
and 1999
</TABLE>
+ Previously filed with the Commission as an exhibit to the Registrant's
Registration Statement on Form S-1 (File No. 333-1606) and incorporated
herein by reference.
++ Previously filed with the Commission as an exhibit to the Form 8-K filed
on February 17, 1999 and incorporated herein by reference.
* Management contract or compensatory plan.
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KENTEK INFORMATION SYSTEMS, INC.
By /s/ PHILIP W. SHIRES
Philip W. Shires
President and Chief Executive Officer
October 8, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ PHILIP W. SHIRES
Philip W. Shires President, Chief Executive Officer
and Director (Principal Executive Officer) October 8, 1999
/s/ KRISTIAN M. QUIGLEY Controller
Kristian M. Quigley (Principal Financial and Accounting Officer) October 8, 1999
/s/ HOWARD L. MORGAN
Howard L. Morgan Chairman of the Board October 8, 1999
/s/ JUSTIN J. PERREAULT
Justin J. Perreault Director October 8, 1999
/s/ JAMES H. SIMONS
James H. Simons Director October 8, 1999
/s/ SHELDON WEINIG
Sheldon Weinig Director October 8, 1999
</TABLE>
40
<PAGE> 41
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C> <C>
2.1++ -- Merger Agreement dated as of May 14, 1999 between Kentek
Information Systems, Inc. and KE Acquisition Corp.
3(i).1+ -- Amended and Restated Certificate of Incorporation of the
Registrant.
3(ii).1+ -- Bylaws of the Registrant.
4.1+ -- Reference is made to Exhibits 3(i).1 and 3(ii).1.
4.2+ -- Specimen Stock Certificate.
10.1+ -- Form of Indemnity Agreement entered into between the
Registrant and its directors and executive officers.
10.2+ -- Common Stock Registration Rights Agreement, dated as of
October 5, 1984, as amended.
10.3+ -- Series A Convertible Preferred Stock Purchase Agreement,
dated as of October 5, 1984, as amended.
10.4+* -- Amended and Restated 1992 Stock Option Plan of the
Registrant (the "Option Plan").
10.5+ -- Form of Option granted to persons other than non-employee
directors under the Option Plan.
10.6+ -- Form of Option granted to non-employee directors under the
Option Plan.
10.7+* -- Employment Agreement between the Registrant and Philip W.
Shires, dated April 1, 1989.
10.8+ -- Lease Agreement between the Registrant and Security
Connecticut Life Insurance Company, dated September 20,
1990, as amended.
10.9+ -- Lease Agreement between the Registrant and Pine Property
Limited Partnership, dated July 15, 1992, as amended.
10.10+ -- Lease Agreement between the Registrant and BFN Company,
dated September 28, 1994.
10.11+ -- Agreement on Bank Transactions and translation between
Nippon Kentek Kaisha, Ltd. and The Dai-Ichi Kangyo Bank,
Limited, dated as of July 2, 1984.
10.12+ -- Agreement on Purchase or Negotiation of Bills and
translation between Nippon Kentek Kaisha, Limited and The
Dai-Ichi Kangyo Bank, Limited, dated as of July 2, 1984.
10.12(a)+ -- Security Agreement between the Registrant and the Dai-Ichi
Kangyo Bank, Limited, dated as of July 2, 1992, as amended.
10.12(b)+ -- Guaranty between the Registrant and The Dai-Ichi Kangyo
Bank, Limited, dated as of July 2, 1992.
10.13+ -- Credit and Security Agreement between the Registrant and
Colorado National Bank, dated as of November 2, 1994, as
amended.
10.15+ -- Sales/Purchase Contract between Nippon Kentek Kaisha
Limited and Kao Corporation, dated October 1, 1991.
10.16+ -- Letter Agreement between the Registrant and Lexmark
International, Inc., dated May 10, 1993, as amended.
10.17+ -- Addendum Agreement between the Registrant and Lexmark
International, Inc., dated November 17, 1994.
10.18+ -- Agreement between the Company and Hewlett-Packard Company,
dated March 22, 1994.
10.19+ -- Purchase Agreement between the Company and Siemens Nixdorf
Printing Systems, LP, dated February 3, 1992, as amended.
10.20+ -- Purchase Agreement between the Company and Standard
Register Corporation, dated February 4, 1997.
10.21+ -- Lease Agreement between the Registrant and Avalon
Investment Company, dated March 31, 1997.
21.1+ -- List of subsidiaries of the Registrant.
27.1 -- Financial Data Schedules-Fiscal years ended 1997, 1998 and
1999
27.2+ -- Financial Data Schedules-Quarters 1, 2 and 3 of fiscal 1998
and 1999
</TABLE>
+ Previously filed with the Commission as an exhibit to the Registrant's
Registration Statement on Form S-1 (File No. 333-1606) and incorporated
herein by reference.
++ Previously filed with the Commission as an exhibit to the Form 8-K filed
on February 17, 1999 and incorporated herein by reference.
* Management contract or compensatory plan.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1998 JUN-30-1997
<PERIOD-START> JUL-01-1998 JUL-01-1997 JUL-01-1996
<PERIOD-END> JUN-30-1999 JUN-30-1998 JUN-30-1997
<CASH> 29,963 16,347 18,216
<SECURITIES> 7,013 26,308 16,374
<RECEIVABLES> 4,558 5,297 6,213
<ALLOWANCES> 0 0 0
<INVENTORY> 5,816 7,725 10,074
<CURRENT-ASSETS> 49,171 58,378 54,550
<PP&E> 16,391 16,313 17,783
<DEPRECIATION> 14,927 14,519 16,062
<TOTAL-ASSETS> 51,582 61,472 57,652
<CURRENT-LIABILITIES> 5,274 5,755 6,489
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 72 71 69
<OTHER-SE> 46,236 55,646 50,592
<TOTAL-LIABILITY-AND-EQUITY> 51,582 61,472 57,652
<SALES> 37,173 45,053 56,460
<TOTAL-REVENUES> 37,173 45,053 56,460
<CGS> 17,517 22,324 30,443
<TOTAL-COSTS> 33,505 40,810 49,211
<OTHER-EXPENSES> 2,208 3,314 (1,377)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 5,876 7,557 8,626
<INCOME-TAX> 960 2,580 3,865
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,916 4,977 4,761
<EPS-BASIC> 0.94 0.70 0.70
<EPS-DILUTED> 0.88 0.70 0.69
</TABLE>
