<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
For the quarterly period ended December 31, 1998
or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____________to_____________
Commission file number: 000-27814
KENTEK INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 3577 22-2406249
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
2945 Wilderness Place, Boulder, CO 80301
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 440-5500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No
--- ---
(2) Yes X No
--- ---
Number of shares outstanding of the issuer's common stock, as of December
31, 1998:
4,969,147 shares of Common Stock, $.01 par value per share
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<PAGE> 2
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
December 31, 1998 and June 30, 1998 3
Consolidated Statements of Income -
for the three and six months ended December 31, 1998
and 1997 4
Consolidated Statements of Cash Flows -
for the six months ended December 31, 1998
and 1997 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14 - 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submissions of Matters to a vote of Security
Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION.
Item 1. Consolidated Financial Statements.
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1998 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,371 $ 16,347
Marketable securities 17,276 19,308
Investment in limited partnerships 7,000 7,000
Accounts receivable, less allowance 3,277 5,297
Inventories (Note 2) 6,710 7,725
Deferred income taxes 2,000 2,000
Other 720 701
--------------- ---------------
Total current assets 45,354 58,378
Property and equipment, at cost, less
accumulated depreciation and amortization 2,155 1,794
Deposits and other 952 1,300
--------------- ---------------
Total assets $ 48,461 $ 61,472
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,458 $ 2,200
Accrued expenses (Note 4) 2,832 3,050
--------------- ---------------
Total current liabilities 4,290 5,250
Other 944 505
--------------- ---------------
Total liabilities 5,234 5,755
--------------- ---------------
Stockholders' equity:
Common stock, $.01 par - shares authorized, 12,000;
shares issued, 7,181 and 7,137; shares
outstanding, 4,969 and 7,137 72 71
Treasury stock (Note 3) (12,781) --
Additional paid-in-capital 45,113 44,821
Foreign currency translation adjustment (641) (988)
Retained earnings 11,464 11,813
--------------- ---------------
Total stockholders' equity 43,227 55,717
--------------- ---------------
Total liabilities and stockholders' equity $ 48,461 $ 61,472
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
Page 3
<PAGE> 4
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
----------------------------- ------------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
Printers $ 1,133 $ 1,578 $ 2,102 $ 3,817
Consumable supplies and spare parts 6,873 9,592 15,479 19,007
----------- ----------- ------------ ------------
Total net sales 8,006 11,170 17,581 22,824
Cost of sales 3,400 5,686 8,065 12,182
----------- ----------- ------------ ------------
Gross profit 4,606 5,484 9,516 10,642
----------- ----------- ------------ ------------
Operating Expenses:
Selling, general and administrative 2,320 2,227 4,462 4,329
Research and development 2,355 2,484 5,484 4,389
Restructuring charge (Note 4) 1,142 - 1,142 -
----------- ----------- ------------ ------------
Total operating expenses 5,817 4,711 11,088 8,718
----------- ----------- ------------ ------------
Operating (loss) income (1,211) 773 (1,572) 1,924
Other income, net 724 775 1,511 1,562
----------- ----------- ------------ ------------
(Loss) income before income taxes (487) 1,548 (61) 3,486
Income tax (benefit) expense (160) 580 - 1,307
----------- ----------- ------------ ------------
Net (loss) income $ (327) $ 968 $ (61) $ 2,179
=========== =========== ============ ============
Net (loss) income per share: (Note 5)
Basic $ (0.05) $ 0.14 $ (0.01) $ 0.31
=========== =========== ============ ============
Diluted $ (0.05) $ 0.13 $ (0.01) $ 0.30
=========== =========== ============ ============
Weighted average shares outstanding:
Basic 6,259 7,067 6,676 7,029
=========== =========== ============ ============
Diluted 6,266 7,184 6,690 7,147
=========== =========== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
Page 4
<PAGE> 5
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
December 31
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Operating activities:
Net income $ (61) $ 2,179
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 623 634
Loss on disposal of property and equipment 222 3
Restructuring charge, net of cash payments 882 0
Changes in operating assets and liabilities:
Accounts receivable 2,020 1,032
Inventories 1,015 152
Other current assets (19) (1,114)
Accounts payable and accrued expenses (960) (492)
Other, net 645 457
--------- ---------
Net cash provided by operating activities 4,367 2,851
--------- ---------
Investing activities:
Purchase of marketable securities, net 2,032 (2,148)
Purchase of equipment (1,359) (447)
Proceeds from sale of equipment 171 0
--------- ---------
Net cash provided by (used in) investing activities 844 (2,595)
--------- ---------
Financing activities:
Proceeds from issuance of common stock 293 574
Dividends paid (287) (279)
Purchase of treasury stock (12,781) 0
--------- ---------
Net cash provided by financing activities (12,775) 295
--------- ---------
Effect of exchange rate changes on cash (412) (805)
--------- ---------
Net decrease in cash and cash
equivalents (7,976) (254)
Cash and cash equivalents, beginning of period 16,347 18,216
--------- ---------
Cash and cash equivalents, end of period $ 8,371 $17,962
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
Page 5
<PAGE> 6
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. STATEMENT OF ACCOUNTING PRESENTATION
The accompanying unaudited consolidated financial statements of Kentek
Information Systems, Inc. have been prepared in accordance with generally
accepted accounting principles for interim financial statements and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management all adjustments (consisting only of normal recurring adjustments)
considered necessary for fair presentation have been included. Results of
operations for the three and six months ended December 31, 1998 are not
necessarily indicative of results for the full year. These financial statements
and notes should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto for the year ended June 30, 1998 filed
with the Securities and Exchange Commission in the Company's Annual Report on
Form 10-K. Certain amounts in the 1997 financial statements have been
reclassified to conform to the 1998 presentation.
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ --------
(thousands)
<S> <C> <C>
Finished printers, consumable supplies and spare parts $ 4,041 $ 4,072
Raw Materials 2,669 3,653
-------- -------
$ 6,710 $ 7,725
======== =======
</TABLE>
NOTE 3. TREASURY STOCK
The board of directors has authorized the repurchase of shares of the
Company's common stock. The Company's repurchases of shares of Common Stock are
recorded as Treasury Stock and result in a reduction of Stockholders' equity. No
treasury shares have been reissued, however, in the event of future reissuance
the Company will use a first-in, first-out method and the excess of repurchase
cost over reissuance price will be treated as a reduction of retained earnings.
As of December 31, 1998, the Company has repurchased 2,212,050 shares of its
Common Stock at an aggregate cost of $12,780,959. As of the date of this report,
the board of directors has authorized the Company to repurchase up to one
million additional shares of Common Stock.
Page 6
<PAGE> 7
NOTE 4. RESTRUCTURING CHARGE
In November 1998, the Company terminated its development effort on the KW60, a
wide-format, 60 page-per-minute printer. The Company recorded a pre-tax
restructuring charge of approximately $1,142,000 million for severance and other
termination benefits and other related exit costs. This charge includes
involuntary employee termination benefits for 75 employees, primarily within the
Company's Research and Development Group. The following table summarizes the
costs associated with the restructuring charge (thousands):
<TABLE>
<CAPTION>
Severance &
other termin- Write-off of Noncancellable Total restruct-
ation benefits long-lived assets operating leases uring charge
-------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Initial reserve $ 542 $ 446 $ 154 $ 1,142
Utilized through
December 31, 1998 (359) (446) (14) (819)
------------- ------------- -------------- ---------------
Balance, December 31, 1998 $ 183 $ - $ 140 $ 323
============= ============= ============== ===============
</TABLE>
NOTE 5. EARNINGS PER SHARE
At December 31, 1997 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." All amounts
presented have been restated in accordance with SFAS No. 128. SFAS No. 128
requires companies to present basic earnings per share and diluted earnings per
share, instead of the previously reported primary and fully diluted earnings per
share. The following table is a reconciliation of basic to diluted earnings per
share for the three and six months ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Three months ended December 31, 1998
- ------------------------------------
LOSS PER BASIC SHARE
Loss attributable to common stockholders $ (327) 6,259 $ (0.05)
=========
EFFECT OF DILUTIVE SECURITIES
Stock options -- 7
----------- -------------
LOSS PER DILUTED SHARE $ (327) 6,266 $ (0.05)
=========== ============= =========
Six months ended December 31, 1998
- ----------------------------------
LOSS PER BASIC SHARE
Loss attributable to common stockholders $ (61) 6,676 $ (0.01)
=========
EFFECT OF DILUTIVE SECURITIES
Stock options -- 14
----------- ------------- =========
LOSS PER DILUTED SHARE $ (61) 6,690 $ (0.01)
=========== ============= =========
</TABLE>
Page 7
<PAGE> 8
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Three months ended December 31, 1997
- ------------------------------------
EARNINGS PER BASIC SHARE
Income available to common stockholders $ 968 7,067 $ 0.14
=========
EFFECT OF DILUTIVE SECURITIES
Stock options -- 117
----------- ----------
EARNINGS PER DILUTED SHARE $ 968 7,184 $ 0.13
=========== ========== =========
Six months ended December 31, 1997
- ----------------------------------
EARNINGS PER BASIC SHARE
Income available to common stockholders $ 2,179 7,029 $ 0.31
=========
EFFECT OF DILUTIVE SECURITIES
Stock options -- 118
----------- ----------
EARNINGS PER DILUTED SHARE $ 2,179 7,147 $ 0.30
=========== ========== =========
</TABLE>
The Company declared dividends of $0.02 per share for the quarters
ended June 30, 1998 and September 30, 1998 and paid such dividends on September
18, 1998 and December 4, 1998, respectively.
Page 8
<PAGE> 9
NOTE 6. OTHER COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This standard requires
reporting of changes in stockholders' equity that do not result directly from
transactions with share owners. Components of other comprehensive income (loss)
are as follows:
Three Months Ended:
<TABLE>
<CAPTION>
Current
Balance, October 1 Period Change Balance, December 31
------------------------- ------------------------ ---------------------------
1998 1997 1998 1997 1998 1997
----------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cumulative foreign currency
translation adjustment $ (770) $(1,216) $ 129 $ (17) $ (641) $ (1,233)
Net (loss) income (327) 968
----------- ----------
Comprehensive (loss) income $ (198) $ 951
=========== ==========
</TABLE>
Six Months Ended:
<TABLE>
<CAPTION>
Current
Balance, July 1 Period Change Balance, December 31
------------------------- ------------------------ ---------------------------
1998 1997 1998 1997 1998 1997
----------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cumulative foreign currency
translation adjustment $ (988) $ (753) $ 347 $ (480) $ (641) $ (1,233)
Net (loss) income (61) 2,179
----------- ----------
Comprehensive income $ 286 $1,699
=========== ==========
</TABLE>
Page 9
<PAGE> 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
presented here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section and those
discussed in the Company's Form 10-K for the year ended June 30, 1998,
particularly those contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1998 TO THREE MONTHS ENDED
DECEMBER 31, 1997
Total Net Sales. Total net sales decreased 28.3% from $11,170,000 in
the three months ended December 31, 1997 to $8,006,000 in the three months ended
December 31, 1998. Printer sales revenue decreased 28.2% from $1,578,000 in the
three months ended December 31, 1997 to $1,133,000 in the three months ended
December 31, 1998. This decline was due to increased competition from lower
priced, light duty printers offered by other manufacturers. Consumable supplies
and spare parts sales decreased by 28.3% from $9,592,000 in the three months
ended December 31, 1997 to $6,873,000 in the three months ended December 31,
1998. This decrease was due to a declining printer installed base which resulted
in lower consumable supplies and spare parts sales.
Gross Profit. Gross profit decreased by 16.0% from $5,484,000 in the
three months ended December 31, 1997 to $4,606,000 in the three months ended
December 31, 1998. The gross margin increased from 49.1% to 57.5% in the same
period. The increase in gross margins was due to a shift of consumable supplies
sales to higher margin customers. The Company's exercise of yen forward
contracts purchased at favorable exchange rates in the prior three months also
contributed to the improved gross margin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 4.0% from $2,227,000 in the three months
ended December 31, 1997 to $2,320,000 in the three months ended December 31,
1998. The increase was a result of increased sales and marketing expenses and an
increase in facilities lease expense due to the KW60 printer project. See Note 4
to the Consolidated Financial Statements.
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<PAGE> 11
Research and Development Expense. Research and development expenses
decreased by 5.2% from $2,484,000 in the three months ended December 31, 1997 to
$2,355,000 in the three months ended December 31, 1998. This decrease was due
primarily to the termination of the KW60 project. The Company terminated the
KW60 because in its estimation the return on future sales of the printer no
longer warranted the substantial investment in time and resources that would be
required to finish development.
Restructuring Charge. In November 1998, the Company terminated its
development effort on the KW60, a wide-format, 60 page-per-minute printer. The
Company recorded a pre-tax restructuring charge of approximately $1,142,000 for
severance and other termination benefits and other related exit costs. See Note
4 to the Consolidated Financial Statements.
Other Income, net. Other income, net decreased from $775,000 of income
in the three months ended December 31, 1997 to $714,000 in the three months
ended December 31, 1998. This decrease was due primarily to a reduction in
interest income resulting from a shift of $7,000,000 in cash from interest
earning investments to investments in two limited partnerships that are
accounted for at cost.
Income Tax Expense (Benefit). Income tax expense for the three months
ended December 31, 1997 was $580,000 compared to a benefit of $160,000 for the
three months ended December 31, 1998. The benefit is due to a reduction in the
Company's tax obligations, primarily due to the restructuring charge, for the
period.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1998 TO SIX MONTHS ENDED
DECEMBER 31, 1997
Total Net Sales. Total net sales decreased 23.0% from $22,824,000 in
the six months ended December 31, 1997 to $17,581,000 in the six months ended
December 31, 1998. Printer sales revenue decreased by 44.9% from $3,817,000 for
the six months ended December 31, 1997 to $2,102,000 for the six months ended
December 31, 1998. This decline was due to increased competition from lower
priced, light duty printers offered by other manufacturers. Consumable supplies
and spare parts sales decreased by 18.6% from $19,007,000 in the six months
ended December 31, 1997 to $15,479,000 in the six months ended December 31,
1998. This decrease was due to a declining printer installed base which resulted
in lower consumable supplies and spare parts sales.
Gross Profit. Gross profit decreased by 10.6% from $10,642,000 in the
six months ended December 31, 1997 to $9,516,000 in the six months ended
December 31, 1998. The gross margin increased from 46.6% to 54.1% in the same
period. The increase in gross margins was due to a shift of consumable supplies
sales to higher margin customers. The continued strengthening of the dollar in
relation to the Japanese yen as well as the Company's exercise of yen forward
exchange contracts purchased at favorable exchange rates also contributed to the
improved gross margin.
Page 11
<PAGE> 12
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 3.1% from $4,329,000 in the six months
ended December 31, 1997 to $4,462,000 in the six months December 31, 1998. The
increase was a result of increased sales and marketing expenses offset by a
lower accrual for profit sharing.
Research and Development Expense. Research and development expenses
increased by 24.9% from $4,389,000 in the six months ended December 31, 1997 to
$5,484,000 in the six months ended December 31, 1998. The six months ended
December 31, 1998 included a higher level of expenses associated with the
development of the KW60 printer prior to its termination in November of 1998.
The Company terminated the KW60 because in its estimation the return on future
sales of the printer no longer warranted the substantial investment in time and
resources that would be required to finish development.
Other Income, net. Other income, net decreased from $1,562,000 in the
six months ended December 31, 1997 to $1,511,000 in the six months ended
December 31, 1998. This decrease was due primarily to a reduction in interest
income resulting from a shift of $7,000,000 in cash from interest earning
investments to investments in two limited partnerships that are accounted for at
cost.
Income Tax Expense. Income tax expense for the six months ended
December 31, 1997 was $1,307,000 compared to $ 0 for the six months ended
December 31, 1998. The 1998 income tax provision reflects a reduction in pre-tax
earnings primarily due to the restructuring charge.
LIQUIDITY AND CAPITAL RESOURCES
Changes in cash and cash equivalents during the six months ended
December 31, 1998 resulted in a net decrease of $7,976,000 as compared to a net
decrease of $254,000 in the six months ended December 31, 1997. The primary
reason for this decrease is the Company's repurchase of 2,212,050 shares of the
Company's Common Stock for approximately $12,800,000, an increase in equipment
purchases, net of disposals, of $700,000 and a decrease of approximately
$300,000 in proceeds from the exercise of stock options. These uses of cash were
offset by an increase in the sale of marketable securities of approximately
$4,200,000, an increase in cash generated from operations of approximately
$1,500,000 and a decrease of approximately $400,000 in the effect of foreign
exchange rates on cash. The Company does not believe that the negative sales
trends will have a material impact on its liquidity and capital reserves due to
the cost reduction initiatives already completed and in-process.
Page 12
<PAGE> 13
YEAR 2000 COMPLIANCE
The Company has completed and tested conversion of its accounting and
finance software operating on its IBM AS400-based computers to programs that are
year 2000 compliant. These AS400-based programs are used to compile business
transactions and information and have been tested and judged 100% compliant. The
PC-based network software and business productivity applications such as
Microsoft Office 97, email and internet have not yet been tested for year 2000
compliance. In addition, there are stand-alone, manufacturing tracking systems
that will have to be replaced by year 2000 compliant systems. The Company
estimates that the testing, conversion and/or replacement of these systems will
be completed by June 30, 1999. All maintenance and modification costs associated
with making all internal computer systems, e.g. year 2000 compliant will be
expensed as incurred. As the Company implements solutions to the year 2000
issue, in some circumstances it may determine that replacing existing systems,
hardware or equipment may be more efficient and also provide additional
functionality. Any replacement of these systems would be capitalized, and would
further reduce the estimated expenses associated with the year 2000 issue. The
Company is also continuing its assessment of the readiness of external entities,
such as vendors and suppliers, which interface with the Company and plans to
have this assessment complete by June 30, 1999. The Company believes it has
adequate alternative sources of supply for the majority of the raw materials
used in the printer and consumable supplies production should any particular
vendor fail to be year 2000 compliant.
The Company's contingency plans, if year 2000 modifications do not work
or are not ready by year 2000, rely significantly on manual procedures and
record keeping. All files are presently backed up daily and will be adequately
backed up as of June 30, 1999, which is the end of the Company's fiscal year, as
well as of September 30, 1999, and December 31, 1999, and will be available for
downloading into any spreadsheet package to facilitate manual record keeping.
Adequate hard copy reports of balances and transactions as of June 30, 1999,
September 30, 1999, and December 31, 1999 will also be available to provide a
complete manual system of accounting, inventory control, shipping and receiving
if required. Subsequent to year 2000, manual systems will continue to be in
place to mitigate the risk of lost information due to any unforeseen
interruptions that may occur as a result of year 2000 issues arising after
January 1, 2000.
The Company's past and present printer products incorporate software.
The Company's printer products prior to the K40DX (K2, K2+, K3, K4, K30, K31 and
K40) do not contain any real-time clock functionality and are believed to be
year 2000 compliant. The K40DX printer has a real-time clock and is believed to
be year 2000 compliant. Based on management's assessment, no material product
distribution or warranty claims are expected. Management believes that the
Company will not incur any significant product expenses related to year 2000
compliance.
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<PAGE> 14
Management believes that its efforts will result in year 2000 compliance. Kentek
has incurred no incremental costs associated with year 2000 compliance, as the
majority of the costs have been incurred as a result of normal business upgrade
procedures. The Company does not expect the future costs associated with these
procedures to be material. However, the impact on business operations of failure
by the Company to achieve compliance or failure by external entities which the
Company cannot control, such as vendors, to achieve compliance, could be
material to the Company's financial condition and results of operations.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
relate primarily to the Company's investment portfolio of cash equivalents and
marketable securities. The stated objectives of the Company's investment
guidelines are: safety of principal; liquidity; maximization of yield; and
diversification of risk. The Company places its cash equivalent and marketable
securities investments with U.S. Treasury and federal agency obligations, high
credit quality commercial paper, obligations of corporations, banks and agencies
including notes and bonds, taxable money market preferreds, certificates and/or
time deposits of high quality commercial banks and tax exempt state and
municipal obligations. The investment portfolio includes only those securities
with active secondary resale markets to ensure portfolio liquidity.
The Company also invests in trading securities on a regular basis. The
portfolio is managed by an outside professional and may include equity
securities. Total funds devoted to trading securities are approximately
$17,276,000. As of December 31, 1998, the portfolio did not contain any
equities. The Company also has investments in two limited partnerships in the
amount of $7,000,000 that are subject to market and interest rate risk.
The table below presents principal amounts and related weighted average
interest rates by date of maturity for the Company's investment portfolio of
debt securities. The debt security investment portfolio has a weighted average
maturity of 90 days or less.
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<PAGE> 15
MATURITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FAIR VALUE AT
1999 THEREAFTER TOTAL DEC 31, 1998
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Cash equivalents $ 3,575 $ 3,575 $ 3,575
Average interest rate 4.64% 4.64%
Commercial paper 3,982 $ 0 3,982 3,982
Average interest rate 5.58% 5.58%
============= ========== ========== =============
Total investment portfolio $ 7,557 $ 0 $ 7,557 $ 7,557
Average interest rate 5.13% 5.13%
</TABLE>
The above table is based upon contractual maturity dates in the Company's
investment portfolio of debt securities. These investment securities are subject
to interest rate risk and will fall in value if market interest rates increase.
Due to the short term maturities of the portfolio, no material change in value
is expected if interest rates rise.
FOREIGN CURRENCY RISK
The Company has operations in Japan, and as a result, cost of sales and
operating expenses are dependent on dollar-yen exchange rates. On occasion the
Company has purchased Japanese yen forward exchange contracts to minimize the
effect of fluctuating foreign currencies on its reported income, generally over
the ensuing four to five months. The forward exchange contracts do not qualify
as hedges for financial reporting purposes and are reported in the financial
statements net of changes in forward rates that are reflected in income.
Although the volatility of income over the period covered by such contracts is
reduced, increased volatility may be reported during interim periods. The
counterparty to the Company's forward exchange contract consists of one
financial institution. The credit ratings and concentration of risk of this
financial institution are monitored on a continuing basis and present no
significant risk to the Company. At December 31, 1998, outstanding Japanese yen
contractual amounts were as follows:
NOTIONAL
AMOUNT GAINS LOSSES
(THOUSANDS)
Japanese yen forward contracts $ 652 $ 9 $ -
Based on the Company's overall currency rate exposure at December 31,
1998, a 10% change in currency rates would not have a significant material
effect on the financial position, results of operations or cash flows of the
Company.
Page 15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently not involved in any material legal
proceedings.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submissions of Matters to a vote of Security Holders
The Company held its Annual Meeting of Stockholders on November 20,
1998.
a) All of the nominees for director were elected with the voting results for
each as follows:
Director Votes for Votes withheld
-------- --------- --------------
Howard L. Morgan 5,580,236 39,500
Philip W. Shires 5,580,236 39,500
Justin J. Perreault 4,705,336 914,400
James H. Simons 5,580,236 39,500
Sheldon Weinig 5,577,336 42,400
c) The following details the voting results with respect to ratifying the
selection of Deloitte & Touche LLP as independent auditors for the fiscal year
ending June 30, 1999:
For 5,615,736
Against 2,000
Abstain 2,000
------------
Total 5,619,736
Item 5. Other Information
Not applicable.
Page 16
<PAGE> 17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Form 8-K
Filed on November 16, 1998.
Page 17
<PAGE> 18
KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 12, 1999 KENTEK INFORMATION SYSTEMS, INC.
/s/ HOWARD L. MORGAN
--------------------------------
Howard L. Morgan
Chairman of the Board
/s/ PHILIP W. SHIRES
--------------------------------
Philip W. Shires
President and Chief Executive Officer and Interim
Chief Accounting Officer
(Principal Executive Officer)
Page 18
<PAGE> 19
Exhibit Index
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
27.1 Financial Data Schedule -- 6 month
27.2 Financial Data Schedule -- 3 month
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,371
<SECURITIES> 24,276
<RECEIVABLES> 3,277
<ALLOWANCES> 0
<INVENTORY> 6,710
<CURRENT-ASSETS> 45,354
<PP&E> 18,745
<DEPRECIATION> 16,590
<TOTAL-ASSETS> 48,461
<CURRENT-LIABILITIES> 5,234
<BONDS> 0
0
0
<COMMON> 72
<OTHER-SE> 43,155
<TOTAL-LIABILITY-AND-EQUITY> 48,461
<SALES> 17,581
<TOTAL-REVENUES> 17,581
<CGS> 8,065
<TOTAL-COSTS> 19,153
<OTHER-EXPENSES> (1,511)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (61)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,371
<SECURITIES> 24,276
<RECEIVABLES> 3,277
<ALLOWANCES> 0
<INVENTORY> 6,710
<CURRENT-ASSETS> 45,354
<PP&E> 18,745
<DEPRECIATION> 16,590
<TOTAL-ASSETS> 48,461
<CURRENT-LIABILITIES> 5,234
<BONDS> 0
0
0
<COMMON> 72
<OTHER-SE> 43,155
<TOTAL-LIABILITY-AND-EQUITY> 48,461
<SALES> 8,006
<TOTAL-REVENUES> 8,006
<CGS> 3,400
<TOTAL-COSTS> 9,217
<OTHER-EXPENSES> (724)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (487)
<INCOME-TAX> (160)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (327)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
