-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ilrd0K3MWRi/2TKXfHd4y6ivJPKj0Ry9lkR3U6OJHhVAaFw4HEPSck0yCFri3PWs xt1qUqycZ/FUz1gw3t4dVA== 0001035704-97-000221.txt : 19970929 0001035704-97-000221.hdr.sgml : 19970929 ACCESSION NUMBER: 0001035704-97-000221 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970926 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENTEK INFORMATION SYSTEMS INC \DE\ CENTRAL INDEX KEY: 0001008938 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 222406249 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27814 FILM NUMBER: 97686720 BUSINESS ADDRESS: STREET 1: 2945 WILDERNESS PL CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3034405500 MAIL ADDRESS: STREET 1: 2945 WILDERNESS PLACE CITY: BOULDER STATE: CO ZIP: 80301 10-K 1 FORM 10-K 1 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, 1997 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) DELAWARE 3577 22-2406249 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
2945 Wilderness Place, Boulder, CO 80301 (Address of principal executive offices) (Zip code) 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 August 29, 1997, the bid and ask prices of the Common Stock were $9.50 and $9.88, 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 August 29, 1997 was $48,888,550. On August 29, 1997, 6,985,351 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Item 10, Item 11, Item 12 and Item 13 of Part III of this Form 10-K are incorporated by reference from the Registrant's definitive proxy statement to be filed in accordance with Rule 142-101, Schedule 14A, in connection with the Registrant's November 14, 1997 Annual Meeting of Stockholders for fiscal year ended June 30, 1997. 2 KENTEK INFORMATION SYSTEMS, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE NO ------- PART I. Item 1. Business.....................................................................................3 Item 2. Properties...................................................................................7 Item 3. Legal Proceedings............................................................................7 Item 4. Submission of Matters to a Vote of Security Holders..........................................7 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................8 Item 6. Selected Consolidated Financial Data.........................................................8 Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations.......9 Item 8. Financial Statements and Supplementary Data (F-1 - F-16)...................................12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........28 PART III. Item 10.Directors and Executive Officers of the Registrant..........................................28 Item 11.Executive Compensation......................................................................28 Item 12.Security Ownership of Certain Beneficial Owners and Management..............................28 Item 13.Certain Relationships and Related Transactions..............................................28 PART IV. Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................29 SIGNATURES. ........................................................................................30
2 3 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 DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K AS WELL AS THOSE DISCUSSED IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 FILED WITH THE SECURITIES AND EXCHANGE'S COMMISSION ("COMMISSION") ON APRIL 16, 1996. PART I. ITEM 1. BUSINESS Kentek Information Systems, Inc. ("Kentek" or the "Company") is a leading supplier of heavy-duty mid-range, non-impact laser printers and related consumable supplies and spare parts. The mid-range market is characterized by heavy-duty, high-reliability printers that print 30 to 60 pages per minute ("ppm") and 30,000 to 300,000 pages per month. The Company's printers are designed primarily for high-volume printing requirements, including (i) production printing applications which include printing invoices, forms, payroll, direct mail and check imaging, (ii) print-on-demand applications characterized by the use of a printer rather than a copy machine to generate multiple originals from digitally-stored data on an as-needed basis. and (iii) computer network applications for connecting multiple users on a network in order to share a single heavy-duty printer. 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. Originally, the Company sold its printers and consumable supplies and spare parts almost exclusively to IBM. Since 1991, the Company has sought to reduce its dependence on IBM by expanding its marketing efforts to other customers. Kentek currently sells its products to a broad base of OEMs, system integrators, and independent supplies resellers in the mid-range market. Kentek's customers include Genicom, Lexmark, NCR, Oce Printing Systems (formerly Siemens Nixdorf Printing Systems), Printronix, Standard Register, Tally and Unisys. The Company believes its market leadership is primarily attributable to its high printer reliability, the low total cost of ownership of its printers and consumable supplies, and the attractive pricing Kentek offers its customers. INDUSTRY OVERVIEW 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 12 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 recent year 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 of less than 100,000 pages per month. These printers are often referred to as digital copiers or "mopiers". Dataquest forecasts significant growth in this segment during 1997. The heavy duty segment of the mid-range category includes printers with speeds of 30-60 ppm with duty cycles of 100,000 to 750,000 pages per month. These printers typically demonstrate high reliability, high duty cycle, low cost per printed page and low maintenance. They can handle complex print jobs, run continuously, and often have advanced computer and network connectivity. Printers in this range are typically utilized in three distinct applications: production systems, print-on-demand applications and networks. Production systems serve specific, print intensive applications such as general accounting, invoicing, payroll, direct mail, check imaging and generation of mortgage or insurance forms and documents. These operations share a need for either long periods of continuous operation or heavy use spread over the month and low cost per page. The systems are typically connected to a mini-computer. Print-on-demand applications use a printer as a digital copier for users who need to generate multiple custom documents on demand from a template stored on disk. Network applications use a printer to serve the print needs of multiple users connected to a network. For many business applications, when aggregate usage exceeds 50,000 pages a month, 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 3 4 and cleaner. End-users typically purchase consumable supply products from the company which sold them their 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 is 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. Kentek printers employ technologies that result in lower incidence of paper jams and better durability than many other printers in the industry. For example, the Company utilizes a simple printer engine design incorporating a straight paper path that permits the use of a wide variety of printable media with an incidence of paper jams of approximately 1-in-10,000 printed pages. This characteristic, in conjunction with high volume paper handling accessories, permits Kentek printers to operate continuously, unattended at full speed. Kentek pioneered the use of light emitting diode ("LED") technology in printhead design. This technology is used to generate the individual pixels on the photoconductor. The LED array technology uses no moving parts and provides simple, direct and precise beam alignment from the diode array to the photoconductor. In contrast, a laser beam printer utilizes a motor to drive a rotating polygon mirror at speeds of as high as 35,000 rpm and directs the scanning beam across the width of the photoconductor. As the beam moves from one side to the other, the spot size modulation and magnification must be managed. The Company believes that its simple printer engine design and LED array technology is more durable than laser beam technology, permitting higher duty cycles at lower costs. 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 300,000 pages per month and interface with IBM, HP, DEC and UNIX platforms. 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. Available as options are a 1,200 sheet feeder, 2,500 sheet feeder and 1,400 sheet output stacker. 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 internal hard disk and dual cassette input trays containing a total of 800 sheets and an output tray. Available as options are a 50 MHz IDT 3081 RISC microprocessor to accelerate complex graphics, a 1,200 sheet input feeder, a 2,500 sheet input feeder and 1,400 sheet output stacker. 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, one floppy disk drive a 540 megabyte internal hard disk, and dual cassette input trays containing a total of 800 sheets and an output tray. Available as options are a 50 MHz IDT 3081 RISC microprocessor to accelerate complex graphics, a 2,500 sheet input feeder and 1,400 sheet output stacker. The K40D, a 40 ppm duplex printer, was introduced in November 1994. K40DX Printer. The K40DX printer is anticipated to be introduced to customers in the fall of 1997. An extension of the K40D, the K40DX will include 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, one floppy disk drive, a 1.2 gigabyte internal hard disk, and dual cassette input trays containing a total of 800 sheets and an output tray. Available as options will be electronic collation, a 2,500 sheet input feeder and 1,400 sheet output stacker. 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 PostscriptTM is available as a printer control language option. 4 5 SIGS Controller. In fall 1997, Kentek expects to introduce its SIGS controller system, which will be used on its K40DX printer. The SIGS controller uses an Intel Pentium(R) processor and an industry standard motherboard with 16 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 will use 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 and PCL5, 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 remanufacturing or recycling by others. Although the Company believes it has not historically lost a substantial amount of revenue to recycling or remanufacturing competition, there is no assurance that the Company will not be materially and adversely effected by such competition in the future. Kentek has recently initiated work to develop its own line of remanufactured consumables. PRODUCT DEVELOPMENT The Company believes that the development of new products and the enhancement of existing products are essential to its future success. The market for the Company's products is characterized by rapidly changing technology, evolving industry standards, and frequent new product introductions. Accordingly, the Company believes that its success depends to a significant extent on its ability to enhance existing products and to develop technologically advanced and cost-effective new products that meet a wide range of changing customer needs and achieve market acceptance. The Company intends to continue to devote a substantial portion of its resources to research and development of high speed non-impact printers, printer controllers, paper handling devices and software and consumable supply products. The Company attempts to maintain its technological competitiveness and position its products attractively by working with its customers to plan products that meet end-users' needs. The Company's product development efforts are focused on its KW printer line, as well as on developing higher speed controller and software enhancements for its existing printer line and introducing new features such as highlight color and improved paper handling and additional consumable supply products. The Company believes that its success depends in part on its ability to enhance existing products and to develop new products that maintain technological leadership, meet a wide range of changing customer needs and achieve market acceptance. KW Product Line: The KW product line will offer a series of printers with speeds ranging from 60 to 90 ppm or more with an initial introduction of a 60 ppm printer and will incorporate new features specifically addressing concerns of the production systems, print-on-demand and network computing market segments. This will enable the Company to bring high-range performance to the mid-range market segment. The KW product line is a new design that will incorporate many of the fundamental characteristics of Kentek's existing products, including a straight paper path, high-speed and flexible controllers and software, and high reliability. Further, the standard KW printer will support wide format paper, increased paper handling capacity, 600 dpi resolution, duplex printing, and a full-speed highlight color option. The KW product line also will include the SIGS controller system, a scaleable Pentium-based controller motherboard, a PCI Bus that will increase data transfer rates and enable easy integration of co-processors, and a multiple-connectivity feature that will ease all types of network connectivity. The Company believes that the adoption of these industry-standard processors and communication protocols will decrease the development and engineering cycles associated with implementing future product enhancements. In addition, the Company is designing consumable supplies for its KW printer line that will extend the life span of each component and reduce per page printing costs. The KW printers will be manufactured by Kentek in Boulder, Colorado. The Company believes that locating manufacturing in the United States rather than in Japan will reduce manufacturing costs and exposure to currency fluctuations. In addition to printers and controllers, Kentek is developing pre- and post-processing devices such as staplers, stackers and media feeders that are targeted for specialized needs of Kentek's customers. By focusing on the needs of specific vertical markets, the Company believes it can increase its competitive position in the mid-range market. The Company maintains product development centers in Boulder, Colorado for controller and software development, and in Nagano, Japan, for printer engine and new consumable supply product design. As of June 30, 1997 the Boulder facility employed 60 engineering staff and Nagano employed 30 engineering staff. The Company's R&D expenditures for fiscal years ending June 30, 1997, 1996, 1995 were $8,601,000, $6,175,000 and $5,357,000 respectively. CUSTOMERS, MARKETING AND SUPPORT The Company distributes its printers exclusively through sales to OEM customers and system integrators. In fiscal 1997 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 9 of the notes to 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. Customers typically begin purchasing a printer only after they have completed a lengthy evaluation process and integrated the printer into their product lines. This evaluation process includes participation in the early stages of the printer design process and qualification of production units as they become available. In addition, before volume purchases of a commercially available product can occur, customers must develop marketing programs, including sales and service training. This long sales cycle makes it difficult in the short term for the Company to recapture lost revenues through sales to new customers or through sales of new products to existing customers. Kentek supports its customers through an array of sales literature, technical support and joint sales calling on VAR's or end-users. The Company identifies commercial niches where there is a strong need for the high reliability, high duty cycle and continuous operation features of 5 6 Kentek printers, then identifies new or existing customers that can penetrate that marketplace. In this manner, Kentek is able to leverage the resources of its sales and marketing organization. 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 1999. 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 supply consumables for its customers. The Company needs to maintain only a small sales organization because the Company does not sell directly to end-users and has considerable sales leverage from its customers' sales forces. As of June 30, 1997, the Company's sales and marketing organization consisted of sixteen persons, of whom fourteen are based in three locations in the United States, and two are located at a single office in Europe. 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 14 of the notes to consolidated financial statements which appear elsewhere in this Form 10-K. 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, 1997, 1996, and 1995, the Company incurred warranty expenses of $300,883, $358,634 and $343,796 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 KW60 and future products in the KW printer line will be manufactured in Boulder, Colorado. 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. In fiscal year 1995, the Company completed a two year plan to relocate all consumable supplies' manufacturing from Japan to Boulder, CO. The Company currently sources over 70% of its piece-part volume and 55% 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 its customer agreements, as well as through the purchase of forwards in the foreign exchange market. In November of 1996, the Company completed the sale of its 16,000 square foot facility in Tama, Japan. The facility had most recently been used for the manufacture of consumable supplies and was put up for sale when Kentek transferred their manufacturing to the United States. BACKLOG Aggregate backlog as of June 30, 1997 was approximately $9.2 million, compared to approximately $9.0 million as of June 30, 1996. During fiscal 1997, a major customer of the Company placed orders for delivery of product for a time horizon greater than three months. If these excess orders were excluded from backlog calculations, total backlog would be approximately $6.8 million. The reduction in normal backlog from $9.0 million in fiscal 1996 to $6.8 million in fiscal 1997 is primarily due to the introduction by Hewlett Packard of a competing 40 page-per-minute printer, the Oce acquisition of Siemens Nixdorf, as well as Kentek's effort to improve turnaround time and deliverability for its customers. In the past, the Company's largest customers were supplied out of Japan which required them to place orders with a three-month lead time. Currently many of these customers are supplied from the Company's Boulder site with lead time of less than one month. Although this new process has reduced inventory at customer sites and improved customer satisfaction, it has also reduced the Company's backlog. In addition, Kentek experienced a slowdown in order placement for supplies during the fourth quarter of fiscal 1997. Backlog consists of customer orders, the majority of which are scheduled for shipment within three months 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 6 7 significantly dependent on orders booked and shipped during that quarter, and increasingly becoming more dependent on orders received during the quarter. COMPETITION The Company competes with many companies in the printer segment of its business, including Hewlett-Packard, Hitachi, 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. For certain applications, the Company's products compete with similar speed impact printers manufactured by Genicom, Tally and Printronix. The Company expects 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 Genicom, IBM, Oce Printing Systems, Printronix and Tally. In addition, the Company's consumable supplies products are increasingly being remanufactured by third parties. The principal elements of competition in the Company's markets include total cost of ownership, product features, product quality and reliability, performance characteristics and responsiveness to customers. 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, 1997, 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 of June 30, 1997, the Company had a total of 257 employees including 203 full-time and 54 part-time. There were 98 full-time and 25 part-time employees in manufacturing, 16 full-time employees in sales and marketing, and 26 full-time and two part-time employees in general and administrative functions. In addition, 63 full-time and 27 part-time employees were engaged in research and development. Of the 257 employees, 186 are located in the U.S., 69 in Japan and two in Europe. 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 four buildings, an approximately 30,000 square foot facility for sales, marketing, research and development, and general and administrative purposes, an approximately 42,000 square foot facility for consumables manufacturing and warehousing, an approximately 11,000 square foot facility for consumable supplies recycling and an approximately 7,200 square foot building for engineering design work. The current monthly rent for the administrative facility is $26,765, and the lease agreement will expire March 31, 1999. The current monthly rent for the warehouse facility is $17,363, and the lease agreement will expire March 31, 1999. The current monthly rent on the recycling facility is $6,684, and the lease agreement will expire March 31, 1999. The current monthly rent for the engineering design facility is $6,458 and will expire March 31, 1999. In Nagano, the Company leases a total of approximately 16,500 square feet at three separate sites for manufacturing, warehousing, and research and development purposes. The current aggregate monthly rent for the three facilities is approximately $14,300, and the lease agreements will expire on March 31, 1998, February 28, 1997 and March 17, 1998. The Company also leases office space for sales offices in Detroit, Michigan, Melbourne, Florida and in Gorinchem, The Netherlands. The Company anticipates that it will require approximately 20,000 additional square feet of manufacturing space for the manufacture of the KW60 printer, which it believes is available on commercially reasonable terms. ITEM 3. LEGAL PROCEEDINGS The Registrant is currently not involved in any legal proceedings. On May 12, 1997, the Company settled the lawsuit brought by Printronix Corporation. The settlement included the dismissal of all charges against the Company. The completion of this lawsuit had no material impact on the Company's financial statements for the year ended June 30, 1997. On December 31, 1996, the Company settled the lawsuit with Rosetta Technologies Corporation. The settlement included the dismissal of all charges against the Company and significant payment of past due invoices by Rosetta. The completion of this lawsuit had no material impact on the Company's financial statements for the year ended June 30, 1997. 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, 1997. 7 8 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, 1997, 6,929,345 shares of Common Stock were outstanding and the Company had approximately 93 holders of record of the Common Stock, which figure does not include those stockholders whose certificates are held by nominees. The table below sets forth the per share quarterly high and low closing prices of the Common Stock since the Company's initial public offering on April 17, 1996 as reported on the NASDAQ National Market. A cash dividend of $.02 per share for the fourth quarter was declared on August 12, 1997. It is anticipated that the Company will continue to declare quarterly dividends.
FISCAL YEAR ENDED 6/30/97 HIGH LOW ------------------------- ---- --- 1st Quarter $10.75 $4.25 2nd Quarter 6.50 4.38 3rd Quarter 7.38 5.63 4th Quarter 8.25 6.19 FISCAL YEAR ENDED 6/30/96 ------------------------- 4th Quarter 15.50 8.00
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA Kentek Information Systems, Inc. (amounts in thousands, except per share amounts) SUMMARY OF OPERATIONS
1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- INCOME STATEMENT DATA: Total Net Sales $ 56,460 $ 74,381 $ 70,192 $ 78,867 $ 55,875 Operating income (loss) 7,249 13,277 6,406 10,026 (1,178) Net income (loss) 4,761 13,102 5,035 9,647 (665) Net income (loss) applicable to common stockholders 4,761 11,750 3,556 8,326 (665) PER SHARE DATA: Net income per common share $ 0.68 $ 2.42 $ 0.99 Weighted average common shares 7,022 5,406 5,099 BALANCE SHEET DATA: Working capital $ 48,281 $ 42,860 $ 25,506 $ 17,870 $ 2,942 Total assets 57,652 60,245 39,711 45,450 33,705 Long-term debt -- 115 6,651 5,864 7,839 Total liabilities 6,991 14,078 17,027 29,692 27,473 Total stockholders' equity 50,661 46,167 22,684 15,758 6,232
NOTE: Historical per share information for the years ended June 30, 1994 and 1993 is not relevant as it would differ materially from the per share data for the years ended June 30, 1997, 1996 and 1995, given the significance of the senior convertible preferred stock not being considered a common stock equivalent in computing earnings per share. 8 9 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. OPERATING RESULTS COMPARISON OF FISCAL YEAR 1997 TO FISCAL YEAR 1996 Total Net Sales. Total net sales declined 24.1% from $74,381,000 in fiscal 1996 to $56,460,000 in fiscal 1997. Printer sales constituted 24.8% and 14.8%, respectively, of total net sales in fiscal 1996 and fiscal 1997. Consumable supplies and spare parts sales constituted 75.2% and 85.2%, respectively, of total net sales in fiscal 1996 and fiscal 1997. Printers. Printer sales decreased 54.6% from $18,436,000 in fiscal 1996 to $8,370,000 in fiscal 1997. The decrease in printer sales was due to two major factors: 1) the introduction by Hewlett-Packard of a competing 40 page per minute printer, and 2) the Oce acquisition of Siemens Nixdorf (the Company's largest printer customer). Although Oce (formally Siemens Nixdorf) is currently purchasing printers from Kentek, total year printer volumes sold to Oce declined by 63.5% from fiscal 1996 to fiscal 1997. Consumable Supplies and Spare Parts Sales. Consumable supplies and spare parts sales declined 14.0% from $55,945,000 in fiscal 1996 to $48,090,000 in fiscal 1997. This decrease was due in part to customers returning to normal inventory levels after a large build-up in the last six months of fiscal 1996. In addition, lower printer sales have an immediate impact of reducing related consumable supplies and spare parts sales. Finally, older models of installed printers are being removed from service, reducing the amount of consumable supplies sales. Gross Profit. Gross profit declined 13.2% from $29,973,000 in fiscal 1996 to $26,017,000 in fiscal 1997. The gross margin increased from 40.3% to 46.1% in the same period. The decrease in gross profit dollars is directly attributable to the reduction in total net sales between the two years. The improved gross margin was primarily caused by reduced manufacturing and material costs as the Company realizes the benefit of moving supplies manufacturing from Japan to the United States. Furthermore, the shift of sales from printers to that of consumable supplies and spare parts, which have a higher gross margin, contributed to improved gross margin. The continued strengthening of the dollar in relation to the Japanese Yen also assisted in improving the gross margin. Selling, general and administrative expenses. Selling, general and administrative expenses decreased 3.4% from $10,521,000 in fiscal 1996 to $10,167,000 in fiscal 1997. The decrease is a result of reduced profit sharing bonuses and sales commissions. Research and Development Expenses. Research and development expenses increased 39.3% from $6,175,000 in fiscal 1996 to $8,601,000 in fiscal 1997. The increase is principally attributable to expenses associated with the continued development of the KW60 product line. Interest Expense and Other Income(Expense). Interest expense and other income (expense) increased from $188,000 of income in fiscal 1996 to $1,377,000 of income in fiscal 1997. This increase was realized as a result of greater cash available for investment, partially offset by an $568,000 loss recorded in November 1996 related to the sale of the Company's property in Japan. Income Tax Expense. Income tax expense for fiscal 1996 was $363,000, or an effective tax rate of 2.7% compared with income tax expense of $3,865,000, or an effective tax rate of 44.8% in fiscal 1997. During fiscal 1996, the Company recognized a deferred tax asset of $3,656,000 reducing income tax expense for fiscal 1996. During fiscal 1997, the sale of the Company's property in Japan caused an additional one-time tax expense of $378,000, which increased tax expense and the related effective tax rate during that period. 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 1996 TO FISCAL YEAR 1995 Total Net Sales. Total net sales increased 6.0% from $70,192,000 in fiscal 1995 to $74,381,000 in fiscal 1996. Printer sales constituted 31.0% and 24.8%, respectively, of total net sales in fiscal 1995 and fiscal 1996. Consumable supplies and spare parts sales constituted 69.0% and 75.2%, respectively, of total net sales in fiscal 1995 and fiscal 1996. Printers. Printer sales decreased by 15.2% from $21,736,000 in fiscal 1995 to $18,436,000 in fiscal 1996. The decreases in sales revenue and unit volumes are primarily the result of lower sales to IBM. This was due in large part to a decision by IBM in fiscal 1995 to purchase the competition's 30 ppm printer. Total unit sales of printers to IBM declined from 825 units and revenue of $5,318,000 in fiscal 1995 to 162 units and revenue of $1,228,000 in fiscal 1996. This reduction in printer revenue was partially offset by increased unit sales of the K40D printer. OEM printer revenue totaled $16,418,000 in fiscal 1995, increasing 4.8% to $17,208,000 in fiscal 1996. Consumable Supplies and Spare Parts Sales. Consumable supplies and spare parts sales increased 15.5% from $48,456,000 in fiscal 1995 to $55,945,000 in fiscal 1996. The Company's consumable supplies sales for higher speed printers, which use more consumable supplies, more than offset the decline in spare parts sales to IBM caused by their reduced printer purchases. Gross Profit. Gross profit increased by 37.9% from $21,743,000 in fiscal year 1995 to $29,973,000 in fiscal 1996. The gross margin increased from 31.0% to 40.3% in the same period. The increase in dollars and as a percentage of sales is primarily due to the significant increase in sales of the higher margin K40D printer as well as reduced manufacturing and material costs as the Company completed the movement of supplies manufacturing from Japan to the United States. This increase was attributable to a lesser extent to an increase in higher margin supplies sales and to an increase in consumable supplies sales as a percentage of total net sales. Selling, general and administrative expenses. Selling, general and administrative expenses increased 5.4% from $9,980,000 in fiscal year 1995 to $10,521,000 in fiscal year 1996. This increase was due primarily to increases in salary and profit-sharing payout. 9 10 Research and Development Expenses. Research and development expenses increased 15.3% from $5,357,000 in fiscal 1995 to $6,175,000 in fiscal 1996. This increase was due to the expenses associated with the continued development of the KW60 product line. Interest Expense and Other Income (Expense). Interest expense and other income (expense) decreased from $445,000 of expense in fiscal 1995 to $188,000 of income in fiscal 1996. Net interest expense at June 30, 1995 was $497,000, while at June 30, 1996 net interest income of $267,000 was realized as a result of greater cash available for investment, as well as reduction of debt obligations. Other income (expense) decreased primarily due to all customers who previously paid in yen now paying in U.S. dollars during this period, which results in no foreign exchange gain. Income Tax Expense. Income tax expense for fiscal 1995 was $926,000, or an effective tax rate of 15.5%, as a result of the utilization of available net operating loss carryforwards which offset taxable income. Income tax expense for fiscal 1996 was $363,000, or an effective rate of 2.7%, due to recognition of a deferred tax asset of $3,656,000 in the period. A reconciliation of the income tax rates to the federal statutory rate is presented in Note 8 of the notes to the Consolidated Financial Statements appearing elsewhere in this Form 10-K. As of June 30, 1996, the Company has utilized all of its net operating loss and tax credit carryforwards. Therefore, management anticipates that its future net income will be less than its historical net income because of its future effective tax rate will approximate 40% compared to an effective tax rate of 2.7% and 15.5% in fiscal 1996 and 1995, respectively. The following table summarizes the adjusted pro forma effect to net income per common share assuming the Company had an effective tax rate of 40% for fiscal 1996 and 1995 and assuming the payment of the Excess Liquidation Preference ("ELP"). ELP was a one-time dividend paid to holders of Senior Convertible Preferred Stock ("SCPS") during the Company's IPO.
FISCAL YEAR ENDED JUNE 30, -------------------------- 1996 1995 ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Income before tax $ 13,465 $ 5,961 ELP 1,352 1,479 Income tax expense 5,386 2,384 ---------- ---------- Adjusted net income applicable to common stockholders $ 6,727 $ 2,098 ========== ========== Adjusted net income per common share $ 1.24 $ 0.41 ========== ==========
INTERNATIONAL SALES Direct sales to customers not located in the United States represented 6.0%, 11.8% and 12.0% of the Company's total net sales in fiscal years 1997, 1996 and 1995, 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, and for the year ended June 30, 1997, 29.0% and 25.4%, respectively, of such sales were to customers located in Germany and The Netherlands. The Company believes that its recent decline in international printer sales is primarily attributable to a change in practice by certain OEM customers to purchase more products in the United States for resale abroad. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations historically through internally generated cash, investing, subordinated debt and equity financing, and bank borrowings. In November 1996, the Company sold its manufacturing facility in Tama, Japan. The proceeds from the sale were used to pay off the Company's short term debt and the remaining mortgage on the property. Changes in cash and cash equivalents during fiscal 1997 resulted in a net decrease of $7,776,000 as compared to an increase of $19,603,000 during fiscal 1996. The primary reasons for this decrease were the purchases of marketable securities of $16,374,000, as well as the payoff of the long-term debt associated with the sale of the Japan property. The increase of $491,000 in cash provided by operations was a result of a significant decrease in inventory and others assets partially offset by a decrease in accounts payable and accrued expenses. On April 17, 1996, the Company completed an initial public offering ("IPO"). The Company received net proceeds from the sale of its Common Stock of $15,623,000 after deducting underwriting discounts and commission, offering expenses totaling $1,977,000, and from the net proceeds the Company paid the ELP of $4,152,000 on the Company's SCPS. Changes in cash and cash equivalents during fiscal 1996 resulted in a net increase of $19,603,000 as compared to an increase during fiscal 1995 of $2,358,000. The primary factors for this increase were the net proceeds of $15,623,000, offset by the payment of ELP of $4,152,000 from the Company's IPO in April 1996, as well as $8,405,000 less cash being used in financing activities to reduce debt obligations in fiscal 1996 and a reduction in equipment purchases of $926,000, offset in part by a $1,299,000 decrease in net cash provided by operations. The primary factor for the decrease in cash provided by operations was an increase in inventory. This factor was partially offset by a decrease in accounts payable due to lower sales volume and the reduced cost of manufacturing in the U.S. as compared with Japan. The Company has a $5,000,000 unsecured line of credit with a bank which expires in October 1998. As of June 30, 1997, the Company had no outstanding balance under this loan. The Company does not actively draw on this line of credit, and does not anticipate drawing on this line over the next several months. 10 11 At June 30, 1996 the Company had recorded a $3,656,000 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. This determination is based on several recurring periods of profitable operations, continuing efforts to enhance and develop existing and new customer relationships, the Company's movement of a substantial portion of its supplies manufacturing to the United States from Japan and the strengthening of the dollar against the yen. Management plans to reevaluate the positive and negative evidence to this effect on a quarterly basis and make appropriate adjustments to the deferred tax asset. As of June 30, 1997, the net deferred tax asset totaled $3,338,000, with $490,000 classified as non-current as a result of the nature of these temporary differences. The non-current portion is attributable to property and equipment. 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 funds from operations, 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. The Company pays an annual cash dividend to holders of its Common Stock equal to $.08 per share, payable quarterly. FOREIGN CURRENCY EXCHANGE The Company has sizable operations in Japan, and as a result, operating expenses and production costs are dependent on dollar-yen exchange rates. As the yen strengthens in relation to the dollar, Kentek's manufacturing costs and operating expenses in Japan increase, thereby adversely affecting results of operations. Kentek has a currency risk sharing arrangement with its major customers which mitigates, but does not eliminate, currency risk. The Company has taken steps to reduce this exposure by relocating approximately one-half of its manufacturing operations to the U.S. and plans to manufacture its KW printers and consumable supplies in the United States. In addition, certain of the Company's contracts with its customers contain pricing schedules that are designed to share any financial benefit or burden arising from fluctuations in the yen equally between Kentek and the customer. Currently, these schedules apply primarily to printers and spare parts, whereas most supplies are sold at fixed prices. In addition, the Company from time to time purchases forward contracts to hedge its currency exposure. As of June 30, 1997 the Company had no outstanding forward contracts. NEW ACCOUNTING PRONOUNCEMENTS During 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121). SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and establishes guidelines for determining recoverability based on undiscounted future net cash flows from the use of the asset and for the measurement of the impairment loss. Any impairment loss is recorded in the period in which the recognition criteria are first applied and met. The adoption of SFAS No. 121 during 1997 did not materially impact the results of operations for the year ended June 30, 1997. During October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123). This Statement establishes financial accounting and reporting standards for stock-based employee compensation plans and transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. SFAS No. 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion (APB) No. 25. Entities electing to remain with the accounting in APB No. 25 must make pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting defined by SFAS No. 123 had been applied. The Company has elected to continue accounting for its stock-based employee compensation plans in accordance with APB No. 25 and has adopted the disclosure-only provision of SFAS No. 123 which is included at Note 7. During February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128, which supersedes APB No. 15, establishes new standards for computing and presenting EPS. The Company is required to adopt this Statement in fiscal year 1998, including interim periods, ending after December 15, 1997. When adopted, all prior period earnings per share data are required to be restated. The Company does not expect the adoption of this Statement to have a material effect on the Company's reported EPS amounts. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. The Company is required to adopt this Statement in fiscal year 1999. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company has not yet determined the impact of adopting this Statement on its financial statements. In June 1997, the FASB issued Statement of Financial Accounting Standards (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information", which will be effective for the Company beginning July 1, 1998. SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company has not determined whether the adoption of SFAS No. 131 will have a material impact on current financial statement disclosures. 11 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Reports F-2 Consolidated Balance Sheets as of June 30, 1997 and 1996 F-4 Consolidated Statements of Income for the Years Ended June 30, 1997, 1996 and 1995 F-5 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1997, 1996 and 1995 F-6 Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996 and 1995 F-7 Notes to Consolidated Financial Statements F-8 Financial Statement Schedule II - Consolidated Valuation and Qualifying Accounts F-16
12 13 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Kentek Information Systems, Inc. Boulder, Colorado We have audited the accompanying consolidated balance sheet of Kentek Information Systems, Inc. and subsidiaries as of June 30, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. Our audit also included the consolidated financial statement schedule for the year ended June 30, 1997 listed in the Index at Item 8. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. The financial statements and financial statement schedules of the Company for the years ended June 30, 1996 and 1995 were audited by other auditors whose reports, dated August 9, 1996, expressed unqualified opinions on those statements and schedules. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, such 1997 consolidated financial statements present fairly, in all material respects, the financial position of Kentek Information Systems, Inc. and subsidiaries as of June 30, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, such 1997 financial statement schedule, when considered in relation to the basic 1997 consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Denver, Colorado August 8, 1997 F-2 13 14 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders Kentek Information Systems, Inc. Boulder, Colorado We have audited the accompanying consolidated balance sheet of Kentek Information Systems, Inc. and subsidiaries as of June 30, 1996 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the two years in the period ended June 30, 1996. Our audits also included the consolidated financial statement schedules for each of the two years in the period ended June 30, 1996 listed in the Index at Item 8. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kentek Information Systems, Inc. and subsidiaries as of June 30, 1996, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedules for each of the two years in the period ended June 30, 1996, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. BDO Seidman, LLP Los Angeles, California August 9, 1996 F-3 14 15 KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (THOUSANDS) ASSETS
JUNE 30 -------------------- 1997 1996 -------- -------- Current assets: Cash and cash equivalents $ 18,216 $ 25,992 Marketable securities (Note 2) 16,374 -- Accounts receivable, less allowance for doubtful accounts of $653 and $627 6,213 7,098 Inventories (Note 3) 10,074 13,868 Property held for sale -- 5,955 Deferred income taxes (Note 8) 2,848 2,750 Other 1,045 615 -------- -------- Total current assets 54,770 56,278 -------- -------- Property and equipment: Land and buildings 117 122 Tooling 11,189 11,536 Furniture, fixtures and equipment 5,975 6,607 Leasehold improvements 502 465 -------- -------- Total property and equipment 17,783 18,730 Less accumulated depreciation and amortization 16,062 17,099 -------- -------- Total property and equipment, net 1,721 1,631 -------- -------- Deposits and other 1,161 2,336 -------- -------- Total assets $ 57,652 $ 60,245 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY JUNE 30 -------------------- 1997 1996 -------- -------- Current liabilities: Accounts payable $ 3,324 $ 4,145 Accrued expenses: Income taxes -- 1,334 Bonus 618 860 Other 2,547 2,044 Current maturities of long-term debt (Note 5) -- 5,035 -------- -------- Total current liabilities 6,489 13,418 Long-term debt (Note 5) -- 115 Other 502 545 -------- -------- Total liabilities 6,991 14,078 -------- -------- Commitments and contingencies (Note 10) Stockholders' equity (Note 6): Common stock, $.01 par--shares authorized, 12,000; shares outstanding, 6,929 and 6,825 69 68 Additional paid-in capital 43,945 43,463 Foreign currency translation adjustment (753) (549) Retained earnings 7,400 3,185 -------- -------- Total stockholders' equity 50,661 46,167 -------- -------- Total liabilities and stockholders' equity $ 57,652 $ 60,245 ======== ========
See accompanying notes to consolidated financial statements. F-4 15 16 KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30 ------------------------------ 1997 1996 1995 -------- -------- -------- Net sales (Note 9): Printers $ 8,370 $ 18,436 $ 21,736 Consumable supplies and spare parts 48,090 55,945 48,456 -------- -------- -------- Total net sales 56,460 74,381 70,192 Cost of sales 30,443 44,408 48,449 -------- -------- -------- Gross profit 26,017 29,973 21,743 -------- -------- -------- Operating expenses: Selling, general and administrative 10,167 10,521 9,980 Research and development 8,601 6,175 5,357 -------- -------- -------- Total operating expenses 18,768 16,696 15,337 -------- -------- -------- Operating income 7,249 13,277 6,406 Other income (expense) (Note 11) 1,377 188 (445) -------- -------- -------- Income before income taxes 8,626 13,465 5,961 Income tax expense (Note 8) 3,865 363 926 -------- -------- -------- Net income $ 4,761 $ 13,102 $ 5,035 ======== ======== ======== Net income applicable to common stockholders (Note 6) $ 4,761 $ 11,750 $ 3,556 ======== ======== ======== Net income per common share $ 0.68 $ 2.42 $ 0.99 ======== ======== ======== Weighted average common and common equivalent shares outstanding 7,022 5,406 5,099 ======== ======== ========
See accompanying notes to consolidated financial statements. F-6 16 17 KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (THOUSANDS)
SENIOR CONVERTIBLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK SHARES AMOUNT SHARES AMOUNT ------------ ------------ ------------ ------------ BALANCE JULY 1, 1994 11,005 $ 550 1,785 $ 18 Foreign currency translation adjustment -- -- -- -- Net income for the period -- -- -- -- ------------ ------------ ------------ ------------ BALANCE JUNE 30, 1995 11,005 550 1,785 18 Conversion of preferred stock to common (Note 6) (11,005) (550) (1,785) (18) Sale of common stock, net of offering costs (Note 6) -- -- -- -- Payment of excess liquidation preference on preferred stock conversion (Note 6) -- -- -- -- Foreign currency translation adjustment -- -- -- -- Net income for the period -- -- -- -- ------------ ------------ ------------ ------------ BALANCE JUNE 30, 1996 -- -- -- -- Exercise of stock options -- -- -- -- Dividends paid -- -- -- -- Foreign currency translation adjustment -- -- -- -- Net income for the period -- -- -- -- ------------ ------------ ------------ ------------ BALANCE JUNE 30, 1997 -- $ -- -- $ -- ============ ============ ============ ============ FOREIGN RETAINED ADDITIONAL CURRENCY EARNINGS COMMON STOCK PAID-IN TRANSLATION (ACCUMULATED SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) ------------ ------------ ------------ ------------ ------------ BALANCE JULY 1, 1994 836 $ 8 $ 31,484 $ (1,350) $ (14,952) Foreign currency translation adjustment -- -- -- 1,891 -- Net income for the period -- -- -- -- 5,035 ------------ ------------ ------------ ------------ ------------ BALANCE JUNE 30, 1995 836 8 31,484 541 (9,917) Conversion of preferred stock to common (Note 6) 3,789 38 530 -- -- Sale of common stock, net of offering costs (Note 6) 2,200 22 15,601 -- -- Payment of excess liquidation preference on preferred stock conversion (Note 6) -- -- (4,152) -- -- Foreign currency translation adjustment -- -- -- (1,090) -- Net income for the period -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ 13,102 BALANCE JUNE 30, 1996 6,825 68 43,463 (549) 3,185 Exercise of stock options 104 1 482 -- Dividends paid -- -- -- -- (546) Foreign currency translation adjustment -- -- -- (204) -- Net income for the period -- -- -- -- 4,761 ------------ ------------ ------------ ------------ ------------ BALANCE JUNE 30, 1997 6,929 $ 69 $ 43,945 $ (753) $ 7,400 ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. F-6 17 18 KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS)
YEAR ENDED JUNE 30 -------------------------------- 1997 1996 1995 -------- -------- -------- OPERATING ACTIVITIES: Net income $ 4,761 $ 13,102 $ 5,035 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,281 1,648 1,818 Loss on disposal of property and equipment 777 191 130 Deferred income tax expense (benefit) 318 (3,656) -- Changes in operating assets and liabilities: Accounts receivable 885 724 7,751 Inventories 3,794 (2,122) 1,589 Other current assets (429) 129 678 Other assets 758 (181) 140 Accounts payable and accrued expenses (1,937) (118) (6,125) -------- -------- -------- Net cash provided by operating activities 10,208 9,717 11,016 -------- -------- -------- INVESTING ACTIVITIES: Purchases of marketable securities, net (16,374) -- -- Purchase of equipment (1,062) (832) (1,758) Proceeds from sale of equipment 4,928 12 -- -------- -------- -------- Net cash used in investing activities (12,508) (820) (1,758) -------- -------- -------- FINANCING ACTIVITIES: Net payment of loans and notes payable -- -- (7,730) Principal payments of long-term debt and capital lease obligations (5,150) (85) (760) Proceeds from issuance of common stock 483 17,600 -- Dividends paid (546) -- -- Payment of offering costs -- (1,977) -- Payment of excess liquidation preference on preferred stock -- (4,152) -- -------- -------- -------- Net cash provided by (used in) financing activities (5,213) 11,386 (8,490) -------- -------- -------- Effect of exchange rate changes on cash (263) (680) 1,590 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (7,776) 19,603 2,358 Cash and cash equivalents, beginning of year 25,992 6,389 4,031 -------- -------- -------- Cash and cash equivalents, end of year $ 18,216 $ 25,992 $ 6,389 ======== ======== ========
See accompanying notes to consolidated financial statements. F-7 18 19 KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF 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 U.S. consist of manufacturing facilities in Boulder, Colorado, which are used to manufacture the consumable supply products. The Company's principal subsidiary, Nippon Kentek Kaisha Ltd., a Delaware corporation ("Nippon Kentek"), is engaged in research and development and 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 subsidiaries. The accompanying consolidated financial statements include the accounts of Nippon Kentek. All significant intercompany balances and transactions have been eliminated in consolidation. Foreign Currency Translation - The functional currency for the Company's foreign operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains and losses resulting from such translation are included in stockholders' equity. 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, management has estimated reserves for inventory obsolescence, uncollectible accounts receivable and warranty reserves based upon historical and developing trends, aging of items, and other information it deems 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 security 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, net of tax, are excluded from earnings and included as a separate component of stockholders' equity. Realized gains and losses are included in other income (expense). Marketable securities classified as trading securities are carried at fair value based upon market quotations. Accordingly, net realized and unrealized gains and losses on trading securities are included in earnings. 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 for tooling and accelerated methods for substantially all other assets over the following estimated useful lives:
YEARS ----- Tooling 3 Furniture, fixtures and equipment 3-7 Leasehold improvements Term of Lease
F-8 19 20 Income Taxes - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("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 liability 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". Net Income Applicable to Common Stockholders - For the years ended June 30, 1996 and 1995, net income has been reduced by the Excess Liquidation Preference ("ELP") (Note 6) attributable to the Senior Convertible Preferred Stock ("SCPS") totaling $1,352,000 and $1,479,000 respectively, in computing net income applicable to common stockholders. Net Income Per Common Share - Net income per common share is computed using net income and the weighted average number of common shares (1,258,000 and 836,000 as of June 30, 1996 and 1995) and common equivalent shares outstanding. Common equivalent shares include convertible preferred stock which was converted into common stock at the completion of the Company's IPO (3,789,000 shares as of June 30, 1996 and 1995) (Note 6) and those shares issuable upon the assumed exercise of dilutive stock options as adjusted for the effects of the application of Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 83 (359,000 and 474,000 shares as of June 30, 1996 and 1995). Pursuant to SAB No. 83, options granted within one year of the IPO which have an exercise price less than the IPO price are treated as outstanding for all periods presented. Earnings per share is computed using the treasury stock method, under which the number of shares outstanding reflects an assumed use of the proceeds from the assumed exercise of such options to repurchase shares of the Company's common stock at the IPO price. 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 - During 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121). SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and establishes guidelines for determining recoverability based on undiscounted future net cash flows from the use of the asset and for the measurement of the impairment loss. Any impairment loss is recorded in the period in which the recognition criteria are first applied and met. The adoption of SFAS No. 121 during 1997 did not materially impact the results of operations for the year ended June 30, 1997. During October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123). This Statement establishes financial accounting and reporting standards for stock-based employee compensation plans and transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. SFAS No. 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion (APB) No. 25. Entities electing to remain with the accounting in APB No. 25 must make pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting defined by SFAS No. 123 had been applied. The Company has elected to continue accounting for its stock-based employee compensation plans in accordance with APB No. 25 and has adopted the disclosure-only provision of SFAS No. 123 which is included at Note 7. During February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128, which supersedes APB No. 15, establishes new standards for computing and presenting EPS. The Company is required to adopt this Statement in fiscal year 1998, including interim periods ending after December 15, 1997. When adopted, all prior period earnings per share data are required to be restated. The Company does not expect the adoption of this Statement to have a material effect on the Company's reported EPS amounts. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. The Company is required to adopt this Statement in fiscal year 1999. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company has not yet determined the impact of adopting this Statement on its financial statements. In June 1997, the FASB issued Statement of Financial Accounting Standards (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information", which will be effective for the Company beginning July 1, 1998. SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company has not determined whether the adoption of SFAS No. 131 will have a material impact on current financial statement disclosures. Reclassifications - Certain prior year amounts have been reclassified to conform to current year presentation. F-9 20 21 KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. MARKETABLE SECURITIES In 1997, the Company adopted FASB Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which 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. As of June 30, 1997, the Company holds $8,215,000 in available-for-sale securities and $8,159,000 in trading securities. As of June 30, 1997, available-for-sale and trading securities consisted of the following (in thousands):
GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- --------- --------- --------- Available-for-sale Securities Bank and corporate debt $ 8,215 $ -- $ -- $ 8,215 Trading Securities - Equities 8,000 159 -- 8,159 --------- --------- --------- --------- Total $ 16,215 $ 159 $ -- $ 16,374 ========= ========= ========= =========
During fiscal year 1997, proceeds from sales of available-for-sale securities totaled $4,014,000. Gross realized gains and losses on sales of available-for-sale securities were not material. Net unrealized holding gains on trading securities of $159,000 have been included in net income for the fiscal year ended June 30, 1997. 3. INVENTORIES Inventories consist of the following net of allowance:
JUNE 30 ----------------- 1997 1996 ------- ------- (THOUSANDS) Finished printers, consumable supplies and spare parts $ 6,064 $ 6,183 Raw materials 4,010 7,685 ------- ------- $10,074 $13,868 ======= =======
4. REVOLVING CREDIT AGREEMENT The Company has an unsecured revolving line-of-credit agreement with a bank, which expires October 31, 1998. The available loan amount is $5,000,000. The line-of-credit agreement provides for interest at the bank's prime rate. The Company must meet certain financial ratio requirements under the terms of the agreement. At June 30, 1997 and 1996, no amounts were drawn on the line-of-credit. 5. LONG-TERM DEBT Long-Term debt consisted of the following:
JUNE 30 --------------------- 1997 1996 --------- --------- (THOUSANDS) Bank loan - 3.35% - 4.1%, due July, 1996 $ -- $ 4,959 Obligations under capital lease -- 171 Other -- 20 --------- --------- -- 5,150 Less current maturities -- 5,035 --------- --------- $ -- $ 115 ========= =========
Property and equipment at June 30, 1996 includes equipment under capital leases with a total cost of $276,000 and accumulated depreciation of $214,000. The capital leases were paid in full in advance of the due date during fiscal year 1997. F-10 21 22 6. CAPITAL STOCK On April 17, 1996, the Company completed its IPO of 2,200,000 shares at $8 per share. The Company sold 2,200,000 shares and an additional 300,000 shares were sold by non-management stockholders. An additional 375,000 shares were sold by non-management stockholders to cover over-allotments 30 days after the IPO. The Company received $15,623,000 in proceeds net of offering costs of $1,977,000. Effective immediately prior to the IPO, the outstanding SCPS and Convertible Preferred Stock ("CPS") were converted into common stock and the SCPS and CPS authorized shares were canceled. The SCPS was voting and had a primary liquidation preference of $1 per share, plus the aggregate amount of the ELP. ELP accrued on the SCPS at an annual rate of 12%. On April 23, 1996, the ELP of approximately $4,152,000 was paid to SCPS holders, and the SCPS shares were converted into common stock at a conversion rate of 1.3869245 shares of common stock per SCPS share. 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 to be granted under the plan. The Plan provides for the grant of stock options, including incentive stock options and non-statutory stock options. At June 30, 1997, there were 497,771 shares available for future stock option grants. The following table summarizes information on stock option activity for the Plan:
EXERCISE PRICE WEIGHTED AVERAGE NUMBER OF SHARES PER SHARE EXERCISE PRICE PER SHARE ---------------- --------- ------------------------ Outstanding at July 1, 1995 344,112 $3.24 - $6.49 $4.13 Granted 378,575 $6.49 $6.49 Expired (41,685) $3.24 - $6.49 $4.43 ------- 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 =======
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. Subsequent to July 1, 1997, all stock option grants will 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:
FISCAL YEAR ENDED FISCAL YEAR ENDED 6/30/97 6/30/96 ------- ------- Net income - as reported $4,761,000 $13,102,000 Net income - pro forma $4,437,000 $12,995,000 Earnings per share - as reported $0.68 $2.42 Earnings per share - pro forma $0.64 $2.40
F-11 22 23 The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model at the weighted average price of $3.20 with the following assumptions used for grants in 1997 and 1996; risk-free interest rate of 6.00% in 1997 and 6.47% in 1996; annual dividend of $.08; expected life of five years; and expected volatility of 57.00% in 1997 and 51.50% in 1996. The outstanding stock options at June 30, 1997 have a weighted average contractual life of four years. The following table summarizes information about stock options outstanding under the Plan as of June 30, 1997:
WEIGHTED WEIGHTED NUMBER WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE EXERCISE RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE PRICE EXERCISE PRICES AT 6/30/97 CONTRACTUAL LIFE PRICE AT 6/30/97 EXERCISABLE - --------------------------------------------------------------------------------------------------------------------------- $3.24 107,938 1 YEAR $3.24 107,938 $3.24 3.24 TO 6.49 43,380 2 YEARS 6.13 43,380 6.13 6.49 70,116 3 YEARS 6.49 23,369 6.49 6.49 TO 6.63 202,998 4 YEARS 6.50 127,186 6.49 3.24 TO 6.00 41,556 5 YEARS 5.23 11,556 3.24 3.24 34,978 6 YEARS 3.24 34,978 3.24 3.24 TO 6.49 14,638 7 YEARS 5.87 14,638 5.87 6.49 10,477 8 YEARS 6.49 10,477 6.49 6.38 TO 7.88 58,332 9 YEARS 6.49 56,483 6.49 5.64 TO 7.88 63,000 10 YEARS 6.60 36,000 5.64 - --------------------------------------------------------------------------------------------------------------------------- $3.24 TO $7.88 647,413 $5.67 466,005 $5.29 ===========================================================================================================================
8. TAXES ON INCOME Taxes on income consisted of the following:
YEAR ENDED JUNE 30 ----------------------------- 1997 1996 1995 ------- ------- ------- (THOUSANDS) Current expense: Federal $ 3,072 $ 3,273 $ 845 State 475 746 51 Foreign -- -- 30 ------- ------- ------- 3,547 4,019 926 ------- ------- ------- Deferred expense (benefit): Federal 215 1,035 1,632 State 103 55 210 ------- ------- ------- 318 1,090 1,842 Valuation allowance -- (4,746) (1,842) ------- ------- ------- 318 (3,656) -- ------- ------- ------- Income tax expense $ 3,865 $ 363 $ 926 ======= ======= =======
The components of the net deferred tax asset are shown below:
JUNE 30 ------------------- 1997 1996 -------- -------- (THOUSANDS) Inventories $ 1,694 $ 1,740 Accrued expenses and other 730 654 Property and equipment 710 1,018 Accounts receivable allowance 204 244 -------- -------- Net deferred tax asset $ 3,338 $ 3,656 ======== ========
The net deferred tax asset at June 30, 1996 was $3,656,000. The current portion of $2,750,000 is a result of temporary differences which primarily reverse annually. The remaining non-current portion of $906,000 is attributable to property and equipment. The net deferred tax asset $3,338,000 at June 30, 1997 is realizable as the Company has determined, based on several recurring periods of profitable operations, continuing efforts to enhance and develop existing and new customer relationships, its movement of a substantial portion of its supplies manufacturing to the United States from Japan and the strengthening of the dollar against the yen, 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. 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. As a result of the nature of these temporary differences, $490,000 of the net deferred tax asset at June 30, 1997 is classified as non-current. The non-current portion which is included in deposits and other assets is attributable to property and equipment. F-12 23 24 A reconciliation of the effective tax rates to the federal statutory rate is shown below:
YEAR ENDED JUNE 30 ---------------------------- 1997 1996 1995 ------- ------- ------- (THOUSANDS) Federal and state income tax computed at statutory rate $ 3,217 $ 4,578 $ 2,027 Reduction of valuation allowance -- (4,746) (1,842) Alternative minimum tax -- -- 773 Other permanent differences 648 531 (32) ------- ------- ------- Tax expense $ 3,865 $ 363 $ 926 ======= ======= =======
9. SALES TO PRINCIPAL CUSTOMERS Transactions Sales to customers and their affiliates which were 10% or more of total net sales are shown below:
YEAR ENDED JUNE 30 -------------------------- 1997 1996 1995 ------ ------ ------ Customer A 5% 6% 14% Customer B 34 32 32 Customer C 14 16 12 Customer D 2 10 8 Customer E 15 10 5
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 2001. Rent expense for the years ended June 30, 1997, 1996 and 1995 was $928,000, $980,000 and $1,106,000. Future minimum lease payments under operating leases are as follows:
YEAR ENDING JUNE 30, (THOUSANDS) -------- ----------- 1998 $ 703 1999 526 2000 5 2001 2 ------ $1,237 ======
Employment Agreement On April 1, 1989, the Company entered into an Employment Agreement with the 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. As of June 30, 1997, 1996 and 1995 bonuses of approximately $129,000, $202,000 and $80,000 have been 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 contributions are vested 20% per year beginning with the second year of service. During the years ended June 30, 1997, 1996 and 1995 the Company's contributions to the plan were $73,000, $53,000 and $103,000. Related Party Transactions Consulting services are provided to the Company by the Chairman of the Board of Directors. Consulting expense for these services for the years ended June 30, 1997, 1996 and 1995 were approximately $81,000, $78,000 and $87,500. F-13 24 25 11. OTHER INCOME (EXPENSE) Other income (expense) consisted of the following:
YEAR ENDED JUNE 30 ----------------------------- 1997 1996 1995 ------- ------- ------- (THOUSANDS) Interest expense $ (96) $ (253) $ (844) Litigation settlement -- -- (325) Foreign currency exchange gain -- -- 338 Interest income and investment income 2,000 520 347 Loss on sale of assets held for sale (568) -- -- Miscellaneous 41 (79) 39 ------- ------- ------- Other income (expense) $ 1,377 $ 188 $ (445) ======= ======= =======
12. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED JUNE 30 ------------------------ 1997 1996 1995 ------ ------ ------ (THOUSANDS) Supplemental cash flow information: Cash paid during the year for: Interest $ 25 $ 233 $ 655 Income taxes $5,304 $3,251 $ 391
Non-cash activities: Preferred stock of $568,000 was converted into common stock during the year ended June 30, 1996. 13. CONTINGENCIES On May 12, 1997, the Company settled the lawsuit brought by Printronix Corporation. The settlement included the dismissal of all charges against the Company. The completion of this lawsuit had no material impact on the Company's financial statements for the year ended June 30, 1997. On December 31, 1996, the Company settled the lawsuit with Rosetta Technologies Corporation. The settlement included the dismissal of all charges against the Company and significant payment of past due invoices by Rosetta. The completion of this lawsuit had no material impact on the Company's financial statements for the year ended June 30, 1997. The Registrant is currently not involved in any legal proceedings. 14. OPERATIONS BY GEOGRAPHIC AREA During the years ended June 30, 1997, 1996 and 1995 the Company had foreign and domestic sales, operating income and assets as shown below:
U.S. JAPAN EUROPE TOTAL ---- ----- ------ ----- (THOUSANDS) 1997 Net Sales $53,045 $ -- $ 3,415 $56,460 Operating income 6,811 -- 438 7,249 Assets 54,246 3,195 211 57,652 1996 Net Sales $65,640 $ -- $ 8,741 $74,381 Operating income 11,717 -- 1,560 13,277 Assets 49,521 10,460 264 60,245 1995 Net sales $61,766 $ -- $ 8,426 $70,192 Operating income 5,637 -- 769 6,406 Assets 23,686 15,780 245 39,711
F-14 25 26 15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair values of the Company's financial instruments as June 30, 1997 and 1996 are as follows:
1997 1997 1996 1996 CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- --------- -------- --------- (IN THOUSANDS) Cash and cash equivalents $ 18,216 $ 18,216 $ 25,992 $ 25,992 Marketable securities 16,374 16,374 -- -- Long and short-term debt -- -- 5,150 5,150
The following methods and assumptions were used to estimate the fair value of financial instruments: Cash and cash equivalents - The carrying amount approximates fair value. Marketable securities - The carrying amount is based on quoted market prices. Long and short-term debt - The carrying amount approximates fair value. F-15 26 27 KENTEK INFORMATION SYSTEMS, INC. AND SUBSIDIARIES FINANCIAL STATEMENT SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS (THOUSANDS)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995 --------------------------------------------- ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND END OF PERIOD EXPENSES DEDUCTIONS PERIOD --------- --------- --------- --------- Year Ended June 30, 1997: Allowance for doubtful accounts $ 627 $ 138 $ 112 $ 653 Allowance for inventory 3,548 1,023 426 4,145 Deferred tax asset valuation allowance -- -- -- -- --------- --------- --------- --------- $ 4,175 $ 1,161 $ 538 $ 4,798 ========= ========= ========= ========= Year Ended June 30, 1996: Allowance for doubtful accounts $ 686 $ -- $ 59 $ 627 Allowance for inventory 2,336 1,725 513 3,548 Deferred tax asset valuation allowance 4,746 -- 4,746 -- --------- --------- --------- --------- $ 7,768 $ 1,725 $ 5,318 $ 4,175 ========= ========= ========= ========= Year Ended June 30, 1995: Allowance for doubtful accounts $ 965 $ 180 $ 459 $ 686 Allowance for inventory 1,654 762 80 2,336 Deferred tax asset valuation allowance 6,588 -- 1,842 4,746 --------- --------- --------- --------- $ 9,207 $ 942 $ 2,381 $ 7,768 ========= ========= ========= =========
F-16 27 28 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On May 9, 1997, the Company orally dismissed BDO Seidman LLP ("BDO") as its principal accountant. The Company confirmed the dismissal of its principal accountant in a letter to BDO dated May 12, 1997. The decision to dismiss BDO was approved by the Company's Audit Committee of the Board of Directors. The BDO reports on the Company's consolidated financial statements for each of the years ended June 30, 1996 and 1995 did not contain an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to audit scope or accounting principles. During fiscal years 1996 and 1995 and any subsequent interim period preceding the dismissal of BDO, the Company is not aware of any "disagreements" between the Company and BDO or "reportable events" as defined in Item 304 of Regulation S-K. On May 29, 1997, the Board of Directors of the Company authorized the engagement of the firm of Deloitte & Touche LLP as the Company's independent auditors for its fiscal year 1997 audit. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning directors and executive officers is set forth in the 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 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 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 Proxy Statement under the heading "Certain Relationships and Related Transactions", which information is incorporated herein by reference. 28 29 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 Item 8 of this report. See Index to Financial Statements (F-1) on Page 12. 2. Financial Statement Schedules: Financial statement schedules required under the related instructions are applicable for the period ended June 30, 1997, 1996 and 1995, 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. 1. On May 16, 1997, the Company filed a report on Form 8-K in which it reported the dismissal of BDO Seidman LLP as its principal accountant effective as of that date. 2. On May 27, 1997, the Company filed an amended report on Form 8-K/A to include the response letter of BDO Seidman LLP. 3. On June 3, 1997, the Company filed a report on Form 8-K in which it reported the engagement of Deloitte & Touche LLP as independent auditors for fiscal year ended June 30, 1997. EXHIBITS EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------------- ----------------------- 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. 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, L.P., dated February 3, 1992, as amended. 10.20++ -- Purchase Agreement between the Company and Tally Printer Corporation, dated April 20, 1996 and Amendment No. 1 to the Purchase Agreement, dated April 16, 1997. 10.21 -- Lease Agreement between the Registrant and Avalon Investment Company, dated March 18, 1997, and Assignment and Consent Agreement, dated March 31, 1997. 13.1* -- Report on Form 10-Q for the period ending March 31, 1997. 13.2** -- Report on Form 10-Q for the period ending December 31, 1996. 13.3*** -- Report on Form 10-Q for the period ending September 30, 1996. 21.1+ -- List of subsidiaries of the Registrant. 27 -- Financial Data Schedules. + 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. ++ Certain confidential information contained in this document has been filed with the Securities and Exchange Commission pursuant to Rule 2.4(b)(2) of the Securities Exchange Act of 1934, as amended. * Previously filed with the Commission on May 15, 1997. ** Previously filed with the Commission on February 13, 1997. *** Previously filed with the Commission on November 13, 1996. 29 30 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 September 19, 1997 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.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ PHILIP W. SHIRES Philip W. Shires President, Chief Executive Officer and Director (Principal Executive Officer) September 19, 1997 /s/ CRAIG G. LAMBORN Craig G. Lamborn Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) September 19, 1997 /s/ HOWARD L. MORGAN* Howard L. Morgan Chairman of the Board September 19, 1997 /s/ I. JIMMY MAYER* I. Jimmy Mayer Director September 19, 1997 /s/ JUSTIN J. PERREAULT* Justin J. Perreault Director September 19, 1997 /s/ JAMES H. SIMONS* James H. Simons Director September 19, 1997 /s/ SHELDON WEINIG* Sheldon Weinig Director September 19, 1997 *By: /s/ PHILIP W. SHIRES Philip W. Shires Attorney-in-Fact
30 31 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------------- ----------------------- 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. 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, L.P., dated February 3, 1992, as amended. 10.20++ -- Purchase Agreement between the Company and Tally Printer Corporation, dated April 20, 1996 and Amendment No. 1 to the Purchase Agreement, dated April 16, 1997. 10.21 -- Lease Agreement between the Registrant and Avalon Investment Company, dated March 18, 1997, and Assignment and Consent Agreement, dated March 31, 1997. 13.1* -- Report on Form 10-Q for the period ending March 31, 1997. 13.2** -- Report on Form 10-Q for the period ending December 31, 1996. 13.3*** -- Report on Form 10-Q for the period ending September 30, 1996. 21.1+ -- List of subsidiaries of the Registrant. 27 -- Financial Data Schedules.
+ 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. ++ Certain confidential information contained in this document has been filed with the Securities and Exchange Commission pursuant to Rule 2.4(b)(2) of the Securities Exchange Act of 1934, as amended. * Previously filed with the Commission on May 15, 1997. ** Previously filed with the Commission on February 13, 1997. *** Previously filed with the Commission on November 13, 1996. EX-10.20 2 PURCHASE AGREEMENT 1 EXHIBIT 10.20 CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THE DOCUMENT, MARKED BY BRACKETS IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 2.4b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. PURCHASE AGREEMENT By and Between MANNESMANN TALLY CORPORATION And KENTEK INFORMATION SYSTEMS, INC. For The Purchase of Kentek Printers Parts and Supplies REVISION #3 DATE: APRIL 20, 1996 2 PURCHASE AGREEMENT 1 Terms and Conditions 1.1 Definitions 1.2 Construction 2. Scope 3. Sale and Purchase; Term; Territory 3.1 Sale and Purchase of Product 3.2 Term of Agreement 3.3 Territory 4. Purchase Orders 4.1 Initial Spare Parts Order 4.2 Forecasts 4.3 Lead Time 4.4 Purchase Orders 4.5 Cancellation 4.6 Rescheduling 4.7 Agreement Prevails over Purchase Orders 5. Delivery; Licenses; Carriers 5.1 Delivery 5.2 Conditions to Deliveries 5.3 Import and Export Licenses 5.4 Carrier Selection 6. Acceptance 6.1 Products Not Rejected Deemed Accepted 6.2 Buyer's Rights Upon Receipt of a Non-Conforming Delivery 6.3 Right to Cure 6.4 Burden of Showing Products Non-Conforming; Payment Not Waiver 6.5 Quality Assurance 7. Payment 8. Prices; Modification of Prices 9. Taxes and Duties 10. Product Approvals; Certifications 3 11. Product Changes 11.1 Engineering Changes 11.2 Mandatory Changes 11.3 Enhancements 12. Patent, Copyrights and Trade Secrets Indemnity 13. Parts and Repairs 13.1 Parts Support Program 13.2 Out of Warranty Exchange 13.3 End-of-Product Life Parts Support 14. Buyer Responsibilities 15. Publications; Documentation 15.1 Publications 15.2 License to Publications; Documentation 16. License of Software Products 16.1 Grant 16.2 Proprietary Rights 16.3 Sublicenses 16.4 Reverse Engineering 16.5 General Copying Restrictions 16.6 Termination of Buyer License 16.7 Warranty Disclaimer 17. Training 18. Product Warranties; Limitation of Liability; Disclaimer 18.1 Product Warranties 18.2 Warranties Do Not Apply To Buyer Components, Modifications, Etc. 18.3 Disclaimer; Limitation of Liability 18.4 Product Liability; Insurance 19. Product Reliability 20. Delays and Inability to Perform 21. Confidentiality 21.1 Confidential Information 21.2 Non-Disclosure of Confidential Information 21.3 Permitted Disclosure 4 21.4 Loss of Confidentiality 21.5 Right to Equitable Relief 21.6 Survival 22. Public Announcements 23. Notices 24. Termination and Expiration of Agreement 24.1 Insolvency, Bankruptcy, Etc. 24.2 Breach of this Agreement, Etc. 24.3 Rights of the Parties in the Event of Termination 25. Point of Sale Reporting 26. Nameplates and Trademarks 26.1 Buyer's Trademarks 26.2 Kentek Proprietary Rights Legend and Trademarks 27. Compliance with Laws 28. Document Precedence 29. Authority 30. Limitation of Liability and Actions 31. Severability 32. Miscellaneous Schedules: A - Printer Prices B - Consumables Prices C - Spare Parts Prices D - Printer Specifications E - DELETED F - Currency Fluctuations G - Publications; Documentation H - Software Products I - Customer Service Support Program 5 PURCHASE AGREEMENT This Agreement is made and entered into as of the day of by and between Kentek Information Systems, Inc., a Delaware corporation with its principal offices at 2945 Wilderness Place, Boulder, Colorado 80301 ("Kentek") and Mannesmann Tally Corporation, with its principal offices at 8301 South 180th Street, P.0. Box 97018, Kent, Washington 98064-9718 ("Buyer"). A. Kentek is engaged in the design, development, manufacture and marketing of electronic printers and related products; and B. Buyer desires to purchase from Kentek certain of such products for resale in the regular course of its business, on the terms and conditions set forth herein. 1. Terms and Conditions. 1.1 Definitions. As used in this Agreement, the following terms shall have the following respective meanings unless the context otherwise requires: "Acceptance Period" shall mean the period from the date of receipt at Buyer's facility of Products and thirty (30) days thereafter. "Affiliate" shall mean any person controlling, controlled by or under common control, directly or indirectly with that person, but only so long as such control exists. For purposes hereof, the term "control" and references of same shall mean the possession, directly or indirectly, of the power to direct, or cause the direction of, the management and policies of another person, whether through ownership of voting securities, by contract or otherwise. "Best Efforts" shall have the meaning set forth in Section 4.4. "Cancellation Charges" shall have the meaning set forth in Section 4.5. "Customer" shall include any person, including without limitation any Affiliate of Buyer, that buys or leases Products sold hereunder from Buyer or any authorized distributor or dealer of Buyer. "Engineering Change" shall have the meaning set forth in Section 11.1. "Ex Works" shall have the meaning attributed to it by INCOTERMS (1990) issued by the International Chamber of Commerce. "Information" shall mean that information contained in any form including, without limitation, drawings, sketches, blueprints, parts, lists, schedules, manuals, documentation, written descriptions of all kinds, models, samples, reports, data, tapes, oral discussion or briefings by Kentek or Buyer personnel or the like relating to any Products or Buyer's or Kentek's products and the manufacture and marketing thereof and Kentek's and Buyer's financial and business arrangements including, without limitations, working features, design, processes, logic specifications, data flow, 5 6 software and communications protocol requirements, know-how, technology, sources of supply and arrangements therefor, test and market data, business forecasts and planning. "Normal Lead Time" shall mean ninety (90) days for printers and accessories and thirty (30) days for consumables and spare parts from the date of Kentek's receipt of a Purchase Order, OR SIXTY (60) DAYS FOR PRINTERS AND ACCESSORIES IF FORECAST IN ACCORDANCE WITH SECTION 4.2. "Parts" shall mean the consumables, listed on Schedules B and C, as each such Schedules may be amended from time to time by Kentek. "Printers" shall mean the Kentek printers and accessories set forth on Schedule A, as more fully described in Schedule D, as such Schedule may be added to, modified or amended by Kentek from time to time, subject to Section 2, Scope, Subsection B, but shall in no event include any printer, or supplies, parts, accessories, software or firmware therefor which has been, or will be, designed for, or which incorporates changes or enhancements already provided or provided in the future exclusively for, a particular customer (other than Buyer) or to any such customer's specifications and which Kentek is prohibited by such customer from selling to its other customers. "Products" shall mean Printers and Parts, collectively, excluding the Software Products. "Publications and Documentation" shall have the meaning set forth in Section 15.1. "Purchase Order(s)" shall mean a purchase order for Products to be sold by Kentek to Buyer, and purchased by Buyer from Kentek, hereunder. "Requested Delivery Date" shall mean the date of requested delivery of a Product in a Purchase Order given to Kentek in accordance with this Agreement. "Software Product(s)" shall mean the encoded data or instructions for use by or in connection with or incorporated into Printers or Parts, including, without limitation, the encoded data and instructions described in Schedule H hereto, as such Schedule may be added to, modified or amended by Kentek from time to time at the sole discretion of Kentek upon 60 days' notice from Kentek to Buyer and including, without limitation, at the option of Kentek, enhancements, updates, improvements, modifications, revisions, adaptations and additions to such data and instructions, but Software Products shall in no event include any software or firmware which has been, or will be, designed for or which incorporates changes or enhancements already provided or provided in the future exclusively for a particular customer (other than to Buyer) or to any such customer's specifications and which Kentek is prohibited by such customer from selling to its other customers. "Term" shall have the meaning set forth in Section 3.2. "UCC" shall mean the Uniform Commercial Code of the State of Colorado, as amended from time to time. 1.2 Construction. (a) The terms "hereby", "hereof", "hereto, "herein", "hereunder" and any similar terms as used in this Agreement refer to this Agreement. All references herein to this Agreement, including such terms, shall, except as expressly provided to the contrary, include the Schedules referred to in the Table of Contents hereof and initialed by the parties hereto. 6 7 (b) Words importing persons shall include firms, associations, partnerships (including limited partnerships), joint ventures, trusts, corporations, public and governmental bodies, agencies and instrumentalities and other entities, as well as natural persons. 2. Scope. A. Kentek hereby appoints and Buyer hereby accepts appointment as an Original Equipment Manufacturer (OEM) Reseller of Kentek-manufactured equipment (hereinafter referred to as the "Products*). B. Kentek agrees to sell and Buyer agrees to purchase for the purpose of resale, the Products listed in the Schedules incorporated into this Agreement as well as future, standard (noncustomized) product during the term of this agreement. Kentek reserves the right to modify Schedule A by adding and/or deleting Products offered therein, subject to three (3) months written notice. C. Buyer will employ its own resources in performing marketing efforts involving the Products and has, or will develop, the technical capability to be familiar with the Products, and will maintain a sales organization sufficient to solicit and actively promote the sale of the Products. 3. Sale and Purchase; Term; Territory. 3.1. Sale and Purchase of Product. Subject to the terms and conditions contained herein, Kentek shall sell to Buyer, and Buyer shall purchase from Kentek, Printers and Parts for use in or with Printers manufactured by Kentek, as hereinafter provided. 3.2. Term of Agreement. The term of this Agreement shall commence upon the date hereof and shall continue for twenty-four (24) months from such date, unless earlier terminated, or extended by written agreement of the parties (the "Term"). 3.3. Territory. Buyer's rights to resell Printers and Parts, and sublicense Software Products pursuant to this Agreement shall be non-exclusive and worldwide. 4. Purchase Orders. 4.1 Kentek will offer Buyer a 50% discount for the Initial Spare Part Order scheduled to be ordered and delivered within the first six (6) months of the term of this Agreement. If Kentek is unable to deliver any spare parts order(s) placed for delivery within this first six months, the 50% discount will remain applicable to those orders until delivered. 4.2 Forecasts. In order to accomplish 60-day lead time, a 6-month rolling forecast of printers and accessories is required. The schedule for forecast and ordering is per the following example 7 8 Example based on a June production schedule: December 20th: Initial forecast for June production January 20th: Revised forecast - no restriction February 20th: Revised forecast - no restriction March 20th: 90-day forecast within +/- 50% of February April 20th: Purchase order issued at +/- 10% of March forecast order June 20th: Production/shipment 4.3 Lead Time. Unless otherwise agreed in writing by Kentek, all Purchase Orders shall specify a Requested Delivery Date within the Normal Lead Time. The lead time between the date of the Order and Delivery of Product(s) will be sixty (60) days, IF FORECASTED AND ORDERED BY THE 20TH DAY OF EACH MONTH. 4.4 Purchase Orders. All purchases of Products by Buyer shall be by English language Purchase Orders referencing this Agreement sent to the corporate Kentek office. Kentek shall use its Best Efforts to deliver Products in accordance with Purchase Orders received by it; provided, however, that Kentek shall not be obligated to deliver a quantity of any model Printer in any month that is greater than 150% of the aggregate quantity of such model Printer that was ordered to be delivered hereunder in the previous calendar month. In the event Kentek discontinues any Product, Buyer has the right to place a final Purchase Order within the sixty (60) day discontinuance notice period subject to availability. Delivery must be no later then ninety (90) days after expiration of the discontinuance notice unless extension is requested by Kentek. No Purchase Order shall request delivery of any Products after the end of the Term unless mutually agreed upon in writing by both parties. Kentek shall have the right, without notice, to elect to fill purchase orders for Products not conforming with the requirements set forth herein and, in such case, such purchase orders shall be treated by all parties as Purchase Orders pursuant to this Agreement. 4.5 Cancellation. Buyer may cancel delivery of any or all Printers and Accessories on order and scheduled for shipment beyond sixty (60) days by giving written notice to Kentek at least sixty (60) days prior to the Requested Delivery Date. Products cancelled with less than sixty (60) days notice will incur a charge of $150 for each Printer Product and $50 for EACH Accessory Product. Printers and/or Accessories cancelled within thirty (30) days prior to the scheduled shipment date will incur a charge equal to 100% of the purchase price for all canceled items. Consumables and Spare Parts may not be cancelled within 15 days of the Requested Delivery Date. The parties agree that it would be impossible to determine the damages that would be suffered by Kentek in the event of any such cancellation and that the foregoing represents a reasonable preestimate of the damages that would result. 4.6 Rescheduling. By notice delivered to Kentek at least 30 days prior to the originally scheduled shipment date, Buyer may reschedule a delivery of Product requested by it to a later date within the Term, subject to the following limitations (the date of the reschedule being deemed to be the date notice of same is given to Kentek): a. no delivery for printers and/or accessories may be rescheduled to later than 30 days after the original scheduled shipment date; 8 9 b. there may be only one reschedule per delivery. 4.7 Agreement Prevails Over Purchase Orders, Etc. Buyer may use its form of purchase order to effect orders hereunder; provided, however, that (i) all such purchase orders must be in conformance with and refer to this Agreement and (ii) any terms in such orders which conflict with, or supplement the terms of this Agreement shall be deemed null and void, and this Agreement shall govern. 5. Delivery; Licenses; Carriers. 5.1 Delivery. For purposes hereof, the date of purchase and sale of Products hereunder shall be the date of delivery thereof. Deliveries of Products purchased hereunder shall be made as follows: a. Ex Works Kentek's designated production or distribution facility in Japan for Products, except as set forth in (b) below; b. Ex Works Kentek's designated U.S. facility for certain special order requirements of Products, as designated in Schedules A, B, and C. Kentek will provide proof of delivery upon request and will provide reasonable assistance to Buyer at no charge in any claim Buyer may make against a carrier or insurer for misdelivery, loss or damage to Products after delivery has been made to Buyer. All risk of loss or damage shall pass upon delivery. 5.2 Conditions to Deliveries. Kentek shall not be required to deliver any Products if Buyer (i) has not made any undisputed payments due to Kentek, (ii) shall be otherwise in continuing material breach of any other material obligation, or (iii) shall fail to provide adequate assurances of due payment requested by Kentek in accordance with Section 2-609 of the UCC. 5.3 Import and Export Licenses. Buyer will be responsible for any licenses, permits or approvals of the country of import. Buyer will also be responsible for obtaining any and all such export licenses, permits or approvals for exports to any other location. The parties shall give all reasonably required assistance to each other in obtaining all the licenses, permits and approvals mentioned above. Kentek may request that Buyer provide delivery verification certificates for each drop ship delivery. 5.4 Carrier Selection. Upon execution of this Agreement, Buyer shall notify Kentek of Buyer's designation of the carrier or agent to whom Products delivered hereunder are to be delivered. If Buyer desires to change its designation of such carrier or agent, Buyer shall, not less than 10 days prior to the Requested Delivery Date for the delivery to be affected by the change, notify Kentek of the new carrier or agent. 6. Acceptance. 6.1 Products Not Rejected Deemed Accepted. If Buyer does not give Kentek the notice set forth in Section 6.2 within the Acceptance Period, each delivery of Products shall be deemed to have been accepted by Buyer, subject to its remedies under Section 18. 6.2 Buyer's Rights Upon Receipt of a Non-Conforming Delivery. If any delivery of Products or Products delivered by Kentek (i) are non-conforming with this Agreement or (ii) are non-conforming with the Products requested in the applicable Purchase Order, (except for deliveries that are non-conforming 9 10 reason of (x) under 60 days lateness, or (y) greater lateness if accepted by Buyer's agent or carrier) Buyer shall have the right to accept such delivery in whole or, by written notice to Kentek within the Acceptance Period giving full particulars of the non-conformity, reject such portion of such delivery as is non-conforming upon notice to Kentek. 6.3 Right to Cure. If Buyer rejects any non-conforming Products as provided in Section 6.2, at its option, Kentek shall have the right to (i) request the return of such Products, or (ii) to correct the nonconformity within a reasonable period on a Best Efforts basis of not more than thirty (30) days. If Kentek elects to cure the non-conformity but fails to do so within such period, Buyer shall have the right to reject the portion of the delivery that is still non-conforming in whole or part. 6.4 Burden of Indicating Products Non-Conforming; Payment Not Waiver. Buyer shall have the burden of indicating how any delivery made or Products delivered are non-conforming. Buyer's payment for any Products or agreement to pay any other charges shall not by itself be deemed a waiver of Buyer's rights hereunder. 7. Payment. Kentek may issue invoices for Products sold no earlier than the shipment of Products. Subject to Kentek's right to receive adequate assurances pursuant to Section 2-609 of the UCC, payments for Products ordered shall be made within 30 days of invoice. An interest charge equal to 1.5% per month will be due on all undisputed invoices past due or the maximum amount permitted by law - whichever is less. 8. Prices; Modification of Prices. The prices applicable to Printers, Accessories, Consumables and Spare Parts ordered hereunder shall be established as set forth on Schedules A, B, and C except for increases or decreases from time to time due to currency fluctuations in accordance with Schedule F. The prices applicable to Parts ordered shall be as set forth on Schedule C; provided, however, that Kentek shall have the right to change the price of any and all Parts one time during any 12-month period. The prices set forth in Schedule C are per part number and per shipment. 9. Taxes and Duties. Prices are exclusive of certain taxes, duties, brokerage or like charges imposed on Products after their delivery to Buyer and will be paid by Buyer. In lieu of Buyer paying the above taxes and/or charges, Buyer may furnish Kentek with a tax exemption certificate acceptable to the taxing authority. 10. Product Approvals; Certifications. Kentek warrants that all complete Printers delivered to Buyer under this Agreement, without any Buyer Unique Items, will comply with applicable U.L., CSA and VDE standards and will comply with the applicable FCC rules for the type of product involved, including type acceptance or certification where required. Kentek will obtain and maintain at its own expense all applicable listings, certifications and approvals with respect to the above-noted standards in Kentek's name. Kentek will provide information and assistance to Buyer with respect to (i) listings, certifications and approvals that are required to be in Buyer's name and (ii) compliance of the Printers with any such standards after modification or additions made by Buyer or made by Kentek with Buyer Unique Items. 11. Product Changes. 11.1 Engineering Changes. Kentek shall, subject to Buyer's right to be advised, have the right to make engineering changes and to order and use in the Product(s) parts and materials of Kentek's 10 11 choosing. Kentek shall notify Buyer in writing of any major changes. A "major change" is defined, for purposes of this Article, as one which affects the Product's form, fit and function. Non-incorporation of a change shall be at Buyer's sole risk and responsibility. In such event, Kentek shall, at its sole option, continue to make available and deliver, in accordance with this Agreement, the unchanged equipment. If Kentek incurs additional costs as a result of Buyer's non-acceptance of said change, a premium price to provide unchanged Product shall be assessed. Change notices will be in Kentek's standard form and such notices will be directed to the Buyer's Vice President of Engineering & Manufacturing. 11.2 Mandatory Changes. In the event mandatory engineering and safety changes to the Product(s) are required, Kentek shall issue to Buyer a Mandatory Field Change Order including all necessary documentation and implementation instructions. Kentek shall ship to Buyer, free of charge, freight prepaid, upgrade kits to incorporate all mandatory changes and retrofit all Product(s) delivered to Buyer's customers prior to the changes. Such upgrade kits may include hardware and/or software. Buyer shall, at Buyer's expense, perform all labor to implement the Mandatory Field Change Order, except in cases where a Mandatory Field Change Order is required to make the Product(s) safe in compliance with regulatory agency standards. Kentek shall reimburse Buyer for Buyer's travel and labor cost for implementing such Mandatory Field Change Order in that instance only. Kentek may, at its option, elect to execute such Mandatory Changes at its own expense. 11.3 Enhancements. If, during the term of this Agreement, Kentek offers any improvement, option, additional functionality or other enhancements to any Product not available at the time this Agreement is signed (an "Enhancement"), provided that such Enhancement is not exclusive to another customer, Kentek will offer such Enhancement to Buyer at prices that do not exceed those charged to any other customer of Kentek purchasing the same or lesser quantities of such Enhancement on similar terms and conditions as those contained herein. 12. Patent, Copyrights, Trademarks, and Trade Secrets Indemnity. Except as provided below, Kentek, at its own expense, agrees to defend (without prejudice to its sole option to settle) and hold Buyer harmless against any suit or proceeding brought against Buyer alleging that any Product, or any Software Product or any part thereof sold or licensed hereunder infringes any United States patent, trademark, copyright or trade secret or other proprietary right owned by others (an "Infringement Action"), provided Kentek is promptly notified in writing, given all reasonable assistance it requires, (at Kentek's expense) and permitted to direct the defense and/or settlement of such Infringement Action. Further, Kentek will pay in full any final non-appealable judgment rendered in such Infringement Action by a court, or shall pay any agreed upon settlement with respect to such Infringement Action, but shall not be responsible for costs or settlements incurred without its consent. If Buyer's use or sale of any such Product of Software Products is enjoined, or in the event that Kentek desires to minimize its liabilities hereunder, Kentek will, at its sole option and expense, (i) substitute other equally suitable Product, or Software Product (ii) modify the Product or Software Product so that it is no longer alleged to infringe, but delivers substantially equivalent or better performance, (iii) obtain for Buyer the right to continue its use or sale and (iv) if no other reasonably commercial option is available, grant to Buyer credit for the Product or Software Product as depreciated and accept its return. The depreciation shall be an equal amount per year over the lifetime of the Product or Software Product for three years. The foregoing states the entire liability of Kentek for Patent, copyright, trademark, trade secret or other infringement. No indemnity shall apply to patent, copyright, trademark, trade secret or other infringement liability to the extent directly arising from any Product or Software Product made or modified to Buyer's specifications or design, or with components or subassemblies supplied by Buyer, or a supplier designated by Buyer, including (without limitation) copyright, patent infringement or other claims related to images produced in accordance with Buyer's specifications or based on Buyer's 11 12 modification of Product or Software Product or programming. The foregoing indemnity shall not apply and Buyer agrees to indemnify Kentek in a manner fully equivalent to the foregoing indemnity with respect to any claim made, or any suit or proceeding brought against Kentek, in which and to the extent that the alleged infringement arises from the combination of any Product or Software Product with any equipment, subassemblies or components not supplied by Kentek or its operation or use with apparatus, data or programs not furnished by Kentek, except for the operating system of the host computer or if the alleged infringement arises from any modification of any Product or Software Product or from the printing of an image produced or modified, in accordance with the specifications of Buyer or any Customer. 13. Parts and Repairs. 13.1 Parts Support Program. The terms of Kentek's parts support program are set forth in Schedule I hereto. 13.2 Out of Warranty Exchange. In addition to Kentek's obligations under Section 18, Kentek shall offer the Out of Warranty Exchange Program set forth in Schedule 1. 13.3 End-of-Life Parts Purchasing. Buyer may purchase spare parts from Kentek to provide service to its customers. In the event Buyer/Kentek terminate this Agreement or any Product under this Agreement is discontinued by Kentek, Kentek agrees to allow Buyer to purchase Parts and Consumables at the then current prices for a period of up to five (5) years for the purpose of supporting Buyer's installed base. 14. Buyer Responsibilities. In addition to all other rights and obligations created by this Agreement, Buyer shall: (a) use its best efforts to sell the Products; (b) maintain its own facilities suitable for demonstrating the Printers; and (c) maintain an inventory of Parts necessary to meet greater than 90% of (i) its expected needs for normal maintenance and (ii) the orders of its Customers, in either case within 48 hours. 15. Publications; Documentation. 15.1 Publications. Subject to Section 15.2, Kentek shall furnish (or already has furnished) to Buyer two English language copies of each of the publications or documentation relating to the Printers listed on Schedule G (collectively, the "Publications"). 15.2 License to Publications and Documentation. Kentek hereby grants to Buyer, during the Term, a non-exclusive, non-transferable royalty-free license, that may not be sublicensed, to use and prepare derivative works based upon the Publications for the purpose of including all, or portions of the same in documentation to be provided to Customers in connection with the sale, use, leasing, installation, assembly, repair and maintenance of Printers sold hereunder only. Such license and rights shall include all additions, modifications and improvements thereto which may, at Kentek's sole discretion, be 12 13 effected from time to time. Buyer shall have the right to provide the Publications or Documentation to its Customers for the purpose of resale. 16. License of Software Products. 16.1 Grant. Kentek hereby grants to Buyer a non-exclusive, non-transferable, royalty-free license to use, to sublicense to End Users to use, and to sublicense to its authorized distributors to use and sublicense to End Users, to use each of the Software Products in connection with Products. 16.2 Proprietary Rights. The Software Products contain proprietary or trade secret information which is either owned or licensed by Kentek and/or Buyer. The Software Products may also be subject to patent, copyright, and trademark protection. Both parties agree not to remove any copyright, other proprietary rights or related notices from any Software Products and agree to include all such notices existing on any Software Product on any copies. Neither party has ownership rights in any of the other party's Software Products. Some portions of the techniques, algorithms or processes contained in the Software Products, or any modification thereof, constitute trade secrets and other proprietary information owned or licensed by Kentek and/or Buyer. 16.3 Sublicense. The Software Products may be sublicensed only to a party who agrees to accept the terms and conditions of this Section 16. NEITHER PARTY WILL DISCLOSE, TRANSFER, LEASE, COPY, SUBLEASE OR OTHERWISE MAKE AVAILABLE ANY SOFTWARE PRODUCTS OR ANY PROPRIETARY INFORMATION DESCRIBED ABOVE TO ANY THIRD PARTY, EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT. Any attempt to sublicense, or otherwise transfer any such information, any Software Products or any rights, duties or obligations hereunder, except as expressly provided in this Agreement, is void. 16.4 Reverse Engineering. Neither party may reverse engineer, decompile, create derivative works based upon or modify any Software Products. 16.5 General Copying Restrictions. Neither party shall make copies of any royalty-bearing Software Products, except one copy for backup purposes in support of a single Printer. In the event of unauthorized copying of the Software Products by Buyer or any transferee of Buyer, Kentek may seek such remedies as the law provides, i.e.; public flogging and any other punishment that it deems appropriate in the circumstances. 16.6 Termination of License. If any of the terms or conditions of this Section 16 are broken by Buyer or Kentek, its successors or any sublicensees of any Software Products, the license granted to any breaching party (but not the obligations and limitation of rights of Buyer or Kentek, such successors and sublicensees) will terminate. Upon any such termination, Buyer and any successor or sublicensee breaking this software license agreement must cease all use of the Software Products and must destroy all copies of the Software Products and/or return them to Kentek or Buyer. Either party shall have the right to cure any such default within thirty (30) days. 16.7 Warranty Disclaimer. The Software Products are distributed and licensed "as is". ALL WARRANTIES, EITHER EXPRESSED OR IMPLIED, AS TO QUALITY, PERFORMANCE, OR FITNESS FOR ANY PARTICULAR PURPOSE ARE DISCLAIMED AS TO SOFTWARE PRODUCTS. IN NO EVENT WILL KENTEK OR ITS LICENSORS BE LIABLE FOR ANY LOST PROFITS OR SAVINGS OR OTHER DIRECT, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES RESULTING FROM USE OF THE SOFTWARE PRODUCTS, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 13 14 17. Training. Kentek agrees to provide the training described in Schedule J. Training classes may be video taped for future use by Buyer with respect to the Products sold hereunder only. 18. Product Warranties; Limitation of Liability; Disclaimer; Product Liability, Etc. 18.1 Product Warranties. Kentek warrants that each Product sold under this Agreement shall be free from defects in material and workmanship under normal use and service, and that such Products will meet the specifications set forth on Schedule D (as the same may be added to, modified, or amended from time to time). Warranties shall apply for the time periods designated below: Model K30, K30D, K31, K31D and K40D engines and related models for two (2) years from date of shipment. Accessories and Spare Parts for one hundred eighty (180) days from date of shipment. Consumables for average rated yield. All warranties are on Products used within specified duty cycle and Product Specifications. Normal use and service does not include any abuse, misuse, transportation damage, alteration or depletion after delivery hereunder. If the defect can be isolated to any particular Parts, the warranties set forth herein cover such Parts only (whether installed in a Printer or not), and in no event shall Kentek be liable for labor or installation of such Parts. In the event of a warranty claim under this Section 18, at Kentek's election, Buyer shall dispose of or ship the defective Parts, or if the defect cannot be isolated to any particular Parts, the defective Printer, in each case uninsured (at Kentek's risk) but properly packaged, with freight collect, to such facility as Kentek shall indicate to Buyer from time to time. At its option, Kentek shall repair or replace the defective Parts or Printer, as the case may be, and shall ship it, with freight and insurance collect, back to Buyer within 30 days of Kentek's receipt of the same. The procedure for claims under this Warranty is set forth in Schedule J under "Defective Material Return Procedure and Product Warranties." 18.2 Warranties Do Not Apply To Buyer Components, Modifications, Etc. The warranties set forth in Section 18.1 do not extend to components or subassemblies supplied by Buyer or suppliers designated by Buyer or to modifications of any Product which have been made by or at the request of Buyer or any Customer, or to units of Products which fail or are damaged after delivery hereunder due to improper shipment, handling, storage, operation, use or maintenance in a manner or environment or with parts, accessories, supplies or consumables not conforming to published instructions or specifications of Kentek at the time of delivery of such Product, or due to service or maintenance by persons not qualified to perform the same. Use of any consumable not specifically supplied by or approved in writing by Kentek shall constitute a modification of Product and shall specifically void any and all warranties for both printer and consumable supply products. Kentek shall have no liability or responsibility with respect to any warranties provided by Buyer or any third person. 18.3 Disclaimer; Limitation of Liability. THE WARRANTIES SET FORTH IN SECTION 18.1 AND THE OBLIGATIONS AND LIABILITIES SET FORTH IN SECTION 18.1 AND IN SECTIONS 10 AND 12 ARE IN LIEU OF ALL OTHER WARRANTIES RELATING TO ANY PRODUCTS SOLD OR SOFTWARE PRODUCTS OR MANUALS, PUBLICATIONS, OR DOCUMENTATION LICENSED BY KENTEK TO BUYER, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, FITNESS 14 15 FOR ANY PARTICULAR PURPOSE OR NON-INFRINGEMENT OF PROPRIETARY RIGHTS OF OTHERS. ALL OTHER CONDITIONS, TERMS, WARRANTIES OR OTHER STATEMENTS CONCERNING WARRANTIES OR THE LIKE WITH RESPECT TO PRODUCTS, SOFTWARE PRODUCTS AND MANUALS AND DOCUMENTATION AND THEIR USE, AND ALL OTHER REMEDIES WITH RESPECT THERETO, WHETHER EXPRESS OR IMPLIED BY STATUTE OR COMMON LAW OR OTHERWISE HOWSOEVER, ARE HEREBY EXPRESSLY DISCLAIMED. Without limiting the foregoing, Buyer's exclusive remedy and Kentek's entire obligation and liability in contract, tort or otherwise for any breach of warranty of any Products, Software Products or Manuals and Documentation, or the failure of any Products or Software Products to meet the specifications set forth in Schedule D, is the repair or exchange of any defective Products covered by the foregoing warranties in the manner and within the time frames set forth. 18.4 Product Liability; Insurance Kentek agrees to indemnify (without prejudice to its sole option to settle) and defend Buyer from and against all liability demands, claims loss, cost damage and expense for property damage, death and personal injury arising out of or relating to the Products sold to Buyer and performance of this order; provided, however, Buyer shall be liable to the extent of its own negligence. At Buyer's request, Kentek will furnish certificates of insurance evidencing liability insurance which includes but is not limited to worker's compensation, general liability, property damage liability, and product liability. Kentek agrees to defend or settle, at its sole expense, all suits or proceedings arising out of any suits or threats of suit provided Buyer gives Kentek prompt written notice of all suits or threats of suit and other such claims. Buyer may be afforded the opportunity to join and fully participate in, at its own expense, the defense of such proceedings. 19. Product Reliability. If any Product does not function at the mean time between failure rate (MTBF) set forth in Schedule D, both parties agree to review their respective failure rate data for such Product and to discuss what course of action, if any, would be appropriate to remedy such failure. 20. Delays and Inability to Perform. Except as otherwise provided in this Agreement, neither Kentek nor Buyer shall in any event be liable for any delays in performance caused by: an act of God; war; riot; fire; explosion; accident; earthquake; flood; sabotage; inability to obtain or shortage of fuel, power, supplies, components, subassemblies or material (for reasons other than such party's negligence or fault or failure to timely order in accordance with normal business practices); inability to obtain transportation; failures of non-Affiliate subcontractors, governmental laws, regulations or orders. Agreed upon delivery schedules and the term of this Agreement shall be considered extended by a period of time equal to the time lost because of any delay excusable under this Section 20, except that both parties shall use due diligence to minimize such delays. If either party is subject to delays excusable under this Section 20, it shall give prompt written notice thereof to the other party including its best estimate of the expected duration of such delay. 21. Confidentiality. 21.1 Confidential Information. All disclosures of Information shall be deemed to be nonconfidential unless specifically designated by the discloser at the time of disclosure as confidential. All disclosures of Confidential Information by one party hereto to the other pursuant to this Agreement shall be made by or under the supervision of the respective Technical Coordinators of Kentek and Buyer, as each such party may from time to time designate, or such Technical Coordinators' respective designees. When such disclosure is orally and/or visually made, then it shall be confirmed in a written resume within 20 days following such disclosure. The initial Technical Coordinators for the Parties are: 15 16 For Kentek: Vice President, Engineering For Buyer: Vice President, Engineering and Manufacturing For purposes of this Section 21, all confidential Information designated as such as provided above is hereinafter referred to as "Confidential Information," the party hereto that discloses the Confidential Information to the other party hereto as provided in this Section 21 is hereinafter referred to as the "Discloser" and the party hereto that receives such Confidential Information from the Discloser is hereinafter referred to as the "Recipient." Each of the parties hereto agrees to mark all Confidential Information which is in tangible form with appropriate secret or confidential legend. 21.2 Non-Disclosure of Confidential Information. Subject to the provisions of Sections 21.3 and 21.4, each of the parties hereto agrees to hold the other's Confidential Information in confidence for the other and not to use any such Confidential Information other than for the purposes of this Agreement. Each agrees not to disclose the other's Confidential Information, by publication or otherwise, to any person other than those persons whose services it requires who have a need to know such Confidential Information for purposes of carrying out the purpose of this Agreement and who agree in writing to be bound by, and comply with, the provisions of this paragraph or are otherwise under an obligation of confidentiality. After termination or expiration of this Agreement, and upon demand, Buyer and Kentek each agrees to return to the other all models and written or descriptive matter, including but not limited to drawings, blueprints, descriptions, and other papers, documents, tapes or any other media which contain Confidential Information of the other party. In the event of a loss of any item containing any Confidential Information, each party shall promptly notify the other party of such fact in writing and assist in the investigation thereof. A Recipient shall protect disclosed Confidential Information by using the same degree of care, but no less than a reasonable degree of care, to prevent the unauthorized use, dissemination or publication of such Confidential Information as the recipient uses to protect its own Confidential Information of a like nature. Each party hereunder agrees to indemnify the other for any loss resulting from a breach of its duty to maintain confidentiality. 21.3 Permitted Disclosure. Disclosure of Confidential Information shall not be precluded if such disclosure is: (i) in response to a valid order of a court or other governmental body of the United States or any political subdivision thereof or any other relevant jurisdiction; provided however, that the party from whom disclosure is sought shall, if permitted, first have given notice to the other and made a reasonable effort to obtain a protective order requiring that the Information and/or documents so disclosed are used only for the purpose for which the order was issued; (ii) otherwise required by law, statute, ordinance, rule, regulation; or (iii) necessary to establish rights under this Agreement during a court proceeding or to its attorneys. 21.4 Loss of Confidentiality. Notwithstanding any other provisions of this Agreement, the obligations specified in Section 21.2 will not apply to any Confidential Information that: 16 17 (i) the Recipient can demonstrate is already in the possession of the Recipient without an obligation of confidence; (ii) is independently developed by the Recipient without resort to the Discloser's Information; (iii) is rightfully received by the Recipient from a third party; (iv) is released for disclosure by the Discloser or with its written consent; (v) is or becomes a matter of general public knowledge or the knowledge of a substantial part of the industry, through no fault of the Recipient; or (vi) is disclosed by the Discloser to a third party without a duty of confidentiality on the third party. 21.5 Right to Equitable Relief. Kentek and Buyer each agrees that a breach of its obligations under this Section 21 would cause irreparable harm to the other, and that the other shall be entitled, in addition to all other remedies available to it, equitable relief in a court of equity by injunction or otherwise, without the necessity of proving actual damages for any breach by the other party of this Section 21 or of any undertaking herein contained. 21.6 Survival. This Section 21 shall survive the Agreement for a period of two(2) years after expiration or termination of Agreement. 22. Public Announcements. Kentek and Buyer each agrees not to make any public announcements regarding this Agreement without the prior written consent of the other. 23. Notices. Any notice or other communication required or permitted to be given hereunder shall be given in writing and shall be deemed to have been duly given and delivered (i) on the date delivered if delivered by hand or overnight courier, (ii) the earlier of the date of actual receipt or seven (7) days after being sent by certified or registered mail (or registered airmail or the equivalent thereof when given to or from persons outside the United States), or (iii) on the date sent by telegraph, cable or facsimile, in each case to addresses set forth below or such other address as a party may designate by notice to the other parties given in accordance with this Section: a. Routine administrative notices, including, without limitation, invoices and shipping instructions, (i) if intended for Kentek, to: Kentek Information Systems, Inc. 2945 Wilderness Place Boulder, Colorado 80301 Attention: Sales Order Administrator Fax No. (303) 440-9600 17 18 (ii) if intended for Buyer to: Erika Linford Mannesmann Tally Corporation P.O. Box 97018 8301 South 180th Street Kent, WA 98032 Fax No. (206) 251-5520 b. Notices other than routine administrative notices, including, without limitation, notices setting forth substantive legal claims or purporting to waive or assert substantive legal rights or remedies or ascribing liability to a party in connection therewith, shall be addressed to the respective parties in accordance with 23. (a), above, with copies to: in the case of Kentek: Kentek Information Systems, Inc. 2945 Wilderness Place Boulder, Colorado 80301 Attention: President and CEO Tel No. (303) 440-5500 Fax No. (303) 440-9600 Cooley Godward 2595 Canyon Boulevard Boulder, Colorado 80302-6737 Attention: James C. T. Linfield Tel No. (303) 546-4000 Fax No. (303) 546-4099 if intended for Buyer and/or the Affiliate: Mannesmann Tally Corporation 8301 South 180th Street P.O. Box 97018 Kent, WA 98032 Attention: Vice President, Materiel Finance & Administration Tel No. (206) 251-5500 Fax No. (206) 251-5520 24. Termination and Expiration of Agreement. 24.1 Insolvency, Bankruptcy, Etc.. This Agreement shall, at the option of each party hereto, terminate, subject to the provisions of Section 24.3 (i) if any petition or proceeding, voluntary or involuntary, for any relief under any bankruptcy, insolvency, reorganization, dissolution, winding-up, receivership, liquidation or similar law or statute, now or hereinafter in effect, is filed or commenced by the other party, (ii) if any such petition or proceeding is filed or commenced against the other party and is not dismissed within 60 days, (iii) if any trustee, custodian, receiver or similar officer is appointed for the other party or any substantial part of its property and is not discharged within 30 days, (iv) if 18 19 the other party shall be dissolved or shall cease to conduct its business (unless it shall have prior thereto or simultaneously therewith disposed of all or substantially all its assets), (v) if the other party shall become insolvent (however defined or evidenced) or (vi) if the assets of the other party shall be seized or attached and such attachment shall not have been released in 30 days. 24.2 Breach of this Agreement, Etc. In the event of a substantial default or a breach of any material term, condition or obligation hereunder, unless the defaulting or breaching party shall fully remedy the default or breach within 30 days after written notice from the other party specifying such default or breach (or, if such default or breach cannot be fully remedied within 30 days, the defaulting or breaching party shall have commenced all actions required for such full remedy within such 30 day period and shall fully remedy the default or breach within such period of time as agreed to by the nondefaulting or non-breaching party), this Agreement shall, at the option of the non-defaulting or non-breaching party, exercised by notice to the other party, terminate. Except as otherwise provided herein, upon termination of this Agreement in the event of such substantial default or material breach, all rights and privileges granted under this Agreement to the defaulting or breaching party shall immediately terminate. 24.3 Rights of the Parties In the Event of Termination. Notwithstanding anything contained herein to the contrary, the following rights and obligations shall survive the expiration or termination of this Agreement for any reason whatsoever, regardless of the party at fault: a. Kentek's rights and obligations under Sections 4.5, 4.6, 4.7, 6, 7, 12, 13, 16, 18, 21, 23, 24, 26, 27, 28, 30, 31, and 32; provided, in each case, that Kentek receives any payment provided for herein, upon Kentek's performance of its rights and obligations under such section; b. Buyer's rights and obligations to pay for Products already delivered by Kentek and for Products ordered under outstanding Purchase Orders (subject to Section 4.4); and C. Buyer's rights and obligations under Sections 4.3, 4.4, 4.5, 4.6, 4.7, 5, 6.2, 7, 9, 12, 13.3,15, 16, 18, 21, 23, 24, 26, 27, 28, 30, 31 and 32. 25. Point of Sale Reporting. Buyer shall provide to Kentek a monthly reporting of the sale of Printers, Accessories, and Consumables into each territory to assist Kentek in providing commissioned sales representatives compensation for efforts to assist Buyer. 26. Nameplates and Trademarks. 26.1 Buyer's Trademarks. Buyer may affix to units of Products Buyer's supplied nameplates including the trademarks or logo of Buyer. Buyer shall indemnify and hold harmless Kentek against all claims, judgments, losses, damages, liabilities, costs and expenses (including reasonable legal fees) that Kentek may sustain or incur or be subjected to by reason of Kentek's or Buyer's affixation of such name plates, including, without limitation, any claim of infringement of the rights of any third person. 26.2 Kentek Proprietary Rights Legend and Trademarks. Kentek shall have the right to affix to units of Product (to the extent not rendered ineffective) inconspicuous nameplates or other designations, and take such other measures to label or identify Products that are in the opinion of Kentek necessary to protect any patent, copyright or trade secret right retained by Kentek or its suppliers, or to meet any requirement of law imposed on Kentek. In addition, Kentek shall have the right to and require Buyer to affix a label showing Kentek's and any licensor's names and trademarks to all diskettes containing any Software Products. Buyer shall not alter, remove or render illegible any such notices. Buyer shall 19 20 not have or acquire any right, title or interest in the trademark "Kentek" or any other "K-" designated non-impact printer or Kentek product, or in any other trademark, service mark or trade name that is now hereafter owned by or licensed to Kentek, either used alone or in conjunction with other words or names, or in the goodwill thereof, and shall not use any such mark or name without the express written consent of Kentek. If Buyer should, in spite of this provision, acquire any such rights, title or interest by operation of law or otherwise, Buyer will, upon request by Kentek, reconvey the same to Kentek. 27. Compliance with Laws. Both parties shall comply, and do all things necessary to comply, with all applicable federal, state, and local laws, regulations and ordinances, including, but not limited to, the regulations of the United States Department of Commerce relating to the export of products or technical data, insofar as they relate to the activities to be performed under this Agreement. Buyer agrees to obtain the required government documents and approvals prior to export of any Products delivered to it or technical data disclosed to it or the direct product related thereto. Buyer shall hold Kentek harmless from any actions arising from its failure to comply with the provisions of this Section 27. 28. Document Precedence. In the event of a conflict between the documents incorporated herein, the terms of Sections 1 through 32 shall have precedence over those of the Schedules. 29. Authority. Each of the parties hereto represents to the other that it has due and proper authority to enter into, execute and perform all duties and obligations set forth and envisioned by this Agreement. Each party indemnifies and holds the other harmless for breach of the warranties and representations contained in this Section 29. 30. Limitation of Liability and Actions. In no event shall either party be liable to the other for any tort, consequential, incidental, punitive or special damages, except to the extent expressly provided in this Agreement, even if such party shall have been advised of the possibility of such potential loss or damage or if such loss or damages arise out of the termination of this Agreement. No action arising out of this Agreement, regardless of form, may be brought more than two years after the cause of action has arisen. 31. Severability. If any provision of this Agreement, or the application hereof to any person or circumstance, for any reason or to any extent, shall be found by any court of competent jurisdiction to be illegal, invalid or unenforceable, the remainder of this Agreement and the application of that provision to other persons or circumstances shall not be affected, but rather shall be enforced to the extent permitted by law so long as it still expresses the intent of the parties. If the intent of the parties cannot hereby be preserved, the parties agree to enter into a legal, valid and enforceable substitute agreement which will achieve the objectives of this Agreement as it is written, or renegotiate the affected portions of this Agreement to the same end. 32. Miscellaneous. This Agreement, including the Schedules listed on the table of contents and the Purchase Orders issued and accepted hereunder set forth the entire understanding of the parties with respect to the Products and the purchase and sale thereof and merges all prior written and oral communications. Except as set forth herein, this Agreement can be modified or amended only in a writing signed by a duly authorized representative of Kentek and Buyer. Section headings are provided for the convenience of reference only and shall not be construed otherwise. 20 21 No failure to exercise, or, delay in exercising, on the part of either party, any right, power or privilege hereunder shall operate as a waiver thereof, or will any single or partial exercise of any right, power or privilege hereunder preclude the further exercise of the same right or the exercise of any other right hereunder. Nothing expressed or implied in this Agreement is intended or shall be construed to confer upon or give to any person other than the parties hereto, and their respective permitted successors and permitted assigns, any rights or remedies under or by reason of this Agreement. This Agreement is not assignable in whole or in part by either party without the prior written consent of the other, except that either party may, without such consent, assign this Agreement and its rights and obligations hereunder to any successor to its business or to the ownership of all or substantially all of its stock or assets that assumes such parties' obligations hereunder. Each party hereto is and at all times shall be independent and nothing contained in this Agreement shall be construed as constituting either party, a partner, co-venturer, employee or agent of the other. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute but one Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. Any action or proceeding brought to enforce obligations contained in this Agreement may be brought in any of the Federal or State courts in Colorado, and Buyer and Kentek consent and agree to submit to the jurisdiction of any of such courts. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the dates mentioned below. KENTEK INFORMATION MANNESMANN TALLY CORPORATION SYSTEMS, INC. By By ------------------------- ------------------------- Title Title ---------------------- ----------------------- Date Date ----------------------- ------------------------ 21 22 SCHEDULE A-1 K30/K30D 300 dpi PRINTER PRICES
OEM JAPAN OEM BOULDER --------- ----------- K30, XS, 30ppm, 300 dpi with Controller (68020 EIGS with co-processor) 4 MB Program RAM, Standard I/O Two (2) 3 1/2" FDD, including Standard Operating and Emulation Software $[ ] [ ] XS with 8Mb MIGS Controller $[ ] $ [ ] XS with 16Mb MIGS Controller $[ ] $ [ ] K30, XS, 30ppm, 300 dpi with Controller (68020 EIGS with co-processor) 4 MB Program RAM, Standard I/0, One (1) 3 1/2" FDD, One (1) installed Hard Disk Drive, and Standard Operating and Emulation Software $[ ] $ [ ] XS with 8Mb MIGS Controller $[ ] $ [ ] XS with 16Mb MIGS Controller $[ ] $ [ ] K30D, XS, 30spm, Duplex, 300 dpi with Controller (68020 EIGS with co-processor) 4 MB Program RAM, Standard I/0 Two (2) 3 1/2" FDD, including Standard Operating and Emulation Software $[ ] $ [ ] XS with 8Mb MIGS Controller $[ ] $ [ ] XS with 16Mb MIGS Controller $[ ] $ [ ] K30D, XS, 30spm, Duplex, 300 dpi with Controller (68020 EIGS with co-processor), 4 MB Program RAM, Standard I/0, One (1) 3 1/2" FDD, One (1) installed Hard Disk Drive, and Standard Operating and Emulation Software $[ ] $ [ ] XS with 8Mb MIGS Controller $[ ] $ [ ] XS with 16Mb MIGS Controller $[ ] $ [ ]
NOTES: 1.) Prices are based on a Y/$ rate of yen between [ ]-[ ]. Outside this range, Kentek will adjust accordingly. 2.) All prices are ExWorks Kentek's designated facility and apply to orders placed within normal lead time only; expedited orders will be subject to then current surcharges. 3.) Prices do not include DRAM surcharges, if applicable. 4.) All XS Printers must be ordered with a Supplies Starter Kit. See Schedule B. 23 SCHEDULE A-2 K31/K31D and K40D 300 dpi PRINTER PRICES
OEM JAPAN OEM BOULDER --------- ----------- K31XS, XS, 30ppm, 300 dpi with Controller (8Mb RIGS I+) Standard I/0, Standard Color No Logo, 4x2OLCD op panel, One (1) 3 1/2" FDD, One (1) installed Hard Disk Drive, Direct Attach FlexIO Card, Standard Operating and Emulation Software $ [ ] $ [ ] XS with 16Mb RIGS II Controller $ [ ] $ [ ] K31DXS, XS, 30spm, Duplex, 300 dpi with Controller (12Mb RIGS I+), Standard I/0, Standard Color, No Logo, 4x20 LCD op panel, One (1) 3 1/2" FDD, One (1) installed Hard Disk Drive, Direct Attach FlexIO Card, Standard Operating and Emulation Software $ [ ] $ [ ] XS with 16Mb RIGS II Controller $ [ ] $ [ ] K40DXS, XS, 40spm, Duplex, 300 dpi with Controller (12Mb RIGS I+) Direct Attach Flex I/0, One installed Hard Disk Drive, One 3 1/2" FDD, 4x20 LCD op panel, Standard Color, No Logo, Standard Operating and Emulation Software $ [ ] $[ ] XS with 16Mb RIGS II Controller $[ ] $[ ]
NOTES: 1.) Prices are subject to a Y/$ rate of yen between [ ]-[ ]. Outside this range, Kentek will adjust accordingly. 2.) All prices are ExWorks Kentek's designated facility and apply to orders placed within normal lead time only; expedited orders will be subject to then current surcharges. 3.) Prices do not include DRAM surcharges, if applicable. 4.) All XS printer configurations must be ordered with a Supplies Starter Kit. See Schedule B. 24 SCHEDULE A-3 K30 and K30D 300 dpi AVAILABLE EX WORKS BOULDER ONLY SPECIAL CONFIGURATION PRINTER PRICES K30, 30ppm, 300 dpi with Dataproducts Interface Configuration 4 MB Program RAM, Standard I/0 (800/550), Two (2) 3 1/2" FDD with EIGS Controller $ [ ] with 8Mb MIGS Controller $ [ ] with 16Mb MIGS Controller $ [ ] K30D, 30spm, Duplex, 300 dpi with Dataproducts Interface Configuration, 4Mb Program RAM, Standard I/0 (800/550), Two (2) 3 1/2" FDD with EIGS Controller $ [ ] with 8Mb MIGS Controller $[ ] with 16Mb MIGS Controller $[ ] EV30, 30ppm, 300 dpi Simplex with Video Signal Interface, Video PCL Controller, Disk Drive Cover, Special Lower Rear Cover, Standard I/0 (800/550), Standard Color, No Logo, (does not include 68020 EIGS with co- processor; Signal Interface PCL Controller and 2 3 1/2" FDDs) $ [ ]
NOTES: 1.) Prices are subject to a Y/$ rate of yen between [ ]-[ ]. Outside this range, Kentek will adjust accordingly. 2.) All prices are ExWorks Kentek's designated U.S. warehouse and apply to orders placed within normal lead time only; expedited orders will be subject to then current surcharges. 3.) Prices do not include DRAM surcharges, if applicable. 25 SCHEDULE A-4 ACCESSORIES PRICE
PRODUCT OEM JAPAN OEM BOULDER DESCRIPTION PRICING PRICING - ----------- ------- ------- 1200 Sheet Feeder Cassette with Variable Paper Sizes thru 8 1/2 x 11* $ [ ] $ [ ] 2500 Sheet Input Cassette with Variable Paper Sizes thru 8 1/2 x 14* $ [ ] $ [ ] 1400 Sheet Facedown Print Stacker w/Offset Jogging Paper Sizes thru 81/2 x 14* $ [ ] $ [ ] 75 Envelope Feeder Cassette* $ [ ] $ [ ] Upper Cassette (550 sheet capacity)* $ [ ] $ [ ] Lower Cassette (250 sheet capacity)* $ [ ] $ [ ] Rear Cover Board Housing (without hardware)* $ [ ] $ [ ] PostScript I Software $ N/A $ [ ] PostScript II Software (RIGS only) $ N/A $ [ ] Hard Disk Drive Assembly $ N/A $ [ ] Ethernet Attachment with Housing $ N/A $ [ ] NETPrint Ethernet Interface w/Novell Support (120v) $ N/A $ [ ] K31K40D Net Attach Ethernet Card (TCP/IP) $ N/A $ [ ] K30 "B" Card (Ethernet Card) Cover $ N/A $ [ ] Printer Cabinet $ N/A $ [ ]
NOTES: 1. All items marked with an asterik are subject to currency fluctuations. Pricing based on Y/$ rate of yen between [ ]-[ ]. Outside this range, Kentek will adjust accordingly. 2. Prices are Ex Works Kentek's designated facility and apply to orders placed within normal lead time only; expedited orders are subject to then current surcharges. 26 SCHEDULE B-1 K30/K31/K40D XL CONSUMABLES PRICES (PALLET QUANTITIES)
PALLET ITEM DESCRIPTION PRICE QUANTITIES YIELD - ---------------- ----- ---------- ----- Toner Cartridges (2 pack) $ [ ] 72 34,000 Toner Cartridges (8 pack) $[ ] 21 136,000 Photoconductor Unit $[ ] 54 100,000 Photoconductor Unit $[ ] 54 200,000 Fuser Unit $[ ] 52 200,000 Cleaning Unit $[ ] 40 400,000 K30 Developer Unit $[ ] 30 600,000 K31 Developer Unit $[ ] 30 600,000 K40D Developer Unit $[ ] 30 600,000 Supplies Starter Kit $[ ] N/A
NOTES: 1.) All prices are on a per order, single delivery basis. 2.) All prices are pallet quantity; ExWorks Kentek's production facility. 3.) Some newly manufactured supplies may contain selected recycled parts equivalent to new in performance. 4.) Supplies Starter Kit includes one each fuser, developer, cleaner, photoconductor, and 2-pack toner. 27 SCHEDULE B-2 K30/K31/K40D XL CONSUMABLES PRICES (LESS THAN PALLET QUANTITIES)
ITEM DESCRIPTION PRICE YIELD - ---------------- ----- ----- Toner Cartridges (2 pack) $ [ ] 34,000 Toner Cartridges (8 pack) $[ ] 136,000 Photoconductor Unit $[ ] 100,000 Photoconductor Unit $[ ] 200,000 Fuser Unit $[ ] 200,000 Cleaning Unit $[ ] 400,000 K30 Developer Unit $[ ] 600,000 K31 Developer Unit $[ ] 600,000 K40D Developer Unit $[ ] 600,000
NOTES: 1.) All prices are on a per order, single delivery basis. 2.) All prices are ExWorks Kentek's production facility. 3.) Some newly manufactured supplies may contain selected recycled parts equivalent to new in performance. 28 SCHEDULE B-3 CONSUMABLES ORDERING TERMS AND CONDITIONS
STANDARD EXPEDITE/EMERGENCY STOCK TERMS -------- ------------------ PRICING Schedule B-1 Schedule B-2 LEAD TIME 30 Days ARO 24 Hours ARO U.S. warehouse U.S.warehouse(1) DELIVERY TERMS ExWorks Kentek ExWorks Kentek production facility production facility SPECIAL CONDITIONS None Reasonable quantities per item plus $50 per order material handling charge
NOTES: 1.) Kentek will use its best efforts to ship consumables requested in a purchase order by the customer identified as an "Emergency Order" within twenty-four (24) hours during normal business hours Monday - Friday, 8:00 a.m. - 4:30 p.m., after receipt of order (ARO). 29 SCHEDULE C-1 SPARE PART ORDERING TERMS AND CONDITIONS
STANDARD EMERGENCY STOCK TERMS -------- --------- DISCOUNTS [ ]% [ ]% (off list price in Schedule C) LEAD TIME 30 Days ARO 24 Hours ARO(1) ExWORKS U. S. warehouse U.S. warehouse SPECIAL CONDITIONS None Reasonable quantities per part plus $50 per order material handling charge
NOTES: 1.) Kentek will use its best efforts to ship spare parts requested in a purchase order by the customer identified as an "Emergency Order" within twenty-four (24) hours during normal business hours, Monday - Friday, 8:00 a.m.-4:30 p.m., after receipt of order (ARO). 2.) Prices are subject to yen between [ ]-[ ]. Outside this range, Kentek will adjust accordingly. 3.) Prices are ExWorks Kentek's designated U.S. warehouse and apply to orders placed within normal lead times only; expedited orders will be subject to then current surcharges. 30 SCHEDULE D PRODUCT SPECIFICATIONS 31 SCHEDULE E DELETED FROM THIS AGREEMENT 32 SCHEDULE F CURRENCY FLUCTUATIONS In the event of fluctuations in the Yen/Dollar "Bank Exchange Rate," the prices listed in Schedules A and C shall be automatically adjusted in the following manner. These adjustments will be made at the time of Purchase Order Placement. After an order is placed, there will be no further adjustment for additional "Bank Exchange Rate" fluctuations. The "Bank Exchange Rate" shall be determined by the previous month's average Yen/Dollar rate calculated from the fifteenth day of the prior month to the fourteenth day of the current month of selling rates between the U.S. Dollar and the Japanese Yen as quoted daily in The Wall Street Journal exchange rate tables of "New York Foreign Exchange Selling Rates". If the previous month's average is outside the base rate range [ ]-[ ] Yen per Dollar, then Kentek shall advise the Customer of the price adjustment for all purchase orders received after the fourteenth day of the current month. Such price adjustments shall be in accordance with the attached schedule. Outside of the ranges indicated, Kentek will adjust accordingly. 33 SCHEDULE F CURRENCY FLUCTUATIONS (CONTINUED)
WHEN THE "BANK EXCHANGE RATE" IS: MIDPOINT PRICE WILL BE: Greater than [ ] but less than or equal to [ ] [ ] Base plus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base plus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base plus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base plus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base plus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base plus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base plus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base plus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base plus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base plus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base plus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base plus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base Price Greater than [ ] but less than or equal to [ ] [ ] Base minus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base minus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base minus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base minus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base minus [ ]% Greater than [ ] but less than or equal to [ ] [ ] Base minus [ ]%
GREATER THAN [ ] OR LESS THAN OR EQUAL TO [ ] -- KENTEK WILL ADJUST ACCORDINGLY. 34 SCHEDULE G PUBLICATIONS 1.) K30/K30D GUIDE TO OPERATIONS MANUAL 2.) K30/K30D FIELD SERVICE MANUAL 3.) K40D QUICK REFERENCE CARD 4.) K40D USER'S GUIDE 5.) K40D REFERENCE GUIDE 6.) K40D FIELD SERVICE MANUAL TO BE SUPPLIED AFTER CONTRACT EXECUTION 35 SCHEDULE H SOFTWARE PRODUCTS STANDARD OPERATING AND EMULATION SOFTWARE PCL 5 PROGRAM JOB LANGUAGE (PJL) OPTIONAL PHOENIXPAGE POSTSCRIPT INTERPRETER Some of the foregoing are subject to license agreements between Bitstream, Phoenix Technologies, VS Software and Kentek. 36 SCHEDULE I CUSTOMER SERVICE SUPPORT PROGRAM 1 PRODUCT WARRANTIES 2. CONSUMABLE WARRANTIES 3. K30/K30D/K31/K31D/K40D PRINTER OUT-OF-WARRANTY PROGRAM 4. DEFECTIVE MATERIAL RETURN PROCEDURE 5. TRAINING PROGRAM 6. TRAINING PROGRAM COURSE ITINERARY 7. TRAINING RATES 8. FIELD SERVICE SUPPORT 9. TECHNICAL MANUALS PRICE LIST TO BE SUPPLIED AFTER CONTRACT EXECUTION 37 KENTEK INFORMATION SYSTEMS, INC. PRODUCT WARRANTY Kentek warrants that the Printer Product delivered shall be free from defects in material and workmanship, under normal use and service, and that any part or parts found defective within: a. 180 days from original shipping date for spare parts b. 180 days from original shipping date for high capacity feeders and stackers c. 2 years from original shipping date for printer engine (when operated within specified duty cycle);* shall be repaired by the Reseller with parts supplied by Kentek or replaced by Kentek at Kentek's shipping point. The Reseller will segregate and make available to Kentek at a central location those parts found defective with a list price exceeding $50.00. The Reseller will return defective parts freight prepaid. This Product Warranty is applicable only if the Product has had normal utilization within the specification, and has been maintained in accordance with recommended procedures. Any and all other costs in the implementation of this warranty shall be the responsibility of the Reseller. The warranty set forth in this Article does not extend to altered units of the Product or to units of the Product which fail or are damaged after delivery to the Reseller due to the shipment, handling, storage, operation, use or maintenance in a manner or environment not conforming to any published instructions and specifications of Kentek at the time of delivery. Use of any consumable not specifically supplied by or approved in writing by Kentek shall constitute a modification of Product and shall void any and all warranties for both printer and consumable supply product. * Any repair or replacement of any portion or part of the printer engine (excluding Consumables, Software, and Accessories) does not decrease or extend the original two-year warranty period. 38 KENTEK INFORMATION SYSTEMS INC. CONSUMABLE WARRANTY PROCEDURE The Kentek product warranty is contained in the Agreement between Kentek and the Reseller. There are two parts to the warranty: a. Defects due to material and workmanship/out of box/mechanical warranty, and; b. failure to meet the average specified yield. The warranty period is ninety (90) days from date of shipment to the Reseller. Kentek's published specification yields are "average" and the warranty is measured against the average yield for each type of consumable. If the rated yield of any consumable is 400,000 prints and that consumable produces prints within specification at the rated life then it is considered to have reached its specified life. For example, if the customer has four K30 cleaners and two make 425,000 prints and two make 375,000 prints, then no warranty credit is applicable as the average is the specified 400,000. In the event a customer returns consumable item(s) short of average life, the customer should be given a credit only for the unused portion; i.e., 325,000 prints/400,000 average yield x unit selling price. Kentek will work with the Reseller to provide credits where the population of supplies does not meet the average life specified. Credits (or replacement units) must be provided to the customer by the Reseller. At Kentek's option, the Reseller will segregate consumables found defective and return the defective consumables to Kentek freight prepaid. A Kentek Consumable Warranty Return Form (sample attached) is required for each consumable being returned for warranty evaluation. This product warranty is applicable only if the product has had normal utilization within specification and returned in a protective shipping container. Toner cartridges must always be removed from Developers, and Developers must be resealed prior to shipment. Should the defective consumable be received damaged due to unsafe packaging warranty consideration will become void. 39 KENTEK Consumable Warranty Claim Form Receiving Department 2845 29th Street Mfg RMA #:_______ Boulder, CO 80301 Distributor Reference #:_______ (303) 440-50500 / Fax (303) 440-9600 Date: __________________________ MASTER DISTRIBUTOR/VAR END USER REPORTING FAILURE NAME & ADDRESS NAME & ADDRESS _____________________________________ _____________________________________ _____________________________________ _____________________________________ _____________________________________ _____________________________________ Contact:_____________________________ Contact:_____________________________ Tel. #_______________________________ Tel. #_______________________________ Printer Model:_______________________ Consumable Part Desc.________________ Printer S/N#_________________________ Consumable P/N_______________________ Consumable S/N_______________________ Did the consumable fail on installation? (check one) _____yes _____no If no, provide page count when consumable installed: _________ & when consumable failed_______________________________ DESCRIPTION OF PROBLEM:________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ CORRECTIVE ACTION:_____________________________________________________________ _______________________________________________________________________________ 1. Attach test prints and the error log to this form. (Instructions describing how to produce test prints and the error log are found in the Guide to Operations.) 2. Contact manufacturer's Customer Service Department (303) 440-5500 to obtain a Return Material Authorization (RMA) number. This logs your consumable claim and expedites evaluation. PACKAGING INSTRUCTIONS When you return consumables, package the consumable following the packing instructions closely as listed in Appendix C of the Guide to Operations. If the consumable is damaged during shipping due to improper packaging, your warranty claim may be invalid. - ------------------------------------------------------------------------------- MANUFACTURER CONSUMABLE EVALUATION Assessment of Failure:_________________________________________________________ Explain any descrepancy between claim and assessment:__________________________ Credit Recommendation:________________Signature:____________________Date:______ Authorized Credit %:__________________Mgr. Signature:_______________Date:______ 40 KENTEK INFORMATION SYSTEMS, INC. OUT OF WARRANTY EXCHANGE PROGRAM Kentek offers an out-of-warranty exchange program whereby Kentek will repair or provide a replacement on any of the items listed below.
DESCRIPTION EXCHANGE COST ----------- ------------- K30 EIGS BOARD (300 dpi, 4Mb) $ [ ] K30 MIGS BOARD (300 dpi, 8Mb) $[ ] K30D EIGS BOARD (300 dpi, 4Mb) $ [ ] K30D MIGS BOARD (300 dpi, 8Mb) $[ ] K31S/D RIGS I BOARD (300 dpi, 12Mb) $ [ ] K31S/D RIGS II BOARD (300 dpi 16Mb) $[ ] K40D RIGS I BOARD (300 dpi, 12Mb) $ [ ] K40D RIGS II BOARD (300 dpi, 16Mb) $[ ] PCL BOARD (300 dpi) $ [ ] PCL VIDEO I/F BOARD (240/300 dpi) $ [ ] K30/K30D AC POWER SUPPLY (Universal) $ [ ] K30/K30D DC POWER SUPPLY (Universal) $ [ ] K40D DC POWER SUPPLY $ [ ]
NOTE: Prices listed above are Net (No Discount Allowed). Turn around time is 30 days from receipt of goods. WARRANTY - 90 Days on All Exchange Items. o To participate in this program the customer must contact the "Customer Service Department" at Kentek corporate headquarters. o Request a "Return Material Authorization" (RMA) number and provide Kentek with a purchase order number authorizing the exchange. o The customer is required to return the defective part to Kentek corporate headquarters, freight prepaid, in a protective shipping container. Should the defective part be received damaged due to unsafe packaging, the retail parts price will be applied to the exchange order. 41 KENTEK INFORMATION SYSTEMS, INC. DEFECTIVE MATERIAL RETURN PROCEDURES The customer must first contact Kentek corporate headquarter's "Customer Service Department" requesting a "Return Material Authorization" (RMA) number. Kentek's Customer Service Department will collect the necessary data from the customer to process the return of material accordingly. The assigned RMA number must be referenced on the outside of the shipping container. Return Material Tags are to be used by the customer when returning defective parts either Under Warranty or for Exchange to Kentek corporate headquarters, freight prepaid. Repairs will be made or a replacement part will be sent to the customer within 30 days from receipt of defective part. Warranty Items If the returned defective item under warranty tested is found to be operational (not defective), Kentek will notify the customer of our findings and a charge for Kentek's testing and evaluation time will be billed back to the customer at $75 per hour minimum of two (2) hours. Exchange Program Kentek has identified a selected list of material such as printed circuit boards and power supply units that can be exchanged for a repaired and tested replacement with a 90-day warranty given by Kentek. The procedure to return defective items under our Exchange Program is the same as the procedure for returning defective items under warranty as stated above. 42 KENTEK INFORMATION SYSTEMS, INC. KENTEK'S TRAINING PROGRAM Kentek will provide the customer with one (1) training class, with up to six (6) students at no cost. The class will be held at Kentek corporate headquarters. Any additional training requested by the customer will be offered at a "most favored status" price. In the event the customer requests the training class to be held anywhere other than Kentek corporate headquarters, the customer will reimburse Kentek for all travel and living expenses incurred by our training personnel during the course. The rates for additional training courses, if required, are included as a part of this Schedule. The rates for field service support from Kentek to resolve a problem at the customer's location or at a printer location, are included in this Schedule I. A minimum of four (4) weeks notice is required to schedule a training course at either Kentek's or the customer's training location. 43 KENTEK INFORMATION SYSTEMS, INC. PRINTER TRAINING PROGRAM COURSE ITINERARY The training session will be a 3-day course and classes will be a standard eight (8) hour day. Class size is limited to six (6) students. In order to provide the most effective possible training, we urge a minimum of three printers be made available to the students. Class subjects will consist of: - - Operational overview - - Component/assembly layout - - Xerographic process - - IGS & PCL block diagram of operations - - Communication theory RS 232, 422, Centronics (Host Connections) - - Diagnostics ... how they work and how to use them - - Problem/failure determination (flow chart) - - TAGS (Troubleshooting Analysis Guide) familiarization Field Service manuals are available for each student consisting of: - - Installation/operational manual - - Maintenance manual - - Removal/replacement procedure - - Self diagnostic test procedure - - Troubleshooting - - Electrical adjustments - - Parts catalog - - Technical bulletins Special training material such as schematics, diagrams and technical data will be issued to each student. Troubleshooting time will be scheduled to allow the students to perform failure analysis on the printer. Kentek parts are sold as assemblies, not components, so this class will teach each student to repair printers down to the assembly level. 44 KENTEK INFORMATION SYSTEMS, INC. TRAINING RATES (Does Not Apply to Initial Training Course) 1. $500.00 - Hardware or Software Training Course Fee 2. $750.00 - Hardware and Software Training Course Fee 3. $250.00 - Per Day per Student. Note: Should the course be held anywhere other than at Kentek corporate headquarters, all travel and living expenses incurred by our instructor will be billed to the customer in the following manner: Air Fare.................... Coach for domestic flights Business for international flights Rent-A-Car.................. $200.00 per week (Estimate) Hotel....................... $100.00 per day (Estimate) Meals....................... $ 30.00 per day (Estimate) Telephone, Misc., Etc.
45 KENTEK INFORMATION SYSTEMS, INC. FIELD SERVICE SUPPORT RATES 1. $110.00 per hour - portal to portal (8:00 AM to 4:30 PM - Monday through Friday) 2. $140.00 per hour - portal to portal (after 4:30 PM and before 8:00 AM Monday through Friday) 3. $190.00 per hour - portal to portal (anytime Saturday, Sunday and holidays) 4. Mileage charge: $0.35 per mile (plus tolls) 5. Parts Cost - (See Suggested Retail Spare Parts Price list) NOTE: The rates listed above only apply within a 125-mile radius to either Kentek's corporate headquarters and/or Kentek's Regional support off ices. Locations: Eastern Region - Melbourne, Florida Western Region - San Jose, California Kentek service rates and mileage charges include any and all travel to the customer's office/printer location and return to Kentek headquarters. All other areas will be charged for travel and expenses. 46 KENTEK INFORMATION SYSTEMS, INC. TECHNICAL MANUAL PRICE LIST
PART NUMBER DESCRIPTION NET PRICE - ----------- ----------- ---------- 61050010 K30/K30D Operator/Installation Manual $ 25.00 62050010 K30/K30D Field Service Manual $ 75.00 81250001 K40D User's Guide $ 10.00 81250002 K40D Field Service Manual $ 75.00 81250003 K40D Quick Reference Card $ 2.00 81250004 K40D Reference Guide $ 20.00 51020818 Print Quality Masters $ 500.00
NOTE: No discounts applied to manuals. 47 AMENDMENT NO. 1 To The PURCHASE AGREEMENT By and Between TALLY PRINTER CORPORATION ("Tally" or "Buyer") And KENTEK INFORMATION SYSTEMS, INC. ("KENTEK") Dated April 16, 1997 ================================================================================ WHEREAS, Tally and Kentek have entered into an agreement entitled "Purchase Agreement," dated April 22, 1995 ("Agreement"); and WHEREAS, the parties now desire to amend the Agreement to change certain terms and conditions of the sale and purchase of Products; and WHEREAS, the Agreement would expire unless extended by written agreement of the parties; NOW THEREFORE, in consideration of the covenants and agreements herein contained, SNPS and Kentek hereby agree as follow: 1. All capitalized terms not defined in this Amendment shall have the meaning ascribed thereto in the Agreement. 2. Section 3.2 Term of Agreement, shall be amended to read "The term of this Agreement shall commence upon the date hereof and shall continue for twelve (12) months from such date (April 16, 1998), unless earlier terminated or extended by written agreement of the parties (the "Term"). 3. Section 13.3 End-of-Life Parts Purchasing, shall be amended to read "Buyer may purchase spare parts from Kentek to provide service to its customers. In the event Buyer or Kentek terminate this Agreement, if any Product under this Agreement is discontinued by Kentek, or if the annualized run rate purchased over a period of six months is less than 200 printers per year activating an End-of-Life condition, then Kentek agrees to allow Buyer to purchase Parts and Consumables at the new category (non-OEM designation) current prices for a period of up to five (5) years for the purpose of supporting Buyer's installed base. 48 Except as provided above, the Agreement shall in all other respects remain unchanged and shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be executed in duplicate by their duly authorized representatives as of the dates subscribed. TALLY KENTEK INFORMATION SYSTEMS, INC. /s/ ALAN PINSON /s/ [ILLEGIBLE] - -------------------------- ---------------------------- Vice President CEO - -------------------------- ---------------------------- Title Title 6/4/97 - -------------------------- ---------------------------- Date Date EX-10.21 3 LEASE AGREEMENT 1 EXHIBIT 10.21 LEASE AGREEMENT BY AND BETWEEN AVALON INVESTMENT COMPANY, A CALIFORNIA GENERAL PARTNERSHIP (LANDLORD) -AND- KENTEK INFORMATION SYSTEMS, INC. (TENANT) DATED MARCH 18, 1997 2 TERM SHEET THIS TERM SHEET is provided for the convenience of Tenant. Reference should be made to the terms and conditions of the Lease Agreement dated the 18th day of March, 1997. In the event of any conflict, the terms contained in the Lease shall control. BASIC LEASE PROVISIONS 1. Property Name and Address 2840 Wilderness Place Suites A & B Boulder, CO 80301 2. Approximate Square Footage 7,200 s.f. 3. Basic Annual Rent $82,944.00 4. Basic Monthly Rent $6,912.00 5. Term: Ten (10) months 6. Option Periods Available (if any) None 7. Commencement Date June 1, 1998 8. Security Deposit $6,912.00 9. Late Payment Service Charge Five percent (5%) 10. Address for Notices: Landlord: Avalon Investment Company P. O. Bx 35 Nederland, CO 80466 Tenant: Information Systems, Inc. 2945 Wilderness Place Boulder, CO 80301 11. Lease Payments Payable to: Avalon Investment Company
3 LEASE AGREEMENT THIS LEASE AGREEMENT (hereinafter the "Lease") is dated March 18, 1997 and is by and between AVALON INVESTMENT COMPANY, a California partnership (hereinafter the "LANDLORD") and Kentek Information Systems, Inc., (hereinafter the "TENANT"). The "GUARANTOR" of this Lease is Kentek Information Systems, Inc., if any. RECITALS 1. Landlord is the owner of certain real estate legally described in Exhibit A located in Boulder, Colorado and commonly known as 2840 Wilderness Place, (hereinafter the "REAL ESTATE"). The Real Estate is improved with a(n) industrial building (hereinafter the "IMPROVEMENTS") (the Real Estate and improvements are collectively referred to as the "PROPERTY"). 2. Tenant is desirous of leasing a certain portion of the Property from Landlord pursuant to the terms and conditions contained herein. 3. Landlord is desirous of leasing a certain portion of the Property to Tenant pursuant to the terms and conditions contained herein. NOW, THEREFORE, for good and valuable consideration recited herein, including payment of rent and the other covenants, conditions and agreements, Landlord and Tenant agree as follows: 1. PREMISES. 1.4. DEMISE. Landlord hereby leases and demises to Tenant the following described portion of the Property: UNIT A & B, CONSISTING OF APPROXIMATELY 7,200 SQUARE FEET IN INTERIOR AREA (hereinafter the "PREMISES"). The Premises are more specifically described in Exhibit B attached hereto. 1.5. LICENSES. Additionally, for the Term, Landlord grants to Tenant a Parking License and Common Area License, both of which are hereafter defined. 1.6. PARKING. Landlord further grants to Tenant, its employees and invitees a non-exclusive license for the use of eighteen (18) parking spaces upon the Property (hereinafter the "PARKING LICENSE"). The Parking License shall be effective for the term of this Lease as defined below. Landlord reserves the right to designate specific spaces for the Parking License. 1.7. COMMON AREAS. The "COMMON AREAS" are all areas outside of the Premises upon the Property designated by Landlord for common use of Tenant, its employees, licensees, invitees, contractors and Landlord. Landlord grants to Tenant, its employees, licensees, invitees and contractors a non-exclusive license over such Common Areas of Property which are necessary to the use and occupancy of Premises and Parking License (hereinafter the "COMMON AREA LICENSE"). Said License shall be effective for the Term of this Lease. Tenant shall not use Common Areas for any type of storage or parking of trucks, trailers or other vehicles without the advance written consent of Landlord. 1.8. CONTROL OF COMMON AREAS. All parking and Common Areas of Property shall at all times be subject to the management of Landlord. Same shall not be deemed part of the Premises. 1.9. LIMITED USE OF PREMISES. The premises shall be used for: Those uses allowed in I-D zoning. Tenant shall not, without the prior written consent of Landlord, permit the Premises to be used for any other purpose. 4 2. TERM/DEPOSIT. 2.10. TERM. This Law shall commence on June 1, 1998, and terminate on March 31, 1999 (hereinafter the "TERM") unless sooner terminated by reason of default or otherwise, as provided herein. 2.11. DEPOSIT SUM. The "SECURITY DEPOSIT" shall be in the sum of $6,912 due and payable on or before June 1, 1998. 3. RENT/UTILITIES 3.12. BASIC RENT. Tenant shall pay as basic rent for the Premises, the amount of Sixty-Nine Thousand One Hundred Twenty and 00/100 ($69,120.00) annually (hereinafter the "BASIC RENT"). The Basic Rent shall be payable in equal monthly installments of $6,912.00, in advance, without notice, on the first (1st) day of the month for which due. The Basic Rent for a period of less than one month shall be adjusted on a pro rata basis. Basic Rent shall be adjusted after the first twelve (12) months of the Term pursuant to Escalation Rider attached hereto as Exhibit C. Any rent not paid on or before the first (lst) of the month shall be subject to an additional late charge of Five Percent (5.0%) of rental payment due. 3.13. UTILITIES. Except as provided herein, Tenant shall be responsible for the payment of all utility charges upon the Premises and in conjunction with the Tenant's business, including but not limited to, electric, natural gas and telephone. Tenant shall contract directly with all utility providers. All utility payments shall be directed to the respective utility providers. Payments shall be made in a timely manner. 3.14. LANDLORD PROVIDED UTILITIES. Landlord shall provide and pay for water and sewer services. Landlord shall also provide and pay for electrical, lighting and HVAC services in the Common Areas of the Property (if applicable). Water and sewer shall only be supplied to those points of supply in existence at this time and only in quantities sufficient for normal use for washing, drinking, and utility uses and not for industrial or manufacturing use. 3.15. INTERRUPTION OF UTILITIES. Tenant agrees that Landlord shall not be liable by abatement of Rent or otherwise, for failure to furnish or delay in furnishing any utility service, or for any diminution or surge thereof. Such failures, delays, diminutions or power surges shall never be deemed to constitute an eviction or disturbance of the Tenant's use and possession of the Premises or relieve Tenant from performing any of Tenant's obligations hereunder, including the payment of Rent. 4. SECURITY DEPOSIT. 4.1. RECEIPT OF DEPOSIT. To secure the faithful performance by Tenant of all of the covenants, conditions and agreements in this Lease, set forth and contained on the part of the Tenant to be observed and performed and agreements in this Lease which become applicable upon its termination by re-entry or otherwise. 4.2. APPLICATION OF DEPOSIT. The parties agree: (a) that Security Deposit, or any portion thereof, may be applied to the curing of any default that may exist, and/or payment of subsequent damages and costs incurred by Landlord, without prejudice to any other remedy or remedies which the Landlord may have on account thereof, and upon such application Tenant shall pay Landlord on demand the amount so applied which shall be added to the Security Deposit, so the same will be restored to its original amount; (b) that should the Premises be conveyed by Landlord, the Security Deposit or any portion thereof may be turned over to Landlord's grantee, and if the same be turned over, Tenant agrees to look to such grantee for such application or return; (c) that Landlord shall not be obligated to hold Security Deposit as a separate fund; (d) that should the Basic Rent be increased, the Security Deposit shall be increased in the same proportion within thirty (30) days of such Basic Rent increase. 4.3. RETURN OF DEPOSIT. If Tenant shall perform all of its respective covenants and agreements in this Lease, the Security Deposit or the part of the portion thereof not 5 previously applied pursuant to the provisions of this Lease, together with a statement, shall be returned to Tenant without interest, no later than sixty (60) days after the expiration of the Term or any renewal or extension thereof, (or such earlier time if required by applicable law) provided Tenant has vacated the Premises and surrendered possession thereof to Landlord. 5. USE OF PREMISES. 5.1. SIGNS. Any and all signage of Tenant upon the Premises shall be subject to the prior written approval of Landlord. All signage shall be in conformance with local and state laws. All signage shall conform to aesthetic and design criteria, themes and standards of the Property. 5.2. LEGAL COMPLIANCE. Tenant, its employees and invitees, shall comply with and abide by all federal, state, county and municipal laws and ordinances in connection with the occupancy of the Premises and the Property. Improvements and uses of Premises shall comply with all applicable laws, regulations and ordinances. No alcoholic beverages shall be dispensed or consumed by Tenant, its employees, invitees, agents or contractors upon the Premises or Property. No controlled substance shall be permitted upon the Premises or Property. No use which shall increase the rate or cost of insurance upon Property shall be permitted. No hazardous or dangerous activities shall be permitted upon the Premises. 5.3. NUISANCE PROHIBITED. Tenant shall not act in any manner, nor permit employees or invitees to act in any manner, which shall be a nuisance to other tenants or invitees of the Property or adjacent property owners or tenants, or which would interfere with the other tenant's quiet employment of their premises. Said prohibition includes, but is not limited to, loud noises, music, noxious or unpleasant odors, and disruptive behavior or actions. 6. CONDITION, MAINTENANCE AND IMPROVEMENT OF PREMISES AND PROPERTY. 6.1. CONDITION OF PREMISES/WORK LETTER. Tenant is familiar with the physical condition of the Premises and Property. Landlord makes no representations or warranties as to the physical condition thereof or its suitability for Tenant's intended purpose. Other than the work, if any, to be performed pursuant to Tenant's work letter (hereinafter the "WORK LETTER"), the Premises are rented AS-IS, in current condition, and all warranties are hereby expressly disclaimed. 6.2. TENANT IMPROVEMENTS. Unless otherwise provided in Work Letter, Tenant shall be responsible for any and all improvements and alterations within the Premises, including but not limited to, electrical wiring, HVAC, plumbing, framing, drywall, flooring, finish work, telephone systems, wiring and fixtures (hereinafter the "TENANT WORK"). 6.3. IMPROVEMENTS/PRIOR LANDLORD CONSENT. Tenant agrees to submit to Landlord complete plans and specifications including engineering, mechanical and electrical work covering any and all contemplated Tenant Work, and any subsequent improvements or alterations of the Premises. The plans and specifications shall be in such detail as Landlord may require, and in compliance with all applicable statutes, ordinances, regulations and codes, and shall be certified by a licensed architect. As soon as reasonably feasible thereafter, Landlord shall notify Tenant of any failures of Tenant's plans to meet with Landlord's approval. Tenant shall cause Tenant's plans to be revised to the extent necessary to obtain Landlord's approval. Tenant shall not commence any Tenant Work or any other improvements or alterations of Premises until Landlord has approved its plans. Any and all minor work or repairs for which plans are not necessary shall also be approved in advance by Landlord prior to ANY WORK being performed. 6.4. TENANT'S DUTY TO REPAIR. Tenant shall, at Tenant's sole cost and expense, take good care of, and maintain the entire interior leased Premises, including, but not limited to, the plumbing, electric wiring, fixtures, appliances, and interior walls, doorways, and appurtenances belonging thereto installed for the use or used in connection with the interior leased Premises. Tenant shall, at Tenant's own expense, make as and when needed all repairs to the Premises and to all such equipment, fixtures, appliances and appurtenances necessary to keep the same in good order and condition. "REPAIRS" shall include 6 all interior replacements, renewals, alterations and betterments. All Repairs shall be equal or better in quality and class to the original work. For the purpose of maintaining and repairing the HVAC, the Tenant shall be obligated to secure for the Term an HVAC service contract from a servicer pre-approved by Landlord. In the event Tenant fails to secure same, Landlord may obtain same and bill Tenant for contract parts as additional rent. 6.5. LANDLORD'S DUTY TO REPAIR. Landlord shall maintain the foundation HVAC equipment, exterior walls (including all plate glass and other windows, window frames and doors) and roof of the Improvements in good repair. The cost of any maintenance, Repairs or replacements necessitated by the act, neglect, misuse or abuse of Tenant, its agents, employees, customers, licensees, invitees or contractors, shall be paid by Tenant to Landlord promptly upon billing. Landlord shall use reasonable efforts to cause any necessary repairs to be made promptly; provided, however, that Landlord shall have no liability whatsoever for any delays in causing such repairs to be made, including, without limitation, any liability for injury to or loss of Tenant's business, nor shall any delays entitle Tenant to any abatement of Rent or damages or be deemed an eviction of Tenant in whole or in part. Landlord must accomplish repairs within 21 calendar days or Tenant shall be entitled to abatement or rent or damages. 6.6. TENANT WORK/COMPLIANCE CODES. Tenant shall promptly pay when due the entire cost of any Tenant Work and repairs in the Premises undertaken by Tenant, so that the Premises shall at all times be free of liens for labor and materials. Tenant shall procure all necessary permits before undertaking such work. Tenant shall perform all of such work in a good and workmanlike manner. Tenant shall employ materials of good quality and perform such work only with contractors previously approved of in writing by Landlord. Tenant shall comply with all governmental laws, ordinances and regulations including, but not limited to, building, health, fire and safety codes. Tenant hereby agrees to hold Landlord and Landlord's agents harmless and indemnified from all injury, loss, claims, or damage to any person or property (including the cost for defending against the foregoing) occasioned by or growing out of such work. 6.7. WASTE PROHIBITED. Tenant shall not lay waste to the Premises. Tenant shall not perform any action or practice which may injure the Premises or Property. 6.8. RUBBISH REMOVAL. Tenant shall keep the Premises and the Property surrounding Premises free and clear of all debris, garbage and rubbish. Tenant shall be responsible for contracting for and paying for trash and debris removal required by its business. 6.9. VIOLATIONS OF CODES PROHIBITED. In the event a governmental entity notifies Landlord or Tenant as to any violation or alleged violation of law, ordinance or regulation of any portion of the Premises other than foundation, roof or exterior walls, it shall be Tenant's sole obligation to cause same to be remedied, corrected or dismissed. Tenant shall hold Landlord harmless from costs or damages arising from any failure on Tenant's part to correct or remedy same in a timely manner. In the event same relates to the foundation, roof or exterior walls, Landlord shall have a reasonable period of time to remedy, correct or dismiss said violation. Under no circumstances shall the existence of same be deemed to constitute an eviction or disturbance of Tenant's use and possession of Premises or relieve Tenant from performing any obligations hereunder including the obligation to pay Rent. 6.10. SNOW/ICE REMOVAL. Landlord shall use reasonable efforts to cause snow to be removed from the parking areas but shall have no liability whatsoever for any failure to do so unless such failure is due to Landlord's willful misconduct. 6.11. COMMON AREA MAINTENANCE. Landlord shall use reasonable efforts to maintain and repair Common Areas of Property including walks and parking lots. The cost of any maintenance, repairs or replacements necessitated by the act, neglect, misuse or abuse by Tenant, its employees, licensees, invitees, or contractors shall be paid by Tenant to Landlord. Landlord shall use reasonable efforts to cause any necessary repairs to be made promptly; provided, however, that landlord shall have no liability whatsoever for any delays in causing such repairs to be made, including, without limitation, any liability for injury, to or loss of 7 Tenant's business, nor shall any delays entitle Tenant to any abatement of Rent or damages or be deemed an eviction of Tenant in whole or in part. 7. DAMAGE TO PREMISES AND PROPERTY/INDEMNIFICATION INSURANCE. 7.1. NEGLIGENT DAMAGES. Tenant shall be responsible for and reimburse Landlord for any and all damages to the Premises or Property and persons and property therein, caused by the negligent, grossly negligent, reckless or intentional acts of itself, its employees, agents, invitees, licensees or contractors. 7.2. LIABILITY/INDEMNIFICATION/INSURANCE. Tenant shall save Landlord, Landlord's agents and their respective successors and assigns, harmless and indemnified from all injury, loss, claims or damage to any person or property while on the Premises or any other part of the Property, or arising in any way out of Tenant's business, which is occasioned by an act or omission of Tenant, its employees, agents, invitees, licensees or contractors. Tenant shall maintain public liability insurance, insuring Landlord, Landlord's agents, as their interest may appear, against all claims, demands or actions for injury to or death in an amount of not less than $1 Million arising out of any one occurrence, made by or on behalf of any person, firm or corporation, arising from, related to, or connected with the conduct and operation of Tenant's business, including but not limited to, events in the Premises, and anywhere upon the Property. Tenant shall also obtain coverage in amounts covering Tenant's contractual liability under the aforesaid hold harmless clauses. 7.3. FIRE/CASUALTY INSURANCE. Tenant shall maintain fire, extended coverage, vandalism, and malicious mischief insurance and such other insurance as Tenant may deem prudent, and also as Landlord may from time to time require, covering all of Tenant's stock in trade, fixtures, furniture, furnishing, floor coverings and equipment in the Leased Premises. 7.4. INSURANCE REQUIREMENTS. All of said insurance shall in the form and from responsible and well-rated companies satisfactory to Landlord, shall name Landlord as an additional insured thereunder, and shall provide that it will not be subject to cancellation, termination or change except after at least (30) days prior written notice to Landlord. The policies or duly-executed certificates for the same shall be provided to Landlord prior to commencement of Term and upon request of Landlord. 7.5. WAIVER OF LIABILITY. Landlord and Landlord's agents and employees shall not be liable for, and Tenant waives all claims for, damage to person or property sustained by Tenant, employees, agents or contractors or any other person claiming through Tenant, resulting from any accident or occurrence in or upon the Premises or the Property of which they shall be a part, including but not limited to, claims for damage resulting from: 1) any equipment or appurtenances becoming out of repair; 2) Landlord's failure to keep the Property or the Premises in repair; 3) injury done or occasioned by wind, water, or other natural element; 4) any defect in or failure of plumbing, heating, or air-conditioning equipment, electric wiring or installation thereof, gas, water and steam pipes, stairs, porches, railings or walks (including wood stoves); 5) broken glass; 6) the backing-up of any sewer pipe or downspout; 7) the bursting, leaking or running of any tank, tub, sink, sprinkler system, water closet, waste pipe, drain or any other pipe or tank in, upon or about the Property or Premises; 8) the escape of steam or hot water; 9) water, snow, or ice being upon or coming through the roof, skylight, doors, stairs, walks, or any other place upon or near such Property or the Leased Premises or otherwise; 10) the falling of any fixtures, plaster or stucco; 11) fire or other casualty; 12) any act, omission or negligence of co-Tenants or of other persons or occupants of said Property or of adjoining or contiguous buildings or of adjacent or contiguous property; and 13) any Hazardous Materials or conditions on the Premises, Property or adjacent property. 7.6. LANDLORD INSURANCE. Insurance shall be procured by Landlord in accordance with its sole discretion. All awards and payments thereunder shall be the property of the Landlord and Tenant shall have no interest in same. 8 8. CONDEMNATION. 8.1. TAKING OF WHOLE. In the event that the entire Premises shall be condemned or taken by the exercise of eminent domain, this Lease shall terminate on the date of the taking of possession by the condemning authority. All rents shall be prorated accordingly. 8.2. PARTIAL TAKING. In the event that less than the entire Premises shall be condemned or taken by the exercise of eminent domain, this Lease shall, at the option of the Landlord, either: 1) terminate on the date of the taking possession by the condemning authority, all rent being prorated accordingly; or, 2) remain in full force and effect provided that the Base Rent shall be reduced in proportion to the square footage lost by virtue of said condemnation. In the event of the exercise of option (ii), if necessary, Landlord at its cost, shall make such repairs and restorations so as to constitute the remaining Premises a complete architectural unit. 8.3. CONDEMNATION AWARDS. All condemnation awards shall be the sold property of Landlord. All awards shall be the sole property of Landlord, whether awards arise from actual taking, damage from the threat of taking, diminution in the value of the Leased Premises, or other reasons. 9. DAMAGE/RESTORATION OF PREMISES. 9.1. IRREPARABLE DAMAGE. If Property or the Premises shall be destroyed in whole or in part by fire, the elements or other casualty so as to render the Premises wholly unfit for occupancy and if, in the sole opinion of Landlord, they cannot be repaired within ninety (90) days from the happening of said injury and Landlord informs Tenant of said decision, or if Premises are damaged in any degree and Landlord informs Tenant it does not desire to repair same and desires to terminate Lease, then this Lease shall terminate on the date of such injury. 9.2. REPAIRABLE DAMAGES/NO REPAIR. If the Premises shall be destroyed in whole or in part by fire, the elements or other casualty, but same can be repaired within said ninety (90) days and Landlord informs Tenant it shall repair, and Landlord fails to do so, this Lease shall terminate on the expiration of said ninety (90) days without further liability on the part of either parties hereto. In the event of such termination, Tenant shall immediately surrender the possession of the Premises, and all rights therein to the Landlord, and Landlord shall have the right immediately to enter into and take possession of said Premises and shall not be liable for any loss, damage or injury to the Property or persons of Tenant or occupancy of, in or upon said Premises. Tenant shall not be liable for rent for said period. 9.3. REPAIR OF DAMAGES. If Landlord repairs the Premises within said ninety (90) days, this Lease shall continue in full force and effect. Tenant shall not be required to pay rent for any portion of said ninety (90) days during which the Premises are wholly unfit for occupancy. 9.4. TERMINATION BY TENANT. In the event the Premises are destroyed in whole or in part by fire, the elements, or other casualty (but only if such damage is in excess of 50% of said premises) Tenant may, at its option, terminate the Lease. This election must be exercised by Tenant on or before five (5) days of the occurrence of such damage or destruction by providing written notice to Landlord. Such termination shall not affect Tenant's continued duties and liability which may exist under the Lease for such damages or other pre-existing liabilities. 10. TENANT'S ADDITIONAL COVENANTS 10.1. LANDLORD ENTRY. Tenant shall permit Landlord, Landlord's mortgagees and their agents to enter the Premises at reasonable times for the purpose of inspecting same, of making repairs, additions or alterations thereto or to the building in which the same are located and of showing the Premises to prospective purchasers, lenders and tenants. At any time less than ninety (90) days from the expiration of Term, Landlord may place signs upon Premises advertising the availability of same. In the event Landlord elects to offer Property for sale, Landlord may place reasonable "For Sale" signs upon Premises. 10.2. REMOVAL OF FIXTURES/REDELIVERY. Tenant shall remove, at the termination of this Lease, provided Tenant is not in default, such of Tenant's moveable trade fixtures, and 9 other personal property, as are not permanently affixed to the Premises. Tenant shall remove such of the alterations and additions and signs made by Tenant as Landlord may request and repair any damage caused by such removal. Tenant shall peaceably yield up the Premises, and all alterations and additions thereto (except such as Landlord has requested Tenant to remove) and all fixtures, furnishings, floor coverings and equipment which are permanently affixed to the Premises which, for the purpose of this Lease, shall be deemed to be permanently affixed to the Premises, which shall thereupon become the property of the Landlord. The Premises shall be returned in clean and good order, repair and condition, normal wear and tear excepted. Any personal property of Tenant not removed within five (5) days following such termination shall, at Landlord's option, become the property of Landlord. 10.3. SUBORDINATION/ESTOPPEL LETTERS. The rights and interest of Tenant under this Lease shall be subject and subordinate to any mortgages or trust deeds now existing or hereafter placed upon the Property and the Premises, and to any and all extensions, renewals, refinancing and modifications thereof. Tenant shall execute and deliver whatever instruments may be required for such purposes or for the purpose of informing potential or existing lender or purchaser of Property as to status of its tenancy. Any such instruments or estoppel letters shall contain all information reasonably required by Landlord or other entity in conjunction with such transaction. In the event Tenant fails to do so within ten (10) days after demand in writing, Tenant does hereby make, constitute and irrevocably appoint Landlord as its attorney-in-fact and in its name, place and stead to execute same. Tenant agrees to attorn to a lender or other party coming into title to Property upon written request of Landlord. Attornment Letter shall provide that: (i) the Lease is in full force and effect, that there exists no default (or if same exist, shall detail same); (ii) that Tenant shall look to lender or other new party as Landlord under this Lease effective as of the date of attornment; and (iii) the new Landlord shall not be liable for any prior claims, offsets or defenses available against old Landlord. 10.4. GUARANTY. In the event that this lease is benefitted by a guaranty, the guarantor shall have the same obligations to provide the same documents as Tenant, including Estoppel and Attornment letters. If guaranty is applicable, the same is attached as Exhibit E. 10.5. ASSIGNMENT PROHIBITED. Tenant shall not sublet the Premises or any part thereof, nor assign this Lease or any interest therein, without the prior written consent of Landlord. Such consent shall be at the sole discretion of Landlord. As a condition of assignment or sublease, Landlord may require the continued liability of Tenant or a separate personal guaranty by Tenant or its principal. If Tenant is a corporation, limited liability company or other entity which is not a natural person, any change in ownership of over Thirty Percent (30.0%) (over any period) of the ownership interest shall be deemed an assignment of this Lease. In the event an assignment or sublease is permitted, all payments from assignee or sublessee shall be made directly by said party to Landlord, and not through Tenant. Furthermore, any increase in rent occasioned by sublease or assignment (i.e., any sums paid in excess of Basic Rent by said party), whether paid in lump sum or periodic monthly payments, and whether categorized as rent or not, shall be payable to, and be the sole property of Landlord. 10.6. STORAGE. Tenant shall store all personal property entirely within the Premises. Tenant shall store all trash and refuse in adequate containers within the Premises which Tenant shall maintain in a neat and clean condition and so as not to be visible to members of the public in or about the Property, and so as not to create any health or fire hazard, and to attend to the daily disposal thereof in the manner designated by Landlord. 10.7. HAZARDOUS MATERIAL PROHIBITED. Tenant shall not cause or permit any Hazardous Material to be brought upon, kept or used in or about the Premises by Tenant, its agents, employees, contractors or invitees. If Tenant breaches the obligations stated in the preceding sentence, or if the presence of Hazardous Material on the Premises caused or permitted by Tenant results in contamination of the Premises, or if contamination of the Premises by Hazardous Material otherwise occurs for which Tenant is responsible to Landlord for damage resulting therefrom, then Tenant shall indemnify, defend and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses. 10 10.8. HAZARDOUS MATERIAL; DEFINITION. As used herein, the term "HAZARDOUS MATERIAL" means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State or the United States Government, The term "Hazardous Material' includes, without limitations any material or substance that is: 1) defined as a "hazardous substance" under law Provisions; 2) petroleum: 3) asbestos; 4) designated as a "hazardous substance" pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. Section 1321); 5) defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act (42 U.S.C. Section 6903): 6) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601); or 7) defined as a "regulated substance" pursuant to Subchapter IX, Solid Waste Disposal Act (Regulation of Underground Storage Tanks) (42 U.S.C. Section 6991). 10.9. HAZARDOUS CONDITIONS. If Landlord shall become aware of any hazardous condition or the presence of any Hazardous Materials upon the Property, Landlord may immediately terminate this Lease, and shall return any portion of unused rent to Tenant on or before thirty (30) days thereafter. Landlord shall not be responsible for any claims, damages or costs of Tenant incurred by such circumstance. 10.10. USE OF HAZARDOUS MATERIALS. If Tenant desires to use Hazardous Materials upon Premises in connection with its business, it may request permission to use same from Landlord in writing. Landlord, at its sold discretion,may approve or disapprove said request. In the event Landlord approves the request, Landlord may impose any conditions upon Tenant's use of such Hazardous Materials and at all times Tenant shall comply with all Federal, State and Local laws, statutes, ordinances and regulations regarding the use, safety, storage and disposal of Hazardous Materials. In the event Landlord denies Tenant's request, this Lease shall remain in full force and effect and such denial shall not give rise to any right of set-off, reduction or relieve Tenant from performing any obligation under this Lease. 11. ADDITIONAL COVENANTS OF LANDLORD. 11.1. QUIET ENJOYMENT. Landlord agrees that upon Tenant paying the rent and performing Tenant's obligations under the Lease, Tenant shall peacefully and quietly have, hold and enjoy the Premises throughout the Term or until it is terminated pursuant to the terms contained herein. 12. DEFAULT. 12.1. EVENT OF DEFAULT. Any of the following occurrences or acts shall constitute an "EVENT OF DEFAULT" under this Lease: 1. If Tenant shall: A. Default in making payment when due upon written notification landlord of any Basic Rent, Utility Payment or any other amount payable by Tenant hereunder; or B. Default in the observance or performance of any other covenants, conditions, rules, regulations or Provisions of this Lease to be observed or performed by Tenant hereunder; and if such default shall continue for twenty (20) days, after Landlord shall have given to Tenant notice specifying such default and demanding that same be cured; or 2. If the Premises are left vacant and unused for a consecutive period of thirty (30) days or more without permission of Landlord; or 3. If an uncontested-to Assignment or Sublease occurs or is attempted; or 4. If Tenant shall institute bankruptcy proceedings or be declared bankrupt or insolvent pursuant to Federal or State law; or 5. If any receiver be appointed for Tenant, Tenant's business or property, or if any assignment shall be made of the Tenant's property for tile benefit of 11 creditors. 13.1. REMEDIES. This Lease and the Term hereby granted are subject to limitation that whenever an Event of Default shall have occurred, landlord may, at its election: 1. Proceed by appropriate judicial proceedings, either at law or in equity, to enforce performance or observance by Tenant of the applicable provisions of this Lease and/or to recover actual and consequential damages for the breach thereof, plus all costs and attorney's fees; or 2. Give Tenant six (6) days written notice requiring payment of the rent or compliance with other terms or provisions of this Lease or delivery of possession of the Premises. In the event said default remains uncorrected after six (6) days written notice, Landlord at its option may terminate this Lease whereupon Tenant's estate and all rights of Tenant to the use of the Premises shall forthwith terminate but Tenant shall remain liable as hereinafter provided; and thereupon Landlord shall have the immediate right of re-entry and possession of the Premises and the right to remove all persons and property therefrom, either with or without the assistance of legal process and instituting of a forcible entry and detainer action, and Landlord may thenceforth hold, possess and enjoy the Premises (including the right to lease or sell the Premises or any portion thereof upon any terms deemed satisfactory to Landlord) free from any rights of Tenant and any person claiming through Tenant and in addition shall have the right to recover forthwith from Tenant: A. Any and all Basic Rent and all other amounts payable by Tenant hereunder, which may then be due and unpaid, and Basic Rent for the remainder Term, subject to Landlord's duty to undertake reasonable measures to mitigate such damage: and B. Any and all other costs, fees, and expenses incurred or due under the provisions of this Lease (including, without limitation, attorneys' fees and expenses), together with any mortgage prepayment or late payment premium or penalty which Landlord shall have sustained by reason of the breach of any provision of this Lease, 3. Exercise any and all rights provided under applicable law to enforce "LANDLORD'S LIEN" upon Tenant's property; or 4. Any and all other remedies afforded by law. 13.2. CUMULATIVE REMEDIES. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to any other legal or equitable right or remedy given hereunder. 13.3. INDUCEMENT RECAPTURE. Any agreement by Landlord for free or abated rent, Tenant improvements or other charges applicable to the Premises, or for the giving or paying by Landlord to Tenant of any cash or other bonus, inducement or consideration for Tenant's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS" shall be deemed conditioned upon Tenant's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon the occurrence of a Default of this Lease by Tenant, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Landlord under an Inducement Provision shall be immediately due and payable by Tenant to Landlord, and recoverable by Landlord as additional rent due under this Lease. 14. ADDITIONAL PROVISIONS 14.1. COSTS OF NEGOTIATION. Except as otherwise expressly provided herein, each party will pay all of its expenses, including attorneys and accountant's fees, in connection with the negotiation of this Lease, the performance of its obligations hereunder, and the consummation of the transactions contemplated by this Lease. 12 14.2. CONFIDENTIALITY. The parties agree that they each shall keep confidentiality and all information furnished by the other party in connection with the transactions contemplated hereby, except to the extent any such information may be generally available to the public, obtained from independent sources or as required by law or judicial order or decree or by any governmental agency or authority. 14.3. CONTINUING ASSISTANCE. Subsequent to the execution of this Lease, Tenant will provide to Landlord whatever assistance the Landlord reasonably requests including execution of additional documents contemplated by this Lease. Landlord will pay Tenant the reasonable out-of-pocket expenses incurred in providing such assistance. 14.4. NOTICES. Any notice required or permitted to be given under this Lease shall be in writing and shall be deemed to have been given or delivered when delivered by hand or three (3) days after being deposited in a United States Post Office, registered or certified mail, postage prepaid, return receipt required, and addressed as follows: If to Tenant: --------------------------- --------------------------- --------------------------- --------------------------- Tel: ---------------------- Fax: ---------------------- WITH A COPY TO: --------------------------- --------------------------- --------------------------- --------------------------- Tel: ---------------------- Fax: ---------------------- If to Landlord: AVALON INVESTMENT COMPANY P.0. Box 358 Nederland, CO 80466 Tel: (303) 258-3604 WITH A COPY TO: Avalon Investment Company Attn: Jon Cookler 4525 Reseda Boulevard Tarzana, CA 91356 Tel: (818) 342-6848 Fax: (818) 342-9817 or to such other address as either party may from time to time specify in writing to the other. All rental payments shall be directed to Landlord's address as shown above. 14.6. HOLDOVER. In the event Tenant remains in possession of the Premises after the expiration of the tenancy created hereunder, and without the execution of a new lease, Tenant at the option of Landlord, shall be deemed to be occupying the Leased Premises as a tenant from month-to-month, at one and one half (1 1/2) times the Basic Rent, subject to all the other conditions, provisions and obligations of this @ insofar as the same are applicable to a month-to-month tenancy. 14.7. CURE BY LANDLORD. Landlord may, but shall not be obligated to, cure, at any time, without notice, any default by Tenant under this Lease; and whenever Landlord so 13 elects, all costs and expenses incurred by Landlord including, without limitation reasonable attorneys' fees together with interest on the amount of costs and expenses so incurred at the maximum legal rate then in effect in the State shall be paid by Tenant to Landlord on demand. 14.8. HEIRS AND ASSIGNS. This Lease shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors, heirs, administrators and assigns. However, notwithstanding the foregoing, Tenant may not assign this Lease except as specifically provided herein. 14.9. AMENDMENT. Unless otherwise provided in this Lease, this Lease may be amended, modified or terminated only by a written instrument executed by Landlord and Tenant. 14.10. GOVERNING LAW. This Lease shall be governed by and construed in accordance with the laws of the State in which the Property is located. The parties stipulate that proper forum and venue for the adjudication of any issues relative to this Lease is State Court in the County in which the Property is located. 14.11. SOLE AGREEMENT. This Lease and attached Exhibits supersedes all prior agreements and understandings between the parties hereto relating to the subject matter hereof. The parties do not intend to confer any benefit on any person, firm or corporation other than the parties to this except as and to the extent otherwise expressly provided herein. 14.12. ATTORNEYS' FEES. In the event either party hereto fails to perform any of its obligations under this Lease or in the event a dispute arises concerning the meaning or interpretation of any provision of this Lease, the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay any and all costs and expenses incurred by the other party in enforcing or establishing its rights hereunder, including, without limitation, court costs and reasonable attorneys' fees. 14.13. CAPTIONS. The section titles or captions in this Lease are for convenience only and shall not be deemed to be part of this Lease. 14.14. INTERPRETATION. All pronouns and any variations of pronouns shall be deemed to refer to the masculine, feminine, or neuter, singular, or plural, as the identity of the parties may require. Whenever the terms referred to herein are singular, the same shall be deemed to mean the plural, as the context indicates and vice versa. 14.15. NO WAIVER. No right under this Lease may be waived except by written instrument executed by the party who is waiving such right. No waiver of any breach of any provision contained in this Lease shall be deemed a waiver of any preceding or succeeding breach of that provision or of any other provision contained in this Lease. No extension of time for performance of any obligations or acts shall be deemed an extension of the time for performance of any other obligations or acts. 14.16 SEVERABILITY. If any term, covenant, condition, or provision of this Lease or the application thereof to any person or circumstance shall, at any time or to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and shall be enforced to the fullest extent permitted by law. 14.17. NO RECORDATION. Neither this Lease nor a Memorandum thereof shall be recorded with the Clerk and Recorder of the County in which the Property is situated. However, notwithstanding the foregoing, nothing contained herein shall prohibit Landlord from recording a Memorandum of Lease with the State Department of Revenue or UCC-1 Financing Statement with the State Secretary of State. 14.18. AUTHORITY. In the event the Tenant is not a natural person, Tenant and party(ies) executing this Lease on behalf of Tenant shall represent and warrant that: (i) Tenant is an entity in good standing or licensed to do business in the State which the Property is located; (ii) parties executing this Lease on behalf of Tenant are duly authorized to execute 14 same. In the event said representations and warranties are not made, Landlord shall have all available remedies against parties and Tenant including, but not limited to, holding the existing parties personally responsible for all debts and obligations arising under this Lease. 14.19. EXHIBITS. This Lease shall consist of this writing and the following Exhibits: Exhibit A: Description of Property (legal) Exhibit B: Description of Premises (floorplan) All of the foregoing Exhibits and this Lease shall be deemed to comprise one document. In the event of any conflict between the Lease and any Exhibits, the language in the Exhibits shall control. 14.20. COUNTERPARTS. This Lease may be executed in counterparts. 14.21. ADDITIONAL PROVISIONS. A. Premises shall be occupied in "As Is" condition. 14.22 The execution of the Lease Agreement shall be contingent on the full execution of the Assignment and Consent Agreement by between Avalon Investment Company (Lessor), Johnson Engineering Corporation (Assignor) and Kentek Information Systems, Inc. (Assignee). AGREED TO BY AND BETWEEN THE PARTIES as of the day and date first written above. LANDLORD: TENANT: AVALON INVESTMENT COMPANY, A KENTEK INFORMATION California General Partnership SYSTEMS, INC. By: /s/ [ILLEGIBLE] By: /s/ RICHARD L. KANN - -------------------------------- -------------------------------- Its: General Partner Its: Vice President, Operations 15 ASSIGNMENT AND CONSENT AGREEMENT This Assignment, Assumption and Consent Agreement is entered into the 31 day of March, 1997, by and between Avalon Investment Company, a California General Partnership ("Lessor"), Johnson Engineering Corporation ("Assignor") and Kentek Information Systems, Inc. ("Assignee"). RECITALS Assignor is a tenant in the premises, located at 2840 Wilderness Place, Boulder, Colorado (the "Premises"). Lessor and Assignor have entered into a lease dated May 13, 1995 attached hereto as Exhibit A and incorporated herein by reference (the "Lease"). The term of the Lease extends through May 31, 1998. Assignee desires the assignment of the Assignor's leasehold interest in the Subject Premises which are approximately 7,200 square as shown on Exhibit B attached hereto (the "Subject Premises") for the term to commence on March 29, 1997 and continue through May 31, 1998. Rent for the subleased premises is to be paid on the first of each month in the amount due under the Lease, plus separate metered utilities. This amount shall increase by 3% per annum on the anniversary date of and according to the Master Lease (June 1, 1997). Lessor is willing to accept and consent to such assignment and assumption. NOW THEREFORE, in consideration of the payment of rent and the performance of the covenants and agreements by the parties as hereinafter set forth, the parties agree as follows: 1. Assignment and Delivery of the Premises. Assignor assigns to Assignee, effective as of the 29th day of March, 1997 (the "Effective Date"), all of Assignor's right, title and interest in the Subject Premises. Assignor will deliver possession of the Subject Premises to Assignee on March 29, 1997 in its "as-is" condition. 2. Assumption and Acceptance of the Subject Premises. Assignee assumes and agrees to perform each and every obligation of Assignor under the Lease that arises on or after the Effective Date herein. Assignee will accept the Subject Premises in its condition as of the Effective Date and acknowledges that it shall have no claim against Lessor for any matters arising prior to the Effective Date. 16 3. Assignor's Representations and Warranties. Assignor represents and warrants that: a. The Lease is in full force and effect, and unmodified, except as provided above and in this Assignment, Assumption and Consent Agreement; b. Assignor's interest in the Lease is free and clear of any liens, encumbrances, or adverse interests of third-parties, and c. Assignor possesses the requisite legal authority to assign its interest in the Lease. 4. Assignor's Responsibility of Payment of Rent and Other Charges. In connection with the assignment of the Subject Premises to Assignee, and notwithstanding any agreement between Assignor and Assignee, Assignor agrees to remain responsible to make all payments to Lessor for the rent and all other charges, fees and expenses payable to Lessor pursuant to the Lease. Assignor is thus not responsible to collect same from Assignee including utilities, which are paid for by the Assignee. 5. Enforceability by Lessor. The provisions of this Assignment, Assumption and Consent Agreement inure to the benefit of Lessor and shall be enforceable by Lessor. 6. Lessor's Consent to Assignment. Lessor consents to this Assignment, Assumption and Consent Agreement on the express conditions that: a. Such consent will not be deemed a consent to any subsequent assignment but, rather, any subsequent assignment will require the consent of Lessor pursuant to the Lease; and b. Assignee agrees to be bound by the Lease as evidenced by the execution of this agreement and the attached Lease (Exhibit A) hereof. 7. Entire Agreement. This Assignment and Consent Agreement embodies the entire agreement of Lessor, Assignor, and Assignee with respect to the subject matter contained herein, and it supersedes any prior agreement, whether written or oral, with respect to the subject matter contained herein. This Assignment and Consent Agreement may be modified only by written instrument duly executed by Lessor, Assignor and Assignee. 17 8. Notices. All notices required to be given or desired to be given hereunder shall be in writing and shall be deemed duly served for all purposes by delivery in person or by mailing a copy thereof, postage prepaid, addressed to: Lessor: Avalon Investment Company P.O. 358 Nederland, CO 80466 Assignor: Johnson Engineering Corporation 555 Forge River Rd. #150 Webster, TX 77598 Assignee: Kentek Information Systems, Inc. 2945 Wilderness Place Boulder, CO 80301 or at such address as such party shall subsequently designate in writing. 9. Additional Provision. a. On the date of execution of this Assignment, Assumption and Consent agreement, Assignee shall reimburse Assignor $3,500.00 which is being held by Lessor without liability for interest, as a security deposit for the performance by Assignee of all its obligations under this lease. If Assignee is in default, Lessor can use the security deposit, or any portion of it, to cure the default or to compensate Lessor for all damage sustained by it resulting from Assignee's default. Assignee shall immediately on demand pay such amount to Lessor as is necessary to restore the security deposit to the amount set forth above. At the expiration or termination of this Lease, Lessor shall return to Assignee that portion of the security deposit remaining after application of such amounts as are necessary to compensate Lessor for Assignee's defaults, and or damage beyond wear and tear, if any. b. Assignor shall clean the carpeting and leave the warehouse in broom clean condition. c. Assignor confirms that the hydraulic lift is in working condition. 10. The execution of the Assignment and Consent Agreement is contingent on the full execution of the new Lease Agreement by and between Avalon Investment Company (Lessor) and Kentek Information Systems, Inc. (Lessee). 18 IN WITNESS WHEREOF, the parties have executed this Assignment and Consent Agreement on the day and year first above written. LESSOR: Avalon Investment Company, a California General Partnership By: /s/ [ILLEGIBLE] -------------------------------------- Its General Partner ASSIGNOR: Johnson Engineering Corporation By: /s/ W. T. SHORT President/COO -------------------------------------- William Jackson Its Chief Financial Officer ASSIGNEE: Kentek Information Systems, Inc. By: /s/ RICHARD L. KANN -------------------------------------- Richard Kann Its Vice President, Operations EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 18,216 16,374 6,213 0 10,074 54,770 17,783 16,062 57,652 6,489 0 0 0 69 50,592 57,652 56,460 56,460 30,443 49,211 1,377 0 0 8,626 3,865 0 0 0 0 4,761 0.68 0.68
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