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JANNEY MONTGOMERY SCOTT
INVESTMENT BANKING
Established 1832
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Supplemental Presentation to the
Board of Directors of
Kentek Information Systems, Inc.
August 13, 1999
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Table of Contents
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SECTION
1 SUPPLEMENTAL ANALYSIS
2 STATUS QUO PROJECTIONS
3 ADDITIONAL VALUATION ANALYSES
4 VALUATION SUMMARY
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SUPPLEMENTAL ANALYSIS
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BACKGROUND
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[ ] Per the SEC's request, Janney Montgomery Scott has revisited several
previously performed analyses utilizing "Status Quo Projections"
(defined hereinafter) recently provided to Janney Montgomery Scott by
Kentek's management.
[ ] Status Quo Projections are projections of Kentek's ongoing business and
prospects. They do not include any financial adjustments related to the
proposed Merger.
[ ] The analyses specifically affected by the use of the Status Quo
Projections include:
o the calculated price per share values derived by multiplying
Kentek's estimated earnings by the Comparable Companies' stock
price multiples; and
o the Discounted Cash Flow analysis
[ ] Additionally, Janney Montgomery Scott referred to "Management" and a
"Management Buyout" in the May 14, 1999 presentation; however, it was
intended to refer to Mr. Philip W. Shires, Kentek's President and Chief
Executive Officer.
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STATUS QUO PROJECTIONS
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STATUS QUO PROJECTIONS
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[ ] The following Status Quo Projections for Kentek Information Systems,
Inc. have been reviewed by the Company's management. Janney has relied
upon the assessment of the management of the Company regarding the
Company's business and prospects, and assumed that the Status Quo
Projections were reasonably prepared on basis reflecting the best
currently available estimates.
[ ] Differences between the Status Quo Projections and the projections
presented in the May 14, 1999 presentation includes the following:
o Cash is kept within Kentek and earns interest income based on
a rate of 5.0%
o Kentek does not undertake any debt since cash is kept in the
business
o The ongoing cost of remaining a public company is included in
operating expenses
o The tax rate on pretax income is based on the historical tax
rate Kentek has experienced as a public company
o Dividends will continue to be paid
[ ] Management has indicated to Janney Montgomery Scott that projected
revenues under the Status Quo Projections are unchanged since negative
industry fundamentals affecting Kentek's future business and prospects
would continue to be present, regardless of whether Kentek is a public
or private company.
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PROJECTED REVENUE BREAKDOWN
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For The Year Ended June 30,
----------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(in thousands, except per share data)
Printers-IBM(a) $ -- $ -- $ -- $ -- $ --
Printers-OEM(b) 3,400 1,600 -- -- --
-------- -------- -------- -------- --------
Total Printer Revenue 3,400 1,600 -- -- --
Supplies-Lexmark(c) 4,500 2,000 1,000 500 500
Supplies-OEM(d) 12,494 10,000 8,000 5,000 2,000
Supplies-OEM New(e) 1,006 2,515 3,018 3,018 3,018
-------- -------- -------- -------- --------
Total Supplies Revenue 18,000 14,515 12,018 8,518 5,518
Parts-IBM(f) 750 350 250 100 100
Parts-OEM(g) 1,501 1,000 1,000 500 500
Other 48 30 15 10 5
-------- -------- -------- -------- --------
Total Parts and Other Revenue 2,299 1,380 1,265 610 605
Total Revenue $ 23,699 $ 17,495 $ 13,283 $ 9,128 $ 6,123
======== ======== ======== ======== ========
UNIT SALES DATA (ACTUAL)
Printers-IBM -- -- -- -- --
Printers-OEM 400 200 -- -- --
UNIT PRICE DATA (WEIGHTED AVERAGE)
Printers-IBM $ -- $ -- $ -- $ -- $ --
Printers-OEM $ 8,500 $ 8,000 $ 7,500 $ 7,000 $ 6,500
Supplies-OEM (15% cloning adjust.) $ 5,029 $ 5,029 $ 5,029 $ 5,029 $ 5,029
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PROJECTED REVENUE BREAKDOWN - FOOTNOTES
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($ in thousands, unless otherwise specified)
a PRINTERS - IBM. The Company has had no IBM printer sales since FY 1996.
b PRINTERS - OEM. In 1997 and 1998, Kentek began to experience
significant declines in new printer sales as a result of negative
competitive trends effecting the traditional mid-range printer industry
and its failure to develop a new faster mid-range printer to address
increasing performance from light duty printers. Substantially all of
Kentek's customers have introduced or announced the introduction of the
new Xerox 40 ppm light-duty mid-range printer to their product lines.
Xerox's new 40 ppm printer is priced at approximately $3,000 per unit
while Kentek's 40 ppm printer is priced at approximately $15,000 per
unit and Xerox's 40 ppm printer incorporates all of the product
features of Kentek's printers. Kentek believes that its competitors,
including Xerox, will continue to release new lower cost printers with
superior features and that its customers will continue to replace
Kentek printers with such lower cost printers. As a result, Kentek
anticipates that it will continue to suffer progressively greater
declines in new printer sales. Based on the foregoing and based on
Kentek's historical printer unit sales numbers set forth below, Kentek
estimates that it is unlikely that it will sell more than 600 printer
units prior to June 30, 2001. Likely buyers include (but are not
limited to): Unisys, Oce, Tally, Banctec, NCR, Printer Systems
International, Print Assist and Trisquare. Management projected printer
unit sales with the following historical trend:
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
Printer Unit Shipments 4,327 2,849 1,791 793 671 513
Yr/Yr Change (34.2)% (37.1)% (55.7)% (15.4)% (23.5)%
c SUPPLIES - LEXMARK. The Company does not have accurate data available
as to how many printers remain in the Lexmark installed base;
therefore, they are unable to project these revenues utilizing unit
data. Management projected these revenues with the following historical
trend:
($ in millions) 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
Revenues $20.5 $22.2 $23.7 $ 19.4 $ 12.7 $ 8.3
Yr/Yr Change 8.3% 6.6% (17.9)% (34.8)% (34.2)%
d SUPPLIES - OEM. The Company does not have accurate data available as to
how many printers remain in their installed base; therefore, they are
unable to project these revenue utilizing unit data. Management
projected these revenues with the following historical trend:
($ in millions) 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
Revenues $16.3 $16.2 $20.8 $20.2 $18.7 $17.4
Yr/Yr Change (0.6)% 28.0% (2.8)% (7.6)% (6.7)%
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PROJECTED REVENUE BREAKDOWN - FOOTNOTES
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($ in thousands, unless otherwise specified)
e SUPPLIES - OEM NEW. Assumes each new printer sold after FY 1999 will
produce $5,029 in annual supplies revenue, after adjusting for
potential cloning of 15%. We have assumed these revenues will continue
over the 7 year life of the printers, with the Company only realizing
50% of these revenues in years 1 and 7 and 100% of these revenues in
years 2 through 6.
f PARTS - IBM. Though not officially announced, the Company believes that
IBM is close to announcing end-of-life on Kentek printers, as evidenced
by the huge drop in parts sales to IBM in recent years. The Company
assumes that minimal, declining sales will occur over the next five
years as independent resellers form some sort of sales channel for
these parts.
g PARTS - OEM. The Company's estimate as to the amount of parts that will
be sold in conjunction with the sale of the remaining 600 printers.
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PROJECTED FINANCIAL STATEMENT ASSUMPTIONS
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For the Year Ended June 30,
-----------------------------------------------------------
2000 2001 2002 2003 2004
------------ ------- ------- ------- ---------
(in thousands, except per share data)
UNIT SALES DATA (ACTUAL)
Printers - IBM -- -- -- -- --
Printers - OEM 400 200 -- -- --
Average Useful Life 7 7 7 7 7
UNIT PRICE DATA (WEIGHTED AVERAGE)
Printers - IBM $ -- $ -- $ -- $ -- $ --
Printers - OEM $8,500 $8,000 $7,500 $7,000 $6,500
Supplies - OEM (bef. cloning adjust.) $5,917 $5,917 $5,917 $5,917 $5,917
Cloning Factor 15% 15% 15% 15% 15%
Supplies - OEM (after cloning adjust.) $5,029 $5,029 $5,029 $5,029 $5,029
OTHER ASSUMPTIONS
Gross Margin 48% 48% 48% 48% 48%
Tax Rate 37.5% 37.5% 37.5% 37.5% 37.5%
Interest Rate on Cash 5% 5% 5% 5% 5%
Capital Expenditures $ 361 $ 260 $ 200 $ 200 $ 200
A/R Turnover 45 45 45 45 45
Inventory Turnover 125 125 125 125 125
A/P Turnover 36 36 36 36 36
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PROJECTED INCOME STATEMENT
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For the Year Ended June 30,
--------------------------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(in thousands, except per share data)
Net Revenues $ 23,699 $ 17,495 $ 13,283 $ 9,128 $ 6,123
Cost of Sales(1) 12,323 9,097 6,907 4,746 3,184
-------- -------- -------- -------- --------
Gross Profit 11,375 8,397 6,376 4,381 2,939
Operating Expenses(2):
Sales & Marketing 1,145 1,000 800 500 200
General & Administrative 2,299 2,000 1,700 1,250 1,000
Engineering/R&D 1,075 750 500 300 --
Operations 2,064 1,200 1,000 750 600
Other(3) 723 535 515 495 465
-------- -------- -------- -------- --------
Total Operating Expenses 7,306 5,485 4,515 3,295 2,265
-------- -------- -------- -------- --------
Operating Cash Flow (EBITDA) 4,069 2,912 1,861 1,086 674
Depreciation &
Amortization(4) 564 300 300 300 200
-------- -------- -------- -------- --------
Operating Income (EBIT) 3,505 2,612 1,561 786 474
Interest Income(5) (1,987) (2,205) (2,383) (2,542) (2,675)
-------- -------- -------- -------- --------
Profit Before Taxes 5,492 4,817 3,944 3,329 3,149
Provision for Income Taxes(6) 2,060 1,807 1,479 1,248 1,181
-------- -------- -------- -------- --------
Net Income $ 3,433 $ 3,011 $ 2,465 $ 2,080 $ 1,968
======== ======== ======== ======== ========
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PROJECTED BALANCE SHEET - ASSETS
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AT JUNE 30,
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2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(in thousands, except per share data)
Assets:
Cash and Investments $ 39,731 $ 44,098 $ 47,660 $ 50,845 $ 53,499
Accounts Receivable, net(7) 2,922 2,157 1,638 1,125 755
Inventory, net(8) 4,220 3,115 2,365 1,625 1,090
Pre-paid Expenses 375 325 275 200 150
Deferred Tax Asset 819 819 819 819 819
-------- -------- -------- -------- --------
Current Assets 48,067 50,515 52,757 54,615 56,314
Property & Office Equipment(9) 7,117 7,377 7,577 7,777 7,977
Tooling 11,853 11,853 11,853 11,853 11,853
Accumulated Depreciation(10) (17,202) (17,502) (17,802) (18,102) (18,302)
-------- -------- -------- -------- --------
Net Fixed Assets 1,768 1,728 1,628 1,528 1,528
Guaranty Deposits 136 136 100 50 --
Deferred Tax Asset 528 528 528 528 528
Other Assets 48 8 -- -- --
-------- -------- -------- -------- --------
Total Assets $ 50,547 $ 52,915 $ 55,013 $ 56,721 $ 58,370
======== ======== ======== ======== ========
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PROJECTED BALANCE SHEET - LIABILITIES AND EQUITY
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At June 30,
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2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(in thousands, except per share data)
Liabilities:
Bank Credit Lines $ -- $ -- $ -- $ -- $ --
Accounts Payable(11) 1,215 897 681 468 314
Royalties Payable 468 468 468 468 468
Accrued Expenses 1,400 1,300 1,250 1,200 1,100
Other Current Liabilities 50 25 25 15 --
Current Maturities of LT Debt(12) -- -- -- -- --
-------- -------- -------- -------- --------
Current Liabilities 3,133 2,690 2,424 2,151 1,882
Debentures -- -- -- -- --
LT Debt(12) -- -- -- -- --
NKJ Retirement Liability 450 250 150 50 --
-------- -------- -------- -------- --------
Total Liabilities 3,583 2,940 2,574 2,201 1,882
-------- -------- -------- -------- --------
Stockholders' Equity:
Common Stock 72 72 72 72 72
Treasury Stock (15,179) (15,179) (15,179) (15,179) (15,179)
Additional Paid in Capital 43,842 43,842 43,842 43,842 43,842
Translation Gain (Loss)(13) (641) (641) (641) (641) (641)
Retained Earnings 19,317 22,327 24,792 26,873 28,841
Dividend(14) (447) (447) (447) (447) (447)
-------- -------- -------- -------- --------
Total Equity 46,964 49,974 52,439 54,520 56,488
-------- -------- -------- -------- --------
Total Liabilities & Equity $ 50,547 $ 52,915 $ 55,013 $ 56,721 $ 58,370
======== ======== ======== ======== ========
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PROJECTED CASH FLOW STATEMENT
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At June 30,
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2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(in thousands, except per share data)
Operating Activities:
Net Income (Loss) $ 3,433 $ 3,011 $ 2,465 $ 2,080 $ 1,968
Depreciation 564 300 300 300 200
Adjustments:
Accounts Receivable 399 765 519 512 370
Inventory 1,376 1,105 750 740 535
Other Current Assets 1,373 50 50 75 50
Other Assets 356 40 44 50 50
Accounts Payable and Accruals (585) (443) (266) (273) (269)
Other Liabilities (non-debt) 100 (200) (100) (100) (50)
-------- -------- -------- -------- --------
Cash Provided by Operating Activities 7,016 4,627 3,762 3,384 2,855
-------- -------- -------- -------- --------
Cash Used in Investing Activities:
Purchase of Equipment (813) (260) (200) (200) (200)
-------- -------- -------- -------- --------
Financing Activities:
Net Borrowings (Payment) of Debt -- -- -- -- --
Dividends Paid -- -- -- -- --
Treasury Stock (Purchases)/Sales -- -- -- -- --
Proceeds from sale of stock -- -- -- -- --
-------- -------- -------- -------- --------
Cash Provided by Financing Activities -- -- -- -- --
-------- -------- -------- -------- --------
Effect of exchange rate changes (181) -- -- -- --
-------- -------- -------- -------- --------
Net increase (decrease) in cash 6,022 4,367 3,562 3,184 2,655
Cash-bop 33,709 39,731 44,098 47,660 50,845
-------- -------- -------- -------- --------
Cash-eop $ 39,731 $ 44,098 $ 47,660 $ 50,845 $ 53,499
======== ======== ======== ======== ========
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PROJECTED FINANCIAL STATEMENTS - FOOTNOTES
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($ in thousands, unless otherwise specified)
1 COST OF SALES. Assumed gross margin stays constant at 48%; based on
Management's projection.
2 OPERATING EXPENSES. Assumed to decline at a rate consistent with the
winding down of the printer business; based on Management's projection.
3 OTHER OPERATING EXPENSES. Includes costs of being a public company
which are assumed to be $415 per year throughout the forecast period;
based on Management's projections.
4 DEPRECIATION AND AMORTIZATION. Based on Management's projection of
declining capital expenditures and the depreciation of existing fixed
assets.
5 INTEREST INCOME. Assumes cash balances earn interest at a rate of 5.0%
per year.
6 PROVISION FOR INCOME TAXES. Assumes the historical tax rate of 37.5%.
7 ACCOUNTS RECEIVABLE. Assumes 45 days turnover; based on Management's
projection.
8 INVENTORY. Assumes 125 day turnover; based on Management's projection.
9 PROPERTY AND OFFICE EQUIPMENT. Assumes declining capital expenditures
of $361, $260, $200, $200, and $200 for years 2000, 2001, 2002, 2003,
and 2004, respectively; based on Management's projection.
10 ACCUMULATE DEPRECIATION. Assumes depreciation of $564, $300, $300,
$300, and $200 for years 2000, 2001, 2002, 2003, and 2004,
respectively; based on Management's projection.
11 ACCOUNTS PAYABLE. Assumes 36 days turnover; based on Management's
projection.
12 LONG TERM DEBT. Assumes the Company has no long term debt outstanding
throughout the forecast period.
13 TRANSLATION LOSS. Assumed constant at $641, which is the value for 1999
and approximates the historical trend; based on Management's
projection.
14 DIVIDEND. Assumes the Company will keep dividend payments constant.
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ADDITIONAL VALUATION ANALYSES
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ADDITIONAL VALUATION ANALYSES
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[ ] As previously mentioned, only two valuation analyses presented in the
May 14, 1999 presentation are specifically affected by the use of the
Status Quo Projections:
- the calculated price per share values derived by multiplying
Kentek's estimated earnings by the Comparable Companies'
stock price multiples; and
- the Discounted Cash Flow analysis
[ ] Price per share values derived from Revenue, EBITDA, and EBIT figures
(as seen in the Comparable Companies Analysis and the Comparable
Transaction Analysis) are not affected by the Status Quo Projections
since they are presented in the conventional last twelve month format.
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COMPARABLE COMPANY ANALYSIS
SUMMARY OF KEY MULTIPLES AND PRICE RANGE
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ENTERPRISE VALUE/ EQUITY VALUE/
------------------------------------ ------------------------------------
LTM LTM LTM LTM 1999(P) 2000(P)
REVENUE EBITDA EBIT NET INCOME NET INCOME NET INCOME
---------- ---------- ---------- ---------- ---------- ----------
High 4.7X 133.5X 182.7X 38.1X 28.6X 24.0X
Low 0.3 3.0 5.7 4.9 9.0 7.7
Median 0.9 6.1 16.7 23.7 15.2 13.5
Adjusted Average(1) 1.2 17.3 19.3 22.5 17.0 15.1
KENTEK - PER SHARE EQUITY VALUE
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LTM(2) LTM(2) LTM(2) LTM(2) 1999(P) 2000(P)
REVENUE EBITDA EBIT NET INCOME NET INCOME NET INCOME
---------- ---------- ---------- ---------- ---------- ----------
KENTEK $ 39,810 $ 3,156 $ 1,889 $ 3,422 $ 3,491 $ 3,222
Shares Outstanding (000) 4,769 4,769 4,769 4,769 4,769 4,769
High $ 39.35 $ 88.37 $ 72.37 $ 27.36 $ 20.38 $ 16.22
Low 2.38 1.97 2.26 3.53 6.42 5.22
Median 7.38 4.01 6.61 17.00 10.85 9.11
Adjusted Average(1) 10.00 11.47 7.64 16.13 12.12 10.18
(1) Where five or more data points exist, adjusted to exclude the highest and
lowest value before averaging.
(2) LTM results for period ending December 1998.
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DISCOUNTED CASH FLOW ANALYSIS
KENTEK INFORMATION SYSTEMS, INC.
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PROJECTED
-------------------------------------------------------- TERMINAL
06/30/00 06/30/01 06/30/02 06/30/03 06/30/04 VALUE
-------- -------- -------- -------- -------- --------
Sales $ 23,699 $ 17,495 $ 13,283 $ 9,128 $ 6,123
o in A/R 399 765 519 512 370
-------- -------- -------- -------- --------
Cash Sales 24,098 18,260 13,802 9,640 6,493
Cost of Goods Sold 12,323 9,097 6,907 4,746 3,184
o in inventory (1,376) (1,105) (750) (740) (535)
o in A/P 135 318 216 213 154
-------- -------- -------- -------- --------
Cash Cost of Goods Sold 11,082 8,311 6,373 4,220 2,803
Cash Gross Profit 13,016 9,949 7,429 5,420 3,690
Operating Expenses 7,870 5,785 4,815 3,595 2,465
Depreciation & Amortization (564) (300) (300) (300) (200)
-------- -------- -------- -------- --------
Cash Operating Expenses 7,306 5,485 4,515 3,295 2,265
Cash Operating Income 5,710 4,464 2,914 2,125 1,425
Less: 37.5% Pro Forma Tax on Taxable Net Income 1,315 980 585 295 178
Less: Capital Expenditures 361 260 200 200 200
-------- -------- -------- -------- --------
Unlevered FCF to Capital Providers $ 4,034 $ 3,224 $ 2,129 $ 1,631 $ 1,048 $ 1,348(2)
Interest Expense Tax Shield -- -- -- -- --
NPV of Unlevered FCF(1) $ 8,484
Add: NPV of Tax Shields --
Add: Present Value of Cash(3) 24,856
------------
SUGGESTED VALUE $ 33,340
'Going Concern' Per Share Value $ 1.78
Add: Present Value of Cash Per Share Value 5.21
------------
SUGGESTED PER SHARE VALUE $ 6.99
EBITDA MULTIPLE RANGE
-------------------------------------
0.0X 1.0X 2.0X 3.0X 4.0X
----- ----- ----- ----- -----
12.5% $8.21 $8.29 $8.37 $8.45 $8.53
DISCOUNT 15.0% $7.49 $7.57 $7.64 $7.71 $7.78
FACTOR 17.5% $6.86 $6.93 $6.99 $7.06 $7.12
RANGE 20.0% $6.30 $6.36 $6.41 $6.47 $6.53
22.5% $5.79 $5.85 $5.90 $5.96 $6.01
(1) Unlevered Free Cash Flows discounted at 17.5%, with only 75.1% of Year 1
Unlevered FCF (and Tax Shields) being captured.
(2) Assumes a terminal value equal to last year EBITDA of $.7 million
multiplied by an EBITDA multiple of 2.0x.
(3) Cash discounted at 17.50%
[JANNEY MONTGOMERY SCOTT LOGO]
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VALUATION SUMMARY
[JANNEY MONTGOMERY SCOTT LOGO]
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VALUATION SUMMARY
[ ] The following valuation summary is similar to the one presented in the
May 14, 1999 presentation, adjusted to include the two additional
valuation analyses performed in the previous section.
[JANNEY MONTGOMERY SCOTT LOGO]
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PER SHARE EQUITY VALUATION - SUMMARY
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Dollar values represent median values
[GRAPH]
COMPARABLE COMPANY ANALYSIS:
Revenue $ 7.38
EBITDA $ 4.01
EBIT $ 6.61
P/E FY + 1 $ 6.65
Status Quo P/E FY + 1 $10.85
P/E FY + 2 $ 4.48
Status Quo P/E FY + 2 $ 9.11
COMPARABLE TRANSACTIONS:
Revenue $10.25
EBITDA $ 6.37
EBIT $ 5.12
DCF:
EBITDA $ 7.93
Status Quo EBITDA $ 6.99
LIQUIDATION:
Net Assets $ 6.65
[JANNEY MONTGOMERY SCOTT LOGO]
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