<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1995
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 1-7916
RECOGNITION INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 75-1080346
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2701 EAST GRAUWYLER ROAD, IRVING, TEXAS 75061
(Address or principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 579-6000
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.
YES X NO
----- -----
At September 11, 1995, the Registrant had outstanding 15,406,840 shares of its
Common Stock, par value $.25 per share.
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RECOGNITION INTERNATIONAL INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
---------------------
Consolidated Balance Sheet as of 1
July 31, 1995 and October 31, 1994.
Consolidated Statement of Operations - 2
Three Months and Nine Months
Ended July 31, 1995 and 1994.
Consolidated Statement of Cash Flows - 3
Nine Months Ended July 31, 1995 and 1994.
Notes to Consolidated Financial Statements. 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
----------------------------------------
FINANCIAL CONDITION AND RESULTS OF
----------------------------------
OPERATIONS. 7
-----------
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES 14
---------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
--------------------------------
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 15
INDEX TO EXHIBITS 16
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RECOGNITION INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(thousands)
<TABLE>
<CAPTION>
July 31,
1995 October 31,
ASSETS (Unaudited) 1994
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents, including
restricted amounts of $1,755 in 1995
and $6,359 in 1994 $ 29,097 $ 40,115
Short-term investments, including
restricted amounts of $5,647 in 1995
and $536 in 1994 5,661 549
Receivables - net 52,244 50,263
Inventories:
Raw materials and parts 11,383 4,375
Work in process 10,856 10,243
Finished goods 10,562 10,067
Other current assets 5,048 5,599
--------- ---------
Total current assets 124,851 121,211
--------- ---------
Property, plant and equipment - net 14,811 16,304
Service parts - net 28,544 25,281
Long-term receivables 3,151 5,278
Goodwill - net 14,726 16,377
Capitalized software - net 5,230 5,605
Other assets 13,713 14,407
--------- ---------
Total assets $205,026 $204,463
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 8,694 $ 7,988
Trade accounts payable 16,178 10,426
Domestic and foreign income taxes 522 1,650
Accrued compensation and benefits 5,758 5,328
Advance payments by customers 18,026 20,350
Accrued and other current liabilities 18,247 22,877
--------- ---------
Total current liabilities 67,425 68,619
--------- ---------
Long-term debt 49,472 51,722
--------- ---------
Other liabilities 6,814 6,285
--------- ---------
Stockholders' equity:
Preferred stock, no par value: authorized
shares - 800; issued shares - none -- --
Series A junior participating preferred
stock, no par value: authorized shares -
200; issued shares - none -- --
Common stock, $.25 par value: authorized
shares - 30,000; issued shares - 15,406
in 1995 and 15,295 in 1994 3,852 3,824
Capital in excess of par value 142,295 140,851
Accumulated deficit (62,691) (63,947)
Translation adjustments (1,753) (2,503)
Treasury stock (388) (388)
--------- ---------
Total stockholders' equity 81,315 77,837
--------- ---------
Commitments and contingencies
--------- ---------
Total liabilities and stockholders' equity $205,026 $204,463
========= =========
</TABLE>
See notes to consolidated financial statements.
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RECOGNITION INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(thousands, except per share)
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
---------------------------- -----------------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product $ 20,518 $ 14,620 $ 66,201 $ 64,489
Customer service 31,995 30,497 95,164 93,553
--------- --------- --------- ---------
52,513 45,117 161,365 158,042
--------- --------- --------- ---------
Cost of revenues:
Product 13,936 11,817 46,164 47,237
Customer service 22,771 21,583 66,632 62,523
--------- --------- --------- ---------
36,707 33,400 112,796 109,760
--------- --------- --------- ---------
Gross profit 15,806 11,717 48,569 48,282
Operating expenses:
Engineering and development 2,327 6,225 7,814 14,569
Selling and marketing 8,332 8,078 24,487 24,912
General and administrative 2,527 3,305 8,362 10,056
Restructuring 223 19,041 1,527 19,041
Amortization and other operating 840 1,233 2,436 2,994
--------- --------- --------- ---------
Operating income (loss) 1,557 (26,165) 3,943 (23,290)
Interest income 583 570 1,851 1,749
Interest expense (1,003) (1,067) (3,153) (3,215)
Foreign exchange gains (losses),
net (156) 502 800 676
Other income (expense), net 10 26 (28) (167)
--------- --------- --------- ---------
Income (loss) before income taxes 991 (26,134) 3,413 (24,247)
Benefit (provision) for income
taxes 121 (292) (2,155) (2,914)
--------- --------- --------- ---------
Net income (loss) $ 1,112 $(26,426) $ 1,258 $(27,161)
========= ========= ========= =========
Earnings (loss) per share $ .07 $ (1.71) $ .08 $ (1.73)
========= ========= ========= =========
Weighted average shares 15,653 15,474 15,548 15,695
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
2
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RECOGNITION INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(thousands)
<TABLE>
<CAPTION>
Nine months ended
July 31,
----------------------------
1995 1994
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,258 $(27,161)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation 8,865 8,289
Amortization 3,932 5,258
Restructuring 1,527 19,041
Write-down of capitalized software -- 2,821
Net book value of service parts used 1,450 766
Other 786 1,488
Changes in assets and liabilities:
Receivables (1,150) 3,528
Inventories (7,951) (3,838)
Trade accounts payable 4,907 78
Advance payments by customers (2,496) (3,287)
Other current assets and liabilities (5,691) (8,529)
Other non-current assets and liabilities 853 500
--------- ---------
Net cash provided by (used for) operating activities 6,290 (1,046)
--------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,456) (4,731)
Additions to service parts (9,841) (11,481)
Additions to capitalized software (935) (2,302)
Increase in short-term investment (5,161) (11)
Payment for acquisition of business (197) (405)
Escrow for purchase of real property 1,400 --
Other 30 248
--------- ---------
Net cash used for investing activities (17,160) (18,682)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt 200 273
Repayment of short-term debt (417) (583)
Repayment of long-term debt (1,934) --
Issuance of common stock 611 1,460
--------- ---------
Net cash provided by (used for) financing activities (1,540) 1,150
--------- ---------
Effect of exchange rate changes on cash 1,392 799
--------- ---------
Net decrease in cash and cash equivalents (11,018) (17,779)
Cash and cash equivalents at beginning of period 40,115 53,334
--------- ---------
Cash and cash equivalents at end of period $ 29,097 $ 35,555
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the nine-month period for:
Interest $ 2,142 $ 2,142
Income taxes $ 3,455 $ 5,015
========= =========
</TABLE>
See notes to consolidated financial statements.
3
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RECOGNITION INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited financial statements presented herein have been prepared
in accordance with the instructions to Form 10-Q and do not include
all of the information and note disclosures required by generally
accepted accounting principles. These statements should be read in
conjunction with the financial statements and notes thereto included
in Recognition's Annual Report on Form 10-K for the year ended October
31, 1994. The accompanying financial statements have not been
examined by independent accountants in accordance with generally
accepted auditing standards, but in the opinion of management such
financial statements include all adjustments of a normal recurring
nature necessary to fairly present Recognition's financial position,
results of operations and cash flows. The results of operations for
the nine months ended July 31, 1995 may not be indicative of the
results that may be expected for the year ending October 31, 1995.
(2) Certain amounts in the 1994 financial statements have been
reclassified to conform with the 1995 presentation.
(3) In 1994, Recognition adopted a plan to restructure its operations.
There were three major parts to this plan: (1) to eliminate duplicate
support and overhead operations and move Recognition's systems
business more quickly through the transition from older, proprietary
products to newer, open architecture products by consolidating certain
operations; (2) to consolidate manufacturing and engineering into the
Dallas, Texas facility and to close the Charlotte, North Carolina
facility and other offices; and (3) to reduce expenses and overall
headcount in Recognition's software business by consolidating certain
software support functions. At the end of the third quarter of 1995,
the restructuring plan was substantially complete.
As a result of adopting this plan, Recognition recorded restructuring
charges of $19,732,000 in 1994 and $1,454,000 in 1995. In the third
quarter of 1995, Recognition reduced the amounts previously recorded
by $1,879,000 as the current estimate of liabilities to be paid was
lower than originally estimated. These net charges include termination
benefits of $7,257,000 for the involuntary termination of 296
employees. The majority of the employees affected by the
restructuring were employed in Recognition's Charlotte, North Carolina
facility. The remainder of the affected employees were employed in
the systems and software businesses. The restructuring charges also
include $2,866,000 for obligations relating to employee relocation,
$5,223,000 for the write-down of certain assets no longer required in
the business, $1,407,000 for facility lease terminations and
$2,554,000 for other related items. As of July 31, 1995, Recognition
has paid $5,133,000 in termination benefits for the involuntary
termination of 278 employees and
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has written down assets or paid amounts totaling $10,785,000 related
to other restructuring items.
(4) Recognition has been notified by a major customer of its Netherlands
subsidiary they will not renew their maintenance contract at the end
of its term. As a result, Recognition plans to terminate 24 customer
service technicians and support personnel located in the subsidiary by
the third quarter of 1996. A restructuring charge of $1,996,000 and a
related income tax benefit of $618,000 were recorded in the third
quarter of 1995 for the estimated termination benefits to be paid to
those employees.
(5) On May 19, 1995, the boards of directors of BancTec, Inc. (BancTec)
and Recognition unanimously approved an agreement to merge the two
companies through an exchange of stock. Under the terms of the
agreement, Recognition stockholders will receive .59 of a share of
BancTec common stock for each share of Recognition common stock owned.
The agreement is subject to regulatory approval as well as approval by
the stockholders of both companies. Stockholder meetings for both
companies to vote on this matter are scheduled for September 27, 1995.
BancTec and Recognition each filed notification and report forms under
the Hart-Scott-Rodino Act with the Federal Trade Commission and the
Antitrust Division on June 8, 1995 along with requests for early
termination of the waiting period. On July 7, 1995, the Antitrust
Division issued a request for additional information and documents
relevant to the proposed acquisition. Both parties produced documents
to the Antitrust Division in response to such request. On August 28,
1995, the Antitrust Division issued to each party a Civil
Investigative Demand ("CID") requesting additional information and
documents. Both parties currently are responding to the CID, and the
transaction remains under further review by the Antitrust Division.
The transaction is expected to be tax free to both companies'
stockholders and to be accounted for on a "pooling of interests"
basis. Under this basis of accounting, the assets and liabilities of
BancTec and Recognition will be combined based on the respective
carrying values of the accounts in the historical financial statements
of each entity. Results of operations of the combined company will
include income of BancTec and Recognition for the entire fiscal period
in which the combination occurs and the historical results of
operations of the separate companies for fiscal years prior to the
merger will be combined and reported as the results of operations of
the combined company.
(6) In August 1995, a lawsuit was filed against Recognition and certain of
its officers and employees by a distributor of the Company's products
alleging breach of contract, tortious interference, fraud, and breach
of fiduciary duties, among other claims, and seeking actual and
punitive damages in an unspecified amount. The defendants
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intend to deny the allegations and vigorously defend the suit. No
discovery has occurred in the suit and neither the outcome nor the
effect on Recognition can be assessed at this time.
At July 31, 1995, Recognition was contingently liable for
approximately $899,000 under letters of credit issued primarily in
connection with vendor purchase contracts and performance guarantees
on customer sales contracts.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CHANGES IN FINANCIAL CONDITION
On May 19, 1995, the boards of directors of BancTec, Inc. (BancTec)
and Recognition unanimously approved an agreement to merge the two companies
through an exchange of stock. Under the terms of the agreement, Recognition
stockholders will receive .59 of a share of BancTec common stock for each share
of Recognition common stock owned. The agreement is subject to regulatory
approval as well as approval by the stockholders of both companies.
Stockholder meetings for both companies to vote on this matter are scheduled
for September 27, 1995. BancTec and Recognition each filed notification and
report forms under the Hart-Scott-Rodino Act with the Federal Trade Commission
and the Antitrust Division on June 8, 1995 along with requests for early
termination of the waiting period. On July 7, 1995, the Antitrust Division
issued a request for additional information and documents relevant to the
proposed acquisition. Both parties produced documents to the Antitrust
Division in response to such request. On August 28, 1995, the Antitrust
Division issued to each party a Civil Investigative Demand ("CID") requesting
additional information and documents. Both parties currently are responding to
the CID, and the transaction remains under further review by the Antitrust
Division. The transaction is expected to be tax free to both companies'
stockholders and to be accounted for on a "pooling of interest" basis. Under
this basis of accounting, the assets and liabilities of BancTec and Recognition
will be combined based on the respective carrying values of the accounts in the
historical financial statements of each entity. Results of operations of the
combined company will include income of BancTec and Recognition for the entire
fiscal period in which the combination occurs and the historical results of
operations of the separate companies for fiscal years prior to the merger will
be combined and reported as the results of operations of the combined company.
Recognition adopted a restructuring plan in 1994 to consolidate
certain operations in its systems business, close its Charlotte, North Carolina
facility and other offices and consolidate certain software support functions.
The plan was substantially completed by the end of the third quarter of 1995.
As a result of adopting this plan, Recognition recorded restructuring charges
of $19.7 million in 1994 and $1.5 million in 1995 for obligations relating to
employee severance and relocation, write-down of certain assets no longer
required in the business, facility lease terminations, the hiring and training
of employees to accomplish the restructuring and other related items. In the
third quarter of 1995, Recognition reduced the previously recorded
restructuring charges by $1.9 million. Recognition also recorded a
restructuring charge in the third quarter of 1995 of $2.0 million for
termination benefits to be paid to employees in its Netherlands subsidiary who
are expected to be involuntarily terminated as a result of the expiration of a
maintenance contract with a major customer. As of July 31, 1995, approximately
$5.4
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million of cash remains to be paid under both restructuring plans, a
substantial portion of which will be paid over the next twelve months.
Working capital at July 31, 1995 was $57.4 million, an increase of
$4.8 million compared to October 31, 1994. The change was a result of an
increase in current assets of $3.6 million and a decrease in current
liabilities of $1.2 million.
The increase in current assets included an increase in inventories of
$8.1 million due to purchases in anticipation of future shipments. Short-term
investments increased $5.1 million due to investments previously held in cash
equivalents being invested in securities with original maturities greater than
three months. Accounts receivable increased $2.0 million primarily due to
revenue recorded for shipments made in the third quarter of 1995. These
increases were partially offset by a decrease in cash and cash equivalents of
$11.0 million (see Consolidated Statement of Cash Flows).
The decrease in current liabilities included a $4.6 million decrease
in accrued and other current liabilities due to payments related to
restructuring liabilities accrued at October 31, 1994. Advance payments by
customers decreased $2.3 million due to products and services delivered in the
first nine months of 1995 for which payment was received in 1994. These
decreases were partially offset by an increase in trade accounts payable of
$5.8 million due to recent inventory purchases.
Recognition is a defendant in a lawsuit described in Note 6 of the
"Notes to Consolidated Financial Statements" appearing on page 5 of this
Report. Recognition intends to deny the allegations and vigorously defend the
suit. No discovery has occurred in the suit and neither the outcome nor the
effect on Recognition can be assessed at this time.
Recognition's orders and revenues have been and may continue to be
adversely impacted by the announcement of the proposed merger and resulting
uncertainties created in the market place for its products and services. In
the event orders and revenues are substantially impacted, Recognition's
liquidity, particularly in its domestic operations, may be adversely affected.
At July 31, 1995, Recognition had $34.8 million of cash, cash equivalents and
short-term investments, of which $13.9 million was held in its domestic
operations and $20.9 million was held by its foreign subsidiaries. Of the
amounts held by foreign subsidiaries, $7.4 million was pledged as collateral or
otherwise committed to secure certain guarantees and a foreign bank loan, and
the remainder may be subject to currency transfer restrictions. Recognition's
credit facility expired in July 1995, and was not renewed due to the proposed
merger with BancTec.
8
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RESULTS OF OPERATIONS - COMPARISON OF THREE MONTH PERIODS ENDED
JULY 31, 1995 AND 1994
Recognition recorded net income for the third quarter of 1995 of $1.1
million compared to a net loss of $26.4 million in the third quarter of 1994,
an increase of $27.5 million. Net income for the third quarter of 1995
included a restructuring charge of $.2 million for hiring, training and asset
relocations associated with the restructuring plan adopted in the third quarter
of 1994 and a reduction of previously recorded restructuring liabilities of
$1.9 million as the current estimate of liabilities to be paid was lower than
originally estimated. This reduction was offset by a $2.0 million
restructuring charge and a related income tax benefit of $.6 million related to
the planned termination of employees in Recognition's Netherlands subsidiary.
The loss for the third quarter of 1994 included a restructuring charge of $18.6
million, net of tax, and $5.9 million of other charges. The other charges
included $1.8 million for the write-down of inventory and $.4 million of
additional amortization of capitalized software charged to cost of product
revenues, $.5 million for the write-down of service parts charged to cost of
customer service revenues, $2.8 million for the write-down of certain
capitalized software charged to engineering and development expenses, and $.4
million of additional allowances for bad debt charged to other operating
expenses. Excluding the restructuring charges and the other charges, net
income for the third quarter of 1995 was $.7 million and the net loss for the
third quarter of 1994 was $1.9 million, an increase of $2.6 million. This
increase was primarily the result of an increase in revenues associated with
the new, open system high-speed document transport and the Universal
Transport(TM) products and a decrease in operating expenses associated with the
restructuring.
Consolidated revenues were $52.5 million in the third quarter of 1995,
an increase of 16 percent, or $7.4 million, as compared to the third quarter of
1994. Consolidated revenues from equipment products and services were $41.3
million in the third quarter of 1995, an increase of $5.5 million, or 15
percent, as compared to the third quarter of 1994. Consolidated revenues from
software products and services, including Plexus(R) software products and
software sold in conjunction with equipment, were $11.2 million in the third
quarter of 1995. This represented an increase of $1.9 million, or 20 percent,
as compared to the third quarter of 1994.
The increase in consolidated revenues reflected an increase in
domestic revenues of $5.3 million, or 18 percent, and an increase in foreign
revenues of $2.1 million, or 13 percent. Foreign operations contributed 34
percent of revenues for the third quarter of 1995 compared to 35 percent in the
third quarter of 1994.
Product revenues were $20.5 million, an increase of 40 percent, or
$5.9 million, when compared to the third quarter of 1994. Revenues from
equipment products were $13.2 million in the third quarter of 1995, an increase
of 47 percent, or $4.2 million, due to
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increased revenues associated with the new, open system high-speed document
transport and the Universal Transport products. Revenues from software
products were $7.3 million in the third quarter of 1995, an increase of 30
percent, or $1.7 million, primarily due to increased sales of Plexus and third
party software products.
Customer service revenues were $32.0 million, an increase of five
percent, or $1.5 million, when compared to the third quarter of 1994.
Equipment related service revenues were $28.1 million in the third quarter of
1995, an increase of five percent, or $1.5 million. This increase in equipment
related service revenues reflected increased revenues for Recognition's
multi-vendor services offset by decreased revenues from the expected expiration
of domestic maintenance agreements for older products. Software service
revenues related to both Plexus products and software sold in conjunction with
equipment were $3.9 million in the third quarter of 1995, unchanged when
compared to the third quarter of 1994.
Consolidated gross profit in the third quarter of 1995 was $15.8
million, up $4.1 million from the third quarter of 1994. Product gross profit
was $6.6 million, or 32 percent of revenues, compared to $2.8 million, or 19
percent of revenues, in the third quarter of 1994. Product gross profit for
the third quarter of 1994 included the charges for the write-down of inventory
of $1.8 million and for additional amortization of capitalized software of $.4
million. Excluding these charges, product gross profit for the third quarter
of 1994 was $5.0 million, or 34 percent of revenues.
Customer service gross profit was $9.2 million, or 29 percent of
revenues, in the third quarter of 1995 compared to $8.9 million, or 29 percent
of revenues in the third quarter of 1994.
Engineering and development expenses decreased $3.9 million due to the
$2.8 million charge for the write-down of certain capitalized software in the
third quarter of 1994, the completion of certain development activities related
to the high-speed document transport and Universal Transport products in the
latter half of 1994, cancellation of non- strategic development activities in
the software business and lower sustaining engineering for older, proprietary
products.
General and administrative expenses decreased $.8 million due to a
reduction in headcount as a result of the restructuring.
Recognition recorded a foreign exchange loss of $.2 million in the
third quarter of 1995, compared to a foreign exchange gain of $.5 million in
the third quarter of 1994. The current period loss is primarily due to
valuation losses on intercompany receivables from foreign subsidiaries as a
result of the strengthening of the U.S. dollar.
The provisions for income taxes for 1995 and 1994 were a result of
income earned by certain foreign entities with relatively high
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effective tax rates while no tax benefits were available to entities which
recorded losses for the three months. The 1995 provision also included a $.6
million tax benefit for the restructuring charges related to Recognition's
Netherlands subsidiary recorded in the third quarter of 1995, while the 1994
provision included a $.4 million tax benefit for the restructuring charges
recorded in the third quarter of 1994.
RESULTS OF OPERATIONS - COMPARISON OF NINE MONTH PERIODS ENDED
JULY 31, 1995 AND 1994
Recognition recorded net income for the first nine months of 1995 of
$1.3 million compared to a net loss of $27.2 million in the first nine months
of 1994, an increase of $28.5 million. Net income for the first nine months of
1995 included a restructuring charge of $1.5 million for hiring, training and
asset relocations associated with the restructuring plan adopted in the third
quarter of 1994 and a reduction of previously recorded restructuring
liabilities of $1.9 million as the current estimate of liabilities to be paid
was lower than originally estimated. This reduction was offset by a $2.0
million restructuring charge and a related income tax benefit of $.6 million
related to the planned termination of employees in Recognition's Netherlands
subsidiary. The loss for the first nine months of 1994 included a
restructuring charge of $18.6 million, net of tax, and $5.9 million of other
charges. Excluding the restructuring charges and the other charges, net income
for the first nine months of 1995 was $2.2 million and the net loss for the
first nine months of 1994 was $2.7 million, an increase of $4.9 million. This
increase was primarily the result of a decrease in operating expenses
associated with the restructuring.
Consolidated revenues were $161.4 million in the first nine months of
1995, an increase of two percent, or $3.3 million, as compared to the first
nine months of 1994. Consolidated revenues from equipment products and
services were $126.7 million in the first nine months of 1995, an increase of
$1.1 million, or one percent, as compared to the first nine months of 1994.
Consolidated revenues from software products and services, including Plexus
software products and software sold in conjunction with equipment, were $34.7
million in the first nine months of 1995. This represented an increase of $2.2
million, or seven percent, as compared to the first nine months of 1994.
The increase in consolidated revenues reflected an increase in
domestic revenues of $4.9 million, or five percent and a decrease in foreign
revenues of $1.6 million, or three percent. Foreign operations contributed 39
percent of revenues for the first nine months of 1995 compared to 41 percent in
the first nine months of 1994.
Product revenues were $66.2 million, an increase of three percent, or
$1.7 million, when compared to the first nine months of
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1994. Revenues from equipment products were $44.1 million in the first nine
months of 1995, a decrease of two percent, or $1.1 million, due primarily to
decreased revenues associated with network integration products provided by
Recognition's Canadian subsidiary to branches of the Canadian government,
partially offset by increased revenues associated with the new, open system
high-speed document transport and the Universal Transport products. Revenues
from software products were $22.1 million in the first nine months of 1995, an
increase of 15 percent, or $2.8 million, due primarily to sales of Plexus and
third party software products.
Customer service revenues were $95.2 million, an increase of two
percent, or $1.6 million, when compared to the first nine months of 1994.
Equipment related service revenues were $82.6 million in the first nine months
of 1995, an increase of three percent, or $2.3 million. This increase in
equipment related service revenues reflected increased international service
revenues and increased revenues for multi-vendor services offset by decreased
revenues from the expected expiration of maintenance agreements for older
products. Software service revenues related to both Plexus products and
software sold in conjunction with equipment were $12.6 million in the first
nine months of 1995, a decrease of five percent, or $.7 million. The 1994
software service revenues included significant revenues for custom software
completed for a customer in Japan.
Consolidated gross profit in the first nine months of 1995 was $48.6
million, up $.3 million from the first nine months of 1994. Product gross
profit was $20.0 million, or 30 percent of revenues in the first nine months of
1995 compared to $17.3 million, or 27 percent of revenues, in the first nine
months of 1994. Product gross profit for 1994 included the charges for the
write-down of inventory of $1.8 million and for additional amortization of
capitalized software of $.4 million. Excluding these charges, product gross
profit was $19.5 million, or 30 percent of revenues in 1994.
Customer service gross profit was $28.5 million, or 30 percent of
revenues, in the first nine months of 1995 compared to $31.0 million, or 33
percent of revenues in the first of nine months of 1994. The 33 percent gross
profit margin in 1994 was unusually high due to custom software revenues in
Japan. The 30 percent gross profit margin in 1995 is generally in line with
historical trends. However, the gross profit margin on equipment maintenance
services is declining as revenues from the service of proprietary products are
being replaced by revenues from the service of third party products with lower
gross profit margins. Gross profit margins vary for other services based upon
the specific services performed. As a result, it is difficult to predict
future total customer service gross profit margins.
Engineering and development expenses decreased $6.8 million due to the
$2.8 million charge for the write-down of certain capitalized software in the
third quarter of 1994, the completion of certain development activities related
to the high-speed document transport
12
<PAGE> 15
and Universal Transport products in the latter half of 1994, cancellation of
non-strategic development activities in the software business and lower
sustaining engineering for older, proprietary products.
General and administrative expenses decreased $1.7 million due to a
reduction in headcount as a result of the restructuring.
Amortization and other operating expenses decreased $.6 million
primarily due to the $.4 million charge to record additional allowances for bad
debt recorded in 1994.
The provisions for income taxes for 1995 and 1994 were a result of
income earned by certain foreign entities with relatively high effective tax
rates while no tax benefits were available to entities which recorded losses
for the nine months. The 1995 provision also included a $.6 million tax
benefit for the restructuring charges related to Recognition's Netherlands
subsidiary recorded in the third quarter of 1995, while the 1994 provision
included a $.4 million tax benefit for the restructuring charges recorded in
the third quarter of 1994.
13
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In July 1995, Recognition's $25 million credit facility expired and was not
renewed due to the proposed merger with BancTec, Inc. The credit facility
contained various covenants, including maintenance of certain financial ratios,
net worth requirements and restrictions on future borrowings and payment of
dividends. In addition, the obligations under the facility were secured by a
lien on substantially all of Recognition's assets, excluding its real estate.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The information required by this portion of Item 6 is set
forth in the Index to Exhibits on pages 16 through 19 of this Report.
(b) Reports on Form 8-K - A Current Report on Form 8-K dated May 19, 1995
was filed by the Registrant during the quarter for which this report
is being filed.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RECOGNITION INTERNATIONAL INC.
(Registrant)
Date: September 14, 1995 /s/Thomas Hoefert
------------------ ------------------------------------
Thomas E. Hoefert
Vice President and Chief Financial
Officer
(Duly Authorized Officer and
Principal Financial Officer)
15
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2.1 Agreement and Plan of Merger dated as of May 19, 1995 among BancTec, Inc.,
BTEC Merger Subsidiary, Inc. and Registrant (incorporated by reference to
Exhibit 2.1 to Registrant's Current Report on Form 8-K dated March 19, 1995).
4.1 Restated Certificate of Incorporation effective May 30, 1974 (incorporated by
reference to Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1993).
4.2 Amendment to Article First of Registrant's Restated Certificate of
Incorporation effective March 12, 1993 (incorporated by reference to Exhibit
28(b) to Registrant's Current Report on Form 8-K dated March 12, 1993).
4.3 Amendment to Article Fourth of Registrant's Restated Certificate of
Incorporation effective April 3, 1985 (incorporated by reference to Exhibit
3.3 to Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 1993).
4.4 Amendment adding Article Thirteenth to Registrant's Restated Certificate of
Incorporation effective March 16, 1987 (incorporated by reference to Exhibit
3.4 to Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 1992).
4.5 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock effective September 28, 1992 (incorporated by
reference to Exhibit 3.5 to Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1992).
4.6 By-Laws, as amended and restated as of December 15, 1994 (incorporated by
reference to Exhibit 3.6 to Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 1994).
</TABLE>
16
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
4.7 Indenture dated as of April 3, 1986 and First Supplemental Indenture dated as
of November 1, 1987 between Registrant and MBank Dallas, National Association,
as Trustee, with respect to Registrant's 7-1/4% Convertible Subordinated
Debentures due 2011 (incorporated by reference to Exhibit 4.1 to Registrant's
Annual Report on Form 10-K for the fiscal year ended October 31, 1992).
4.8 Rights Agreement dated as of September 18, 1992 between Registrant and Society
National Bank as Rights Agent (incorporated by reference to Registrant's Form
8-A Registration Statement dated September 25, 1992).
4.9 Amended and Restated Credit Agreement dated as of July 29, 1993 by and among
Registrant and The First National Bank of Boston, National Bank of Canada, New
York Branch and First Interstate Bank of Texas, N.A. (incorporated by
reference to Exhibit 4.11 to Registrant's Quarterly Report on Form 10-Q for
the period ended July 31, 1993).
4.10 First Amendment to Amended and Restated Credit Agreement and Amendment No. 2
to Stock Pledge Agreement dated as of January 31, 1994 by and among
Registrant, Recognition Australia Pty. Ltd., Recognition Holding Limited, The
First National Bank of Boston, National Bank of Canada, New York Branch and
First Interstate Bank of Texas, N.A., (incorporated by reference to Exhibit
4.12 to Registrant's Quarterly Report on Form 10-Q for the period ended
January 31, 1994).
4.11 Second Amendment dated as of October 31, 1994 to Amended and Restated Credit
Agreement dated as of July 29, 1993 (incorporated by reference to Exhibit 10.7
to Registrant's Annual Report on Form 10-K for the period ended October 31,
1994).
4.12 Amended and Restated Revolving Credit Notes dated as of July 29, 1993 in the
principal amounts of $12,000,000, $7,000,000 and $6,000,000 payable by
Registrant to The First National Bank of Boston, as agent for The First
National Bank of Boston, First
</TABLE>
17
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
Interstate Bank of Texas, N.A. and National Bank of Canada, New York Branch,
respectively (incorporated by reference to Exhibit 4.12 to Registrant's
Quarterly Report on Form 10-Q for the period ended July 31, 1993).
4.13 Security Agreement dated as of March 26, 1992 by and among Registrant, Hybrid
Systems Inc. and The First National Bank of Boston (incorporated by reference
to Exhibit 19.5 to Registrant's Quarterly Report on Form 10-Q for the period
ended April 30, 1992).
4.14 General Security Agreement dated as of March 26, 1992 by and between Mohawk
Data Sciences-Canada, Limited and The First National Bank of Boston
(incorporated by reference to Exhibit 19.6 to Registrant's Quarterly Report on
Form 10-Q for the period ended April 30, 1992).
4.15 Unlimited Guaranty dated as of March 26, 1992 by Hybrid Systems Inc. and
Recognition Equipment (Japan), Inc. in favor of The First National Bank of
Boston (incorporated by reference to Exhibit 19.7 to Registrant's Quarterly
Report on Form 10-Q for the period ended April 30, 1992).
4.16 Unlimited Guaranty dated as of March 26, 1992 by Mohawk Data Sciences-Canada,
Limited in favor of The First National Bank of Boston (incorporated by
reference to Exhibit 19.8 to Registrant's Quarterly Report on Form 10-Q for
the period ended April 30, 1992).
4.17 Amendment of Security Documents Agreement dated as of July 29, 1993 by and
among Registrant, Recognition Canada Inc., Recognition Japan Inc., Recognition
Australia Pty. Ltd. and Recognition Holding Limited and The First National
Bank of Boston (incorporated by reference to Exhibit 4.17 to Registrant's
Quarterly Report on Form 10-Q for the period ended July 31, 1993).
11.1 Statement re computation of per share earnings.
15. Not applicable.
</TABLE>
18
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
18. Not applicable.
19. Not applicable.
22. Not applicable.
23. Not applicable.
24. Not applicable.
27.1 Financial Data Schedules.
99. Not applicable.
</TABLE>
19
<PAGE> 1
EXHIBIT 11.1
RECOGNITION INTERNATIONAL INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS (LOSS) PER SHARE
(Unaudited)
(thousands, except per share)
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 31, July 31 ,
-------------------------- --------------------------
1995 1994 1995 1994
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Primary:
Net income (loss) $ 1,112 $(26,426) $ 1,258 $(27,161)
======== ========= ======== =========
Shares:
Weighted average shares
outstanding, net of treasury
shares 15,355 15,056 15,294 14,965
Net shares issuable on exercise
of certain stock options 298 418 254 730
-------- --------- --------- ---------
Weighted average shares
outstanding, as adjusted 15,653 15,474 15,548 15,695
======== ========= ======== =========
Earnings (loss) per share -
primary $ .07 $ (1.71) $ .08 $ (1.73)
======== ========= ======== =========
Fully Diluted (A):
-----------------
Earnings:
Net income (loss) $ 1,112 $(26,426) $ 1,258 $(27,161)
Add after tax interest expense
applicable to 7 1/4% convertible
subordinated debentures 919 919 2,756 2,756
-------- --------- -------- --------
Net income (loss), as adjusted $ 2,031 $(25,507) $ 4,014 $(24,405)
======== ========= ======== =========
Shares:
Weighted average shares
outstanding, net of treasury
shares 15,355 15,056 15,294 14,965
Shares issuable assuming
conversion of 7 1/4% convertible
subordinated debentures 3,088 3,088 3,088 3,088
Net shares issuable on exercise
of certain stock options 417 418 253 730
-------- --------- -------- ---------
Weighted average shares
outstanding, as adjusted 18,860 18,562 18,635 18,783
======== ========= ======== =========
Earnings (loss) per share -
fully diluted $ .11 $ (1.37) $ .22 $ (1.30)
======== ========= ======== =========
</TABLE>
Note A: This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No.
15 because it produces an anti-dilutive result.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> JUL-31-1995
<CASH> 29,097
<SECURITIES> 5,661
<RECEIVABLES> 53,102
<ALLOWANCES> 2,031
<INVENTORY> 32,801
<CURRENT-ASSETS> 205,026
<PP&E> 108,433
<DEPRECIATION> 65,078
<TOTAL-ASSETS> 205,026
<CURRENT-LIABILITIES> 67,425
<BONDS> 49,472
<COMMON> 3,852
0
0
<OTHER-SE> 77,463
<TOTAL-LIABILITY-AND-EQUITY> 205,026
<SALES> 66,201
<TOTAL-REVENUES> 161,365
<CGS> 46,164
<TOTAL-COSTS> 112,796
<OTHER-EXPENSES> 10,231
<LOSS-PROVISION> 19
<INTEREST-EXPENSE> 3,153
<INCOME-PRETAX> 3,413
<INCOME-TAX> 2,155
<INCOME-CONTINUING> 1,258
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,258
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
