SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 1996 Commission File No. 1-13528
KNOGO NORTH AMERICA INC.
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(Exact name of registration as specified in its charter)
NEW YORK 11-3231714
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
350 WIRELESS BOULEVARD, HAUPPAUGE, NEW YORK 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code 516-232-2100
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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, and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
---- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
CLASS OUTSTANDING AT 7/26/96
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Common Stock $.01 par value 5,772,032
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<PAGE>
KNOGO NORTH AMERICA INC.
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets --
June 30, 1996 and December 31, 1995 1
Condensed Consolidated Statements of Operations --
Three Months Ended June 30, 1996 and 1995
and Six Months Ended June 30, 1996 and 1995 2
Condensed Consolidated Statements of Cash Flows --
Six Months Ended June 30, 1996 and 1995 3
Notes to Condensed Consolidated Financial
Statements -- June 30, 1996 4 - 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 6 - 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 7
Item 6. Exhibits and Reports on Form 8-K 7
SIGNATURES 7
<PAGE>
KNOGO NORTH AMERICA INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 4,121 $ 409
Accounts receivable, less allowance for doubtful
accounts of $897 and $931, respectively 6,086 9,599
Net investment in sales-type leases -
current portion 2,112 778
Inventories 6,299 5,954
Prepaid expenses and other current assets 645 496
--------- ---------
Total current assets 19,263 17,236
NET INVESTMENT IN SALES-TYPE LEASES -
non-current portion 1,178 1,753
SECURITY DEVICES ON LEASE, net 661 399
PROPERTY, PLANT AND EQUIPMENT, net 8,960 9,081
OTHER ASSETS 995 869
--------- ---------
$ 31,057 $ 29,338
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,113 $ 2,194
Accrued liabilities 3,363 3,070
Obligations under capital leases -
current portion 291 277
Deferred lease rentals 255 369
--------- ---------
Total current liabilities 5,022 5,910
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion 344 471
DEFERRED INCOME TAXES 430 288
MINORITY INTEREST IN SUBSIDIARY 476 ---
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value;
authorized 3,000 shares; none issued
Common stock, $.01 par value;
authorized 10,000 shares; issued and
outstanding 5,772 shares and 5,720,
respectively 58 57
Additional paid-in capital 21,076 20,881
Retained earnings 3,651 1,731
--------- ---------
24,785 22,669
--------- ---------
$ 31,057 $ 29,338
========= =========
</TABLE>
See notes to the condensed consolidated financial statements.
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<PAGE>
KNOGO NORTH AMERICA INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
-------------------------- --------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 6,887 $ 7,962 $ 12,439 $ 14,967
COSTS AND EXPENSES:
Cost of sales 3,790 3,820 6,390 7,313
Customer service expenses 756 1,070 1,418 1,853
Selling, general and
administrative expenses 1,967 2,117 3,843 4,285
Research and development 359 411 731 800
Interest (income) expense (41) 8 (41) 21
--------- --------- --------- ---------
6,831 7,426 12,341 14,272
--------- --------- --------- ---------
OPERATING PROFIT 56 536 98 695
OTHER INCOME:
Gain on sale of assets --- --- 2,462 ---
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 56 536 2,560 695
INCOME TAXES 14 80 640 104
--------- --------- --------- ---------
NET INCOME $ 42 $ 456 $ 1,920 $ 591
========= ========== ========= =========
NET INCOME PER SHARE $ .01 $ .08 $ .32 $ .10
========= ========== ========= =========
WEIGHTED AVERAGE
COMMON SHARES 6,124 5,804 6,081 5,803
========= ========== ========= =========
</TABLE>
See notes to the condensed consolidated financial statements.
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<PAGE>
KNOGO NORTH AMERICA INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
` -----------------------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,920 $ 591
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization of security
devices and property, plant and equipment 565 545
Provision for bad debts 54 202
Decrease (increase) in accounts receivable 3,459 (2,344)
Increase in net investment in sales-type leases (759) (809)
(Increase) decrease in inventories (209) 864
(Decrease) increase in accounts payable (1,081) 835
Increase (decrease) in accrued liabilities 293 (87)
Other, net 38 (120)
--------- ---------
Net cash provided by (used in)
operating activities 4,280 (323)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (192) (100)
(Increase) decrease in security devices on lease (351) 55
--------- ---------
Net cash used in investing activities (543) (45)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of obligations under capital leases (89) (114)
Exercise of stock options 64 ---
--------- ---------
Net cash used in financing activities (25) (114)
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INCREASE (DECREASE) IN CASH 3,712 (482)
CASH, at beginning of period 409 1,258
--------- ---------
CASH, at end of period $ 4,121 $ 776
========= =========
</TABLE>
See notes to the condensed consolidated financial statements.
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<PAGE>
KNOGO NORTH AMERICA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
NOTE A -- BASIS OF PRESENTATION
The consolidated financial statements are unaudited and include the accounts of
Knogo North America Inc. and wholly owned and majority owned subsidiaries
("Knogo N.A." or the "Company"). In the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary for a fair presentation of
the financial information for the periods indicated have been included. Interim
results are not necessarily indicative of results for a full year.
NOTE B -- FORMATION OF JOINT VENTURE
In January 1996, the Company acquired a controlling interest in K&M Converting
Corp. (KMCC). KMCC is a newly established joint venture entered into with Marian
Rubber Products Co., Inc. ("Marian"). KMCC will be the exclusive supplier of
disposable targets or labels from converted magnetic material purchased for use
in the Company's EAS systems. The Company contributed $15,000 in cash, $430,000
in inventory and $49,000 in machinery to KMCC and issued 20,000 shares of Knogo
N.A. common stock to Marian in exchange for 50.001% of KMCC.
The acquisition has been accounted for under the purchase method of accounting
and the operating results of KMCC have been included in the consolidated
operating results of the Company beginning in the first quarter of 1996. The
minority interest not acquired by Knogo N.A., which is immaterial, is included
in income before income taxes on the condensed consolidated statement of income
and in minority interest in subsidiary on the consolidated balance sheet.
NOTE C -- NET INVESTMENT IN SALES-TYPE LEASES
The Company is the lessor of security devices under agreements expiring in
various years through 2001. The net investment in sales-type leases consists of:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
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(in thousands)
<S> <C> <C>
Minimum lease payments receivable $ 3,813 $ 3,183
Allowance for uncollectible minimum
lease payments (191) (159)
Unearned income (362) (523)
Unguaranteed residual value 30 30
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Net investment 3,290 2,531
Less current portion 2,112 778
--------- ---------
Non-current portion $ 1,178 $ 1,753
========= =========
</TABLE>
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<PAGE>
KNOGO NORTH AMERICA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
NOTE D -- INVENTORIES
Inventories consist of the following:
JUNE 30, 1996 DECEMBER 31, 1995
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(in thousands)
Raw materials $ 2,583 $ 2,692
Work-in-process 2,016 1,986
Finished goods 1,700 1,276
--------- ---------
$ 6,299 $ 5,954
========= =========
Reserves for excess and obsolete inventory totaled $1,404,000 and $1,441,000 as
of June 30, 1996 and December 31, 1995, respectively and have been included as a
component of the above amounts.
NOTE E -- SUPPLY AGREEMENT
Knogo N.A. has a supply agreement in which Sensormatic is obligated to purchase
products from Knogo N.A. in the amount of $12,000,000 during 1995 and an
additional $12,000,000 during the ensuing 18 months. Such products are priced to
yield Knogo N.A. a 35% gross margin. Sales under the supply agreement were
$1,234,000 and $3,038,000 in the quarters ended June 30, 1996 and 1995 and
$3,397,000 and $6,026,000 in the six month periods ended June 30, 1996 and 1995,
respectively. During the quarter ended June 30, 1996 Sensormatic failed to meet
its minimum purchase amounts and, in accordance with the agreement, was charged
50% of the shortfall. This additional amount of $301,000 was included in
revenues in the second quarter of 1996. Included in accounts receivable as of
June 30, 1996 and December 31, 1995 are amounts due from Sensormatic of
$1,198,000 and $4,561,000, respectively.
NOTE F -- GAIN ON SALE OF ASSETS
On March 22, 1996, the Company completed the sale of certain assets (primarily
patents and technology) of its library security systems business to Minnesota
Mining and Manufacturing Company ("3M") for a purchase price of $3 million, paid
at closing. In connection with such sale, Knogo and 3M entered into an agreement
pursuant to which the Company has become a distributor of certain of 3M's
library systems products for an initial term of three years and has agreed not
to compete with 3M in the sale of security systems products (other than closed
circuit video systems) in the library market except as otherwise contemplated by
the transaction documentation. The parties also settled certain patent
litigation between them.
The impact of the transaction resulted in an increase in cash of $3 million and
pretax tax gain of approximately $2.5 million in the quarter ended March 31,
1996. The impact on the Company's historical revenues and net income from the
sale of products covered by the patents and related technology sold is not
material.
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<PAGE>
KNOGO NORTH AMERICA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS:
Consolidated revenues were 14% and 17% lower in the second quarter and six month
period ended June 30, 1996 than in the quarter and six month period ended June
30, 1995. Revenues from third party customers in the current periods were
$5,352,000 and $8,741,000 or 78% and 70% of total revenues as compared to
$4,924,000 and $8,941,000 or 62% and 60% of total revenues in the prior year
periods. The increase in the current quarter is attributable to increases
primarily in the retail and library market segments. During the second quarter
of 1996, a significant contract was entered into with a retail customer. If
certain store shrinkage reductions are met through the use of Knogo's equipment
over a period of two years, the contract revenue amount would approximate $3
million. Knogo recorded approximately $1.5 million in revenues in the quarter
which represents the minimum value to be received under the contract. However,
all of the equipment costs have been recorded in the current period resulting in
a significant lower gross margin on this sale. Successful shrinkage reductions
will result in future revenues with substantially no additional costs. Sales
under the Supply Agreement with Sensormatic in the quarter and six month period
ended June 30, 1996 were $1,234,000 and $3,397,000 or 18% and 27% of total
revenues as compared to $3,038,000 and $6,026,000 or 38% and 40% of total
revenues in the prior periods. In accordance with the terms of the Supply
Agreement, the Company expected a reduction of approximately $1 million in
revenues per quarter in 1996 compared to 1995. However, in the second quarter
Sensormatic failed to meet its minimum purchase amounts. Accordingly, in
accordance with the Supply Agreement, the Company invoiced to Sensormatic and
recorded in revenues 50% of the cumulative shortfall or $301,000. In all periods
presented sales represented 92% and service and rental income 8% of total
revenues.
Cost of sales were 55% and 51% of total revenues in the quarter and six month
period ended June 30, 1996 as compared to 48% and 49% in the same periods in the
previous year. The increase in percentages in the current periods were a result
of 1) high initial costs recorded on the retail contract indicated above, 2)
greater proportion of CCVS sales which generate lower margins than traditional
EAS products and offset partially by 3) a reduction in the level of sales under
the Supply Agreement with Sensormatic which carry lower margins than sales to
third party customers.
Customer service expenses were lower in both the second quarter and first six
months of 1996 than in the previous year. The Company reduced its staff in 1996
as a result of more efficient installations and fewer service calls primarily
attributable to the transfer of its library maintenance obligations to 3M.
The decrease in selling, general and administrative expenses in the second
quarter and first six months of 1996 as compared to 1995 is primarily a result
of a reduction in administrative personnel and lower sales promotional expenses.
Research and development costs were lower in dollar value in the 1996 periods
but substantially the same as a percentage of revenues in all periods presented.
The 1995 periods included higher prototype costs particularly associated with
the development of the Express library self patron check-out system which was
part of the technology sale to 3M in the first quarter of 1996.
The Company's interest income was $61,000 and $82,000 in the quarter and six
month period ended June 30, 1996 as compared to $14,000 and $23,000 in the
corresponding periods in 1995. The increase is due to the investment of the
proceeds from the sale of assets at the end of the first quarter. These amounts
are shown net of interest expense of $20,000 and $41,000 in respective 1996
periods and $22,000 and $44,000 in the 1995 periods relating to payments on
capitalized leases for the Company's computer equipment.
In the first quarter of 1996, the Company sold certain assets to 3M, consisting
of patents and technology, for a purchase price of $3 million. The proceeds, net
of certain costs including patent costs, inventory write downs, new product
training costs, legal and other costs, resulted in a gain of approximately $2.5
million which is included in the six month period of 1996. See Note F.
- 6 -
<PAGE>
KNOGO NORTH AMERICA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The Company's effective tax rate is 25% for 1996 as compared to 15% in 1995. The
increase in the rate was primarily related to the tax on the gain on the sale of
assets in 1996 which will be taxed at the statutory federal tax rate and will
represent a significant proportion of the taxable income in the current year.
The lower rate in 1995 was primarily due to the normal provisions on the
earnings of the Puerto Rico manufacturing operations.
As a result of the foregoing, Knogo North America had net income of $42,000 and
$1,920,000 in the quarter and six months ended June 30, 1996 as compared to
$456,000 and $591,000 in the quarter and six months ended June 30, 1995.
FINANCIAL CONDITION AS OF JUNE 30, 1996
Knogo N.A.'s financial position is strong, with $4.1 million in cash and cash
equivalents, shareholders' equity of approximately $25 million and no bank debt
as of June 30, 1996.
The Company anticipates that current cash reserves, cash generated by
operations, including the Supply Agreement with Sensormatic, and the available
bank credit facility will be adequate to finance the Company's anticipated
working capital requirements as well as future capital expenditure requirements
for at least the next twelve months.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a) The annual meeting of shareholders was held on May 6, 1996.
b) Proxies were solicited by Knogo's management pursuant to
Regulation 14 under the Securities Exchange Act of 1934.
There was no solicitation in opposition to management's
nominees as listed in the proxy statement and all such
nominees were elected to the classes indicated in the proxy
statement pursuant to the vote of the shareholders.
c) The proposal to amend the Company's 1994 Stock Incentive Plan
to increase by 600,000 the aggregate number of shares of
Common Stock of the Company available for future options was
approved:
FOR AGAINST ABSTAIN
--- ------- -------
2,883,058 474,537 13,276
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K - There were no reports on Form 8-K filed for the three
months ended June 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KNOGO NORTH AMERICA INC.
Date: JULY 26, 1996 By: /S/ PETER J. MUNDY
------------- --------------------
Peter J. Mundy, Vice President Finance
(Principal Financial and Accounting Officer)
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