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 September 30, 1996 Commission File No. 1-13528
- - --------------------------------------------------------------------------------
KNOGO NORTH AMERICA INC.
- - --------------------------------------------------------------------------------
(Exact name of registration as specified in its charter)
New York 11-3231714
- - --------------------------------------------------------------------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
350 Wireless Boulevard, Hauppauge, New York 11788
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code 516-232-2100
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 10/31/96
----------------- -----------------------
Common Stock $.01 par value 5,772,632
<PAGE>
KNOGO NORTH AMERICA INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets --
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations --
Three Months Ended September 30, 1996 and 1995
and Nine Months Ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements -- September 30, 1996 6 - 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 9 - 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
Financial Data Schedule 11
- 2 -
<PAGE>
KNOGO NORTH AMERICA INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,482 $ 409
Accounts receivable, less allowance for doubtful
accounts of $770 and $931, respectively 7,243 9,599
Net investment in sales-type leases -
current portion 1,840 778
Inventories 6,798 5,954
Prepaid expenses and other current assets 504 496
--------- ---------
Total current assets 18,867 17,236
NET INVESTMENT IN SALES-TYPE LEASES -
non-current portion 1,395 1,753
SECURITY DEVICES ON LEASE, net 345 399
PROPERTY, PLANT AND EQUIPMENT, net 8,950 9,081
OTHER ASSETS 928 869
--------- ---------
$ 30,485 $ 29,338
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 999 $ 2,194
Accrued liabilities 2,834 3,070
Obligations under capital leases -
current portion 304 277
Deferred lease rentals 313 369
--------- ---------
Total current liabilities 4,450 5,910
OBLIGATIONS UNDER CAPITAL LEASES -
non-current portion 283 471
DEFERRED INCOME TAXES 435 288
MINORITY INTEREST IN SUBSIDIARY 459 ---
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 5,773 shares and 5,720,
respectively 58 57
Additional paid-in capital 21,078 20,881
Retained earnings 3,722 1,731
--------- ---------
24,858 22,669
--------- ---------
$ 30,485 $ 29,338
========= =========
</TABLE>
See notes to the condensed consolidated financial statements.
- 3 -
<PAGE>
KNOGO NORTH AMERICA INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 5,741 $ 7,422 $ 18,180 $ 22,389
COSTS AND EXPENSES:
Cost of sales 3,008 3,855 9,398 11,168
Customer service expenses 779 768 2,197 2,621
Selling, general and
administrative expenses 1,544 1,847 5,387 6,132
Research and development 338 377 1,069 1,177
Interest (income) expense (23) 5 (64) 26
--------- --------- --------- ---------
5,646 6,852 17,987 21,124
--------- --------- --------- ---------
OPERATING PROFIT 95 570 193 1,265
OTHER INCOME:
Gain on sale of assets --- --- 2,462 ---
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 95 570 2,655 1,265
INCOME TAXES 24 86 664 190
--------- --------- --------- ---------
NET INCOME $ 71 $ 484 $ 1,991 $ 1,075
========= ========== ========= ==========
NET INCOME PER SHARE $ .01 $ .08 $ .33 $ .18
========= =========== ========= ==========
WEIGHTED AVERAGE
COMMON SHARES 6,141 5,961 6,101 5,856
========= ========= ========= =========
</TABLE>
See notes to the condensed consolidated financial statements.
- 4 -
<PAGE>
KNOGO NORTH AMERICA INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,991 $ 1,075
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of security
devices and property, plant and equipment 847 830
Provision for bad debts 69 307
Decrease (increase) in accounts receivable 2,287 (3,514)
Increase in net investment in sales-type leases (704) (861)
(Increase) decrease in inventories (708) 1,508
(Decrease) increase in accounts payable (1,195) 632
Decrease in accrued liabilities (236) (41)
Other, net 292 404
--------- ---------
Net cash provided by
operating activities 2,643 340
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (438) (153)
(Increase) decrease in security devices on lease (85) 71
--------- ---------
Net cash used in investing activities (523) (82)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of obligations under capital leases (113) (182)
Exercise of stock options 66 ---
Other --- (10)
--------- ----------
Net cash used in financing activities (47) (192)
--------- ---------
INCREASE IN CASH 2,073 66
CASH, at beginning of period 409 1,258
--------- ---------
CASH, at end of period $ 2,482 $ 1,324
========= =========
</TABLE>
See notes to the condensed consolidated financial statements.
- 5 -
<PAGE>
KNOGO NORTH AMERICA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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:
September 30, 1996 December 31, 1995
------------------ -----------------
(in thousands)
Minimum lease payments receivable $ 3,700 $ 3,183
Allowance for uncollectible minimum
lease payments (185) (159)
Unearned income (310) (523)
Unguaranteed residual value 30 30
--------- ---------
Net investment 3,235 2,531
Less current portion 1,840 778
--------- ---------
Non-current portion $ 1,395 $ 1,753
========= =========
- 6 -
<PAGE>
KNOGO NORTH AMERICA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996
NOTE D -- Inventories
Inventories consist of the following:
September 30, 1996 December 31, 1995
------------------ -----------------
(in thousands)
Raw materials $ 2,727 $ 2,692
Work-in-process 2,374 1,986
Finished goods 1,697 1,276
--------- ---------
$ 6,798 $ 5,954
========= =========
Reserves for excess and obsolete inventory totaled $1,418,000 and $1,441,000 as
of September 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
$593,000 and $3,036,000 in the quarters ended September 30, 1996 and 1995 and
$3,990,000 and $9,062,000 in the nine month periods ended September 30, 1996 and
1995, respectively. During the quarter ended September 30, 1996 Sensormatic did
not meet its minimum purchase amounts and, in accordance with the agreement, was
charged with the profit factor on the shortfall. These additional amounts of
$341,000 and $642,000 were included in revenues in the third quarter and first
nine months of 1996. Included in accounts receivable as of September 30, 1996
and December 31, 1995 are amounts due from Sensormatic of $948,000 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.
NOTE G -- Subsequent Event
On October 10, 1996, the Company announced that it signed a merger agreement
with Video Sentry Corporation which will result in the Company becoming a wholly
owned subsidiary of a new publicly traded entity called Sentry Technology
Corporation (Sentry). Video Sentry Corporation, headquartered in Minneapolis,
Minnesota, is a pioneer in patented traveling closed circuit television (CCTV)
surveillance systems.
- 7 -
<PAGE>
KNOGO NORTH AMERICA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996
The merger between Knogo and Video Sentry will enable the resulting entity to
offer a more comprehensive line of security products by combining Knogo's
patented EAS technology and renowned customer service with Video Sentry's
patented innovative CCTV systems technology.
The merger agreement provides for Sentry, a newly-formed Delaware corporation,
to issue 1 share of common stock for each 1 share of Video Sentry common stock
outstanding at the effective time of the merger. Sentry will issue 1 share of
common stock and 1 share of Class A Preferred Stock for each 1.2022 shares of
Knogo common stock outstanding. As contemplated by the merger agreement, the
Sentry Class A Preferred Stock will have a face value of $5.00 per share and a
dividend rate of 5.0% (the first two years of which are paid-in-kind). The
preferred will be non voting and subject to a mandatory redemption four years
from the date of issuance and optional redemption by Sentry at any time after
one year from the date of issuance. The redemption price will be equal to $5.00
per preferred share (plus accrued and unpaid dividends as of the redemption
date) plus the amount, if any, by which the market price of Sentry's common
stock at the time of redemption exceeds $6.50 per share. The preferred stock is
non convertible, but the redemption price may, in certain circumstances, be paid
in common stock at Sentry's option. Following consummation of the merger, it is
anticipated that there will be approximately 9.6 million shares of Sentry common
stock (51% owned by former Video Sentry shareholders and 49% owned by former
Knogo shareholders) and 4.8 million shares of Sentry Class A Preferred Stock
outstanding, all owned by former Knogo shareholders.
The merger agreement also provides for Sentry's Board of Directors to consist
initially of two representatives each from Video Sentry and Knogo, as well as
one additional director to be mutually agreed upon between the parties. Mr.
Nicolette will be the CEO of Sentry. Andrew Benson, the founder and president of
Video Sentry, will be Vice President, CCTV Products. The Knogo and Video Sentry
boards have both unanimously approved the transaction.
It is expected that special shareholder meetings of both companies will be held
during the late fall. Consummation of the merger is subject to approval by the
holders of a majority of the outstanding common stock of each company. It is
intended that the merger qualify as a tax-free reorganization.
- 8 -
<PAGE>
KNOGO NORTH AMERICA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations:
Consolidated revenues were 23% and 19% lower in the third quarter and nine month
period ended September 30, 1996 than in the quarter and nine month period ended
September 30, 1995. Revenues from third party customers in the current periods
were $4,807,000 and $13,548,000 or 84% and 75% of total revenues as compared to
$4,386,000 and $13,327,000 or 59% and 60% of total revenues in the prior year
periods. The increase in the current quarter is attributable to higher sales in
the retail and library market segments. Revenues in the first nine months of
1996 include a significant contract 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.
If the shrinkage reductions are not met, the customer has the option to purchase
the equipment for $1.5 million which represents the minimum lease payments under
the fixed, non-cancellable lease term. However, all of the equipment costs have
been recorded in the cumulative nine month period resulting in a significantly
lower cumulative gross margin associated with that 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 nine
month period ended September 30, 1996 were $593,000 and $3,990,000 or 10% and
22% of total revenues as compared to $3,036,000 and $9,062,000 or 41% of total
revenues in the same periods of 1995. Under 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 third quarter and nine month
period ending September 30, 1996, Sensormatic did not meet its minimum order
amounts. Accordingly, in accordance with the Supply Agreement, the Company
recorded in revenues an amount representing the cumulative profits on the
shortfall or $341,000 and $642,000, respectively. Sales represented 91% and
service and rental income 9% of total revenues in 1996 as compared to 92% and 8%
in 1995.
Cost of sales were 52% of total revenues in the quarter and nine month period
ended September 30, 1996 as compared to 52% and 50% in the same periods in the
previous year. The cost of sales percentage is impacted by several factors
including the mix of products sold to its own third party customers and the
amount of sales to Sensormatic under the Supply Agreement. In both the third
quarter and nine month period of 1996, the Company sold a higher percentage of
CCVS equipment and 3M library products to its third party customers than in the
same periods in 1995. These products are not manufactured directly by Knogo and
carry lower margins than the traditional EAS products it does produce. In the
first nine months of 1996 cost of sales was also impacted by the higher initial
costs recorded on the large retail sale noted above. During 1996, there was a
substantially lower amount of sales to Sensormatic than in 1995. The gross
margin on these sales is fixed at 35% under the Supply Agreement. Margins on
future sales will be dependent upon product mix and sales volume under the
Supply Agreement.
Customer service expenses were slightly higher in the third quarter of 1996 as
compared to the third quarter of 1995. This is related to the Company's efforts
to recover equipment from the bankruptcy of a significant customer as well as
the costs of hiring temporary employees during the finalization of the
installation of the major retail contract shipped in the second quarter and
mentioned above. During the first nine months of 1996 as compared to 1995, total
costs were lower as a result of permanent staff reductions due to 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 third
quarter and first nine months of 1996 as compared to 1995 is primarily a result
of ongoing cost control measures, lower sales promotional expenses and lower
required bad debt provisions.
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.
- 9 -
<PAGE>
KNOGO NORTH AMERICA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The Company's interest income was $43,000 and $125,000 in the quarter and nine
month period ended September 30, 1996 as compared to $20,000 and $43,000 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 $61,000 in respective 1996
periods and $25,000 and $69,000 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 nine month period of 1996. See Note F.
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 $71,000 and
$1,991,000 in the quarter and nine months ended September 30, 1996 as compared
to $484,000 and $1,075,000 in the quarter and nine months ended September 30,
1995.
Financial Condition as of September 30, 1996
Knogo N.A.'s financial position is strong, with $2.5 million in cash and cash
equivalents, shareholders' equity of approximately $25 million and no bank debt
as of September 30, 1996.
The Company anticipates that current cash reserves, cash generated by operations
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 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K - There were no reports on Form 8-K filed
for the three months ended September 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: October 31, 1996 By: /S/ PETER J. MUNDY
----------------- --------------------------------------------
Peter J. Mundy, Vice President Finance
(Principal Financial and Accounting Officer)
- 10 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,482
<SECURITIES> 0
<RECEIVABLES> 8,013
<ALLOWANCES> 770
<INVENTORY> 6,798
<CURRENT-ASSETS> 18,867
<PP&E> 18,683
<DEPRECIATION> 9,733
<TOTAL-ASSETS> 30,485
<CURRENT-LIABILITIES> 4,450
<BONDS> 283
0
0
<COMMON> 58
<OTHER-SE> 24,800
<TOTAL-LIABILITY-AND-EQUITY> 30,485
<SALES> 15,922
<TOTAL-REVENUES> 18,180
<CGS> 9,398
<TOTAL-COSTS> 8,584
<OTHER-EXPENSES> (2,462)
<LOSS-PROVISION> 69
<INTEREST-EXPENSE> (64)
<INCOME-PRETAX> 2,655
<INCOME-TAX> 664
<INCOME-CONTINUING> 1,991
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,991
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
