1
CONFORMED
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 30, 2002
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 0-3035
COGNITRONICS CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-1953544
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Corporate Drive, Danbury, Connecticut 06810-4130
(Address of principal executive offices) (Zip Code)
(203) 830-3400
Registrant's telephone number, including area code
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 requirements
for at least 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 June 30, 2002.
Common Stock, par value $0.20 per share 5,415,793 shares
2
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
2002 2001
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,529 $ 7,731
Marketable securities 7,620 6,400
Accounts receivable, net 2,255 2,035
Inventories 4,979 5,682
Deferred income taxes 1,115 1,110
Other current assets including loans
to officers of $1,600 and $1,516 3,005 2,431
------- -------
TOTAL CURRENT ASSETS 24,503 25,389
PROPERTY, PLANT AND EQUIPMENT, NET 1,543 1,514
GOODWILL, NET 319 319
DEFERRED INCOME TAXES 762 812
OTHER ASSETS 466 539
------- -------
$27,593 $28,573
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,002 $ 871
Accrued compensation and benefits 1,121 1,109
Income taxes payable 383 290
Current maturities of debt 35 46
Other accrued expenses 408 319
------- -------
TOTAL CURRENT LIABILITIES 2,949 2,635
LONG-TERM DEBT 4 26
OTHER NON-CURRENT LIABILITIES 2,366 2,314
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 10,000,000 shares;
issued 5,863,229 shares 1,173 1,173
Additional paid-in capital 13,322 13,322
Retained earnings 11,984 13,413
Cumulative other comprehensive loss (259) (260)
Unearned compensation (397) (506)
------- -------
25,823 27,142
Less cost of 447,436 and 445,936
common shares in treasury (3,549) (3,544)
------- -------
TOTAL STOCKHOLDERS' EQUITY 22,274 23,598
$27,593 $28,573
======= =======
See Note to Condensed Consolidated Financial Statements.
3
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME(LOSS)(UNAUDITED)
(dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
NET SALES $3,356 $5,848 $6,498 $10,787
------ ------ ------ -------
COST AND EXPENSES:
Cost of products sold 1,889 2,981 3,829 5,604
Research and development 890 915 1,748 1,619
Selling, general and
administrative 1,509 1,923 3,153 3,658
Amortization of goodwill 83 166
Other (income), net (43) (141) (92) (310)
------ ------ ------ -------
4,245 5,761 8,638 10,737
------ ------ ------ -------
Income(loss) before income
taxes (889) 87 (2,140) 50
PROVISION(BENEFIT) FOR
INCOME TAXES (274) 29 (711) 15
------ ------ ------ -------
NET INCOME(LOSS) (615) 58 (1,429) 35
Currency translation
adjustment 18 ( 40) 1 (40)
------ ------ ------- -------
COMPREHENSIVE INCOME(LOSS) $ (597) $ 18 $(1,428) $ (5)
====== ====== ======= =======
NET INCOME(LOSS) PER SHARE:
Basic $(.11) $.01 $(.26) $.01
===== ==== ===== ====
Diluted $(.11) $.01 $(.26) $.01
===== ==== ===== ====
Weighted average number
of outstanding shares:
Basic 5,416,999 5,365,157 5,414,757 5,442,719
========= ========= ========= =========
Diluted 5,416,999 5,502,900 5,414,757 5,613,941
========= ========= ========= =========
See Note to Condensed Consolidated Financial Statements
4
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Six Months Ended
June 30,
-----------------
2002 2001
---- ----
NET CASH (USED) PROVIDED BY OPERATIONS $ (575) $4,124
------ ------
INVESTING ACTIVITIES
Purchases of marketable securities (7,620) (1,200)
Sales of marketable securities 6,400 2,400
Loans to employees (84) (383)
Additions to property, plant and
equipment, net (301) (247)
Purchase of software licenses (192)
------ ------
NET CASH (USED) PROVIDED BY INVESTING
ACTIVITIES (1,605) 378
------ ------
FINANCING ACTIVITIES
Repurchase of 1,500 and
206,650 shares for treasury (5) (1,461)
Principal payment of debt (33) (46)
Common stock issued pursuant to employee
stock plans, 900 shares 6
------ ------
NET CASH USED BY FINANCING ACTIVITIES (38) (1,501)
------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES 16 (5)
------ ------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (2,202) 2,996
CASH AND CASH EQUIVALENTS- BEGINNING
OF PERIOD 7,731 3,499
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $5,529 $6,495
====== ======
INCOME TAXES PAID $ 3 $ 536
====== ======
INTEREST PAID $ 15 $ 13
====== ======
See Note to Condensed Consolidated Financial Statements.
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NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2002
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-month and six-month periods ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2002. The balance sheet at December 31, 2001 has been
derived from the audited financial statements at that date. For further
information, refer to the consolidated financial statements and footnotes
thereto and the quarterly financial data included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
Inventories (in thousands):
June 30, December 31,
2002 2001
-------- ------------
Finished and in process $3,249 $3,455
Materials and purchased parts 1,730 2,227
------ ------
$4,979 $5,682
====== ======
Other Non-Current Liabilities (in thousands):
June 30 December 31,
2002 2001
------- ------------
Accrued supplemental pension plan $ 526 $ 511
Accrued deferred compensation 264 274
Deferred directors' fees 309 269
Accrued pension expense 646 658
Accrued post-retirement benefit 844 843
------ ------
2,554 2,555
Less current portion 223 241
------ ------
$2,366 $2,314
====== ======
Income Per Share
In computing basic earnings per share, the dilutive effect of stock options
and warrants are excluded, whereas for dilutive earnings per share they are
included.
Adoption of Financial Accounting Standard 142 ("FAS 142")
Effective January 1, 2002, the Company adopted FAS No. 142. Under FAS 142,
goodwill is no longer amortized, rather it is subject to a periodic
impairment test based on its fair value. The Company has performed the
transitional goodwill impairment test (as of January 1, 2002) on its
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applicable reporting units. As the estimated fair values of these reporting
units exceeded their respective net book values, including goodwill, no
impairment charge was recognized. If FAS 142 was effective as of January 1,
2001, then the pro forma results of operations for the periods ended June
30, 2001 would have been as follows (dollars in thousands):
As Reported Adjustment Pro Forma
----------- ---------- ---------
Three Months
Pretax Income $ 87 $83 $170
==== === ====
Net Income $ 29 $76 $105
==== === ====
Earnings per share:
Basic $.01 $.02
==== ====
Diluted $.01 $.02
==== ====
Six Months
Pretax Income $ 50 $166 $216
==== ==== ====
Net Income $ 35 $152 $187
==== ==== ====
Earnings per share:
Basic $.01 $.03
==== ====
Diluted $.01 $.03
==== ====
Operations by Industry Segments and Geographic Areas:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Sales
United States $2,033 $4,144 $ 3,590 $ 7,243
Europe 1,323 1,704 2,908 3,544
Intercompany eliminations
------ ------ ------- -------
$3,356 $5,848 $ 6,498 $10,787
====== ====== ======= =======
Operating Profit(Loss)
United States $ (537) $ 447 $(1,505) $ 530
Europe (58) (177) (44) (187)
Intercompany eliminations 3 3 6 6
------ ------ ------- -------
(592) 273 (1,543) 349
General Corporate Expense 340 327 689 609
Other (income), net (43) (141) (92) (310)
------ ------ ------- -------
Income(loss) before
income taxes $ (889) $ 87 $(2,140) $ 50
====== ====== ======= =======
Total Assets
United States $25,135 $27,327
Europe 2,477 3,229
Intercompany eliminations (19) (38)
------- -------
$27,593 $30,518
======= =======
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net loss was $615,000 and $1,429,000, respectively, for the three and
six-month periods ended June 30, 2002 versus net income of $58,000 and
$35,000, respectively, in the prior year periods.
Consolidated sales for the quarter ended June 30, 2002 decreased $2.5
million (43%) to $3.4 million primarily due to sales decreases in the
domestic operations of $2.1 million (51%) due to the continuing reduction in
infrastructure buildout, particularly by CLECs and reduction in capital
expenditures by major telecommunication providers as previously noted by the
Company. Sales of the Company's UK distributorship operations decreased $.4
million (22%) due to lower volume to its largest customer. Consolidated
sales for the six months ended June 30, 2002 decreased $4.3 million (40%)
primarily due to a sales decrease of $3.7 million (50%)in the domestic
operations and a decrease of $.6 million (18%) in its UK distributorship
operations due to the reasons stated above.
Gross margin percentage was 44% for the three months and 41% for the six
months ended June 30, 2002 and 49% and 48%, respectively, in the comparable
2001 periods. The three and six-month periods ended June 30, 2002 versus
the prior year periods were adversely impacted by lower sales and the
concomitant lower absorption of fixed costs offset, in part, by favorable
product mix in the US operations.
Research and development expenses increased $129,000 (8%) in the six-month
period ended June 30, 2002 versus the comparable period in 2001 primarily
due to higher consultancy expenses.
Other (income) decreased due to lower interest earned on cash balances and
marketable securities due to lower interest rates.
The Company's effective tax rate for the three and six-month periods ended
June 30, 2002 were 31% and 33%, respectively, versus 33% and 30%,
respectively, for the 2001 periods.
Subsequent to June 30, 2002, the Company instituted cost reduction programs.
In the quarter ending September 30, 2002 the Company will incur severance
expense of approximately $110,000, reduce consultancy expense and reduce the
work week for certain positions. These steps, once implemented, will reduce
quarterly expenses by approximately $250,000. In addition, the Company is
continuing to review all expenses to determine where further reductions can
be made.
Liquidity and Sources of Capital
Net cash used by operations for the six months ended June 30, 2002 was
$575,000 primarily due to loss from operations versus net cash provided of
$4.1 million in 2001. The cash used by investing activities in 2002
primarily reflects the net increase in marketable securities and purchase of
property, plant and equipment. In 2001, the net cash provided by investing
activities reflects a net decrease in marketable securities offset, in part,
by purchases of property plant and equipment and software licenses and
employee loans. The net cash used for financing activities in 2002
primarily represents scheduled paydown of debt and in 2001 primarily
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reflects the repurchase of shares for treasury.
Working capital and the ratio of current assets to current liabilities were
$21.6 million and 8.3:1 at June 30, 2002 compared to $22.8 million and 9.6:1
at December 31, 2001. The decrease in working capital in 2002 is mainly due
to the results of operations.
During the remainder of 2002, the Company may repurchase up to an additional
253,792 shares of its common stock and anticipates purchasing $.2 million of
equipment. Management believes that its cash and cash equivalents,
marketable securities and the cash flow from operations in 2002 will be
sufficient to meet these needs.
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-Q) may contain statements which
are not historical facts, so-called "forward-looking statements". These
forward-looking statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company's
actual future results may differ significantly from those stated in any
forward-looking statements. Forward-looking statements involve a number of
risks and uncertainties, including, but not limited to, variability of sales
volume quarter to quarter, product demand, pricing, market acceptance,
litigation, risk of dependence on significant customers and third party
suppliers, intellectual property rights, risks in product and technology
development and other risk factors detailed in this Quarterly Report on Form
10-Q and in the Company's other Securities and Exchange Commission filings.
Item 3. Market Risk
The Company does not use derivative financial instruments. The Company has
Marketable Securities, which are exposed to changes in interest rates. Due
to the term of these securities and/or their variable rate provisions, a
change in interest rates would not have a material impact on their value.
Exchange rate fluctuations will impact the results of operations and the net
assets of the Company's UK distributorship operations. At June 30, 2002,
the UK distributorship operations had net assets of $1.3 million. The
Company does not hedge this foreign currency net asset exposure.
PART II
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Registrant's Annual Meeting of Stockholders was
held on May 9, 2002.
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(c) The following matters were voted upon by stockholders:
Withheld Broker
For or Against Abstain Non-votes
1. Election of six
Directors -
John T. Connors 4,543,066 276,009 222,018
Edward S. Davis 4,537,542 281,533 222,018
Brian J. Kelley 4,507,116 311,959 222,018
Jack Meehan 4,541,761 277,314 222,018
William A. Merritt 4,538,992 280,083 222,018
William J. Stuart 4,544,416 274,659 222,018
2. To approve a proposal
to amend the Company's
1990 Stock Option Plan 4,346,626 456,223 17,301 222,018
3. To approve a proposal
to amend the Company's
Restricted Stock Plan 4,365,629 437,820 16,701 222,018
4. To approve the selection
of Ernst & Young LLP as
independent auditors 4,761,908 46,367 11,875 222,018
Item 6. Exhibits and reports on Form 8-K
(a) Index to Exhibits
Exhibit
10.1 1990 Stock Option Plan, as amended (attached as
Exhibit 10.1 to this Quarterly Report on Form 10-Q).
10.2 Cognitronics Corporation Restricted Stock Plan, as
amended (attached as Exhibit 10.2 to this Quarterly
Report on Form 10-Q).
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) No reports on Form 8-K were filed during the current quarter.
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SIGNATURE
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.
COGNITRONICS CORPORATION
Registrant
Date: August 14, 2002 By /s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer