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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 March 31, 2003
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 March 31, 2003.
Common Stock, par value $0.20 per share -- 5,564,241 shares
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,198 $ 2,732
Marketable securities 7,707 8,387
Accounts receivable, net 2,080 2,038
Inventories 3,899 3,687
Tax recoverable 2,028 2,028
Other current assets including loans
to officers of $1,910 and $1,906 2,073 1,982
------- -------
TOTAL CURRENT ASSETS 19,985 20,854
PROPERTY, PLANT AND EQUIPMENT, NET 1,233 1,315
GOODWILL, NET 319 319
OTHER ASSETS 285 324
------- -------
$21,822 $22,812
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,115 $ 952
Accrued compensation and benefits 1,274 1,252
Income taxes payable 440 441
Current maturities of debt 3 26
Other accrued expenses 540 394
------- -------
TOTAL CURRENT LIABILITIES 3,372 3,065
NON-CURRENT LIABILITIES 2,365 2,413
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 12,374 12,374
Retained earnings 5,644 6,969
Cumulative other comprehensive loss (281) (298)
Unearned compensation (453) (512)
------- -------
18,457 19,706
Less cost of 298,988
common shares in treasury (2,372) (2,372)
------- -------
TOTAL STOCKHOLDERS' EQUITY 16,085 17,334
------- -------
$21,822 $22,812
======= =======
See Note to Condensed Consolidated Financial Statements.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME(LOSS) (UNAUDITED)
(dollars in thousands except per share amounts)
Three Months Ended
March 31,
------------------
2003 2002
---- ----
SALES $ 2,496 $ 3,142
------- -------
COST AND EXPENSES:
Cost of products sold 1,578 1,939
Research and development 673 858
Selling, general and
administrative 1,609 1,644
Other (income)expense, net (39) (49)
------- -------
3,821 4,392
------- -------
Loss before income taxes (1,325) (1,250)
BENEFIT FOR INCOME TAXES (437)
------- -------
NET LOSS (1,325) (813)
Currency translation adjustment 17 (17)
------- ------
COMPREHENSIVE LOSS $(1,308) $ (830)
======= ======
NET LOSS PER SHARE:
Basic $(.23) $(.15)
===== =====
Diluted $(.23) $(.15)
===== =====
Weighted average number of
shares outstanding:
Basic 5,654,494 5,411,890
========= =========
Diluted 5,654,494 5,411,890
========= =========
See Note to Condensed Consolidated Financial Statements.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Three Months Ended
March 31,
--------------------
2003 2002
---- ----
NET CASH PROVIDED(USED) BY
OPERATING ACTIVITIES $(1,129) $ 125
------- ------
INVESTING ACTIVITIES
Purchase of marketable securities (800) (1,600)
Sales of marketable securities 1,433 2,100
Loans to employees (34)
Additions to property, plant and
equipment, net (19) (253)
------ ------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 614 213
------ ------
FINANCING ACTIVITIES
Repurchase of 1,500 shares
for treasury (5)
Principal payments on debt (23) (12)
------ ------
NET CASH USED BY FINANCING ACTIVITIES (23) (17)
------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES 4 (2)
------ ------
INCREASE(DECREASE)IN CASH AND
CASH EQUIVALENTS (534) 319
CASH AND CASH EQUIVALENTS - BEGINNING
OF PERIOD 2,732 7,731
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $2,198 $8,050
====== ======
INCOME TAXES PAID $ 0 $ 3
====== ======
INTEREST PAID $ 4 $ 10
====== ======
See Note to Condensed Consolidated Financial Statements.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2003
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States 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 accounting
principles generally accepted in the United States 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 period ended March 31,
2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003. The balance sheet at December 31, 2002
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, 2002.
Inventories (in thousands):
March 31, December 31,
2003 2002
---- ----
Finished and in process $2,682 $2,273
Materials and purchased parts 1,217 1,414
------ ------
$3,899 $3,687
====== ======
Non-Current Liabilities (in thousands):
March 31, December 31,
2003 2002
---- ----
Accrued supplemental pension plan $ 455 $ 466
Accrued deferred compensation 250 254
Deferred directors' fees 351 332
Accrued pension expense 741 777
Accrued post-retirement benefit 856 856
------ ------
2,653 2,685
Less current portion 288 272
------ ------
$2,365 $2,413
====== ======
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.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value at the date of grant. The
Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and therefore recognizes no compensation expense for stock
options granted.
If the Company had elected to recognize compensation expense for the 1990
Stock Option Plan and the 1967 Stock Purchase Plan based on the fair value
at the grant date , consistent with the method presented by Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation", the pro forma net income (loss) and net income (loss) per
share would be as follows (in thousands except per share information):
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Net loss As reported $(1,325) $(813)
======= =====
Pro forma $(1,435) $(923)
======= =====
Net loss per share As reported Basic $(.23) $(.15)
===== =====
Diluted $(.23) $(.15)
===== =====
Pro forma Basic $(.25) $(.17)
===== =====
Diluted $(.25) $(.17)
===== =====
Operations by Industry Segments and Geographic Areas:
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Net Sales
United States $ 680 $ 1,557
Europe 1,816 1,585
------- -------
$ 2,496 $ 3,142
======= =======
Operating Profit(loss)
United States $(1,210) $ (967)
Europe 189 14
Intercompany eliminations 3
------- -------
(1,021) (950)
General corporate expense 343 349
Other (income)expense (39) (49)
------- -------
Income(loss) before income taxes $(1,325) $(1,250)
======= =======
Total Assets
United States $18,907 $25,780
Europe 2,922 2,703
Intercompany eliminations (7) (22)
------- -------
$21,822 $28,461
======= =======
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the quarter ended March 31, 2003, the Company reported a loss of $1.3
million ($.23 per diluted share), versus a loss of $.8 million ($.15 per
diluted share) in the comparable 2002 quarter.
Consolidated sales for the first quarter of 2003 decreased $.6 million, or
21%, from the prior year period. Sales of domestic operations decreased $.9
million, or 56%, due to the continuing reduction in capital expenditures by
the major telecommunications service providers as previously noted by the
Company. This reduction was offset, in part, by a $.2 million (15%)
increase from the prior year in UK distributorship operation sales. This
increase is primarily attributable to foreign exchange rates.
The gross margin percentage was approximately 37% in the 2003 quarter versus
38% in the prior year. This decrease is attributable to decrease in the
sales volume of the domestic operations, offset, in part, by improved
product mix in the UK distributorship operations.
Research and development expense decreased $.2 million (22%) from the same
period in 2002 primarily due to lower personnel costs attributable to lower
headcount expenses and lower contract engineering services expenses.
Selling, general and administrative expense decreased $35,000, or 2%, due to
lower expenses at the Company's domestic operations due to lower personnel
and related expenses, offset, in part, by higher expenses at the UK
distributorship operations. The increase in the UK distributorship expenses
is primarily due to exchange rates.
Other (income) expense decreased due to lower interest earned on cash
balances and marketable securities, reflecting lower interest rates and
balances.
No tax benefit was provided for the losses incurred in 2003 since the
Company cannot determine that the realization of net deferred tax asset is
more likely than not.
Liquidity and Sources of Capital
Net cash used from operations for the three months ended March 31, 2003 was
$1.1 million versus cash provided of $.1 million in 2002; this decrease in
cash flow is attributable to the higher loss. The increase in cash provided
by investing activities of $.6 million in 2003 versus $.2 million in 2002
reflects higher net sales of marketable securities and lower capital
expenditures in 2003.
Working capital and the ratio of current assets to current liabilities was
$16.6 million and 5.9:1 at March 31, 2003 compared to $17.8 million and
6.8:1 at December 31, 2002.
During the remainder of 2003, the Company may repurchase up to an additional
253,792 shares of its common stock and anticipates purchasing $.3 million of
equipment. Management believes that its cash and cash equivalents and
marketable securities will be sufficient to meet these needs in 2003.
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 from 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 March 31, 2003,
the UK distributorship operations had net assets of $1.5 million.
Item 4. Controls and Procedures
Cognitronics Corporation's management, including the Chief Executive Officer
and Chief Financial Officer, have conducted an evaluation of the
effectiveness of disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the disclosure controls and
procedures are effective in ensuring that all material information required
to be filed in this quarterly report has been made known to them in a timely
fashion. There have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
Part II
Item 6. Exhibits and Reports on Form 8-K
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.
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: May 14, 2003 By /s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer
CERTIFICATION
I, Brian J. Kelley certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cognitronics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Brian J. Kelley
Brian J. Kelley
Chief Executive Officer
CERTIFICATION
I, Garrett Sullivan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cognitronics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Garrett Sullivan
Garrett Sullivan
Chief Financial Officer