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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, 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 by check mark whether registrant is an
accelerated filer (as defined by 12b-2 of the Exchange Act).
Yes No x
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of June 30, 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)
June 30, December 31,
2003 2002
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,164 $ 2,732
Marketable securities 7,189 8,387
Accounts receivable, net 2,531 2,038
Inventories 3,550 3,687
Taxes recoverable 2,028 2,028
Other current assets including loans
to officers of $1,917 and $1,906 2,025 1,982
------- -------
TOTAL CURRENT ASSETS 18,487 20,854
PROPERTY, PLANT AND EQUIPMENT, NET 1,152 1,315
GOODWILL, NET 319 319
OTHER ASSETS 242 324
------- -------
$20,200 $22,812
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 467 $ 952
Accrued compensation and benefits 1,272 1,252
Income taxes payable 407 441
Current maturities of debt 26
Other accrued expenses 683 394
------- -------
TOTAL CURRENT LIABILITIES 2,829 3,065
OTHER NON-CURRENT LIABILITIES 1,525 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 5,318 6,969
Cumulative other comprehensive loss (252) (298)
Unearned compensation (395) (512)
------- -------
18,218 19,706
Less cost of 298,988 common
shares in treasury (2,372) (2,372)
------- -------
TOTAL STOCKHOLDERS' EQUITY 15,846 17,334
------- -------
$20,200 $22,812
======= =======
See Note to Condensed Consolidated Financial Statements.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS (UNAUDITED)
(dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
NET SALES $2,448 $3,356 $4,944 $6,498
------ ------ ------ ------
COST AND EXPENSES:
Cost of products sold 1,458 1,889 3,036 3,829
Research and development 646 890 1,319 1,748
Selling, general and
administrative 1,521 1,509 3,130 3,153
Other (income), net (47) (43) (86) (92)
Gain on termination of
post-retirement
benefit plan (834) (834)
------ ------ ------ ------
2,744 4,245 6,565 8,638
------ ------ ------ ------
Loss before income taxes (296) (889) (1,621) (2,140)
PROVISION(BENEFIT) FOR
INCOME TAXES 30 (274) 30 (711)
------ ------ ------ ------
NET LOSS (326) (615) (1,651) (1,429)
Currency translation
adjustment 29 18 46 1
------- ------ ------- --------
COMPREHENSIVE LOSS $ (297) $ (597) $(1,605) $ (1,428)
======= ====== ======= ========
NET LOSS PER SHARE:
Basic $(.06) $(.11) $(.29) $(.26)
===== ===== ===== =====
Diluted $(.06) $(.11) $(.29) $(.26)
===== ===== ===== =====
Weighted average number
of outstanding shares:
Basic 5,697,052 5,416,999 5,676,357 5,414,757
========= ========= ========= =========
Diluted 5,697,052 5,416,999 5,676,357 5,414,757
========= ========= ========= =========
See Note to Condensed Consolidated Financial Statements.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Six Months Ended
June 30,
-----------------
2003 2002
---- ----
NET CASH USED BY OPERATIONS $(2,694) $ (575)
------- ------
INVESTING ACTIVITIES
Purchases of marketable securities (1,328) (7,620)
Sales of marketable securities 2,506 6,400
Loans to employees (84)
Additions to property, plant and
equipment, net (35) (301)
------- ------
NET CASH PROVIDED(USED) BY INVESTING
ACTIVITIES 1,143 (1,605)
------- ------
FINANCING ACTIVITIES
Repurchase of 1,500 shares for treasury (5)
Principal payment of debt (26) (33)
------- ------
NET CASH USED BY FINANCING ACTIVITIES (26) (38)
------- ------
EFFECT OF EXCHANGE RATE DIFFERENCES 9 16
------- ------
DECREASE IN CASH AND CASH EQUIVALENTS (1,568) (2,202)
CASH AND CASH EQUIVALENTS- BEGINNING
OF PERIOD 2,732 7,731
------- ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $1,164 $5,529
======= ======
INCOME TAXES PAID $ 63 $ 3
====== ======
INTEREST PAID $ 5 $ 15
====== ======
See Note to Condensed Consolidated Financial Statements.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 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 and six-month periods ended
June 30, 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):
June 30, December 31,
2003 2002
---- ----
Finished and in process $2,424 $2,273
Materials and purchased parts 1,126 1,414
------ ------
$3,550 $3,687
====== ======
Other Non-Current Liabilities (in thousands):
June 30, December 31,
2003 2002
---- ----
Accrued supplemental pension plan $ 444 $ 466
Accrued deferred compensation 244 254
Deferred directors' fees 371 332
Accrued pension expense 727 777
Accrued post-retirement benefit 22 856
------ ------
1,808 2,685
Less current portion 283 272
------ ------
$1,525 $2,413
====== ======
In June 2003, the Board of Directors voted to terminate the post-retirement
health benefits plan (the "Plan") and notified the effected retirees.
Termination of the Plan resulted in a non-cash gain of $834,000 which was
recorded in the quarter ended June 30, 2003.
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 loss and per share amounts would be as
follows (in thousands except per share information):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2002 2002
---- ---- ---- ----
Net loss
As reported $(326) $(615) $(1,651) $(1,429)
===== ===== ======= =======
Pro forma $(397) $(725) $(1,832) $(1,567)
===== ===== ======= =======
Net loss per share
As reported Basic $(.06) $(.11) $(.29) $(.26)
===== ===== ===== =====
Diluted $(.06) $(.11) $(.29) $(.26)
===== ===== ===== =====
Pro forma Basic $(.07) $(.13) $(.32) $(.29)
===== ===== ===== =====
Diluted $(.07) $(.13) $(.32) $(.29)
===== ===== ===== =====
Operations by Industry Segments and Geographic Areas:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net Sales
United States $1,639 $2,033 $ 2,319 $ 3,590
Europe 809 1,323 2,625 2,908
Intercompany eliminations
------ ------ ------- -------
$2,448 $3,356 $ 4,944 $ 6,498
====== ====== ======= =======
Operating Loss
United States $ (563) $ (537) $(1,773) $(1,505)
Europe (279) (58) (90) (44)
Intercompany eliminations 3 6
------ ------ ------- -------
(842) (592) (1,863) (1,543)
General Corporate Expense 335 340 678 689
Other (income), net (47) (43) (86) (92)
Gain on termination of post-
retirement benefit plan (834) (834)
------ ------ ------- -------
Loss before income taxes $ (296) $ (889) $(1,621) $(2,140)
====== ====== ======= =======
Total Assets
United States $18,163 $25,135
Europe 2,048 2,477
Intercompany eliminations (11) (19)
------- -------
$20,200 $27,593
======= =======
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net loss was $326,000 and $1,651,000, respectively, for the three and
six-month periods ended June 30, 2003 versus net loss of $615,000 and
$1,429,000, respectively, in the prior year periods. Included in the
three-month and six-month periods ended June 30, 2003 was a non-cash
gain on termination of a post-retirement benefit plan of $834,000.
Consolidated sales for the quarter ended June 30, 2003 decreased $.9 million
(27%) to $2.4 million due to sales decreases in both the domestic and the UK
distributorship operations. The sales in the domestic operations decreased
$.4 million (19%) to $1.6 million due to the continuing reduction in capital
expenditures by major telecommunication providers as previously noted by the
Company. Domestic operations' 2003 sales included $1.1 million to a large
telecommunication service provider. Sales of the Company's UK
distributorship operations decreased $.5 million (39%), in spite of an 8%
favorable exchange rate fluctuation, due to lower volume. Consolidated
sales for the six months ended June 30, 2003 decreased $1.6 million (24%)
primarily due to a sales decrease of $1.3 million (35%)in the domestic
operations and a decrease of $.3 million (10%) in its UK distributorship
operations due to the reasons stated above.
Gross margin percentage was 40% for the three months and 39% for the six
months ended June 30, 2003 and 44% and 41%, respectively, in the comparable
2002 periods. The three and six-month periods ended June 30, 2003 versus
the prior year periods were adversely impacted by lower sales and the
concomitant lower absorption of fixed costs and an increase for obsolete
inventory expense of $200,000 offset, in part, by favorable product mix and
cost reductions in the US operations.
Research and development expenses decreased $244,000 (27%) and $429,000
(25%), respectively, in the three-month and six-month periods ended June 30,
2003 versus the comparable periods in 2002 primarily due to lower
consultancy expenses and personnel costs.
In June 2003, the Board of Directors voted to terminate the post-retirement
health benefits plan (the "Plan") and notified the effected retirees.
Termination of the Plan resulted in a non-cash gain of $834,000 which was
recorded in the quarter ended June 30, 2003.
No tax benefits were recorded for losses incurred in 2003 since the Company
cannot determine that the realization of net deferred tax assets is more
likely than not.
In response to the continuing adverse industry-wide trend, the Company
implemented cost and expense reductions in its domestic operations,
including an 11% reduction in workforce and an across-the-board ten percent
salary reductions for most employees, in the second quarter of 2003. As a
result, future expenses will be reduced by approximately $800,000 annually
beginning in the second half of 2003.
Liquidity and Sources of Capital
Net cash used by operations for the six months ended June 30, 2003 increased
to $2,694,000 primarily due to higher losses from operations. The cash
provided by investing activities in 2003 primarily reflects the net decrease
in marketable securities.
Working capital and the ratio of current assets to current liabilities were
$15.7 million and 6.5:1 at June 30, 2003 compared to $17.8 million and 6.8:1
at December 31, 2002. The decrease in working capital in 2003 is mainly due
to the results of operations.
During the remainder of 2003, 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 and
marketable securities 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, 2003,
the UK distributorship operations had net assets of $1.3 million. The
Company does not hedge this foreign currency net asset exposure.
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 4. Submission of Matters to a Vote of Security Holders
(a) The Registrant's Annual Meeting of Stockholders was
held on May 8, 2003.
(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 4,676,926 250,891 180,678
Edward S. Davis 4,669,555 258,262 180,678
Brian J. Kelley 4,663,586 264,231 180,678
Jack Meehan 4,676,931 250,886 180,678
William A. Merritt 4,678,236 249,581 180,678
William J. Stuart 4,694,036 233,781 180,678
2. To approve a proposal
to amend the Company's
1990 Stock Option Plan 4,736,438 180,158 11,221 180,678
3. To approve a proposal
to amend the Company's
Restricted Stock Plan 4,543,066 371,448 13,283 180,678
4. To approve a proposal
to amend the Company's
Directors' Stock Option
Plan 4,729,482 186,236 12,099 180,678
5. To approve the selection
of Ernst & Young LLP as
independent auditors 4,882,225 35,296 10,296 180,678
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).
10.3 The Directors' Stock Option Plan, as amended
(attached as Exhibit 10.3 to this Quarterly Report
on Form 10-Q).
31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) One report on Form 8-K was filed during the current quarter.
On May 9, 2003, the Company filed a Current Report on Form 8-K pursuant
to Item 9 (Regulation FD Disclosures) to furnish a press release reporting
results of our first quarter of 2003.
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, 2003 By /s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer