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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 September 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 the 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 September 30, 2003.
Common Stock, par value $0.20 per share 5,568,611 shares
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2003 2002
(Unaudited)
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,155 $ 2,732
Marketable securities 5,712 8,387
Accounts receivable, net 2,822 2,038
Inventories 3,234 3,687
Taxes recoverable 2,028 2,028
Other current assets including loans
to officers of $1,921 and $1,906 1,991 1,982
------- -------
TOTAL CURRENT ASSETS 18,942 20,854
PROPERTY, PLANT AND EQUIPMENT, NET 1,082 1,315
GOODWILL, NET 319 319
OTHER ASSETS 195 324
------- -------
$20,538 $22,812
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,095 $ 952
Accrued compensation and benefits 1,332 1,252
Current maturities of debt 26
Other accrued expenses 1,191 835
------- -------
TOTAL CURRENT LIABILITIES 3,618 3,065
OTHER NON-CURRENT LIABILITIES 1,467 2,413
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 20,000,000
shares; issued 5,863,229 shares 1,173 1,173
Additional paid-in capital 12,346 12,374
Retained earnings 4,852 6,969
Cumulative other comprehensive income (244) (298)
Unearned compensation (337) (512)
------- -------
17,790 19,706
Less cost of 294,618 and 298,988
shares in treasury (2,337) (2,372)
------- -------
TOTAL STOCKHOLDERS' EQUITY 15,453 17,334
------- -------
$20,538 $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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
NET SALES $3,498 $2,378 $ 8,442 $ 8,876
------ ------ ------- -------
COST AND EXPENSES:
Cost of products sold 1,638 1,986 4,674 5,815
Research and development 675 849 1,994 2,597
Selling, general and
administrative 1,676 1,604 4,806 4,757
Amortization of goodwill
Other (income), net (40) (71) (126) (163)
Gain on termination of
post-retirement
benefit plan (834)
------ ------ ------ ------
3,949 4,368 10,514 13,006
------ ------ ------ ------
Loss before income
taxes (451) (1,990) (2,072) (4,130)
PROVISION(BENEFIT) FOR
INCOME TAXES 15 (739) 45 (1,450)
------ ------ ------ ------
NET LOSS (466) (1,251) (2,117) (2,680)
Currency translation
adjustment 8 52 54 53
------- -------- ------- -------
COMPREHENSIVE LOSS $( 458) $ (1,199) $(2,063) $(2,627)
======= ======== ======= =======
NET INCOME LOSS PER SHARE:
Basic $(.08) $(.23) $(.37) $(.49)
Diluted $(.08) $(.23) $(.37) $(.49)
Weighted average number
of outstanding shares:
Basic 5,764,423 5,441,617 5,705,929 5,424,624
Diluted 5,764,423 5,441,617 5,705,929 5,424,624
See Note to Condensed Consolidated Financial Statements.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Nine Months Ended
September 30,
-------------------
2003 2002
---- ----
NET CASH USED BY OPERATIONS $(2,103) $(1,104)
------- -------
INVESTING ACTIVITIES
Purchases of marketable securities (2,328) (15,245)
Sales of marketable securities 4,919 12,087
Loans to employees (341)
Additions to property, plant and
equipment, net (66) (336)
------- -------
NET CASH PROVIDED(USED) BY
INVESTING ACTIVITIES 2,525 (3,835)
------- -------
FINANCING ACTIVITIES
Repurchase of 1,500 shares for treasury (5)
Principal payment of debt (26) (29)
Shares issued pursuant to stock plans,
4,370 and 3,448 shares 18 5
------- -------
NET CASH PROVIDED(USED) BY
FINANCING ACTIVITIES (8) (29)
------- -------
EFFECT OF EXCHANGE RATE DIFFERENCES 9 16
------- -------
INCREASE(DECREASE) IN CASH AND CASH
EQUIVALENTS 423 (4,952)
CASH AND CASH EQUIVALENTS- BEGINNING
OF PERIOD 2,732 7,731
------- -------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,155 $ 2,779
======= =======
INCOME TAXES PAID $ 63 $ 3
======= =======
INTEREST EXPENSE PAID $ 5 $ 17
======= =======
See Note to Condensed Consolidated Financial Statements.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2003
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America 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 of America
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 nine-month periods ended September 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):
September 30, December 31,
2003 2002
------------- ------------
Finished and in process $2,278 $2,273
Materials and purchased parts 956 1,414
------ ------
$3,234 $3,687
====== ======
Other Non-Current Liabilities (in thousands):
September 30, December 31,
2003 2002
------------- -----------
Accrued supplemental pension plan $ 433 $ 466
Accrued deferred compensation 238 254
Deferred directors' fees 379 332
Accrued pension expense 677 777
Accrued post-retirement benefit 22 856
------ ------
1,749 2,685
Less current portion 282 272
------ ------
$1,467 $2,413
====== ======
In June 2003, the Board of Directors voted to terminate the Company's
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.
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.
The Company applies the disclosure only provisions of Financial Accounting
Standards Board Statement ("SFAS") No. 123, "Accounting for Stock-based
Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" for employee stock option awards. Had
compensation cost for the Company's stock option plan been determined in
accordance with the fair value-based method prescribed under SFAS 123, the
Company's net loss and basic and diluted net loss per share would have
approximated the pro forma amounts indicated below (dollars in thousands
except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss as reported $(466) $(1,251) $(2,117) $(2,680)
Add: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects. (67) (71) (256) (210)
----- ------- ------- -------
Pro forma $(533) $(1,322) $(2,373) $(2,890)
===== ======= ======= =======
Net loss per share
As reported Basic $(.08) $(.23) $(.37) $(.49)
Diluted $(.08) $(.23) $(.37) $(.49)
Pro forma Basic $(.09) $(.24) $(.42) $(.53)
Diluted $(.09) $(.24) $(.42) $(.53)
The fair value of stock options used to compute pro forma net loss and net
loss per share disclosures was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0% for 2003 and 2002; expected volatility
factor of .76% for 2003 and .62% for 2002; average risk-free interest rate
of 3.38% for 2003 and 2.28% for 2002; and an expected option holding period
of 7.5 years for 2003 and 2002.
Operations by Industry Segments and Geographic Areas:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
Net Sales ---- ---- ---- ----
United States $ 1,979 $ 959 $ 4,298 $ 4,549
Europe 1,519 1,419 4,144 4,327
Intercompany eliminations
------- ------ ------- -------
$ 3,498 $2,378 $ 8,442 $ 8,876
Operating Income\(Loss)
United States $ 35 $(1,687) $(1,738) $(3,192)
Europe (146) (40) (236) (84)
Intercompany eliminations 2 8
------- ------- ------- -------
(111) (1,725) (1,974) (3,268)
General Corporate Expense 380 336 1,058 1,025
Other (income), net (40) (71) (126) (163)
Gain on termination of post-
retirement benefit plan (834)
------- ------- ------- -------
Loss before income taxes $ (451) $(1,990) $(2,072) $(4,130)
======= ======= ======= =======
Total Assets
United States $17,927 $24,052
Europe 2,622 2,682
Intercompany eliminations (11) (17)
------- -------
$20,538 $26,717
======= =======
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The net loss was $466,000 and $2,117,000, respectively, for the three and
nine-month periods ended September 30, 2003 versus a net loss of $1,251,000
and $2,680,000, respectively, in the prior year periods. Included in the
nine-month period ended September 30, 2003 was a non-cash gain on
termination of the post-retirement benefit plan of $834,000.
Consolidated sales for the quarter ended September 30, 2003 increased $1.1
million (47%) to $3.5 million due to sales increases in both the domestic
and UK distributorship operations. The sales in the domestic operations
increased $1 million (106%) to $2.0 million due to an increase of $1.2
million in sales to a large telecommunication service provider, offset, in
part, by decreased sales to equipment manufacturers. Sales of the Company's
UK distributorship operations increased $.1 million (7%) due to a favorable
exchange rate. Consolidated sales for the nine months ended September 30,
2003 decreased $.4 million (5%) primarily due to sales decreases in both the
domestic and UK distributorship operations. The domestic operations' sales
decreased $.2 million (6%) in spite of an increase in sales of $1.2 million
to a large telecommunication service provider due to the continuing soft
demand in the Company's announcer business. In the Company's UK
distributorship operations, sales decreased $.2 million (4%) in spite of an
8% favorable exchange rate fluctuation, due to lower volume. In the three
and nine-month periods ended September 30, 2003, the Company's domestic
operations had increased sales to a large telecommunication service
provider. While management believes that this increased volume of sales
will continue in the future, this favorable variance may not occur in the
fourth quarter.
Gross margin percentage was 53% for the three months and 45% for the nine
months ended September 30, 2003 and 16% and 34%, respectively, in the
comparable 2002 periods. The improvement in gross margin percentage for the
quarter ended September 30, 2003 versus the prior year quarter was primarily
due to the higher sales volume in the domestic operations with the
concomitant greater absorption of fixed cost. The improvement for the nine
months ended September 30, 2003 versus the prior year period is due to
favorable product mix and lower fixed costs in the domestic operations and
favorable impact of exchange rate on the UK distributorship operations.
Research and development expenses decreased $174,000 (20%) and $603,000
(23%), respectively, in the three-month and nine-month periods ended
September 30, 2003 versus the comparable periods in 2002 primarily due to
lower consultancy expenses and personnel costs.
Selling, general and administrative expenses increased $72,000 (4%) and
$49,000 (1%), respectively, for the three and nine-month periods ended
September 30, 2003 from the comparable prior year periods. Included in both
current year periods are $220,000 for the estimated settlement of a rent
dispute in the UK distributorship operations, offset by the release of a
reserve of $86,000. With regard to the UK rent dispute, the Company has
a potential claim against a third party for which no benefit has been
recorded.
In June 2003, the Board of Directors voted to terminate the Company's
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 nine months ended September 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.
Liquidity and Sources of Capital
Net cash used by operations for the nine months ended September 30, 2003
increased to $2,103,000 primarily due to an increase in accounts receivable
and lower reduction of inventory. 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
$15.3 million and 5.2:1 at September 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 September 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 6. Exhibits and reports on Form 8-K
(a) Index to Exhibits
Exhibit
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 August 15, 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 second 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: November 14, 2003 By /s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer