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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 quarterly period ended March 31, 2004
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 1-8496
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 the past 90 days. Yes x No
Indicate by check mark whether the registrant is an
accelerated filer (as defined in 12b-2 of the Exchange Act).
Yes No x
The Registrant has 5,692,717 shares of Common Stock, $.20
par value per share outstanding at March 31, 2004.
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2004 2003
--------- ------------
(Unaudited) (Note)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,296 $ 2,877
Marketable securities 4,628 5,956
Accounts receivable, net 1,748 1,183
Inventories 3,024 2,987
Tax recoverable 2,028
Other current assets including loans
to officers of $1,940 and $1,931 2,668 2,312
------- -------
TOTAL CURRENT ASSETS 16,364 17,343
PROPERTY, PLANT AND EQUIPMENT, NET 1,053 1,087
GOODWILL 319 319
OTHER ASSETS 125 149
------- -------
$17,861 $18,898
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,283 $ 778
Accrued compensation and benefits 1,385 1,297
Other accrued expenses 778 1,125
------- -------
TOTAL CURRENT LIABILITIES 3,446 3,200
NON-CURRENT LIABILITIES 1,310 1,474
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 11,678 11,750
Retained earnings 2,068 3,419
Accumulative other comprehensive loss (10) (98)
Unearned compensation (451) (509)
------- -------
14,458 15,735
Less cost of 170,512 and 190,431
common shares in treasury 1,353 1,511
------- -------
TOTAL STOCKHOLDERS' EQUITY 13,105 14,224
------- -------
$17,861 $18,898
======= =======
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,
2004 2003
---- ----
SALES $ 2,261 $ 2,496
COST AND EXPENSES:
Cost of products sold 1,513 1,578
Research and development 595 673
Selling, general and
administrative 1,520 1,609
Other (income)expense, net (31) (39)
------ ------
3,597 3,821
------ ------
Loss before income taxes (1,336) (1,325)
PROVISION FOR INCOME TAXES 15
------ ------
NET LOSS (1,351) (1,325)
Currency translation adjustment 88 17
------- -------
COMPREHENSIVE LOSS $(1,263) $(1,308)
======= =======
NET LOSS PER SHARE:
Basic $(.24) $(.24)
===== =====
Diluted $(.24) $(.24)
===== =====
Weighted average number of
shares outstanding:
Basic 5,707,198 5,509,494
========= =========
Diluted 5,707,198 5,509,494
========= =========
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,
2004 2003
---- ----
NET CASH PROVIDED(USED) BY
OPERATING ACTIVITIES $ 144 $(1,129)
------ -------
INVESTING ACTIVITIES
Purchase of marketable securities (1,529) (800)
Sales of marketable securities 2,810 1,433
Additions to property, plant and
equipment, net (50) (19)
------ -------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 1,231 614
------ -------
FINANCING ACTIVITIES
Shares issued pursuant to
employee stock plans 2
Principal payments on debt (23)
------ -------
NET CASH PROVIDED(USED) BY
FINANCING ACTIVITIES 2 (23)
------ -------
EFFECT OF EXCHANGE RATE DIFFERENCES 42 4
------ -------
INCREASE(DECREASE)IN CASH AND
CASH EQUIVALENTS 1,419 (534)
CASH AND CASH EQUIVALENTS - BEGINNING
OF PERIOD 2,877 2,732
------ -------
CASH AND CASH EQUIVALENTS - END OF PERIOD $4,296 $ 2,198
====== =======
INCOME TAXES PAID $ 81 $ 0
====== =======
INTEREST PAID $ 1 $ 4
====== =======
See Note to Condensed Consolidated Financial Statements.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2004
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 Rule 10-01 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
period ended March 31, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004. The balance
sheet at December 31, 2003 has been derived from the audited consolidated
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, 2003.
Inventories (in thousands):
March 31, December 31,
2004 2003
---- ----
Finished and in process $2,158 $2,172
Materials and purchased parts 866 815
------ ------
$3,024 $2,987
====== ======
Non-Current Liabilities (in thousands):
March 31, December 31,
2004 2003
---- ----
Accrued supplemental pension plan $ 408 $ 419
Accrued deferred compensation 227 232
Deferred directors' fees 343 411
Accrued pension expense 608 664
Accrued post-retirement benefits 4 11
------ ------
1,590 1,737
Less current portion 280 263
------ ------
$1,310 $1,474
====== ======
Income Per Share
In computing basic earnings per share, the dilutive effect of stock options
and warrants are excluded, whereas for diluted 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
March 31,
2004 2003
Net loss as reported $(1,351) $(1,325)
Add: Total stock-based employee
compensation expense determined
under fair valuation method
with no tax benefit. (133) (110)
------- -------
Pro forma $(1,484) $(1,435)
======= =======
Net loss per share
As reported Basic $(.24) $(.24)
Diluted $(.24) $(.24)
Pro forma Basic $(.26) $(.26)
Diluted $(.26) $(.26)
There were no options granted in the periods ended March 31, 2004 and 2003.
Pension Plan
The Company and its domestic subsidiaries have a defined benefit pension
plan. No additional service cost benefits were earned subsequent to June 30,
1994. The Company's funding policy is to contribute amounts to the plan
sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional
amounts as the Company may determine to be appropriate from time to time.
The components of net periodic benefit cost of the plan for the three months
ended March 31 are as follows (in thousands):
2004 2003
---- ----
Interest cost on projected
benefit obligation $23 $29
Expected return on plan assets (13) (16)
Amortization of net loss 3 4
--- ---
Net periodic pension cost $13 $17
=== ===
The Company expects the funding requirement to be $237,000 in 2004 of which
$69,000 was funded during the current interim period.
Operations by Industry Segments and Geographic Areas:
Three Months Ended
March 31,
2004 2003
---- ----
Net Sales
United States $ 431 $ 680
Europe 1,830 1,816
------- -------
$ 2,261 $ 2,496
======= =======
Operating Profit(loss)
United States $(1,213) $(1,210)
Europe 184 189
------- -------
(1,029) (1,021)
General corporate expense 338 343
Other (income)expense (31) (39)
------- -------
Loss before income taxes $(1,336) $(1,325)
======= =======
Total Assets
United States $14,260 $18,907
Europe 3,601 2,922
Intercompany eliminations (7)
------- -------
$17,861 $21,822
======= =======
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain Factors That May Affect Future Results
The following information, including, without limitation, the Quantitative
and Qualitative Disclosures About Market Risk that are not historical facts,
may be forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements generally are characterized by the use of terms such
as "believe", "expect" and "may". Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, the Company's actual results could differ materially
from those set forth in the forward-looking statements. Factors that might
cause such a difference include, but are 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.
Results of Operations
For the quarter ended March 31, 2004, the Company reported a loss of $1.4
million ($.24 per basic and diluted share), versus a loss of $1.3 million
($.24 per basic and diluted share) in the comparable 2003 quarter.
Consolidated sales for the first quarter of 2004 decreased $.2 million, or
9%, from the prior year period. Sales of domestic operations decreased $.2
million, or 37%, due to the continuing reduction in capital expenditures by
the major telecommunications service providers as previously noted by the
Company. The sales of the UK distributorship operations decreased in the
first quarter of 2004 from the prior year by $.2 million (12%) due to lower
volume; however, this was offset by a favorable exchange rate fluctuation.
The gross margin percentage was approximately 33% in the 2004 quarter versus
37% in the prior year. This decrease is attributable to the decrease in the
sales volume of the domestic operations.
Research and development expense decreased $.1 million (12%) from the same
period in 2003, primarily due to lower personnel costs, due to lower
headcount and salary reductions and higher amounts charged to improvement of
existing products.
Selling, general and administrative expense decreased $89,000, or 6%,
primarily due to lower personnel and related expenses, due to lower
headcount and salary reductions in the Company's domestic operations.
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 2004 since the
Company cannot determine that the realization of the net deferred tax asset
is more likely than not.
Liquidity and Sources of Capital
Net cash provided by operations for the three months ended March 31, 2004
was $.1 million versus $1.1 million in 2003; this variance from the prior
year is attributable to the receipt of tax refunds of approximately $2
million, offset by continuing losses and increase in accounts receivable.
The increase in accounts receivable from the prior year period is due to
timing of sales during the respective periods. The cash provided by
investing activities of $1.2 million in 2004 versus $.6 million in 2003
reflects higher net sales of marketable securities.
Working capital and the ratio of current assets to current liabilities was
$12.9 million and 4.7:1 at March 31, 2004 compared to $14.1 million and
5.4:1 at December 31, 2003.
During the remainder of 2004, 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 2004.
Item 3. Quantitative and Qualitative Disclosures About 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, 2004,
the UK distributorship operations had net assets of $1.6 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 disclosed 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.
32.1 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 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 March 30, 2004, the Company filed a Current Report on Form 8-K
pursuant to Item 9 (Regulation FD Disclosures) and Item 12 (Results of
Operations and Financial) to furnish a press release reporting results of
the Company's fourth quarter and year-end results for 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: May 14, 2004 By /s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer