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 September 30, 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 5,726,142 shares of Common Stock, $.20
par value per share outstanding at September 30, 2004.
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2004 2003
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,644 $ 2,877
Marketable securities 5,134 5,956
Accounts receivable, net 1,310 1,183
Inventories 3,293 2,987
Taxes recoverable 2,028
Other current assets including loans
to officers of $1,957 and $1,931 2,137 2,312
------- -------
TOTAL CURRENT ASSETS 15,518 17,343
PROPERTY, PLANT AND EQUIPMENT, NET 925 1,087
GOODWILL, NET 319 319
OTHER ASSETS 131 149
------- -------
$16,893 $18,898
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 697 $ 778
Accrued compensation and benefits 1,453 1,297
Other accrued expenses 1,332 1,125
------- -------
TOTAL CURRENT LIABILITIES 3,482 3,200
OTHER NON-CURRENT LIABILITIES 1,144 1,474
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 20,000,000 shares;
issued 5,863879 AND 5,863,229 shares 1,173 1,173
Additional paid-in capital 11,445 11,750
Retained earnings 1,096 3,419
Cumulative other comprehensive loss (29) (98)
Unearned compensation (345) (509)
------- -------
13,340 15,735
Less cost of 137,737 and 190,431
common shares in treasury 1,073 1,511
------- -------
TOTAL STOCKHOLDERS' EQUITY 12,267 14,224
------- -------
$16,893 $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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
NET SALES $1,889 $3,498 $ 8,393 $ 8,442
------ ------ ------- -------
COST AND EXPENSES:
Cost of products sold 1,176 1,638 4,433 4,674
Research and development 620 675 1,850 1,994
Selling, general and
administrative 1,466 1,676 4,491 4,806
Other (income), net (40) (40) (103) (126)
Gain on termination of
post-retirement
benefit plan (834)
------ ------ ------- -------
3,222 3,949 10,671 10,514
------ ------ ------- -------
Loss before income taxes (1,333) (451) (2,278) (2,072)
PROVISION FOR INCOME TAXES 15 15 45 45
------ ------ ------- -------
NET LOSS (1,348) (466) (2,323) (2,117)
Currency translation
adjustment (9) 8 69 54
------- ------ ------- -------
COMPREHENSIVE LOSS $(1,357) $ (458) $(2,254) $(2,063)
======= ====== ======= =======
NET LOSS PER SHARE:
Basic $(.23) $(.08) $(.40) $(.38)
Diluted $(.23) $(.08) $(.40) $(.38)
Weighted average number
of outstanding shares:
Basic 5,808,997 5,593,012 5,748,129 5,550,427
Diluted 5,808,997 5,593,012 5,748,129 5,550,427
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,
2004 2003
---- ----
NET CASH USED BY OPERATIONS $ (17) $(2,103)
------- -------
INVESTING ACTIVITIES
Purchases of marketable securities (4,733) (2,328)
Sales of marketable securities 5,555 4,919
Additions to property, plant and
equipment, net (92) (66)
------- -------
NET CASH PROVIDED BY INVESTING
ACTIVITIES 730 2,525
------- -------
FINANCING ACTIVITIES
Shares issued pursuant to stock
option plans 25,348 and 4,370 19 18
Principal payment of debt (26)
------- -------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 19 ( 8)
------- -------
EFFECT OF EXCHANGE RATE DIFFERENCES 35 9
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 767 423
CASH AND CASH EQUIVALENTS- BEGINNING
OF PERIOD 2,877 2,732
------- -------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,644 $ 3,155
======= =======
INCOME TAXES PAID $ 63 $ 63
======= =======
INTEREST PAID $ 7 $ 5
======= =======
See Note to Condensed Consolidated Financial Statements.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 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 and
nine-month periods ended September 30, 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
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):
September 30, December 31,
2004 2003
---- ----
Finished and in process $2,210 $2,172
Materials and purchased parts 1,083 815
------ ------
$3,293 $2,987
====== ======
Other Non-Current Liabilities (in thousands):
September 30, December 31,
2004 2003
---- ----
Accrued supplemental pension plan $ 386 $ 419
Accrued deferred compensation 215 232
Deferred directors' fees 332 411
Accrued pension expense 486 664
Accrued post-retirement benefit 3 11
------ ------
1,422 1,737
Less current portion 278 263
------ ------
$1,144 $1,474
====== ======
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.
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 plans 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,
2004 2003 2004 2003
---- ---- ---- ----
Net loss, as reported $(1,348) $(466) $(2,323) $(2,117)
Add: Stock-based compensation
expense included therein 85 95 277 287
Deduct: Total stock-based
compensation expense
determined under the fair
value based method (145) (162) (545) (543)
------- ----- ------- -------
Pro forma net loss $(1,408) $(533) $(2,591) $(2,373)
======= ===== ======= =======
Net loss per share
As reported Basic $(.23) $(.08) $(.40) $(.38)
Diluted $(.23) $(.08) $(.40) $(.38)
Pro forma Basic $(.24) $(.10) $(.45) $(.43)
Diluted $(.24) $(.10) $(.45) $(.43)
On August 1, 2004 and 2003, the Company granted 30,000 and 36,000 stock
options, respectively, with an exercise price of $3.50 and $2.11,
respectively.
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 and
nine months ended September 30 are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Interest cost on projected ---- ---- ---- ----
benefit obligation $23 $28 $69 $86
Expected return on plan assets (15) (16) (43) (48)
Amortization of net loss 3 3 8 10
Settlement expense 43 43
--- --- --- ---
Net periodic pension cost $11 $58 $34 $91
=== === === ===
The Company expects the funding requirement to be $240,000 in 2004 of which
$215,000 was funded during the nine months ended September 30, 2004.
Operations by Industry Segments and Geographic Areas:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Net Sales ---- ---- ---- ----
United States $ 771 $1,979 $ 3,770 $ 4,298
Europe 1,118 1,519 4,623 4,144
------ ------ ------- -------
$1,889 $3,498 $ 8,393 $ 8,442
====== ====== ======= =======
Operating Profit(Loss)
United States $ (929) $ 35 $(1,567) $(1,738)
Europe (160) (146) 117 (236)
------ ------ ------- -------
(1,089) (111) (1,450) (1,974)
General Corporate Expense 284 380 931 1,058
Other (income), net (40) (40) (103) (126)
Gain on termination of post-
retirement benefit plan (834)
------- ------ ------- -------
Loss before income
taxes $(1,333) $ (451) $(2,278) $(2,072)
======= ====== ======= =======
Total Assets
United States $14,099 $17,927
Europe 2,794 2,622
Intercompany eliminations (11)
------- -------
$16,893 $20,538
======= =======
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
The Company reported net losses of $1,348,000 and $2,323,000 for the three
months and nine months ended September 30, 2004 versus net losses of
$466,000 and $2,117,000, 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, 2004 decreased $1.6
million (46%) to $1.9 million due to sales decreases in both the domestic
and the UK distributorship operations. The sales in the domestic operations
decreased $1.2 million (61%) to $.8 million due to lower volume. In the
three-month period ended September 30, 2004, the Company's sales to a large
telecommunication service provider decreased $1.1 million from the prior
year period. The Company's domestic operations continues to experience wide
fluctuations from quarter to quarter. Sales of the Company's UK
distributorship operations decreased $.4 million (26%) due to lower volume,
offset, in part, by a favorable exchange rate fluctuation. While
consolidated sales for the nine months ended September 30, 2004 were
essentially unchanged from the prior year period, sales of the domestic
operations decreased $.5 million (12%) primarily due to lower sales to a
large telecommunication service provider and large telecommunication
equipment manufacturer and sales of the UK distributorship operations
increased $.5 million (12%) primarily due to favorable foreign exchange
fluctuations.
Gross margin percentage was 38% for the three months and 47% for the nine
months ended September 30, 2004 and 53% and 45%, respectively, in the
comparable 2003 periods. The three-month period ended September 30, 2004
versus the prior year period was unfavorably impacted by lower sales and the
concomitant lower absorption of fixed costs.
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.
Liquidity and Sources of Capital
Net cash used by operations for the nine months ended September 30, 2004
decreased to $17,000 due to the receipt of tax refunds of approximately
$2 million offset by continued losses, an increase in inventory and a
decrease in non-current liabilities. Working capital and the ratio of
current assets to current liabilities were $12.0 million and 4.5:1 at
September 30, 2004 compared to $14.1 million and 5.4:1 at December 31, 2003.
The decrease in working capital in 2003 is mainly due to the results of
operations.
During the remainder of 2004, 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.
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 September 30,
2004,the UK distributorship operations had net assets of $1.6 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.
32.1 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 July 28, 2004, the Company filed a Current Report on Form 8-K pursuant
to Item 12 (Results of Operations and Financial Condition) to furnish a
press release reporting second quarter results for 2004.
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 12, 2004 By /s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer