PAGE 1
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, 2001
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 September 30, 2001.
Common Stock, par value $0.20 per share - 5,408,004 shares
PAGE 2
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2001 2000
(Unaudited)
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,201 $ 3,499
Marketable securities 6,800 9,400
Accounts receivable, net 3,863 7,760
Inventories 6,846 6,557
Deferred income taxes 725 746
Other current assets including
loans to officers of $1,545 and $1,062 2,753 1,783
------- -------
TOTAL CURRENT ASSETS 27,188 29,745
PROPERTY, PLANT AND EQUIPMENT, NET 1,484 1,373
GOODWILL, NET 402 651
DEFERRED INCOME TAXES 781 762
OTHER ASSETS 514 467
------- -------
$30,369 $32,998
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,236 $ 1,560
Accrued compensation and benefits 881 1,128
Income taxes payable 342 532
Current maturities of debt 35 43
Other accrued expenses 707 652
------- -------
TOTAL CURRENT LIABILITIES 3,201 3,915
LONG-TERM DEBT 21 47
OTHER NON-CURRENT LIABILITIES 1,972 2,048
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 13,835 14,123
Retained earnings 14,825 15,218
Cumulative other comprehensive income (182) (182)
Unearned compensation (571) (332)
------- -------
29,080 30,000
Less cost of 455,225 and 300,550
shares in treasury (3,905) (3,012)
------- -------
TOTAL STOCKHOLDERS' EQUITY 25,175 26,988
------- -------
$30,369 $32,998
======= =======
See Note to Condensed Consolidated Financial Statements.
PAGE 3
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
NET SALES $4,807 $8,404 $15,594 $22,766
------ ------ ------- -------
COST AND EXPENSES:
Cost of products sold 2,612 3,774 8,216 10,226
Research and development 1,069 595 2,688 1,784
Selling, general and
administrative 1,836 1,802 5,494 5,405
Amortization of goodwill 83 83 249 249
Other (income), net (115) (189) (425) (424)
------ ------ ------- -------
5,485 6,065 16,222 17,240
------ ------ ------- -------
Income(loss) before income
taxes (678) 2,339 (628) 5,526
PROVISION(BENEFIT) FOR
INCOME TAXES (250) 834 (235) 2,030
------ ------ ------- -------
NET INCOME(LOSS) (428) 1,505 (393) 3,496
Currency translation
adjustment 40 (74) (248)
------ ------ ------- -------
COMPREHENSIVE INCOME(LOSS) $ (388) $1,431 $ (393) $ 3,248
====== ====== ======= =======
NET INCOME(LOSS) PER SHARE:
Basic $(.08) $.26 $(.07) $.60
===== ==== ===== ====
Diluted $(.08) $.25 $(.07) $.57
===== ==== ===== ====
Weighted average number
of outstanding shares:
Basic 5,356,975 5,730,585 5,417,044 5,798,452
========= ========= ========= =========
Diluted 5,356,975 6,111,467 5,417,044 6,168,835
========= ========= ========= =========
See Note to Condensed Consolidated Financial Statements.
PAGE 4
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Nine Months Ended
September 30,
-----------------
2001 2000
---- ----
NET CASH PROVIDED BY OPERATIONS $2,842 $3,868
------ ------
INVESTING ACTIVITIES
Purchases of marketable securities (3,800) (2,000)
Sales of marketable securities 6,400 2,600
Loans to employees (483) (638)
Additions to property, plant and
equipment, net (457) (276)
Purchase of software licenses (192)
------ ------
NET CASH PROVIDED(USED) BY
INVESTING ACTIVITIES 1,468 (314)
------ ------
FINANCING ACTIVITIES
Repurchase of 232,450 and
166,880 shares for treasury (1,576) (1,681)
Principal payment of debt (34) (36)
Shares issued pursuant to employee stock
option plans, 1,275 and 26,376 shares 7 105
------ ------
NET CASH (USED) BY FINANCING ACTIVITIES (1,603) (1,612)
------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES (5) (37)
------ ------
INCREASE IN CASH AND CASH EQUIVALENTS 2,702 1,905
CASH AND CASH EQUIVALENTS- BEGINNING
OF PERIOD 3,499 3,992
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $6,201 $5,897
====== ======
INCOME TAXES PAID $ 538 $2,272
====== ======
INTEREST EXPENSE PAID $ 9 $ 15
====== ======
See Note to Condensed Consolidated Financial Statements.
PAGE 5
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2001
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 nine-month periods ended
September 30, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001. The balance sheet at
December 31, 2000 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,
2000.
Inventories (in thousands):
September 30, December 31,
2001 2000
------------- ------------
Finished and in process $4,497 $4,320
Materials and purchased parts 2,349 2,237
------ ------
$6,846 $6,557
====== ======
Other Non-Current Liabilities (in thousands):
September 30, December 31,
2001 2000
------------- ------------
Accrued supplemental pension plan $ 524 $ 553
Accrued deferred compensation 278 291
Accrued pension 525 568
Accrued other post-employment
benefit 834 825
------ ------
2,161 2,237
Less current portion 189 189
------ ------
$1,972 $2,048
====== ======
Common Stock
During the nine months ended September 30, 2001 and September 30, 2000, the
company granted 76,500 and 26,000 shares of common stock under the
Restricted Stock Plan and recorded $382,500 and $236,000 of unearned
compensation expense, respectively.
Income Per Share
In computing basic earnings per share, the dilutive effect of stock options
and restricted stock are excluded; whereas, for dilutive earnings per share,
the dilutive effect, if any, is included.
PAGE 6
Recent Pronouncements
In October 2001, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which provides a single
accounting model for long-lived assets to be disposed of. In August 2001,
the FASB issued SFAS No. 143, "Accounting for Assets Retirement
Obligations", which focuses on accounting for obligations associated with
the retirement of tangible long-lived assets and the associated asset
retirement costs. In June 2001, the FASB issued SFAS No. 141, "Business
Combinations", and No. 142, "Goodwill and Other Intangible Assets". Under
SFAS Nos. 141 and 142, all acquisitions subsequent to June 30, 2001 must be
accounted for under the purchase method of accounting, and purchased
goodwill will no longer be amortized over its useful life. Rather, goodwill
will be subject to a periodic impairment test based upon its fair value.
SFAS Nos. 142 and 144 are effective in 2002 and SFAS No. 143 is effective in
2003. During the three months and nine months ended September 30, 2001, the
Company recognized goodwill amortization expense of $83,000 and $249,000,
respectively. With the exception of the impact on the Company's
amortization of goodwill, these Statements are not expected to have a
material impact on the Company's financial condition or results of
operations.
Operations by Industry Segments and Geographic Areas:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
Net Sales
United States:
Unaffiliated Customers
(North America) $3,454 $6,321 $10,697 $17,022
Intercompany transfers 55
------ ------ ------- -------
3,454 6,321 10,697 17,077
Europe 1,353 2,083 4,897 5,744
Intercompany eliminations (55)
------ ------ ------- -------
$4,807 $8,404 $15,594 $22,766
====== ====== ======= =======
Operating Profit (Loss)
United States $ (24) $2,477 $ 506 $ 6,220
Europe (378) (15) (565) (129)
Intercompany eliminations 20 69 26 27
------ ------ ------- -------
(382) 2,531 (33) 6,118
General Corporate Expense 411 381 1,020 1,016
Other (income), net (115) (189) (425) (424)
------ ------ ------- -------
Income (loss) before taxes $ (678) $2,339 $ (628) $ 5,526
====== ====== ======= =======
Total Assets
United States $26,459 $29,515
Europe 3,945 4,121
Intercompany eliminations (35) (37)
------- -------
$30,369 $33,599
======= =======
PAGE 7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company reported a net loss of $428,000 and $393,000, respectively, for
the three and nine-month periods ended September 30, 2001 versus net income
of $1,505,000 and $3,496,000, respectively, in the prior year periods.
Consolidated sales for the quarter ended September 30, 2001 decreased $3.6
million (43%) to $4.8 million versus the prior year period. In the third
quarter, domestic sales decreased $2.9 million (45%), reflecting the
continued decreased spending in the telecommunication industry. Sales by the
UK distributorship operations decreased by $.7 million due to lower sales to
its principal customer. Consolidated sales for the nine months ended
September 30, 2001 decreased $7.2 million (32%) from the prior year period.
Sales of the domestic operations decreased $6.3 million (37%) due to the
previously mentioned decreased spending in the telecommunication industry.
The demand in the U.S. for telecommunication equipment continues to be soft
and the Company is unable to determine when the telecommunication equipment
market will improve. The sales of the Company's UK distributorship
operations decreased $.8 million (15%) from the prior year period primarily
due to lower sales to its principal customer. For the past two years, the
company's UK distributorship operations has experienced significant
decreases in sales to its principal customer. The Company is unable to
determine whether this trend will continue.
Gross margin percentage was 46% and 47%, respectively, for the three months
and nine months ended September 30, 2001 and 55% in each of the comparable
2000 periods. The decreases in the current year periods versus the prior
year periods are primarily due to the lower volume in the US operations.
Research and development expenses increased $474,000 (80%) and $904,000
(51%), respectively, in the three-month and nine-month periods ended
September 30, 2001 when compared to the prior year periods. The increases
are due to contracted engineering services expenses, increased salaries
attributable to increased headcount and wage rates, higher purchased parts
and increased overhead expenses. The Company's increased research and
development efforts reflect work on next generation equipment. The Company
anticipates the continuance of this level of expenditures.
Selling, general and administrative expenses increased $34,000 (2%) and
$89,000 (2%), respectively, for the three and nine months ended September
30, 2001, when compared to the prior year periods. These increases are
attributable to increases of $26,000 (3.3%) and $184,000 (8%), respectively,
in the Company's UK distributorship operations. Included in both the
three-month and nine-month periods is $77,000 related to termination
expenses at the Company's UK distributorship operations.
Other (income) decreased due to lower interest rates on cash balances and
marketable securities in the three month period ended September 30, 2001.
Liquidity and Sources of Capital
Net cash flow from operations for the nine months ended September 30, 2001
was $2.8 million versus $3.9 million in 2000. In 2000, cash flow from
PAGE 8
operations was adversely impacted by a reduction of $3.2 million in accounts
payable. The increase in cash provided by investing activities reflects the
net decrease in marketable securities offset by an increase in employee
loans and purchase of property, plant and equipment and software licenses.
The net cash used for financing activities in both periods presented
primarily reflects the repurchase of shares for treasury.
Working capital and the ratio of current assets to current liabilities were
$24 million and 8.5:1 at September 30, 2001 compared to $25.8 million and
7.6:1 at December 31, 2000. The decrease in working capital in 2001 is
mainly due to the repurchase of treasury shares.
During the remainder of 2001, the Company may repurchase up to an additional
330,550 shares of its common stock and anticipates purchasing $.3 million of
equipment and incurring increased research and development expenditures.
Management believes that its cash and cash equivalents, marketable
securities and the cash flow from operations in 2001 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, third party
suppliers and 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,
2001, the UK distributorship operations had net assets of $1.6 million. The
Company does not hedge this foreign currency net asset exposure.
PART II
Item 6. Exhibits and reports on Form 8-K
No exhibits or reports on Form 8-K were filed during the current quarter.
PAGE 9
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, 2001 By /s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer