1
CONFORMED
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, 2002
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, 2002.
Common Stock, par value $0.20 per share 5,419,241 shares
2
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2002 2001
(Unaudited)
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,779 $ 7,731
Marketable securities 9,558 6,400
Accounts receivable, net 1,772 2,035
Inventories 4,679 5,682
Deferred income taxes 1,261 1,110
Other current assets including loans
to officers of $1,921 and $1,532 3,766 2,431
------- -------
TOTAL CURRENT ASSETS 23,815 25,389
PROPERTY, PLANT AND EQUIPMENT, NET 1,451 1,514
GOODWILL, NET 319 319
DEFERRED INCOME TAXES 735 812
OTHER ASSETS 397 539
------- -------
$26,717 $28,573
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,225 $ 871
Accrued compensation and benefits 1,289 1,109
Income taxes payable 363 290
Current maturities of debt 35 46
Other accrued expenses 506 319
------- -------
TOTAL CURRENT LIABILITIES 3,418 2,635
LONG-TERM DEBT 8 26
OTHER NON-CURRENT LIABILITIES 2,185 2,314
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 13,300 13,322
Retained earnings 10,734 13,413
Cumulative other comprehensive income (207) (260)
Unearned compensation (372) (506)
------- -------
24,628 27,142
Less cost of 443,988 and 445,936
shares in treasury (3,522) (3,544)
------- -------
TOTAL STOCKHOLDERS' EQUITY 21,106 23,598
------- -------
$26,717 $28,573
======= =======
See Note to Condensed Consolidated Financial Statements.
3
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,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
NET SALES $2,378 $4,807 $ 8,876 $15,594
------ ------ ------- -------
COST AND EXPENSES:
Cost of products sold 1,986 2,612 5,815 8,216
Research and development 849 1,069 2,597 2,688
Selling, general and
administrative 1,604 1,836 4,757 5,494
Amortization of goodwill 83 249
Other (income), net (71) (115) (163) (425)
------ ------ ------- -------
4,368 5,485 13,006 16,222
------ ------ ------- -------
Income(loss) before income
taxes (1,990) (678) (4,130) (628)
------ ------ ------- -------
PROVISION(BENEFIT) FOR
INCOME TAXES (739) (250) (1,450) (235)
------ ------ ------- -------
NET INCOME(LOSS) (1,251) (428) (2,680) (393)
Currency translation
adjustment 52 40 53
------- ------ ------- -------
COMPREHENSIVE INCOME(LOSS) $(1,199) $ (388) $(2,627) $ (393)
======= ====== ======= =======
NET INCOME(LOSS) PER SHARE:
Basic $(.23) $(.08) $(.49) $(.07)
===== ===== ===== =====
Diluted $(.23) $(.08) $(.49) $(.07)
===== ===== ===== =====
Weighted average number
of outstanding shares:
Basic 5,441,617 5,356,975 5,424,624 5,417,044
========= ========= ========= =========
Diluted 5,441,617 5,356,975 5,424,624 5,417,044
========= ========= ========= =========
See Note to Condensed Consolidated Financial Statements.
4
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Nine Months Ended
September 30,
--------------------
2002 2001
---- ----
NET CASH (USED)PROVIDED BY OPERATIONS $(1,099) $2,842
------- ------
INVESTING ACTIVITIES
Purchases of marketable securities (15,245) (3,800)
Sales of marketable securities 12,087 6,400
Loans to employees (341) (483)
Additions to property, plant and
equipment, net (336) (457)
Purchase of software licenses (192)
------- ------
NET CASH PROVIDED(USED) BY
INVESTING ACTIVITIES (3,835) 1,468
------- ------
FINANCING ACTIVITIES
Repurchase of 1,500 and 232,450
shares for treasury (5) (1,576)
Principal payment of debt (29) (34)
Shares issued pursuant to employee
stock option plans, 1,275 shares 7
------- ------
NET CASH (USED) BY FINANCING ACTIVITIES ( 34) (1,603)
------- ------
EFFECT OF EXCHANGE RATE DIFFERENCES 16 (5)
------- ------
(DECREASE)INCREASE IN CASH AND CASH
EQUIVALENTS (4,952) 2,702
CASH AND CASH EQUIVALENTS- BEGINNING
OF PERIOD 7,731 3,499
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $2,779 $6,201
====== ======
INCOME TAXES PAID $ 3 $ 538
====== ======
INTEREST EXPENSE PAID $ 17 $ 9
====== ======
See Note to Condensed Consolidated Financial Statements.
5
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2002
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
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 generally accepted accounting
principles 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, 2002 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2002. The balance sheet at December 31, 2001 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, 2001.
Inventories (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Finished and in process $3,034 $3,455
Materials and purchased parts 1,645 2,227
------ ------
$4,679 $5,682
====== ======
Other Non-Current Liabilities (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Accrued supplemental pension plan $ 482 $ 511
Accrued deferred compensation 259 274
Deferred directors' fees 320 269
Accrued pension expense 536 658
Accrued post-retirement benefit 844 843
------ ------
2,441 2,555
Less current portion 256 241
------ ------
$2,185 $2,314
====== ======
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.
Adoption of Financial Accounting Standard 142 ("FAS 142")
Effective January 1, 2002, the Company adopted FAS 142. Under FAS 142,
goodwill is no longer amortized, rather it is subject to a periodic
impairment test based on its fair value. The Company has performed the
transitional goodwill impairment test (as of January 1, 2002) on its
applicable reporting units. As the estimated fair values of these reporting
units exceeded their respective net book values, including goodwill, no
impairment charge was recognized. If FAS 142 was effective as of January 1,
6
2001, then the pro forma results of operations for the periods ended
September 30, 2001 would have been as follows (dollars in thousands):
As Reported Adjustment Pro Forma
Three Months
Pretax Loss $(678) $83 $(595)
===== === =====
Net Loss $(428) $76 $(352)
===== === =====
Loss per share:
Basic $(.08) $(.07)
===== =====
Diluted $(.08) $(.07)
===== =====
Nine Months
Pretax Loss $(628) $249 $(379)
===== ==== =====
Net Loss $(393) $228 $(165)
===== ==== =====
Loss per share:
Basic $(.07) $(.03)
===== =====
Diluted $(.07) $(.03)
===== =====
Operations by Industry Segments and Geographic Areas:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales
United States $ 959 $3,454 $4,549 $10,697
Europe 1,419 1,353 4,327 4,897
Intercompany eliminations
------- ------ ------ -------
$ 2,378 $4,807 $8,876 $15,594
======= ====== ====== =======
Operating Profit(Loss)
United States $(1,687) $ (24) $(3,192) $ 506
Europe (40) (378) (84) (565)
Intercompany eliminations 2 20 8 26
------- ------ ------- -------
(1,725) (382) (3,268) (33)
General Corporate Expenses 336 411 1,025 1,020
Other (income), net (71) (115) (163) (425)
------- ------ ------- -------
Income(loss) before
income taxes $(1,990) $ (678) $(4,130) $ (628)
======= ====== ======= =======
Total Assets
United States $24,052 $26,459
Europe 2,682 3,945
Intercompany eliminations (17) (35)
------- -------
$26,717 $30,369
======= =======
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 $1.2 million and $2.5 million,
respectively, for the three and nine-month periods ended September 30, 2002
versus a net loss of $.4 million in each of the comparable prior year periods.
Consolidated sales for the quarter ended September 30, 2002 decreased $2.4
million (51%) to $2.4 million versus the prior year period. Domestic sales
decreased $2.5 million (72%), reflecting the continuing reduction in
infrastructure buildout, particularly by CLECs, and reduction in capital
expenditures by major telecommunication providers, as previously noted by
the Company. Sales by the UK distributorship operations increased by $.1
million. Consolidated sales for the nine months ended September 30, 2002
decreased $6.7 million (43%) from the prior year period; sales of the
domestic operations decreased $6.1 million (57%) 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 operation
decreased $.6 million (12%) from the prior year period primarily due to
lower sales to its principal customer. For the past several years, the
Company's UK distributorship operation has experienced significant decreases
in sales to its principal customer. The Company is unable to determine
whether this trend will continue.
The gross margin percentages were 16% and 34%, respectively, for the three
months and nine months ended September 30, 2002 and 46% and 47%,
respectively, in the comparable 2001 periods. The decreases in the current
year periods versus the prior year periods are primarily due to the lower
volume in the US operations and the concomitant reduction in the absorption
of fixed overhead. Reflecting the decrease in the level of sales, the
Company recorded an increase of $325,000 in the provision for inventory in
the three and nine-month periods of 2002 as compared to 2001. If the level
of sales does not increase or decreases further, additional charges will be
required. Included in cost of sales for the three and nine-month periods
ended September 30, 2002 was severance related expense of $26,000.
Research and development expenses decreased $220,000 (21%) and $91,000 (3%),
respectively, in the three-month and nine-month periods ended September 30,
2002 when compared to the prior year periods. The decrease in the third
quarter of 2002 versus the prior year period is due to lower purchased
parts, recruiting expense and contracted engineering services. Included in
research and development expense for the three and nine-month periods ended
September 30, 2002 was $34,000 of severance related expense.
Selling, general and administrative expenses decreased $232,000 (13%) and
$737,000 (13%), respectively, for the three and nine months ended September
30, 2002, when compared to the prior year periods. These decreases are
attributable to decreases of $67,000 (11%) and $651,000 (26%), respectively,
in the Company's UK distributorship operations due to lower personnel costs.
In addition, the US operations recorded lower sales commissions of $56,000
and $103,000 for the three and nine-month periods ended September 30, 2002,
respectively, when compared to the prior year periods. Included in selling,
general and administrative expense for the three and nine months ended
8
September 30, 2002 was $56,000 of severance related expense.
Other (income) decreased due to lower interest rates on cash balances and
marketable securities in the three and nine-month periods ended September
30, 2002.
The Company's effective tax rate for the three-month and nine-month periods
ended September 30, 2002 were 37% and 35%, respectively, versus 37% in each
of the 2001 periods.
Liquidity and Sources of Capital
Net cash flow used by operations for the nine months ended September 30,
2002 was $1.1 million versus net cash flow provided by operations of $2.8
million in 2001. The negative net cash flow from operations in 2002 is due
to the Company's operating loss. The net cash used by investing activities
in 2002 primarily reflects a realignment of the Company's investment
portfolio to corporate bonds from other securities. The net cash used for
financing activities in the 2001 period primarily reflects the repurchase of
shares for treasury.
Working capital and the ratio of current assets to current liabilities were
$20.4 million and 7.0:1 at September 30, 2002 compared to $22.8 million and
9.6:1 at December 31, 2001. The decrease in working capital in 2002 is
mainly due to the results of operations.
During the remainder of 2002, the Company may repurchase up to an additional
253,792 shares of its common stock and anticipates purchasing $.1 million of
equipment. Management believes that its cash and cash equivalents and
marketable securities in 2002 will be sufficient to meet its 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,
9
2002, 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
99.1 Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
No exhibits or reports on Form 8-K were filed during the current quarter.
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, 2002 By /s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer
10
CERTIFICATION
I, Brian J. Kelley certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cognitronics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Brian J. Kelley
Brian J. Kelley
Chief Executive Officer
11
CERTIFICATION
I, Garrett Sullivan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cognitronics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controlsand procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of thiS quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Garrett Sullivan
Garrett Sullivan
Chief Financial Officer