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 June 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 5,716,548 shares of Common Stock, $.20
par value per share outstanding at June 30, 2004.
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
2004 2003
-------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,757 $ 2,877
Marketable securities 5,759 5,956
Accounts receivable, net 3,406 1,183
Inventories 3,328 2,987
Taxes recoverable 2,028
Other current assets including loans
to officers of $1,946 and $1,931 2,164 2,312
------- -------
TOTAL CURRENT ASSETS 17,414 17,343
PROPERTY, PLANT AND EQUIPMENT, NET 997 1,087
GOODWILL, NET 319 319
OTHER ASSETS 100 149
------- -------
$18,830 $18,898
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,403 $ 778
Accrued compensation and benefits 1,466 1,297
Other accrued expenses 1,186 1,125
------- -------
TOTAL CURRENT LIABILITIES 4,055 3,200
OTHER NON-CURRENT LIABILITIES 1,202 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 11,532 11,750
Retained earnings 2,444 3,419
Cumulative other comprehensive loss (20) (98)
Unearned compensation (393) (509)
------- -------
14,736 15,735
Less cost of 146,681 and 190,431
common shares in treasury 1,163 1,511
------- -------
TOTAL STOCKHOLDERS' EQUITY 13,573 14,224
------- -------
$18,830 $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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
NET SALES $4,243 $2,448 $6,504 $ 4,944
COST AND EXPENSES:
Cost of products sold 1,744 1,458 3,257 3,036
Research and development 635 646 1,230 1,319
Selling, general and
administrative 1,505 1,521 3,025 3,130
Other (income), net (32) (47) (63) (86)
Gain on termination of
post-retirement
benefit plan (834) (834)
------ ------ ------ -------
3,852 2,744 7,449 6,565
------ ------ ------ -------
Income(loss) before
income taxes 391 (296) (945) (1,621)
PROVISION FOR INCOME
TAXES 15 30 30 30
------ ------ ------ -------
NET INCOME (LOSS) 376 (326) (975) (1,651)
Currency translation
adjustment (10) 29 78 46
------ ------ ------ -------
COMPREHENSIVE INCOME(LOSS) $ 366 $ (297) $ (897) $(1,605)
====== ====== ====== =======
NET INCOME(LOSS)PER SHARE:
Basic $ .07 $(.06) $(.17) $(.30)
===== ===== ===== =====
Diluted $ .06 $(.06) $(.17) $(.30)
===== ===== ===== =====
Weighted average number
of outstanding shares:
Basic 5,742,442 5,552,338 5,714,372 5,531,520
Diluted 6,278,219 5,552,338 5,714,372 5,531,520
See Note to Condensed Consolidated Financial Statements.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Six Months Ended
June 30,
2004 2003
---- ----
NET CASH USED BY OPERATIONS $ (19) $(2,694)
------- -------
INVESTING ACTIVITIES
Purchases of marketable securities (4,463) (1,328)
Sales of marketable securities 4,660 2,506
Additions to property, plant and
equipment, net (84) (35)
------- -------
NET CASH PROVIDED(USED) BY INVESTING
ACTIVITIES (113) 1,143
------- -------
FINANCING ACTIVITIES
Shares issued pursuant to employee
stock plans 14
Principal payment of debt (26)
------- -------
NET CASH USED BY FINANCING ACTIVITIES 14 (26)
------- -------
EFFECT OF EXCHANGE RATE DIFFERENCES (2) 9
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (120) (1,568)
CASH AND CASH EQUIVALENTS- BEGINNING
OF PERIOD 2,877 2,732
------- -------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,757 $ 1,164
======= =======
INCOME TAXES PAID $ 63 $ 63
======= =======
INTEREST PAID $ 5 $ 5
======= =======
See Note to Condensed Consolidated Financial Statements.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 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
six-month periods ended June 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):
June 30, December 31,
2004 2003
---- ----
Finished and in process $2,209 $2,172
Materials and purchased parts 1,119 815
------ ------
$3,328 $2,987
====== ======
Other Non-Current Liabilities (in thousands):
June 30, December 31,
2004 2003
---- ----
Accrued supplemental pension plan $ 397 $ 419
Accrued deferred compensation 221 232
Deferred directors' fees 321 411
Accrued pension expense 536 664
Accrued post-retirement benefit 4 11
------ ------
1,479 1,737
Less current portion 277 263
------ ------
$1,202 $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 quarter ended June 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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ----- ---- ----
Net income(loss) $ 376 $(326) $ (975) $(1,651)
Add: Stock-based compensation
Expense included therein 96 96 192 192
Deduct: Total stock-based
compensation expense determined
under the fair value based
method (171) (171) (400) (381)
----- ----- ------- -------
Pro forma net income (loss) $ 301 $(401) $(1,183) $(1,840)
===== ===== ======= =======
Net income(loss) per share
As reported Basic $ .07 $(.06) $(.17) $(.30)
===== ===== ===== =====
Diluted $ .06 $(.06) $(.17) $(.30)
===== ===== ===== =====
Pro forma Basic $ .05 $(.07) $(.21) $(.33)
===== ===== ===== =====
Diluted $ .05 $(.07) $(.21) $(.33)
===== ===== ===== =====
There were no options granted in the periods ended June 30, 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 and
six months ended June 30 are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Interest cost on projected
benefit obligation $23 $29 $46 $58
Expected return on plan assets (15) (16) (28) (32)
Amortization of net loss 2 3 5 7
--- --- --- ---
Net periodic pension cost $10 $16 $23 $33
=== === === ===
The Company expects the funding requirement to be $240,000 in 2004 of which
$156,000 was funded during the six months ended June 30, 2004.
Operations by Industry Segments and Geographic Areas:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Net Sales
United States $2,568 $1,639 $ 2,999 $ 2,319
Europe 1,675 809 3,505 2,625
------ ------ ------- -------
$4,243 $2,448 $ 6,504 $ 4,944
Operating Profit(Loss)
United States $ 577 $ (563) $ (638) $(1,773)
Europe 93 (279) 277 (90)
------ ------ ------- -------
670 (842) (361) (1,863)
General Corporate Expense 311 335 647 678
Other (income), net (32) (47) (63) (86)
Gain on termination of post-
retirement benefit plan (834) (834)
------ ------ ------- -------
Income(loss) before income
taxes $ 391 $ (296) $ (945) $(1,621)
====== ====== ======= =======
Total Assets
United States $15,757 $18,163
Europe 3,073 2,048
Intercompany eliminations (11)
------- -------
$18,830 $20,200
======= =======
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 income of $376,000 for the three months ended June
30, 2004 and a net loss of $975,000 for the six months ended June 30, 2004
versus net losses of $326,000 and $1,651,000, respectively, in the prior
year periods. Included in the three-month and six-month periods ended June
30, 2003 was a non-cash gain on termination of the post-retirement benefit
plan of $834,000.
Consolidated sales for the quarter ended June 30, 2004 increased $1.8
million (73%) to $4.2 million due to sales increases in both the domestic
and the UK distributorship operations. The sales in the domestic operations
increased $.9 million (57%) to $2.5 million due to higher volume. In the
three-month period ended June 30, 2004 the Company had sales of $1.7 million
to a large telecommunication service provider, an increase of $.6 million
from the prior year period. Sales of the Company's UK distributorship
operations increased $.9 million (107%) due to higher volume and a favorable
exchange rate fluctuation. Consolidated sales for the six months ended June
30, 2004 increased $1.6 million (32%) primarily due to a sales increase of
$.7 million (29%)in the domestic operations and an increase of $.9 million
(34%) in its UK distributorship operations due to the reasons stated above.
Gross margin percentage was 59% for the three months and 50% for the six
months ended June 30, 2004 and 40% and 39%, respectively, in the comparable
2003 periods. The three-month period ended June 30, 2004 versus the prior
year period was favorably impacted by higher sales and the concomitant
higher absorption of fixed costs and a decrease in obsolete inventory
expense of $150,000. The improvement for the six-month period was due to
favorable product mix, lower obsolete inventory expense and cost reductions.
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 quarter ended June 30, 2003.
Liquidity and Sources of Capital
Net cash used by operations for the six months ended June 30, 2004 decreased
to $19,000. In 2004, the Company received tax refunds of approximately $2
million. This was offset by an increase in accounts receivable due to
higher sales in the second quarter of 2004. The increase in current
liabilities is primarily due to a large purchase of inventory items, at a
discount, at the end of the second quarter of 2004.
Working capital and the ratio of current assets to current liabilities were
$13.4 million and 4.3:1 at June 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 June 30, 2004,
the UK distributorship operations had net assets of $1.7 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 4. Submission of Matters to a Vote of Security Holders
(a) The Registrant's Annual Meeting of Stockholders was
held on May 13, 2004.
(c) The following matters were voted upon by stockholders:
Withheld Broker
For or Against Abstain Non-votes
1. Election of five
Directors -
John T. Connors 5,077,130 160,827 157,166
Brian J. Kelley 5,210,574 27,383 157,166
Jack Meehan 5,206,974 30,983 157,166
William A. Merritt 5,206,974 30,983 157,166
William J. Stuart 5,224,074 13,883 157,166
2. To approve the selection
of Carlin, Charron &
Rosen, LLP as
independent auditors 5,216,564 4,430 16,963 157,166
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) Three reports on Form 8-K were filed during the current quarter.
On April 1, 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 Condition) to furnish a press release reporting results of the
Company's fourth quarter and year end results for 2003, on May 14, 2004, the
Company filed a Current Report on Form 8-K pursuant to Item 9 and Item 12 to
furnish a press release reporting results of the Company's first quarter
results for 2004, and on June 16, 2004, the Company filed a Current Report
on Form 8-K pursuant to Item 9 to furnish a press release reporting its
receipt of purchase orders aggregating $1.2 million.
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: August 5, 2004 By /s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer