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 quarterly period ended March 31, 2005
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 Rule 12b-2 of the Exchange Act).
Yes No x
The Registrant has 5,743,903 shares of Common Stock, $.20
par value per share outstanding at March 31, 2005.
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2005 2004
(Unaudited) (Note)ASSETS
----------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 2,664 $ 2,836
Marketable securities 8,021 5,847
Accounts receivable, net 2,798 4,466
Inventories 2,107 2,303
Other current assets 207 148
------- -------
TOTAL CURRENT ASSETS 15,797 15,600
LOANS TO OFFICERS 1,982 1,968
PROPERTY, PLANT AND EQUIPMENT, NET 862 922
GOODWILL 319 319
OTHER ASSETS 95 147
------- -------
$19,055 $18,956
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 631 $ 348
Accrued compensation and benefits 827 842
Deferred service revenue 1,094 576
Other accrued expenses 1,109 1,137
------- -------
TOTAL CURRENT LIABILITIES 3,661 2,903
NON-CURRENT LIABILITIES 992 1,038
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 per share,
authorized 20,000,000 shares;
issued 5,866,878 shares 1,173 1,173
Additional paid-in capital 12,546 12,586
Retained earnings 2,110 2,865
Accumulative other comprehensive loss (204) (225)
Unearned compensation (262) (303)
------- -------
15,363 16,096
Less cost of 122,975 and 138,308
common shares in treasury (961) (1,081)
------- -------
TOTAL STOCKHOLDERS' EQUITY 14,402 15,015
------- -------
$19,055 $18,956
======= =======
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,
2005 2004
---- ----
REVENUES
Sales $2,230 $ 2,047
Service 499 214
------ -------
$2,729 $ 2,261
COST AND EXPENSES:
Cost of products sold and services 1,232 1,513
Research and development 718 595
Selling, general and
administrative 1,580 1,520
Other (income)expense, net (61) (31)
------ -------
3,469 3,597
------ -------
Loss before income taxes (740) (1,336)
PROVISION FOR INCOME TAXES 15 15
------ -------
NET LOSS (755) (1,351)
Currency translation adjustment 21 88
------ -------
COMPREHENSIVE LOSS $ (734) $(1,263)
====== =======
NET LOSS PER SHARE:
Basic $(.13) $(.24)
====== =====
Diluted $(.13) $(.24)
===== =====
Weighted average number of
shares outstanding:
Basic 5,634,141 5,530,124
========= =========
Diluted 5,634,141 5,530,124
========= =========
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,
2005 2004
---- ----
NET CASH PROVIDED BY
OPERATING ACTIVITIES $2,002 $ 144
------ ------
INVESTING ACTIVITIES
Purchase of marketable securities (3,574) (1,529)
Sales of marketable securities 1,400 2,810
Additions to property, plant and
equipment, net (18) (50)
Purchase of software (17)
------ ------
NET CASH PROVIDED(USED) BY
INVESTING ACTIVITIES (2,209) 1,231
------ ------
FINANCING ACTIVITIES
Shares issued pursuant to
employee stock plans 25 2
------ ------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 25 2
------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES 10 42
------ ------
INCREASE(DECREASE)IN CASH AND
CASH EQUIVALENTS (172) 1,419
CASH AND CASH EQUIVALENTS - BEGINNING
OF PERIOD 2,836 2,877
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $2,664 $4,296
====== ======
INCOME TAXES PAID $ 2 $ 81
====== ======
INTEREST PAID $ 0 $ 1
====== ======
See Note to Condensed Consolidated Financial Statements.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2005
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, 2005 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2005. The balance
sheet at December 31, 2004 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, 2004.
Inventories (in thousands):
March 31, December 31,
2005 2004
--------- -----------
Finished and in process $1,432 $1,572
Materials and purchased parts 675 731
------ ------
$2,107 $2,303
====== ======
Non-Current Liabilities (in thousands):
March 31, December 31,
2005 2004
--------- ------------
Accrued supplemental pension plan $ 357 $ 368
Accrued deferred compensation 200 207
Accrued pension expense 713 740
------ ------
1,270 1,315
Less current portion 278 277
------ ------
$ 992 $1,038
====== ======
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 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
March 31,
2005 2004
---- ----
Net loss as reported $(755) $(1,351)
Add: Stock-based compensation
included therein 80 96
Deduct: Total stock-based compensation
under fair value method (142) (229)
----- -------
Pro forma net loss $(817) $(1,484)
===== =======
Net loss per share
As reported Basic $(.13) $(.24)
Diluted $(.13) $(.24)
Pro forma Basic $(.15) $(.27)
Diluted $(.15) $(.27)
There were no options granted in the periods ended March 31, 2005 and 2004.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-based
Payment" that will require the Company to expense costs related to
share-based payment transactions with employees. With limited exceptions,
SFAS No. 123(R) requires that the fair value of share-based payments to
employees be expensed over the period service is received and eliminates the
ability to account for these instruments under the intrinsic value method
prescribed by APB No. 25, and allowed under the original provisions of SFAS
No. 123. SFAS No. 123(R) becomes mandatorily effective for the Company on
January 1, 2006. SFAS No. 123(R) allows for either prospective recognition
of compensation expense or retrospective recognition, which may be back to
the original issuance of SFAS No. 123 or only to interim periods in the year
of adoption. The Company is currently evaluating these transition methods.
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):
2005 2004
---- ----
Interest cost on projected
benefit obligation $23 $23
Expected return on plan assets (15) (13)
Amortization of net loss 7 3
--- ---
Net periodic pension cost $15 $13
=== ===
The Company expects the funding requirement to be $185,000 in 2005 of which
$42,000 was funded during the current interim period.
Operations by
Industry Segments and Geographic Areas:
Three Months Ended
March 31,
2005 2004
---- ----
Net Revenues
United States $ 1,721 $ 431
Europe 1,008 1,830
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$ 2,729 $ 2,261
======= =======
Operating Profit(loss)
United States $ (204) $(1,213)
Europe (257) 184
------- -------
(461) (1,029)
General corporate expense 340 338
Other (income)expense (61) (31)
------- -------
Loss before income taxes $ (740) $(1,336)
======= =======
Total Assets
United States $16,650 $14,260
Europe 2,405 3,601
------- -------
$19,055 $17,861
======= =======
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, 2005, the Company reported a loss of $.8
million ($.13 per basic and diluted share), versus a loss of $1.4 million
($.24 per basic and diluted share) in the comparable 2004 quarter.
Consolidated revenues for the first quarter of 2005 increased $.5 million,
or 21%, from the prior year period. Revenues of domestic operations
increased $1.3 million, or 299%, due to increased product sales of $1.2
million due to sales of $725,000 to a world-wide telecommunication system
integrator and an increase in sales to telecommunication service providers.
The revenues of the UK distributorship operations decreased in the first
quarter of 2005 from the prior year by $.8 million (45%) due to lower sales
volume. Included in the 2004 quarter was an order of $471,000 for power
over LAN equipment which was not repeated in the current year's quarter.
The gross margin percentage was approximately 55% in the 2005 quarter versus
33% in the prior year. This increase is attributable to the increase in the
sales volume and service revenues of the domestic operations.
Research and development expense increased $.1 million (21%) from the same
period in 2004, primarily due to higher personnel costs.
Selling, general and administrative expense increased $60,000, or 4%,
primarily due to higher commissions and salaries in the domestic operations.
Other (income) expense increased due to higher interest earned on cash
balances and marketable securities, reflecting higher interest rates.
No tax benefit was provided for the losses incurred in 2005 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, 2005
was $2.0 million versus $.1 million in 2004; this variance from the prior
year is attributable to the decrease in accounts receivable in the 2005
quarter. The cash used by investing activities of $2.2 million in 2005
versus $1.2 provided in 2004 reflects net purchases of marketable securities
in 2005 versus net sales in 2004.
Working capital and the ratio of current assets to current liabilities was
$12.1 million and 4.3:1 at March 31, 2005 compared to $12.7 million and
5.4:1 at December 31, 2004.
During the remainder of 2005, 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 the cash flow from operations, its cash
and cash equivalents and marketable securities will be sufficient to meet
these needs in 2005.
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. The UK pound was
stronger against the US dollar during the first quarter of 2005 as compared
to the first quarter of 2004 so the loss of the UK distributorship
operations was translated into more dollars than they would have in the
first quarter of 2004. The relative value of the UK pound to US dollar was
approximately the same at March 31, 2005 as at December 31, 2004. At March
31, 2005, the UK distributorship operations had net assets of $1.0 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 as of the end of the period covered by this report
in ensuring that all material information required to be disclosed in this
quarterly report and all information required to be disclosed by the Company
under the Securities Exchange Act of 1934 has been made known to them in a
timely fashion. During the three months ended March 31, 2005, there were no
changes in the Company's internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls for financial reporting.
Part II
Item 6. Exhibits
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.
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 11, 2005 By
/s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer