<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 June 30, 1996
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 June 30, 1996.
Common Stock, par value $0.20 per share -- 3,451,913 shares
<PAGE> 2
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
1996 1995
(Unaudited)
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,317 $ 3,668
Accounts receivable, net 3,898 2,832
Inventories 2,636 2,983
Deferred income taxes 513 500
Other current assets 550 601
------- -------
TOTAL CURRENT ASSETS 10,914 10,584
PROPERTY, PLANT AND EQUIPMENT, NET 1,358 1,275
GOODWILL, NET 2,147 2,313
DEFERRED INCOME TAXES 790 808
OTHER ASSETS 100 60
------- -------
$15,309 $15,040
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 27 $ 78
Accounts payable 588 705
Accrued compensation and benefits 646 769
Income taxes payable 808 786
Other accrued expenses 770 872
------- -------
TOTAL CURRENT LIABILITIES 2,839 3,210
LONG-TERM DEBT 337 350
OTHER NON-CURRENT LIABILITIES 2,465 2,436
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 10,000,000
shares; issued 3,451,913
and 3,437,936 shares 690 687
Additional paid-in capital 12,179 12,146
Accumulated deficit (2,916) (3,453)
Unearned compensation (214) (265)
Currency translation adjustment (71) (71)
------- -------
TOTAL STOCKHOLDERS' EQUITY 9,668 9,044
------- -------
$15,309 $15,040
======= =======
See Note to Condensed Consolidated Financial Statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
NET SALES $5,051 $5,010 $8,816 $9,398
------ ------ ------ ------
COST AND EXPENSES:
Cost of products sold 2,366 2,317 4,341 4,435
Research and development 386 391 751 763
Selling, general and
administrative 1,500 1,436 2,672 2,715
Amortization of goodwill 83 83 166 166
Other (income) expense,
net (11) 45 (27) 105
------ ------ ------ ------
4,324 4,272 7,903 8,184
Income before income taxes 727 738 913 1,214
------ ------ ------ ------
PROVISION FOR INCOME TAXES 297 328 375 552
------ ------ ------ ------
NET INCOME $ 430 $ 410 $ 538 $ 662
====== ====== ====== ======
NET INCOME PER SHARE $.12 $.12 $.15 $.20
==== ==== ==== ====
Weighted average number of
common and common equivalent
shares outstanding 3,589,243 3,338,178 3,600,041 3,290,630
See Note to Condensed Consolidated Financial Statements.
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COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Six Months Ended
June 30,
----------------
1996 1995
---- ----
NET CASH (USED) PROVIDED BY
OPERATIONS $ (94) $1,886
------ ------
INVESTING ACTIVITIES
Additions to property, plant and
equipment, net (234) (132)
------ ------
NET CASH USED BY INVESTING
ACTIVITIES (234) (132)
------ ------
FINANCING ACTIVITIES
Shares subject to repurchase (500)
Payment of debt (96) (907)
Issuance of debt 36 521
Shares issued pursuant to
employee stock plans 37 55
------ ------
NET CASH USED BY
FINANCING ACTIVITIES (23) (831)
------ ------
(DECREASE) INCREASE IN CASH (351) 923
CASH - BEGINNING OF PERIOD 3,668 2,940
------ ------
CASH - END OF PERIOD $3,317 $3,863
====== ======
INCOME TAXES PAID $ 361 $ 18
====== ======
INTEREST EXPENSE PAID $ 19 $ 99
====== ======
See Note to Condensed Consolidated Financial Statements.
<PAGE> 5
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1996
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 Rule 10-
01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for com-
plete 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, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. The
balance sheet at December 31, 1995 has been derived from the audited finan-
cial statements at that date. For further information, refer to the consoli-
dated 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, 1995.
Inventories June 30, December 31,
(in thousands): 1996 1995
-------- ------------
Finished and in process $1,668 $2,012
Materials and purchased parts 968 971
------ ------
$2,636 $2,983
====== ======
Other Non-Current Liabilities June 30, December 31,
(in thousands): 1996 1995
-------- ------------
Accrued supplemental pension plan $ 725 $ 738
Accrued deferred compensation 334 335
Accrued pension expense 789 776
Accrued post-retirement benefit
liability 810 798
------ ------
2,658 2,647
Less current portion 193 211
------ ------
$2,465 $2,436
====== ======
CONTINGENCIES
Pending Litigation. In 1993, a purported consolidated class action lawsuit
was filed against the Company and certain of its officers alleging securities
law violations in connection with the purchase of the Company's common stock
by members of the purported classes during the period from October 29, 1992
through March 12, 1993. The plaintiffs seek unspecified damages and related
costs. The Company and the other defendants submitted a motion to dismiss
the consolidated amended complaint. The Company has denied any wrongdoing
and believes it has presented viable grounds to support the motion to dis-
miss. The motion is sub judice. Due to the uncertainties involved in litiga-
tion, the ultimate outcome cannot be determined at this time, and no provi-
sion for any liability that may result from this litigation, if any, has been
made in the financial statements. If adversely determined, the resolution of
this matter could have a material negative affect on the Company's financial
condition, results of operations and cash flows.
<PAGE> 6
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
For the quarter ended June 30, 1996, net income was $430,000 ($.12 per share)
compared to $410,000 ($.12 per share) in the comparable period in 1995. For
the six-month period ended June 30, 1996, the Company reported net income of
$538,000 ($.15 per share) versus $662,000 ($.20 per share) in 1995.
Consolidated sales increased $41,000 for the quarter and decreased $582,000
for the six-month period ended June 30, 1996 compared to the same periods of
1995. Sales of the United Kingdom operations increased $71,000 (4% and
$362,000 (10%), respectively, from the prior year periods mainly due to the
increased sales volume of distributorship type products. Sales for the
domestic operations decreased $30,000 and $944,000, respectively, from the
prior year periods primarily due to lower volume of McIAS 2100 systems and
upgrade kits, McIAS 1100s and McIAS 1500s, offset, in part, by higher unit
volume of the McIAS 16xx product line. The quarter ended June 30, 1996
included McIAS 16xx sales of $1,720,000 ($1,135,000 to one customer), repre-
senting 56% of domestic sales. Sustainable, substantive sales of the McIAS
16xx product line is dependent on future acceptance by other telephone compa-
nies.
The gross margin percentage for the six months ended June 30, 1996 decreased
2% to 51% from the comparable period of the prior year due to product mix.
Selling, general and administrative expense increased $64,000 (4%) for the
quarter ended June 30, 1996 compared to the same period of the prior year
primarily due to higher personnel expenses in the Company's U.K. operations
and higher professional fees in its domestic operations, offset, in part, by
lower personnel expenses in its domestic operations.
The Company's effective income tax rate decreased to 41% for both the three
and six months ended June 30, 1996 from 44% and 45%, respectively, in the
comparable periods of the prior year due to a higher proportion of pretax
income in the current periods being attributable to foreign income with a
lower effective tax rate.
Under financial Accounting Standards Board ("FASB") Statement No. 109, the
Company has recognized future tax benefits that management believes will be
realized. In order to realize this benefit, the Company, exclusive of the
results of Dacon Electronics Plc, will have to generate domestic pretax
income of $3.8 million during the carryforward period. The Company's domes-
tic pretax income for the six months ended June 30, 1996 was $.3 million.
The current deferred income tax asset of $.5 million is primarily attributa-
ble to inventory provisions and valuation reserves, and the recognition of
such losses, for tax purposes, are, in large measure, within the control of
the Company. The non-current deferred income tax asset, $.8 million, pri-
marily relates to deferred compensation and benefit plans and, as such, would
be recognized over a long period of time. The Company's U.S. pretax income
(loss) from continuing operations was $1.0 million, $(.3) million and $(1.5)
<PAGE> 7
million in years ended December 31, 1995, 1994 and 1993, respectively. In
1994, the benefit of cost reduction programs initiated in 1993 and 1994 were
not fully realized and included in the 1993 loss were additional inventory
provisions, severance expense and writedowns of assets, aggregating approxi-
mately $1.5 million. The losses in 1994 and 1993 also reflect a decline in
the demand for the Company's McIAS 2100 series of products. The Company
anticipates additional revenue contributions in 1996 from the introduction of
new products at varying price feature points. Based on this and the full
impact of cost reduction programs already instituted, management anticipates
that the Company will generate sufficient taxable income in the future to
realize these benefits.
Liquidity and Sources of Capital
- --------------------------------
Working capital and the ratio of current assets to current liabilities in-
creased to $8.1 million and 3.8:1 at June 30, 1996 compared to $7.4 million
and 3.3:1 at December 31, 1995, respectively. The improvement in 1996 is
mainly due to the Company's results of operations for the six months ended
June 30, 1996.
The Company anticipates purchasing $.3 million of equipment and incurring
increased research and development expenditures during the remainder of the
year. Management believes that its cash balances and the cash flow from
operations in 1996 will be sufficient to meet these needs.
In 1993, a purported consolidated class action lawsuit was filed against the
company and certain of its officers (see Note to Condensed Consolidated
Financial Statements). Due to the uncertainties involved in litigation, the
ultimate outcome cannot be determined at this time. If adversely determined,
the resolution of this matter could have a material negative affect on the
Company's financial condition, results of operations and cash flows.
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 , 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 Com-
mission filings.
Part II
Item 6. Exhibits and Reports on Form 8-K
No exhibits or reports were filed during the current quarter.
<PAGE> 8
SIGNATURES
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: July 30, 1996 By /S/ GARRETT SULLIVAN
_________________________
Garrett Sullivan, Treasurer
and Chief Financial Officer
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