<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, 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 September 30, 1996.
Common Stock, par value $0.20 per share -- 3,473,906 shares
<PAGE> 2
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
1996 1995
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,124 $ 3,668
Accounts receivable, net 2,233 2,832
Inventories 3,395 2,983
Deferred income taxes 516 500
Other current assets 567 601
------- -------
TOTAL CURRENT ASSETS 10,835 10,584
PROPERTY, PLANT AND EQUIPMENT, NET 1,712 1,275
GOODWILL, NET 2,064 2,313
DEFERRED INCOME TAXES 784 808
OTHER ASSETS 99 60
------- -------
$15,494 $15,040
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 6 $ 78
Accounts payable 1,175 705
Accrued compensation and benefits 574 769
Income taxes payable 392 786
Other accrued expenses 678 872
------- -------
TOTAL CURRENT LIABILITIES 2,825 3,210
LONG-TERM DEBT 399 350
OTHER NON-CURRENT LIABILITIES 2,394 2,436
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 10,000,000
shares; issued 3,473,906
and 3,437,936 shares 695 687
Additional paid-in capital 12,227 12,146
Accumulated deficit (2,787) (3,453)
Unearned compensation (188) (265)
Currency translation adjustment (71) (71)
------- -------
TOTAL STOCKHOLDERS' EQUITY 9,876 9,044
------- -------
$15,494 $15,040
======= =======
See Note to Condensed Consolidated Financial Statements.
<PAGE> 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
NET SALES $3,720 $4,038 $12,536 $13,436
------ ------ ------- -------
COST AND EXPENSES:
Cost of products sold 1,731 1,875 6,072 6,310
Research and development 413 330 1,164 1,093
Selling, general and
administrative 1,275 1,194 3,947 3,909
Amortization of goodwill 83 83 249 249
Other (income) expense,
net ( 8) 21 (35) 126
------ ------ ------- -------
3,494 3,503 11,397 11,687
------ ------ ------- -------
Income before income taxes 226 535 1,139 1,749
PROVISION FOR INCOME TAXES 98 191 473 743
------ ------ ------- -------
NET INCOME $ 128 $ 344 $ 666 $ 1,006
====== ====== ======= =======
NET INCOME PER SHARE $.04 $.10 $.19 $.30
==== ==== ==== ====
Weighted average number of
common and common equivalent
shares outstanding 3,564,578 3,582,739 3,586,331 3,396,094
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
-----------------
1996 1995
---- ----
NET CASH PROVIDED BY
OPERATIONS $1,043 $2,270
------ ------
INVESTING ACTIVITIES
Additions to property, plant and
equipment, net (658) (154)
------ ------
NET CASH USED BY INVESTING
ACTIVITIES (658) (154)
------ ------
FINANCING ACTIVITIES
Shares subject to repurchase (500)
Payment of debt (133) (1,712)
Issuance of debt 114 647
Shares issued pursuant to
employee stock plans 90 126
------ ------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 71 (1,439)
------ ------
INCREASE IN CASH 456 677
CASH - BEGINNING OF PERIOD 3,668 2,940
------ ------
CASH - END OF PERIOD $4,124 $3,617
====== ======
INCOME TAXES PAID $ 960 $ 78
====== ======
INTEREST EXPENSE PAID $ 33 $ 125
====== ======
See Note to Condensed Consolidated Financial Statements.
<PAGE> 5
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 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
nine-month periods ended September 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 September 30, December 31,
(in thousands): 1996 1995
------------- ------------
Finished and in process $2,400 $2,012
Materials and purchased parts 995 971
------ ------
$3,395 $2,983
====== ======
Other Non-Current Liabilities (in thousands):
September 30, December 31,
1996 1995
------------- ------------
Accrued supplemental pension plan $ 717 $ 738
Accrued deferred compensation 332 335
Accrued pension expense 733 776
Accrued other post-retirement
benefit liability 806 798
------ ------
2,588 2,647
Less current portion 194 211
------ ------
$2,394 $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 and nine months ended September 30, 1996, the Company report-
ed net income of $128,000 and $666,000, respectively, versus $344,000 and
$1,006,000, respectively in the comparable periods of 1995.
Sales decreased $318,000 (8%) for the quarter ended September 30, 1996 from
the comparable period of the prior year primarily due to lower sales by the
Company's United Kingdom operations of distributorship products into the
British telecommunication market. Sales decreased $900,000 (7%) for the
nine-month period ended September 30, 1996 from the same period of the prior
year primarily due to lower domestic sales of McIAS~ 2100 units and upgrade
kits, McIAS 1100s and McIAS 1500s, offset in part by higher sales of McIAS
16xx units and single line announcers. Management believes that future unit
sales of McIAS 2100s, 1500s and 1100s, if any, will not be significant. The
decrease in gross margin percentage for the nine months ended September 30,
1996 from the prior year period is due to the product mix in the domestic
operations.
Research and development expense increased $83,000 (25%) in the quarter ended
September 30, 1996 from the prior year's quarter primarily due to increased
personnel cost.
Selling, general and administrative expenses increased from the prior year
period, $81,000 (7%) for the quarter just ended primarily due to higher
personnel and facility expenses in the Company's United Kingdom operations.
These costs were incurred in preparation of expanding the product line;
however, these new products have yet to make a significant contribution to
the results of operations.
The improvement in other (income) expense for the three-month and nine-month
periods of 1996 from the comparable periods of 1995 reflects higher interest
income due to higher cash balances available for investment and lower inter-
est expense due to lower debt outstanding.
The Company estimates the effective tax rate for the year and the changes in
this estimate are reflected in the quarter they occur. In 1995, the effec-
tive tax rate was favorably impacted by the increasing proportion of pre-tax
income generated by the Company's United Kingdom operations 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 these benefits, 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 nine months ended September 30, 1996 was approxi-
mately $.3 million.
<PAGE> 7
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)
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 increasing revenue contributions in 1996 and 1997 from sales of
McIAS 16xx as it completes acceptance testing by switch manufacturers and
telephone operating companies. Based on this and the full impact of cost
reduction programs already instituted, management anticipates that the Compa-
ny 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 $8.0 million and 3.8:1 at September 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 nine months
ended September 30, 1996.
The Company does not anticipate major expenditures for the purchase of
equipment during the remainder of 1996; however, the Company will expend $.2
million to have certification testing of the McIAS 16xx product performed at
an independent facility. 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.
<PAGE> 8
PART II
Item 6.
Exhibits and reports on Form 8-K
(a) Index to Exhibit
Exhibit
27 Financial Data Schedule (attached as Exhibit 27 to this
Quarterly Report on Form 10Q)
(b) No reports on Form 8-K were filed during the current quarter.
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: November 7, 1996 By /s/ Garrett Sullivan
_________________________
Garrett Sullivan, Treasurer
and Chief Financial Officer
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0
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