<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 March 31, 1997
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 March 31, 1997.
Common Stock, par value $0.20 per share -- 3,485,633 shares
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Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
1997 1996
(Unaudited)
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,030 $ 4,169
Accounts receivable, net 3,713 3,624
Inventories 3,605 3,877
Deferred income taxes 625 625
Other current assets 627 587
------- -------
TOTAL CURRENT ASSETS 13,600 12,882
PROPERTY, PLANT AND EQUIPMENT, NET 1,605 1,701
GOODWILL, NET 1,898 1,981
DEFERRED INCOME TAXES 822 822
OTHER ASSETS 119 125
------- -------
$18,044 $17,511
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 36
Accounts payable 1,525 $ 1,700
Accrued compensation and benefits 791 748
Income taxes payable 849 772
Other accrued expenses 1,016 917
------- -------
TOTAL CURRENT LIABILITIES 4,217 4,137
LONG-TERM DEBT 437 379
OTHER NON-CURRENT LIABILITIES 2,381 2,383
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 10,000,000
shares; issued 3,485,633
and 3,475,573 shares 697 695
Additional paid-in capital 12,276 12,250
Accumulated deficit (1,850) (2,354)
Currency translation adjustment 24 177
Unearned compensation (138) (156)
------- -------
TOTAL STOCKHOLDERS' EQUITY 11,009 10,612
------- -------
$18,044 $17,511
======= =======
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
March 31,
------------------
1997 1996
---- ----
SALES $5,548 $3,765
------ ------
COST AND EXPENSES:
Cost of products sold 2,653 1,975
Research and development 381 365
Selling, general and
administrative 1,586 1,172
Amortization of goodwill 83 83
Other (income) expense, net (16) (16)
------ ------
4,687 3,579
------ ------
Income before income taxes 861 186
PROVISION FOR INCOME TAXES 357 78
------ ------
NET INCOME $ 504 $ 108
====== ======
NET INCOME PER SHARE $.14 $ .03
==== =====
Weighted average number of
common and common equivalent
shares outstanding 3,629,705 3,605,232
========= =========
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)
Three Months Ended
March 31
--------------------
1997 1996
---- ----
NET CASH PROVIDED BY
OPERATIONS $ 764 $ 273
------ ------
INVESTING ACTIVITIES
Additions to property, plant and
equipment, net (60) (125)
------ ------
NET CASH USED BY INVESTING
ACTIVITIES (60) (125)
------ ------
FINANCING ACTIVITIES
Payment of debt (45) (52)
Issuance of debt 231
Shares issued pursuant to
employee stock plans 29 35
------ ------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 215 (17)
------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES (58) 0
------ ------
INCREASE IN CASH AND CASH EQUIVALENTS 861 131
CASH AND CASH EQUIVALENTS - BEGINNING
OF PERIOD 4,169 3,668
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $5,030 $3,799
====== ======
INCOME TAXES PAID $ 253 $ 270
====== ======
INTEREST EXPENSE PAID $ 10 $ 16
====== ======
See Note to Condensed Consolidated Financial Statements.
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NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1997
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 complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been includ-
ed. Operating results for the three-month period ended March 31, 1997
are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997. The balance sheet at December 31,
1996 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 in-
cluded in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
Inventories March 31, December 31,
(in thousands): 1997 1996
--------- ------------
Finished and in process $2,682 $2,682
Materials and purchased parts 923 1,195
------ ------
$3,605 $3,877
====== ======
Other Non-Current Liabilities (in thousands):
March 31, December 31,
1997 1996
--------- ------------
Accrued supplemental pension plan $ 696 $ 702
Accrued deferred compensation 331 332
Accrued pension expense 720 713
Accrued post-retirement benefit
liability 819 813
------ ------
2,566 2,560
Less current portion 185 177
------ ------
$2,381 $2,383
====== ======
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued State-
ment No. 128, Earnings per Share, which is required to be adopted as of
December 31, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements primary earnings per
share will be replaced with basic earnings per share. In computing
basic earnings per share, the dilutive effect of stock options will be
excluded. The impact of Statement No. 128 on the computation of primary
<PAGE> 6
earnings per share (to be replaced with basic earnings per share) and
fully dilutive earnings per share for the quarters ended March 31, 1997
and March 31, 1996 is not expected to be material.
Contingencies
Pending Litigation. In 1993, a purported consolidated class action
lawsuit was filed against the Company and certain of its officers alleg-
ing 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 com-
plaint. In March 1997, the court denied this motion. The Company
denies any wrongdoing and intends to defend this lawsuit vigorously. Due
to the uncertainties involved in litigation, the ultimate outcome cannot
be determined at this time, and no provision 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 condi-
tion, results of operations and cash flows.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net income increased 367% to $504,000 ($.14 per share) in the quarter
ended March 31, 1997, from $108,000 ($.03 per share) in the comparable
1996 quarter on a sales increase of 47%.
Consolidated sales for the first quarter of 1997 increased $1,783,000,
or 47%, from the prior year period. Sales of domestic operations
increased $1,783,000, or 98%, while sales of the United Kingdom opera-
tions were unchanged. The domestic sales increase was due to higher
volume of sales of the McIAS 16xx family of products for installation in
independent and regional telephone companies, competitive access provid-
ers and competitive local exchange carriers, offset, in part, by lower
sales of older products which have been replaced by the McIAS 16xx
family of products. The Company's domestic operations have experienced
strong demand and improved results in the fourth quarter of 1996 and the
first quarter of 1997 and management anticipates this momentum continu-
ing in the second quarter of 1997. Consolidated backlog at March 31,
1997 was $3.4 million up from $2.0 million at December 31, 1996.
The gross margin percentage increased to 52% in the current quarter from
48% in the comparable quarter in 1996 primarily due to the increase in
sales of higher gross margin McIAS products relative to the lower gross
margin distributorship products.
Selling, general and administrative expense increased $414,000, or 35%,
in the current quarter from the same 1996 quarter. Domestic expenses
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increased $263,000, or 36%, primarily due to higher personnel costs
related to sales commissions and bonus accruals. Expenses in the United
Kingdom increased $151,000, or 34%, due to higher occupancy costs and
increased staff.
Under Statement of Financial Accounting Standards 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 pretax
income of $3.9 million. The current deferred tax benefit of $.6 million
is primarily attributable to inventory provisions and the recognition of
such expense, for tax purposes, is, in large measure, within the control
of the Company. The non-current tax benefit, $.8 million, primarily
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) was $.6 million for the quarter ended March 31, 1997 and
$.8 million, $1.0 million and $(.3) million for the years ended December
31, 1996, 1995 and 1994, respectively. The Company anticipates continu-
ing revenue contributions from the McIAS 16xx family of products. Based
on this, management anticipates that the Company will generate suffi-
cient 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
increased to $9.4 million and 3.2:1 at March 31, 1997 compared to $8.7
million and 3.1:1 at December 31, 1996. The improvement in 1997 is
mainly due to the Company's results of operations for the three months
ended March 31, 1997.
In 1997, the Company anticipates purchasing $.5 million of equipment and
incurring increased research and development expenditures. Management
believes that its cash and cash equivalents and the cash flow from
operations in 1997 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 the Condensed
Consolidated Financial Statements and Part II - Item 1. Legal Proceed-
ings). 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 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 Securi-
ties 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
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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 develop-
ment and other risk factors detailed in this Quarterly Report on Form
10-Q and in the Company's other Securities and exchange Commission
filings.
Part II
Item 1. Legal Proceedings
In 1993, purported class action lawsuits were filed against the Company
and certain of its officers as follows:
1. Michael Germano v. Cognitronics Corporation and Matthew J.
Flanigan in the United States District Court, District of Connecticut,
dated March 15, 1993;
2. Barry L. Bragger and Eve Gerber vs. Matthew J. Flanigan
and Cognitronics, Inc. in the United States District Court, District
of Connecticut dated March 16, 1993; and
3. John M. Mitnick, on behalf of himself and all other similarly
situated v. Cognitronics Corp., Matthew J. Flanigan and G. Sullivan
in the United States District Court for the Northern District of
Georgia, Atlanta Division, dated March 15, 1993.
These actions were consolidated in the United States District Court in
Connecticut and a consolidated amended complaint was filed on July 8,
1993. The consolidated lawsuit alleges 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. On July 28, 1993, the Company and the other defendents filed a
motion to dismiss the consolidated amended complaint. After briefing by
the parties, the motion was submitted to the Court in October 1993 and
denied in March 1997. The parties have engaged in limited discovery.
The Company denies any wrongdoing and intends to defend this lawsuit
vigorously. Management has not made provision for liability, if any, in
the financial statements of the Company which may result from this
litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Registrant's Annual Meeting of Stockholders was held on May 8,
1997.
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(c) The following matters were voted upon by the stockholders:
Withheld Broker
For or Against Abstain Non-Votes
1. Election of seven
Directors -
Edward S. Davis 3,130,938 16,624 56,303
Brian J. Kelley 3,132,819 14,743 56,303
Jack Meehan 3,132,938 14,624 56,303
William A. Merritt 3,132,938 14,624 56,303
Timothy P. Murphy 3,131,938 15,624 56,303
David H. Shepard 2,936,101 211,461 56,303
Roy A. Strutt 3,131,938 15,624
2. To approve the
selection of
Ernst & Young LLP
as independent
auditors 3,133,085 8,846 5,631 56,303
Item 6. Exhibits and Reports on Form 8-K
No exhibits or reports 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: May 14, 1997 By /s/ Garrett Sullivan
_________________________
Garrett Sullivan, Treasurer
and Chief Financial Officer
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<PERIOD-END> MAR-31-1997
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<RECEIVABLES> 3,748
<ALLOWANCES> 35
<INVENTORY> 3,605
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