<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, 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 June 30, 1997.
Common Stock, par value $0.20 per share -- 3,524,030 shares<PAGE>
<PAGE> 2
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
1997 1996
(Unaudited)
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,892 $ 4,169
Accounts receivable, net 6,308 3,624
Inventories 3,650 3,877
Deferred income taxes 620 625
Other current assets 955 587
------- -------
TOTAL CURRENT ASSETS 16,425 12,882
PROPERTY, PLANT AND EQUIPMENT, NET 1,322 1,701
GOODWILL, NET 1,815 1,981
DEFERRED INCOME TAXES 822 822
OTHER ASSETS 112 125
------- -------
$20,496 $17,511
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,862 $ 1,700
Accrued compensation and benefits 1,212 748
Income taxes payable 1,015 772
Other accrued expenses 756 830
Current maturities of debt 371 87
----- -----
TOTAL CURRENT LIABILITIES 5,216 4,137
LONG-TERM DEBT 168 379
OTHER NON-CURRENT LIABILITIES 2,379 2,383
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 10,000,000
shares; issued 3,524,030
and 3,475,573 shares 705 695
Additional paid-in capital 12,412 12,250
Accumulated deficit (236) (2,354)
Currency translation adjustment 24 177
Unearned compensation (172) (156)
------- -------
TOTAL STOCKHOLDERS' EQUITY 12,733 10,612
------- -------
$20,496 $17,511
======= =======
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 Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
NET SALES $9,645 $5,051 $15,193 $ 8,816
COST AND EXPENSES:
Cost of products sold 4,239 2,366 6,892 4,341
Research and development 465 386 846 751
Selling, general and
administrative 2,030 1,500 3,616 2,672
Amortization of goodwill 83 83 166 166
Other (income) expense,
net 30 (11) 14 (27)
------ ------ ------- -------
6,847 4,324 11,534 7,903
------ ------ ------- -------
Income before income
taxes 2,798 727 3,659 913
PROVISION FOR INCOME TAXES 1,184 297 1,541 375
------ ------ ------- -------
NET INCOME $1,614 $ 430 $ 2,118 $ 538
====== ====== ======= =======
NET INCOME PER SHARE $.42 $.12 $.57 $.15
==== ==== ==== ====
Weighted average number
of common and common
equivalent shares
outstanding 3,828,247 3,589,243 3,736,283 3,600,041
See Note to Condensed Consolidated Financial Statements.
<PAGE> 4
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Six Months Ended
June 30
----------------
1997 1996
---- ----
NET CASH PROVIDED (USED) BY
OPERATIONS $ 821 $ (94)
------ ------
INVESTING ACTIVITIES
Additions to property, plant and
equipment, net (249) (234)
------ ------
NET CASH USED BY INVESTING
ACTIVITIES (249) (234)
------ ------
FINANCING ACTIVITIES
Payment of debt (122) (96)
Issuance of debt 212 36
Shares issued pursuant to
employee stock plans 119 37
------ ------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 209 (23)
------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES (58) 0
------ ------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 723 (351)
CASH AND CASH EQUIVALENTS- BEGINNING
OF PERIOD 4,169 3,668
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $4,892 $3,317
====== ======
INCOME TAXES PAID $1,266 $ 361
====== ======
INTEREST EXPENSE PAID $ 21 $ 19
====== ======
See Note to Condensed Consolidated Financial Statements.
<PAGE> 5
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 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 included. Operating results for the three-month and
six-month periods ended June 30, 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
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
Inventories June 30, December 31,
(in thousands): 1997 1996
-------- ------------
Finished and in process $2,741 $2,682
Materials and purchased parts 909 1,195
------ ------
$3,650 $3,877
====== ======
Other Non-Current Liabilities (in thousands):
June 30, December 31,
1997 1996
-------- ------------
Accrued supplemental pension plan $ 689 $ 702
Accrued deferred compensation 330 332
Accrued pension expense 728 713
Accrued other post-retirement
benefit liability 825 813
------ ------
2,572 2,560
Less current portion 193 177
------ ------
$2,379 $2,383
====== ======
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement
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 and fully diluted earnings per
share will be replaced with basic and diluted earnings per share,
respectively. In computing basic earnings per share, the dilutive effect of
stock options will be excluded. The impact of the application of
<PAGE> 6
Statement No. 128 on the computation of earnings per share is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
Net income per share,
as reported (1) $.42 $.12 $.57 $.15
Pro forma net income
per share -
Basic $.47 $.13 $.62 $.16
Diluted $.42 $.12 $.57 $.15
(1) Fully diluted net income per share did not differ materially from primary
net income per share.
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 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 condition, 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 $1,184,000 (275%) to $1,614,000 ($.42 per share) and
$1,580,000 (294%) to $2,118,000 ($.57 per share) for the three-month and
six-month periods ended June 30, 1997, respectively, from the comparable
periods of the prior year due to higher sales volumes.
Consolidated sales for the quarter and the six months ended June 30, 1997
increased $4.6 million (91%) to $9.6 million and $6.4 million (72%) to $15.2
million, respectively, due to sales increases by domestic operations of $5
million and $6.7 million, respectively, partially offset by lower sales volume
by the UK distributorship operations. The domestic sales increases in both
periods were due to higher volume of sales of the McIAS 16xx family of
products for installation in independent and regional telephone companies,
competitive access providers and competitive local exchange carriers (CLECs).
<PAGE> 7
These sales are made through both direct and indirect (switch manufacturers)
distribution channels. Major sales in the current three-month and six-month
periods included (a) an aggregate of $1.8 million and $2.4 million,
respectively, to CLECs in their initial buildup of their infrastructures in
order to offer competitive local communications services pursuant to the
Telecommunications Act of 1996, (b) an aggregate of approximately $1 million
to a North American telephone company to replace existing equipment and (c) a
significant increase in sales to a second switch manufacturer. Management
anticipates that some of this momentum will continue into the second half of
1997. Included in the 1996 periods were indirect sales of $1.1 million for
installation in a telephone operating company. The consolidated sales order
backlog at June 30, 1997 was $3.1 million.
The gross margin percentage for the three-month and six-month periods ended
June 30, 1997 improved to 56% and 55%, respectively, from the comparable prior
year periods due to the higher proportion of sales by the domestic operations.
Research and development expenses increased $79,000 (20%) and $95,000 (13%) in
the three-month and six-month periods ended June 30, 1997, respectively,
primarily due to certification testing of the McIAS 950 and McIAS 16xx series
products and higher personnel expenses.
Selling, general and administrative expenses increased $530,000 (35%) and
$944,000 (35%), respectively, for the three-month and six-month periods when
compared to the comparable periods of the prior year. The domestic operations
accounted for $328,000 (32%) and $592,000 (34%), respectively, of the
increases due to higher personnel costs (commissions and bonuses). The UK
distributorship operations accounted for $202,000 (42%) and $352,000 (38%),
respectively, of the increases due to higher occupancy costs and increased
staff.
Included in Other (income) expense in the current period is a charge of
$76,000 to write down the Company's building in the UK, which is for sale, to
net realizable value. At June 30, 1997, the net book value of the building of
$296,000 and the associated mortgage note of $233,000 are classified as
current assets and current maturities of debt, respectively.
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 $3.9 million during the carryforward period. The current deferred income
tax asset of $.6 million is primarily attributable 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, 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 $3.5 million for the six months
ended June 30, 1997 and $.8 million, $1.0 million and $(.3) million in years
ended December 31, 1996, 1995 and 1994, respectively. The Company anticipates
continuing revenue contributions from the McIAS 16xx family of products.
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.
<PAGE> 8
Liquidity and Sources of Capital
- --------------------------------
Working capital and the ratio of current assets to current liabilities were
$11.2 million and 3.1:1 at June 30, 1997 compared to $8.7 million and 3.1:1 at
December 31, 1996, respectively. The improvement in working capital during
1997 is mainly due to the Company's results of operations for the six months
ended June 30, 1997.
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 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 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, are "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 Commission filings.
PART II
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: July 28, 1997 By/S/GARRETT SULLIVAN
---------------------
Garrett Sullivan, Treasurer
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,892
<SECURITIES> 0
<RECEIVABLES> 6,354
<ALLOWANCES> 46
<INVENTORY> 3,650
<CURRENT-ASSETS> 16,425
<PP&E> 3,113
<DEPRECIATION> 1,791
<TOTAL-ASSETS> 20,496
<CURRENT-LIABILITIES> 5,216
<BONDS> 168
0
0
<COMMON> 705
<OTHER-SE> 12,028
<TOTAL-LIABILITY-AND-EQUITY> 20,496
<SALES> 9,645
<TOTAL-REVENUES> 9,645
<CGS> 4,239
<TOTAL-COSTS> 4,239
<OTHER-EXPENSES> 2,532
<LOSS-PROVISION> 76
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,798
<INCOME-TAX> 1,184
<INCOME-CONTINUING> 1,614
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,614
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
