<PAGE> 1
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 period ended June 30, 1998
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, 1998.
Common Stock, par value $0.20 per share -- 3,671,101 shares
<PAGE> 2
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
1998 1997
-------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,017 $ 4,188
Marketable securities 4,200 3,900
Accounts receivable, net 3,853 4,300
Inventories 4,874 4,386
Deferred income taxes 872 1,023
Other current assets 1,657 1,050
------- -------
TOTAL CURRENT ASSETS 20,473 18,847
PROPERTY, PLANT AND EQUIPMENT, NET 1,330 1,223
GOODWILL, NET 1,481 1,648
DEFERRED INCOME TAXES 760 769
OTHER ASSETS 625 636
------- -------
$24,669 $23,123
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,718 $ 2,378
Accrued compensation and benefits 916 1,051
Income taxes payable 450 317
Current maturities of debt 130 114
Other accrued expenses 1,396 1,875
------- -------
TOTAL CURRENT LIABILITIES 4,610 5,735
LONG-TERM DEBT 219 111
OTHER NON-CURRENT LIABILITIES 2,251 2,263
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 10,000,000
shares; issued 3,671,101
and 3,667,351 shares 734 733
Additional paid-in capital 13,292 13,209
Retained earnings 3,452 1,067
Accumulated comprehensive income 120 24
Unearned compensation ( 9) (19)
------- -------
TOTAL STOCKHOLDERS' EQUITY 17,589 15,014
------- -------
$24,669 $23,123
======= =======
See Note to Condensed Consolidated Financial Statements.
<PAGE> 3
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
NET SALES $7,069 $9,645 $14,609 $15,193
COST AND EXPENSES:
Cost of products sold 3,114 4,239 6,443 6,892
Research and development 460 465 929 846
Selling, general and
administrative 1,594 2,030 3,337 3,616
Amortization of goodwill 84 83 167 166
Other (income) expense,
net (87) 30 (122) 14
------ ------ ------- -------
5,165 6,847 10,754 11,534
------ ------ ------- -------
Income before income taxes 1,904 2,798 3,855 3,659
PROVISION FOR INCOME TAXES 718 1,184 1,470 1,541
------ ------ ------- -------
NET INCOME 1,186 1,614 2,385 2,118
Currency translation
adjustment 96 (153)
------ ------ ------- -------
COMPREHENSIVE INCOME $1,186 $1,614 $ 2,481 $ 1,965
====== ====== ======= =======
Net Income Per Share:
Basic $.32 $.47 $.65 $.62
==== ==== ==== ====
Diluted $.30 $.42 $.59 $.56
==== ==== ==== ====
Weighted average number
of outstanding shares:
Basic 3,687,609 3,435,528 3,686,678 3,431,117
========= ========= ========= =========
Diluted 4,009,000 3,856,824 4,015,667 3,764,101
========= ========= ========= =========
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
--------------------
1998 1997
---- ----
NET CASH PROVIDED BY OPERATIONS $1,222 $ 821
------ ------
INVESTING ACTIVITIES
Additions to property, plant and
equipment, net (293) (249)
------ ------
NET CASH USED BY INVESTING ACTIVITIES (293) (249)
------ ------
FINANCING ACTIVITIES
Purchases of marketable securities (2,800) (3,380)
Sales of marketable securities 2,500 2,050
Payment of debt (123) (122)
Issuance of debt 196 212
Shares issued pursuant to employee
stock plans, 4,751 and 48,457 shares 84 119
------ ------
NET CASH USED BY FINANCING ACTIVITIES (143) (1,121)
------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES 43 (58)
------ ------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 829 (607)
CASH AND CASH EQUIVALENTS- BEGINNING
OF PERIOD 4,188 2,969
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $5,017 $2,362
====== ======
INCOME TAXES PAID $ 893 $1,266
====== ======
INTEREST EXPENSE PAID $ 32 $ 21
====== ======
See Note to Condensed Consolidated Financial Statements.
<PAGE> 5
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)June 30, 1998
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, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998. The
balance sheet at December 31, 1997 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, 1997.
Certain amounts have been reclassified in the prior year for comparative
purposes.
Inventories (in thousands):
June 30, December 31,
1998 1997
-------- ------------
Finished and in process $3,915 $3,450
Materials and purchased parts 959 936
------ ------
$4,874 $4,386
====== ======
Other Non-Current Liabilities (in thousands):
June 30, December 31,
1998 1997
-------- ------------
Accrued supplemental pension plan $ 653 $ 667
Accrued deferred compensation 320 324
Accrued pension expense 664 670
Accrued other post-retirement
benefit liability 790 778
------ ------
2,427 2,439
Less current portion 176 176
------ ------
$2,251 $2,263
====== ======
Income Per Share
In computing basic earnings per share, the dilutive effect of stock options
and warrants are excluded, whereas, for dilutive earnings per share, they are
included.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
established new rules for the reporting of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
<PAGE> 6
Company's net income or shareholders' equity. SFAS No. 130 requires the
Company's foreign currency translation adjustments, which prior to adoption
were reported separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified
to conform to the requirements of SFAS No. 130.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, Disclosure About Segments of an Enterprise and
Related Information; No. 132, Employers Disclosures About Pensions and Other
Postretirement Benefits; and No. 133, Accounting for Derivative Instruements
and Hedging Activities. The Company has not yet adopted these standards.
Management does not anticipate that the adoption of these standards will have
a significant effect on earningsor the financial position of the Company.
Contingencies
In 1993, class action lawsuits were 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 class during the
period from October 29, 1992 through March 11, 1993. The plaintiffs sought
unspecified damages and related costs. On January 28, 1998, the plaintiffs
and the defendants and their insurer signed a Memorandum of Understanding to
settle this litigation, which provides for the payment of an aggregate of $2.3
million by the defendants and their insurer and the complete release of all
claims by the plaintiffs against the defendants and all other persons who were
directors or officers of the Company during the class period. In the year
ended December 31, 1997, the Company expensed its share of the proposed
settlement related to this litigation. In February 1998, the Company
deposited into an escrow account, pending the Court's approval of the
settlement, its share of the proposed settlement, $.8 million, which is
included in other current assets. On April 14, 1998, the parties entered into
a Stipulation of Settlement providing for the settlement of this litigation.
On June 5, 1998, the Court issued an Order of preliminary approval of the
settlement. The settlement is contingent upon final approval by the Court at
a class settlement hearing scheduled for September 11, 1998. The Company has
denied any fault or wrongdoing in this matter. If the Stipulation of
Settlement is not approved by the Court and if the lawsuit is adversely
determined, the resolution of this matter could have a material negative
effect on the Company's financial condition, results of operations and cash
flow.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net income was $1,186,000 and $2,385,000, respectively, for the three and
six-month periods ended June 30, 1998 versus $1,614,000 and $2,118,000,
respectively, in the prior year periods.
Consolidated sales for the quarter and the six months ended June 30, 1998
<PAGE> 7
decreased $2.6 million (27%) to $7.1 million and $.6 million (4%) to $14.6
million, respectively, due to sales decreases by domestic operations of $3
million and $1.7 million, respectively, partially offset by higher sales
volume by the UK distributorship operations. The domestic sales decrease for
the three-month period was primarily due to the inclusion in the 1997 period
of a $1 million order to a North American telephone company to replace
existing equipment and, in the 1998 period, lower sales of $1.8 million to
switch manufacturers. For the six-month period, the decrease was due to lower
sales of $.6 million to the previously mentioned telephone company, $.7
million to another telephone company and $.3 million to switch manufacturers.
Research and development expenses increased $83,000 (10%) in the six-month
period ended June 30, 1998 primarily due to higher personnel expenses.
Selling, general and administrative expenses decreased $436,000 (21%) and
$279,000 (8%), respectively, for the three-month and six-month periods when
compared to the comparable periods of the prior year primarily due to lower
personnel costs (commissions and bonuses) in the domestic operations.
Other (income) expense in the current periods is primarily interest income.
Included in the prior year periods was a charge of $76,000 to write down the
Company's building in the UK, which was for sale, to net realizable value.
The Company's effective tax rate for the 1998 periods was 38% versus 42% for
1997. This reduction is primarily attributable to the decreasing impact of
the non-deductibility of goodwill on the effective tax rate as the pretax
income increases and a higher proportion of income attributable to the UK
distributorship operations, which has a lower effective tax rate. 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 $5 million. The
current deferred tax benefit of $.9 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 and the provision for
the class action settlement which should reverse this year. 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 was $3.1 million for the six months ended
June 30, 1998 and $5.3 million, $.8 million and $1.0 million for the years
ended December 31, 1997, 1996 and 1995, respectively. Based on this,
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
increased to $15.9 million and 4.4:1 at June 30, 1998 compared to $13.1
million and 3.3:1 at December 31, 1997. The improvement in 1998 is mainly due
to the Company's results of operations for the six months ended June 30, 1998.
During the remainder of 1998, the Company anticipates purchasing $.3 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 1998 will be sufficient to meet these needs.
<PAGE> 8
In 1993, class action lawsuits were filed against the Company and certain of
its officers (see Note to Condensed Consolidated Financial Statements).
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 Commission filings.
PART II
Item 1. Legal Proceedings
Item 1, Part II of Form 10-Q for the period ended March 31, 1998, is
incorporated herein by reference.
Item 4.Submission of Matters to a Vote of Security Holders
(a) The Registrant's Annual Meeting of Stockholders was
held on May 14, 1998.
(c) The following matters were voted upon by stockholders:
Withheld Broker
For or Against Abstain Non-votes
1. Election of seven
Directors -
Edward S. Davis 3,228,709 157,789 43,217
Brian J. Kelley 3,231,004 155,494 43,217
Jack Meehan 3,228,147 158,351 43,217
William A. Merritt 3,230,269 156,229 43,217
Timothy P. Murphy 3,228,219 158,279 43,217
David H. Shepard 3,201,608 184,890 43,217
Roy A. Strutt 3,230,369 156,129 43,217
2. To approve a proposal
to amend the Company's
1990 Stock Option Plan
3,137,750 223,634 25,114 43,217
3. To approve a proposal
to amend the Company's
Restricted Stock Plan
3,289,574 75,465 21,459 43,217
4. To approve the selection
of Ernst & Young LLP as
independent auditors
3,363,621 16,243 6,634 43,217
<PAGE> 9
Item 6.Exhibits and reports on Form 8-K
No exhibits or reports were filed during the current quarter.
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: August 6, 1998 By /s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer
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