<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, 1999
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, 1999.
Common Stock, par value $0.20 per share -- 3,662,423 shares
<PAGE> 2
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,983 $ 6,991
Marketable securities 8,000 4,400
Accounts receivable, net 5,459 4,972
Inventories 4,813 5,012
Deferred income taxes 886 858
Other current assets 468 766
------- -------
TOTAL CURRENT ASSETS 23,609 22,999
PROPERTY, PLANT AND EQUIPMENT, NET 1,308 1,334
GOODWILL, NET 1,233 1,316
DEFERRED INCOME TAXES 819 809
OTHER ASSETS 624 622
------- -------
$27,593 $27,080
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,095 $ 1,603
Accrued compensation and benefits 873 1,066
Income taxes payable 1,018 974
Current maturities of debt 98 112
Other accrued expenses 546 963
------- -------
TOTAL CURRENT LIABILITIES 4,630 4,718
LONG-TERM DEBT 120 140
OTHER NON-CURRENT LIABILITIES 2,183 2,189
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 10,000,000
shares; issued 3,732,023 shares 746 746
Additional paid-in capital 13,628 13,628
Retained earnings 7,016 5,733
Cumulative other comprehensive income 68 166
Unearned compensation (218) (239)
------- -------
21,240 20,034
Less cost of 69,600 and 100
common shares in treasury (580) (1)
------- -------
TOTAL STOCKHOLDERS' EQUITY 20,660 20,033
------- -------
$27,593 $27,080
======= =======
See Note to Condensed Consolidated Financial Statements.
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COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands except per share amounts)
Three Months Ended
March 31,
------------------
1999 1998
---- ----
SALES $7,804 $7,540
------ ------
COST AND EXPENSES:
Cost of products sold 3,403 3,329
Research and development 553 472
Selling, general and
administrative 1,798 1,743
Amortization of goodwill 83 83
Other (income)expense, net (82) (35)
------ ------
5,755 5,592
------ ------
Income before income taxes 2,049 1,948
PROVISION FOR INCOME TAXES 766 752
------ ------
NET INCOME 1,283 1,196
Currency translation adjustment (98) 96
------ ------
COMPREHENSIVE INCOME $1,185 $1,292
====== ======
NET INCOME PER SHARE:
Basic $.35 $.32
==== ====
Diluted $.33 $.30
==== ====
Weighted average number of
shares outstanding:
Basic 3,700,420 3,682,910
========= =========
Diluted 3,903,894 4,019,492
========= =========
See Note to Condensed Consolidated Financial Statements.
<PAGE> 4
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Three Months Ended
March 31,
------------------
1999 1998
---- ----
NET CASH PROVIDED(USED) BY
OPERATING ACTIVITIES $1,342 $ (626)
------ ------
INVESTING ACTIVITIES
Purchase of marketable securities (3,600) (1,100)
Sale of marketable securities 700
Additions to property, plant and
equipment, net (88) (58)
------ ------
NET CASH USED BY
INVESTING ACTIVITIES (3,688) (458)
------ ------
FINANCING ACTIVITIES
Repurchase of 69,500 shares for treasury (579)
Principal payments on debt (32) (31)
Issuance of debt 42
Common stock issued pursuant to employee
stock plans (666 shares) 2
------ ------
NET CASH (USED)PROVIDED BY
FINANCING ACTIVITIES (611) 13
------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES (51) 43
------ ------
DECREASE IN CASH AND CASH EQUIVALENTS (3,008) (1,028)
CASH AND CASH EQUIVALENTS - BEGINNING
OF PERIOD 6,991 4,188
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $3,983 $3,160
====== ======
INCOME TAXES PAID $ 258 $ 85
====== ======
INTEREST EXPENSE PAID $ 14 $ 10
====== ======
See Note to Condensed Consolidated Financial Statements.
<PAGE> 5
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
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 Article
10 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 period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. The balance sheet at December 31, 1998 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, 1998.
Inventories (in thousands):
March 31, December 31,
1999 1998
--------- ------------
Finished and in process $3,584 $3,998
Materials and purchased parts 1,229 1,014
------ ------
$4,813 $5,012
====== ======
Other Non-Current Liabilities (in thousands):
March 31, December 31,
1999 1998
--------- ------------
Accrued supplemental pension plan $ 622 $ 630
Accrued deferred compensation 314 316
Accrued pension expense 653 647
Accrued post-retirement benefit 778 778
------ ------
2,367 2,371
Less current portion 184 182
------ ------
$2,183 $2,189
====== ======
Income Per Share
In computing basic earnings per share, the diluted effect of stock options and
warrants are excluded.
<PAGE> 6
Operations by Industry Segments and Geographic Areas:
Three Months Ended
March 31,
------------------
1999 1998
---- ----
Net Sales
United States:
Unaffiliated Customers
(North America) $ 5,738 $ 5,078
Intercompany transfers 84 40
------- -------
5,822 5,118
Europe 2,066 2,462
Intercompany eliminations (84) (40)
------- -------
$ 7,804 $ 7,540
======= =======
Operating Profit
United States $ 2,170 $ 1,810
Europe 199 464
Intercompany eliminations (44) (42)
------- -------
$ 2,325 $ 2,232
General Corporate Expense 358 319
Other (income) expense (82) (35)
------- -------
Income before income taxes $ 2,049 $ 1,948
======= =======
Total Assets
United States $22,797 $17,151
Europe 4,878 6,801
Intercompany eliminations (82) (79)
------- -------
$27,593 $23,873
======= =======
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net income increased 7% to $1.3 million ($.33 per diluted share) in the
quarter ended March 31, 1999, from $1.2 million ($.30 per diluted share) in
the comparable 1998 quarter on a sales increase of 4%.
Consolidated sales for the first quarter of 1999 increased $.3 million, or 4%,
from the prior year period. Sales of domestic operations increased $.7 million,
or 13%, due to higher volume of sales to original equipment manufacturers. When
compared to the prior year's period, sales to one OEM increased by $1 million,
sales under a recently announced agreement with another OEM were $.4 million and
sales to another OEM decreased by $.4 million. Sales of the Company's UK
distributorship operations decreased $.4 million (16%) primarily due to lower
volume caused by a customer's delay in launching a product. Exchange rate
fluctuations accounted for approximately 2% of the decline.
The gross margin percentage was approximately 56% in both periods.
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Research and development expense increased $.1 million, or 17%, from the same
period in 1998 primarily due to purchased material and higher personnel costs.
Selling, general and administrative expense increased $.1 million, or 3%, in
the current quarter from the same 1998 quarter primarily due to higher sales
and marketing expenses in the domestic operations.
Other (income) expense increased due to interest earned on higher available
cash balances and marketable securities.
The Company's effective tax rate for 1999 was 37% versus 39% for 1998. This
reduction is primarily attributable to an increase in tax exempt interest
income. 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 $4.5 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. 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 $1.8 million for the quarter ended March 31,
1999 and $6.0 million, $5.3 million and $.8 million for the years ended December
31, 1998, 1997 and 1996, 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
Net cash flow from operations for the three months ended March 31, 1999 was
$1.3 million versus ($.6) million in 1998. The 1998 cash flow from operations
was adversely impacted by net increases in non-cash working capital accounts
including a $.8 million payment to an escrow fund related to the settlement of
class action litigation. The increase in cash used for investing activities
in 1999 ($3.7 million) versus 1998 ($.1 million) reflects the net increase in
marketable securities. The net cash used for financing activities in 1999
primarily reflects the repurchase of shares for treasury.
Working capital and the ratio of current assets to current liabilities increased
to $19.0 million and 5.1:1 at March 31, 1999 compared to $18.3 million and 4.9:1
at December 31, 1998. The improvement in 1999 is mainly due to the Company's
results of operations for the three months ended March 31, 1999.
During the remainder of 1999, the Company may repurchase up to an additional
130,200 shares of its common stock and anticipates purchasing $.5 million of
equipment and incurring increased research and development expenditures.
Management believes that its cash and cash equivalents, marketable securities
and the cash flow from operations in 1999 will be sufficient to meet these
needs.
Impact of Year 2000
The Company is currently performing tests to verify that its new/modified
internal systems are Year 2000 compliant. It is anticipated that these tests
will be completed in the third quarter of 1999.
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The Company currently has no contingency plans in place in the event that it
does not complete all phases of its Year 2000 program. The Company is
continuously evaluating the status of its programs and those of its critical
suppliers to determine whether such plans are necessary. If such plans are
necessary, they would consist of manual and computer work- arounds and
increased inventory levels.
No assurance can be given that unforeseen circumstances will not arise during
the verification testing of the Company's systems that would adversely affect
the Company's Year 2000 compliance. Furthermore, the Year 2000 compliance
status of critical third party suppliers/vendors, which could adversely impact
the Company cannot fully be known. In addition, disruption to the economy
generally resulting from Year 2000 issues could also adversely affect the
Company. As a result, the Company cannot estimate the adverse impact, if any,
that could arise due to Year 2000 issues not being remediated.
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, Year 2000
compliance, 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.
Item 3. Market Risk
The Company does not use derivative financial instruments. The Company has
Marketable Securities, which are exposed to changes in interest rates. Due to
the term of these securities and/or their variable rate provision, a change in
interest rates would not have a material impact on their value.
Exchange rate fluctuations will impact the results of operation and the net
assets of the Company's UK distributorship operations. At March 31, 1999, the
UK distributorship operations had net assets of $2.4 million. During the
three months ended March 31, 1999 the UK pound depreciated 3.6% versus the US
dollar. The impact of this rate change was reflected in the currency
translation adjustment. The Company does not hedge this foreign currency net
asset exposure.
<PAGE> 9
Part II
Item 6. Exhibits and Reports on Form 8-K
(b) No reports on Form 8-K 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: May 12, 1999 By /s/ Garrett Sullivan
---------------------
Garrett Sullivan, Treasurer
and Chief Financial Officer
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<INVENTORY> 4813
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<CURRENT-LIABILITIES> 4630
<BONDS> 120
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<COMMON> 746
<OTHER-SE> 19914
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