<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, 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 September 30, 1999.
Common Stock, par value $0.20 per share -- 5,828,544 shares
<PAGE> 2
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,707 $ 6,991
Marketable securities 8,200 4,400
Accounts receivable, net 7,689 4,972
Inventories 4,725 5,012
Deferred income taxes 860 858
Other current assets 662 766
------- -------
TOTAL CURRENT ASSETS 27,843 22,999
PROPERTY, PLANT AND EQUIPMENT, NET 1,337 1,334
GOODWILL, NET 1,067 1,316
DEFERRED INCOME TAXES 874 809
OTHER ASSETS 441 622
------- -------
$31,562 $27,080
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,303 $ 1,603
Accrued compensation and benefits 1,310 1,066
Income taxes payable 810 974
Current maturities of debt 54 112
Other accrued expenses 1,026 963
------- -------
TOTAL CURRENT LIABILITIES 4,503 4,718
LONG-TERM DEBT 105 140
OTHER NON-CURRENT LIABILITIES 2,115 2,189
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 10,000,000
shares; issued 5,828,544
and 5,598,034 shares 1,165 1,120
Additional paid-in capital 13,914 13,628
Retained earnings 10,015 5,359
Cumulative other comprehensive income 98 166
Unearned compensation (353) (239)
------- -------
24,839 20,034
Less cost of 150 common shares
in treasury 0 (1)
------- -------
TOTAL STOCKHOLDERS' EQUITY 24,839 20,033
------- -------
$31,562 $27,080
======= =======
See Note to Condensed Consolidated Financial Statements.
<PAGE> 3
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
NET SALES $9,662 $7,029 $25,800 $21,638
COST AND EXPENSES:
Cost of products sold 4,102 3,128 11,101 9,571
Research and development 601 466 1,694 1,395
Selling, general and
administrative 1,992 1,629 5,612 4,966
Amortization of goodwill 83 83 249 250
Other (income), net (114) (102) (297) (224)
------ ------ ------- -------
6,664 5,204 18,359 15,958
------ ------ ------- -------
Income before income taxes 2,998 1,825 7,441 5,680
PROVISION FOR INCOME TAXES 1,125 711 2,773 2,181
------ ----- ------- -------
NET INCOME 1,873 1,114 4,668 3,499
Currency translation
adjustment 60 115 (68) 211
------ ------ ------- -------
COMPREHENSIVE INCOME $1,933 $1,229 $ 4,600 $ 3,710
====== ====== ======= =======
NET INCOME PER SHARE:
Basic $.33 $.20 $.83 $.63
==== ==== ==== ====
Diluted $.31 $.19 $.78 $.58
==== ==== ==== ====
Weighted average number
of outstanding shares:
Basic 5,740,697 5,549,898 5,620,257 5,534,863
========= ========= ========= =========
Diluted 6,115,934 5,972,524 6,004,062 6,004,662
========= ========= ========= =========
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,
1999 1998
---- ----
NET CASH PROVIDED BY OPERATIONS $2,859 $1,845
------ ------
INVESTING ACTIVITIES
Purchases of marketable securities (5,800) (3,700)
Sales of marketable securities 2,000 3,200
Additions to property, plant and
equipment, net (296) (409)
------ -----
NET CASH USED BY INVESTING
ACTIVITIES (4,096) (909)
------ ------
FINANCING ACTIVITIES
Repurchase of 105,750 shares
for treasury (588)
Payment of debt (93) (129)
Issuance of debt 196
Shares issued pursuant to employee
stock plans, 315,202 and 7,126 shares 691 90
------ ------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 10 157
------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES (57) 43
------ ------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,284) 1,136
CASH AND CASH EQUIVALENTS- BEGINNING
OF PERIOD 6,991 4,188
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $5,707 $5,324
====== ======
INCOME TAXES PAID $3,199 $1,460
====== ======
INTEREST EXPENSE PAID $ 29 $ 41
====== ======
See Note to Condensed Consolidated Financial Statements.
<PAGE> 5
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 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 and
nine-month periods ended September 30, 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.
Certain prior year amounts have been reclassified for comparative purposes.
Stock Split
On August 20, 1999, a 3-for-2 stock split in the form of a 50% stock dividend
was distributed to shareholders of record at the close of business as of July
30, 1999. All share and per share amounts have been restated retroactively to
give effect of the stock split. The par value of the additional shares of
common stock issued in connection with the stock split was credited to common
stock and charged to retained earnings.
Inventories (in thousands):
September 30, December 31,
1999 1998
------------- ------------
Finished and in process $3,546 $3,998
Materials and purchased parts 1,179 1,014
------ ------
$4,725 $5,012
====== ======
Other Non-Current Liabilities (in thousands):
September 30, December 31,
1999 1998
------------- ------------
Accrued supplemental pension plan $ 604 $ 630
Accrued deferred compensation 308 316
Accrued pension expense 601 647
Accrued other post-retirement
benefit 793 778
------ ------
2,306 2,371
Less current portion 191 182
------ ------
$2,115 $2,189
====== ======
<PAGE> 6
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.
Operations by Industry Segments and Geographic
Areas:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Net Sales
United States:
Unaffiliated Customers
(North America) $7,775 $5,224 $20,136 $15,295
Intercompany transfers 26 0 156 44
------ ------ ------ ------
7,801 5,224 20,292 15,339
Europe 1,887 1,805 5,664 6,343
Intercompany eliminations (26) 0 (156) (44)
------ ------ ------- -------
$9,662 $7,029 $25,800 $21,638
====== ====== ======= =======
Operating Profit
United States $3,339 $1,910 $ 8,173 $ 5,524
Europe (31) 140 146 811
Intercompany eliminations 14 (6) (31) (13)
------ ------ ------- -------
3,322 2,044 8,288 6,322
General Corporate Expense 438 321 1,144 866
Other (income), net (114) (102) (297) (224)
------ ------ ------- -------
Income before income taxes $2,998 $1,825 $ 7,441 $ 5,680
====== ====== ======= =======
Total Assets
United States $27,379 $18,430
Europe 4,251 6,555
Intercompany eliminations (68) (12)
------- -------
$31,562 $24,973
======= =======
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net income was $1,873,000 and $4,668,000, respectively, for the three and
nine-month periods ended September 30, 1999 versus $1,114,000 and $3,499,000,
respectively, in the prior year periods.
Consolidated sales for the quarter and the nine months ended September 30,
1999 increased $2.6 million (37%) to $9.7 million and $4.2 million (19%) to
$25.8 million, respectively, due to sales increases by domestic operations of
<PAGE> 7
$2.5 million and $4.8 million, respectively, offset, in part, in the nine
month period by lower sales volume by the UK distributorship operations. The
domestic sales increase for both periods were due to increases in both direct
and indirect channels. Sales in the direct channel had increases of $1.7
million and $2.2 million, respectively, and indirect sales increased $.8
million and $2.6 million, respectively. The increase in indirect sales in the
quarter ended September 30, 1999 from the prior year period was due to
increased sales of $2.3 million and $.8 million to two distributors, offset,
in part, by sales decreases of $1.8 million and $.4 million to two other
distributors. For the nine months ended September 30, 1999, indirect sales
increased due to increased volume of $2.9 million, $2.0 million and $1.7
million to three distributors, offset, in part, by a decrease in volume of
$4.1 million to another distributor. The decrease in sales of the Company's
UK distributorship operations are due to lower volume.
Gross margin percentage was 58% and 57%, respectively, for the 1999 three and
nine-month periods vs. 55% and 56% in 1998. The improvement is due to a
higher proportion of sales attributable to the US operations.
Research and development expenses increased $135,000 (29%) and $299,000
(21%),respectively, in the three and nine-month periods ended September 30,
1999 from the prior year periods primarily due to higher personnel expenses
and purchased material.
Selling, general and administrative expenses increased $363,000 (22%) and
$646,000 (13%), respectively, for the three-month and nine-month periods when
compared to the comparable periods of the prior year primarily due to
personnel costs (commissions and bonuses) 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 the 1999 periods was approximately 37%
versus 38% 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 $4.6 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, $.9 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 $7.3 million for the nine months ended September 30, 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 nine months ended September 30, 1999 was
$2.9 million versus $1.8 million in 1998. In 1999, cash flow from operations
was adversely impacted by a $2.7 million increase in accounts receivable and,
in 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 ($4.1 million) versus 1998 ($.9
<PAGE> 8
million) reflects the net increase in marketable securities.
Working capital and the ratio of current assets to current liabilities
increased to $23.3 million and 6.2:1 at September 30, 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 nine months ended September 30,
1999.
During the remainder of 1999, the Company may repurchase up to an additional
194,250 shares of its common stock and anticipates purchasing $.2 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 has installed new systems or modified existing internal systems to
ensure that they are Year 2000 compliant.
The Company is continuously evaluating the status of its programs and those of
its critical suppliers to determine whether contingency 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 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. Furthermore, end users may impose a moratorium on the purchase
and installation of new equipment for a period of time straddling the coming
new year; the Company cannot estimate the adverse effect, if any, that this
may have.
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, variability of sales
volume quarter to quarter, 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.
<PAGE> 9
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 operations and the net
assets of the Company's UK distributorship operations. At September 30, 1999,
the UK distributorship operations had net assets of $2.4 million.
PART II
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: November 10, 1999 By /s/ Garrett Sullivan
---------------------------
Garrett Sullivan, Treasurer
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 5707
<SECURITIES> 8200
<RECEIVABLES> 7723
<ALLOWANCES> 34
<INVENTORY> 4725
<CURRENT-ASSETS> 27843
<PP&E> 3831
<DEPRECIATION> 2494
<TOTAL-ASSETS> 31562
<CURRENT-LIABILITIES> 4503
<BONDS> 120
0
0
<COMMON> 1165
<OTHER-SE> 23674
<TOTAL-LIABILITY-AND-EQUITY> 31562
<SALES> 25800
<TOTAL-REVENUES> 25800
<CGS> 11101
<TOTAL-COSTS> 11101
<OTHER-EXPENSES> 7555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (297)
<INCOME-PRETAX> 7441
<INCOME-TAX> 2773
<INCOME-CONTINUING> 4668
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4668
<EPS-BASIC> .83
<EPS-DILUTED> .78
