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 quarterly period ended September 30, 2005
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 1-8496
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 the past 90 days. Yes x No
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No x
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes No x
The Registrant has 5,751,403 shares of Common Stock, $.20 par
value per share outstanding at September 30, 2005.Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands)
September 30, December 31,
2005 2004
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,867 $ 2,222
Marketable securities 7,305 5,847
Accounts receivable, net 957 3,737
Inventories 1,662 1,595
Other current assets 137 148
Assets - discontinued subsidiary
held for sale 1,983 2,486
------- -------
TOTAL CURRENT ASSETS 14,911 16,035
LOANS TO OFFICERS 2,013 1,968
PROPERTY, PLANT AND EQUIPMENT, NET 618 806
OTHER ASSETS 89 147
------- -------
$17,631 $18,956
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 123 $ 86
Accrued compensation and benefits 728 842
Deferred revenue 2,390 416
Other accrued expenses 746 671
Liabilities - discontinued
subsidiary held for sale 1,620 888
------- -------
TOTAL CURRENT LIABILITIES 5,607 2,903
OTHER NON-CURRENT LIABILITIES 819 1,038
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 20,000,000 shares;
issued 5,866,878 shares 1,173 1,173
Additional paid-in capital 12,610 12,586
Retained earnings (deficit) (1,235) 2,865
Accumulated other comprehensive loss (253) (225)
Unearned compensation (187) (303)
------- -------
12,108 16,096
Less cost of 115,475 and 138,308
common shares in treasury (903) (1,081)
------- -------
TOTAL STOCKHOLDERS' EQUITY 11,205 15,015
------- -------
$17,631 $18,956
======= =======
See Note to Condensed Consolidated Financial Statements.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
---- ---- ---- ----
REVENUES:
Sales $ 751 $ 535 $ 2,929 $ 3,135
Service 235 236 832 635
------- ------- ------- -------
986 771 3,761 3,770
COST AND EXPENSES:
Cost of products sold
and services 598 619 1,969 2,092
Research and development 760 620 2,269 1,850
Selling, general and
administrative 772 740 2,510 2,323
Other (income), net (94) (31) (228) (94)
------- ------- ------- -------
2,036 1,948 6,520 6,171
LOSS FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES (1,050) (1,177) (2,759) (2,401)
PROVISION FOR INCOME
TAXES 15 15 45 45
------- ------- ------- -------
LOSS FROM CONTINUING
OPERATIONS (1,065) (1,192) (2,804) (2,446)
INCOME(LOSS) FROM
DISCONTINUED OPERATIONS (266) (156) (977) 123
IMPAIRMENT LOSS -
DISCONTINUED SUBSIDIARY
HELD FOR SALE (319) (319)
------- ------- ------- -------
NET LOSS (1,650) (1,348) (4,100) (2,323)
CURRENCY TRANSLATION
ADJUSTMENT ( 3) ( 9) (28) 69
------- ------- ------- -------
COMPREHENSIVE LOSS $(1,653) $(1,357) $(4,128) $(2,254)
======= ======= ======= =======
INCOME(LOSS) PER BASIC
AND DILUTED SHARE:
Continuing operations $(.19) $(.21) $(.49) $(.44)
===== ===== ===== =====
Discontinued operations $(.05) $(.03) $(.17) $ .02
===== ===== ===== =====
Impairment loss $(.06) $(.06)
===== =====
Net loss $(.29) $(.24) $(.72) $(.42)
===== ===== ===== =====
WEIGHTED AVERAGE NUMBER
OF OUTSTANDING SHARES:
Basic 5,685,997 5,585,293 5,657,993 5,554,861
========= ========= ========= =========
Diluted 5,685,997 5,585,293 5,657,993 5,554,861
========= ========= ========= =========
See Note to Condensed Consolidated Financial Statements.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Nine Months Ended
September 30,
-----------------
2005 2004
---- ----
NET CASH PROVIDED(USED) BY
CONTINUING OPERATIONS $2,202 $ (294)
------ ------
INVESTING ACTIVITIES - CONTINUING OPERATIONS
Purchases of marketable securities (8,123) (4,733)
Sales of marketable securities 6,665 5,555
Additions to property, plant and
equipment, net (47) (65)
------ ------
NET CASH PROVIDED(USED) BY
INVESTING ACTIVITIES (1,505) 757
------ ------
FINANCING ACTIVITIES - CONTINUING OPERATIONS
Shares issued pursuant to employee
stock plans 38 47
------ ------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 38 47
------ ------
DISCONTINUED OPERATIONS (90)
------ ------
INCREASE IN CASH AND CASH EQUIVALENTS 645 510
CASH AND CASH EQUIVALENTS- BEGINNING
OF PERIOD 2,222 2,220
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $2,867 $2,730
====== ======
INCOME TAXES PAID $ 2 $ 63
====== ======
INTEREST PAID $ 2 $ 7
====== ======
See Note to Condensed Consolidated Financial Statements.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2005
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America 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
accounting principles generally accepted in the United States of America 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, 2005 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2005.
The balance sheet at December 31, 2004 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, 2004.
Reclassifications
Certain current and prior period amounts have been reclassified to conform
to the presentation for discontinued operations under Statement of Financial
Accounting Standards ("SFAS") No. 144 resulting from the discontinued
operations of the Company's subsidiary (discussed below).
Inventories (in thousands):
September 30, December 31,
2005 2004
------------- ------------
Finished and in process $1,061 $ 864
Materials and purchased parts 601 731
------ ------
$1,662 $1,595
====== ======
Other Non-Current Liabilities (in thousands):
September 30, December 31,
2005 2004
------------- ------------
Accrued supplemental pension plan $ 332 $ 368
Accrued deferred compensation 186 207
Accrued pension expense 579 740
------ ------
1,097 1,315
Less current portion 278 277
------ ------
$ 819 $1,038
====== ======
Income Per Share
In computing basic earnings (loss) per share, the dilutive effect of stock
options and warrants are excluded; whereas, for dilutive earnings, they are
included.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value at the date of grant. The
Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees", and therefore recognizes no compensation expense for stock
options granted.
The Company applies the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-based Compensation" and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" for employee stock
option awards. Had compensation cost for the Company's stock option plans
been determined in accordance with the fair value-based method prescribed
under SFAS 123, the Company's net income(loss) and basic and diluted net
income(loss) per share would have approximated the pro forma amounts
indicated below (dollars in thousands except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
---- ---- ---- ----
Net income(loss) as reported $(1,650) $(1,348) $(4,100) $(2,323)
Add: Stock-based compensation
expense included therein 76 85 233 277
Deduct: Total stock-based
compensation expense
determined under the fair
value based method (102) (145) (361) (545)
------- ------- ------- -------
Pro forma net income(loss) $(1,676) $(1,408) $(4,228) $(2,591)
======= ======= ======= =======
Net loss per basic and
diluted share
As reported $(.29) $(.24) $(.72) $(.42)
===== ===== ===== =====
Pro forma $(.29) $(.25) $(.75) $(.47)
===== ===== ===== =====
There were 30,000 options granted in each of the three-month periods ended
September 30, 2005 and 2004.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (Revised 2004), "Share-based Payment" that will require the Company to
expense costs related to share-based payment transactions with employees.
With limited exceptions, SFAS No. 123(R) requires that the fair value of
share-based payments to employees be expensed over the period service is
received and eliminates the ability to account for these instruments under
the intrinsic value method prescribed by APB No. 25, and allowed under the
original provisions of SFAS No. 123. SFAS No. 123(R) becomes mandatorily
effective for the Company on January 1, 2006. SFAS No. 123(R) allows for
either prospective recognition of compensation expense or retrospective
recognition, which may be back to the original issuance of SFAS No. 123 or
to interim periods in the year of adoption. The Company is currently
evaluating these transition methods.
Pension Plan
The Company and its domestic subsidiaries have a defined benefit pension
plan. No additional service cost benefits were earned subsequent to June 30,
1994. The Company's funding policy is to contribute amounts to the plan
sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional
amounts as the Company may determine to be appropriate from time to time.
The components of net periodic benefit cost of the plan for the three and
nine months ended September 30 are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
---- ---- ---- ----
Interest cost on projected
benefit obligation $22 $23 $67 $69
Expected return on plan assets (14) (15) (43) (43)
Amortization of net loss 8 3 23 8
--- --- --- ---
Net periodic pension cost $16 $11 $47 $34
=== === === ===
The Company expects the funding requirement to be $202,000 in 2005 of which
$154,000 was funded during the nine months ended September 30, 2005.
In September of 2005, the Board of Directors voted to apply to the Pension
Benefit Guarantee Company and the Internal Revenue Service for permission to
terminate the Company's defined benefit plan. If permission is granted, it
is estimated that the Company would be required to contribute $850,000 of
additional funds and recognize a charge of like amount.
Discontinued Operations, Goodwill, Intangible Assets and Other Long-Lived
Assets
Goodwill represents the excess of the purchase price over the fair value of
identifiable net assets of businesses acquired and is not amortized. Other
intangible assets are amortized on a straight-line basis over the estimated
future periods to be benefitted, ranging from two to five years.
The Company accounts for its long-lived assets in accordance with SFAS No.
144, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of," which requires that long-lived assets and certain
intangible assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If
the fair value of the assets is less than the carrying value of the assets,
an impairment loss is to be recognized. Fair value may be determined using
various valuation techniques including present value techniques based on
future cash flows or recent sales offers.
The Company reviews the recoverability of goodwill annually, or when events
and circumstances change, by comparing the estimated fair values, based on
appropriate valuation techniques, including a discounted forecast of future
cash flows or recent sales offers (what a willing buyer would pay a willing
seller), of reporting units with their respective carrying values. If the
fair value of a reporting unit exceeds its carrying amount, the goodwill of
the reporting unit is not considered impaired. If the carrying amount of
the reporting unit exceeds its fair value, the goodwill impairment loss is
measured as the excess of the carrying value of goodwill over its implied
fair value. There was no impairment of goodwill at December 31, 2004 based
on a discounted forecast of future cash flows. Impairment of assets held
for sale, including goodwill at September 30, 2005, is discussed below.
During the third quarter of 2005, the Company initiated a plan to sell its
UK subsidiary, Dacon Electronics Plc ("Dacon"). As a result, the Company
has reclassified the carrying value of Dacon's as assets and liabilities
as those of discontinued subsidiary held for sale", respectively, in its
consolidated balance sheets at September 30, 2005 and December 31, 2004,
and has reclassified Dacon's results of operations for the three and
nine months ended September 30, 2005 and September 30, 2004, as results
from discontinued operations. Based on the solicitation offers received
for the sale of Dacon, the Company determined that the carrying value of
Dacon exceeded its fair value and accordingly, recorded an impairment loss
to goodwill of $319,000 against its carrying value in accordance with the
provisions and guidance of SFAS 144. If market conditions become less
favorable, the Company may be required to recognize additional impairment
charges. The Company expects to complete the sale of Dacon during the
fourth quarter of 2005.
Assets and liabilities of the discontinued subsidiary held for sale at
September 30, 2005 and December 31, 2004 are as follows (in thousands):
September 30, 2005 December 31, 2004
Assets-discontinued
subsidiary held for sale:
Cash $ 182 $ 614
Accounts receivable, net 1,127 729
Other current assets 580 708
Fixed assets, net 94 116
Goodwill, net 319 319
Asset Impairment write-off (319)
------ ------
Total assets held
for sale $1,983 $2,486
====== ======
Liabilities-discontinued
subsidiary held for sale:
Accounts payable $ 743 $ 262
Other current liabilities 592 466
Deferred revenue 285 160
------ ------
Total liabilities held
for sale $1,620 $ 888
====== ======
Summary results of discontinued operations of Dacon for the three and nine
months ended September 30, 2005 are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
------------------ ------------------
Revenue $1,352 $2,942
====== ======
Operating expense $1,618 $3,922
====== ======
Loss from discontinued perations $ (266) $ (980)
====== ======
Subsequent Event
On October 28, 2005, the Company entered into a definitive agreement to
acquire privately held ThinkEngine Networks, Inc. for approximately
1,150,000 shares of common stock, $1,250,000 in cash and a note for $300,000.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain Factors That May Affect Future Results
The following information, including, without limitation, the Quantitative
and Qualitative Disclosures About Market Risk that are not historical facts,
may be forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements generally are characterized by the use of terms such
as "believe", "expect" and "may". Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, the Company's actual results could differ materially
from those set forth in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, variability of
sales volume from quarter to quarter, product demand, pricing, market
acceptance, litigation, risk of dependence on significant customers and
third party suppliers, 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.
Results of Operations
The Company reported losses from continuing operations of $1.1 million for
the three months ended September 30, 2005 and $2.8 million for the nine
months ended September 30, 2005 versus loss of $1.2 million and $2.4
million, respectively, in the prior year periods.
Revenues from continuing operations for the quarter ended September 30,
2005 increased $.2 million (28%) to $1 million due to increased sales to
a cable operator. Revenues for the nine months ended September 30, 2005
were essentially the same as the prior year period. Sales of product
decreased by approximately $.2 million for the nine months ended
September 30, 2005 compared to the prior year period, offset by an
increase in service revenue. The decrease in sales reflects lower sales
of $1.5 million to a large telecommunication service provider, offset, in
part, by higher sales to a worldwide telecommunications system integrator
and a domestic cable system operator. During the third quarter, the
Company delivered approximately $2 million of equipment to the above
referenced large telecommunication services provider. It is anticipated
that this revenue will be recognized in the fourth quarter of 2005.
Gross margin percentage was 39% for the three months and 48% for the nine
months ended September 30, 2005 and 20% and 45% respectively, in the
comparable 2004 periods. The three-month period ended September 30, 2005
versus the prior year period was favorably impacted by higher sales volume
and the concomitant absorption of fixed costs.
Research and development expenses for the three and nine-month periods ended
September 30, 2005 increased approximately $.1 million (23%) and $.4 million
(23%), respectively, from the comparable 2004 periods due to higher material
costs and increased personnel costs due to increased salaries and headcount.
Selling, general and administrative expenses increased approxomately $35,000
(4%) and $.2 million (8%) for the three and nine-month periods ended
September 30, 2005 versus the prior year periods due to higher professional
fees, travel expense and personnel costs.
Other income, net increased due to higher interest earned on cash balances
and marketable securities due to higher balances and interest rates.
Liquidity and Sources of Capital
Net cash provided by continuing operations for the nine months ended
September 30, 2005 was $2.2 million versus the cash used of $.2 million in
the 2004 period. In the 2005 period, the positive cash flow from operations
was primarily due to the reduction of accounts receivable by $2.8 and
increase in prepaid revenue of $2.0 million, offset, in part, by a loss from
operations and net increase in marketable securities.
Working capital and the ratio of current assets to current liabilities were
$9.3 million and 2.7:1 at September 30, 2005 compared to $13.1 million and
5.5:1 at December 31, 2004.
During the remainder of 2005, the Company may repurchase up to an additional
253,792 shares of its common stock and anticipates purchasing $.5 million of
equipment and using $1,250,000 for the cash portion of a recently announced
acquisition. Management believes that its cash and cash equivalents and
marketable securities will be sufficient to meet these needs in 2005.
Item 3. Quantitative and Qualitative Disclosures About 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 provisions, a
change in interest rates should not have a material impact on their value.
Exchange rate fluctuations will impact the results of discontinued
operations and the net assets of discontinued operations. The UK pound was
stronger against the US dollar during the nine-month period ended September
30, 2005 as compared to the comparable period of 2004, so the losses of the
UK distributorship operations were translated into more dollars than they
would have in the 2004 periods. The relative value of the UK pound to US
dollar decreased by 5% from December 31, 2004 to September 30, 2005. At
September 30, 2005, the discontinued operations had net assets of $.7
million. The Company does not hedge this foreign currency net asset exposure.
Item 4. Controls and Procedures
Cognitronics Corporation's management, including the Chief Executive Officer
and Chief Financial Officer, have conducted an evaluation of the
effectiveness of disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the disclosure controls and
procedures are effective as of the end of the period covered by this report
in ensuring that all material information required to be disclosed in this
quarterly report and all information required to be disclosed by the Company
under the Securities Exchange Act of 1934 has been made known to them in a
timely fashion. During the three months ended September 30, 2005, there
were no changes in the Company's internal control over financial reporting
that have materially affected, or are reasonably likely to materially
affect, the Company's internal controls for financial reporting.
PART II
Item 6. Exhibits
(a) Index to Exhibits
Exhibit
31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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 14, 2005 By /s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer