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, 2002 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, 2002. Common Stock, par value $0.20 per share 5,415,793 shares 2 Part I, Item 1. COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) June 30, December 31, 2002 2001 ----------- ------------ (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 5,529 $ 7,731 Marketable securities 7,620 6,400 Accounts receivable, net 2,255 2,035 Inventories 4,979 5,682 Deferred income taxes 1,115 1,110 Other current assets including loans to officers of $1,600 and $1,516 3,005 2,431 ------- ------- TOTAL CURRENT ASSETS 24,503 25,389 PROPERTY, PLANT AND EQUIPMENT, NET 1,543 1,514 GOODWILL, NET 319 319 DEFERRED INCOME TAXES 762 812 OTHER ASSETS 466 539 ------- ------- $27,593 $28,573 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,002 $ 871 Accrued compensation and benefits 1,121 1,109 Income taxes payable 383 290 Current maturities of debt 35 46 Other accrued expenses 408 319 ------- ------- TOTAL CURRENT LIABILITIES 2,949 2,635 LONG-TERM DEBT 4 26 OTHER NON-CURRENT LIABILITIES 2,366 2,314 STOCKHOLDERS' EQUITY Common Stock, par value $.20 a share, authorized 10,000,000 shares; issued 5,863,229 shares 1,173 1,173 Additional paid-in capital 13,322 13,322 Retained earnings 11,984 13,413 Cumulative other comprehensive loss (259) (260) Unearned compensation (397) (506) ------- ------- 25,823 27,142 Less cost of 447,436 and 445,936 common shares in treasury (3,549) (3,544) ------- ------- TOTAL STOCKHOLDERS' EQUITY 22,274 23,598 $27,593 $28,573 ======= ======= See Note to Condensed Consolidated Financial Statements. 3 COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(LOSS)(UNAUDITED) (dollars in thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2002 2001 2002 2001 ---- ---- ---- ---- NET SALES $3,356 $5,848 $6,498 $10,787 ------ ------ ------ ------- COST AND EXPENSES: Cost of products sold 1,889 2,981 3,829 5,604 Research and development 890 915 1,748 1,619 Selling, general and administrative 1,509 1,923 3,153 3,658 Amortization of goodwill 83 166 Other (income), net (43) (141) (92) (310) ------ ------ ------ ------- 4,245 5,761 8,638 10,737 ------ ------ ------ ------- Income(loss) before income taxes (889) 87 (2,140) 50 PROVISION(BENEFIT) FOR INCOME TAXES (274) 29 (711) 15 ------ ------ ------ ------- NET INCOME(LOSS) (615) 58 (1,429) 35 Currency translation adjustment 18 ( 40) 1 (40) ------ ------ ------- ------- COMPREHENSIVE INCOME(LOSS) $ (597) $ 18 $(1,428) $ (5) ====== ====== ======= ======= NET INCOME(LOSS) PER SHARE: Basic $(.11) $.01 $(.26) $.01 ===== ==== ===== ==== Diluted $(.11) $.01 $(.26) $.01 ===== ==== ===== ==== Weighted average number of outstanding shares: Basic 5,416,999 5,365,157 5,414,757 5,442,719 ========= ========= ========= ========= Diluted 5,416,999 5,502,900 5,414,757 5,613,941 ========= ========= ========= ========= See Note to Condensed Consolidated Financial Statements 4 COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands) Six Months Ended June 30, ----------------- 2002 2001 ---- ---- NET CASH (USED) PROVIDED BY OPERATIONS $ (575) $4,124 ------ ------ INVESTING ACTIVITIES Purchases of marketable securities (7,620) (1,200) Sales of marketable securities 6,400 2,400 Loans to employees (84) (383) Additions to property, plant and equipment, net (301) (247) Purchase of software licenses (192) ------ ------ NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (1,605) 378 ------ ------ FINANCING ACTIVITIES Repurchase of 1,500 and 206,650 shares for treasury (5) (1,461) Principal payment of debt (33) (46) Common stock issued pursuant to employee stock plans, 900 shares 6 ------ ------ NET CASH USED BY FINANCING ACTIVITIES (38) (1,501) ------ ------ EFFECT OF EXCHANGE RATE DIFFERENCES 16 (5) ------ ------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,202) 2,996 CASH AND CASH EQUIVALENTS- BEGINNING OF PERIOD 7,731 3,499 ------ ------ CASH AND CASH EQUIVALENTS - END OF PERIOD $5,529 $6,495 ====== ====== INCOME TAXES PAID $ 3 $ 536 ====== ====== INTEREST PAID $ 15 $ 13 ====== ====== See Note to Condensed Consolidated Financial Statements. 5 NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2002 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 six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The balance sheet at December 31, 2001 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, 2001. Inventories (in thousands): June 30, December 31, 2002 2001 -------- ------------ Finished and in process $3,249 $3,455 Materials and purchased parts 1,730 2,227 ------ ------ $4,979 $5,682 ====== ====== Other Non-Current Liabilities (in thousands): June 30 December 31, 2002 2001 ------- ------------ Accrued supplemental pension plan $ 526 $ 511 Accrued deferred compensation 264 274 Deferred directors' fees 309 269 Accrued pension expense 646 658 Accrued post-retirement benefit 844 843 ------ ------ 2,554 2,555 Less current portion 223 241 ------ ------ $2,366 $2,314 ====== ====== 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. Adoption of Financial Accounting Standard 142 ("FAS 142") Effective January 1, 2002, the Company adopted FAS No. 142. Under FAS 142, goodwill is no longer amortized, rather it is subject to a periodic impairment test based on its fair value. The Company has performed the transitional goodwill impairment test (as of January 1, 2002) on its 6 applicable reporting units. As the estimated fair values of these reporting units exceeded their respective net book values, including goodwill, no impairment charge was recognized. If FAS 142 was effective as of January 1, 2001, then the pro forma results of operations for the periods ended June 30, 2001 would have been as follows (dollars in thousands): As Reported Adjustment Pro Forma ----------- ---------- --------- Three Months Pretax Income $ 87 $83 $170 ==== === ==== Net Income $ 29 $76 $105 ==== === ==== Earnings per share: Basic $.01 $.02 ==== ==== Diluted $.01 $.02 ==== ==== Six Months Pretax Income $ 50 $166 $216 ==== ==== ==== Net Income $ 35 $152 $187 ==== ==== ==== Earnings per share: Basic $.01 $.03 ==== ==== Diluted $.01 $.03 ==== ==== Operations by Industry Segments and Geographic Areas: Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Net Sales United States $2,033 $4,144 $ 3,590 $ 7,243 Europe 1,323 1,704 2,908 3,544 Intercompany eliminations ------ ------ ------- ------- $3,356 $5,848 $ 6,498 $10,787 ====== ====== ======= ======= Operating Profit(Loss) United States $ (537) $ 447 $(1,505) $ 530 Europe (58) (177) (44) (187) Intercompany eliminations 3 3 6 6 ------ ------ ------- ------- (592) 273 (1,543) 349 General Corporate Expense 340 327 689 609 Other (income), net (43) (141) (92) (310) ------ ------ ------- ------- Income(loss) before income taxes $ (889) $ 87 $(2,140) $ 50 ====== ====== ======= ======= Total Assets United States $25,135 $27,327 Europe 2,477 3,229 Intercompany eliminations (19) (38) ------- ------- $27,593 $30,518 ======= ======= 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net loss was $615,000 and $1,429,000, respectively, for the three and six-month periods ended June 30, 2002 versus net income of $58,000 and $35,000, respectively, in the prior year periods. Consolidated sales for the quarter ended June 30, 2002 decreased $2.5 million (43%) to $3.4 million primarily due to sales decreases in the domestic operations of $2.1 million (51%) due to the continuing reduction in infrastructure buildout, particularly by CLECs and reduction in capital expenditures by major telecommunication providers as previously noted by the Company. Sales of the Company's UK distributorship operations decreased $.4 million (22%) due to lower volume to its largest customer. Consolidated sales for the six months ended June 30, 2002 decreased $4.3 million (40%) primarily due to a sales decrease of $3.7 million (50%)in the domestic operations and a decrease of $.6 million (18%) in its UK distributorship operations due to the reasons stated above. Gross margin percentage was 44% for the three months and 41% for the six months ended June 30, 2002 and 49% and 48%, respectively, in the comparable 2001 periods. The three and six-month periods ended June 30, 2002 versus the prior year periods were adversely impacted by lower sales and the concomitant lower absorption of fixed costs offset, in part, by favorable product mix in the US operations. Research and development expenses increased $129,000 (8%) in the six-month period ended June 30, 2002 versus the comparable period in 2001 primarily due to higher consultancy expenses. Other (income) decreased due to lower interest earned on cash balances and marketable securities due to lower interest rates. The Company's effective tax rate for the three and six-month periods ended June 30, 2002 were 31% and 33%, respectively, versus 33% and 30%, respectively, for the 2001 periods. Subsequent to June 30, 2002, the Company instituted cost reduction programs. In the quarter ending September 30, 2002 the Company will incur severance expense of approximately $110,000, reduce consultancy expense and reduce the work week for certain positions. These steps, once implemented, will reduce quarterly expenses by approximately $250,000. In addition, the Company is continuing to review all expenses to determine where further reductions can be made. Liquidity and Sources of Capital Net cash used by operations for the six months ended June 30, 2002 was $575,000 primarily due to loss from operations versus net cash provided of $4.1 million in 2001. The cash used by investing activities in 2002 primarily reflects the net increase in marketable securities and purchase of property, plant and equipment. In 2001, the net cash provided by investing activities reflects a net decrease in marketable securities offset, in part, by purchases of property plant and equipment and software licenses and employee loans. The net cash used for financing activities in 2002 primarily represents scheduled paydown of debt and in 2001 primarily 8 reflects the repurchase of shares for treasury. Working capital and the ratio of current assets to current liabilities were $21.6 million and 8.3:1 at June 30, 2002 compared to $22.8 million and 9.6:1 at December 31, 2001. The decrease in working capital in 2002 is mainly due to the results of operations. During the remainder of 2002, the Company may repurchase up to an additional 253,792 shares of its common stock and anticipates purchasing $.2 million of equipment. Management believes that its cash and cash equivalents, marketable securities and the cash flow from operations in 2002 will be sufficient to meet these needs. 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 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. 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 provisions, 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 June 30, 2002, the UK distributorship operations had net assets of $1.3 million. The Company does not hedge this foreign currency net asset exposure. PART II Item 4. Submission of Matters to a Vote of Security Holders (a) The Registrant's Annual Meeting of Stockholders was held on May 9, 2002. 9 (c) The following matters were voted upon by stockholders: Withheld Broker For or Against Abstain Non-votes 1. Election of six Directors - John T. Connors 4,543,066 276,009 222,018 Edward S. Davis 4,537,542 281,533 222,018 Brian J. Kelley 4,507,116 311,959 222,018 Jack Meehan 4,541,761 277,314 222,018 William A. Merritt 4,538,992 280,083 222,018 William J. Stuart 4,544,416 274,659 222,018 2. To approve a proposal to amend the Company's 1990 Stock Option Plan 4,346,626 456,223 17,301 222,018 3. To approve a proposal to amend the Company's Restricted Stock Plan 4,365,629 437,820 16,701 222,018 4. To approve the selection of Ernst & Young LLP as independent auditors 4,761,908 46,367 11,875 222,018 Item 6. Exhibits and reports on Form 8-K (a) Index to Exhibits Exhibit 10.1 1990 Stock Option Plan, as amended (attached as Exhibit 10.1 to this Quarterly Report on Form 10-Q). 10.2 Cognitronics Corporation Restricted Stock Plan, as amended (attached as Exhibit 10.2 to this Quarterly Report on Form 10-Q). 99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) No reports on Form 8-K were filed during the current quarter. 10 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 14, 2002 By /s/ Garrett Sullivan Garrett Sullivan, Treasurer and Chief Financial Officer