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, 2003 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 by check mark whether the registrant is an accelerated filer (as defined by 12b-2 of the Exchange Act. Yes No x Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of September 30, 2003. Common Stock, par value $0.20 per share 5,568,611 shares Part I, Item 1. COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) September 30, December 31, 2003 2002 (Unaudited) ------------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,155 $ 2,732 Marketable securities 5,712 8,387 Accounts receivable, net 2,822 2,038 Inventories 3,234 3,687 Taxes recoverable 2,028 2,028 Other current assets including loans to officers of $1,921 and $1,906 1,991 1,982 ------- ------- TOTAL CURRENT ASSETS 18,942 20,854 PROPERTY, PLANT AND EQUIPMENT, NET 1,082 1,315 GOODWILL, NET 319 319 OTHER ASSETS 195 324 ------- ------- $20,538 $22,812 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,095 $ 952 Accrued compensation and benefits 1,332 1,252 Current maturities of debt 26 Other accrued expenses 1,191 835 ------- ------- TOTAL CURRENT LIABILITIES 3,618 3,065 OTHER NON-CURRENT LIABILITIES 1,467 2,413 STOCKHOLDERS' EQUITY Common Stock, par value $.20 a share, authorized 20,000,000 shares; issued 5,863,229 shares 1,173 1,173 Additional paid-in capital 12,346 12,374 Retained earnings 4,852 6,969 Cumulative other comprehensive income (244) (298) Unearned compensation (337) (512) ------- ------- 17,790 19,706 Less cost of 294,618 and 298,988 shares in treasury (2,337) (2,372) ------- ------- TOTAL STOCKHOLDERS' EQUITY 15,453 17,334 ------- ------- $20,538 $22,812 ======= ======= See Note to Condensed Consolidated Financial Statements. COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) (dollars in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- NET SALES $3,498 $2,378 $ 8,442 $ 8,876 ------ ------ ------- ------- COST AND EXPENSES: Cost of products sold 1,638 1,986 4,674 5,815 Research and development 675 849 1,994 2,597 Selling, general and administrative 1,676 1,604 4,806 4,757 Amortization of goodwill Other (income), net (40) (71) (126) (163) Gain on termination of post-retirement benefit plan (834) ------ ------ ------ ------ 3,949 4,368 10,514 13,006 ------ ------ ------ ------ Loss before income taxes (451) (1,990) (2,072) (4,130) PROVISION(BENEFIT) FOR INCOME TAXES 15 (739) 45 (1,450) ------ ------ ------ ------ NET LOSS (466) (1,251) (2,117) (2,680) Currency translation adjustment 8 52 54 53 ------- -------- ------- ------- COMPREHENSIVE LOSS $( 458) $ (1,199) $(2,063) $(2,627) ======= ======== ======= ======= NET INCOME LOSS PER SHARE: Basic $(.08) $(.23) $(.37) $(.49) Diluted $(.08) $(.23) $(.37) $(.49) Weighted average number of outstanding shares: Basic 5,764,423 5,441,617 5,705,929 5,424,624 Diluted 5,764,423 5,441,617 5,705,929 5,424,624 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, ------------------- 2003 2002 ---- ---- NET CASH USED BY OPERATIONS $(2,103) $(1,104) ------- ------- INVESTING ACTIVITIES Purchases of marketable securities (2,328) (15,245) Sales of marketable securities 4,919 12,087 Loans to employees (341) Additions to property, plant and equipment, net (66) (336) ------- ------- NET CASH PROVIDED(USED) BY INVESTING ACTIVITIES 2,525 (3,835) ------- ------- FINANCING ACTIVITIES Repurchase of 1,500 shares for treasury (5) Principal payment of debt (26) (29) Shares issued pursuant to stock plans, 4,370 and 3,448 shares 18 5 ------- ------- NET CASH PROVIDED(USED) BY FINANCING ACTIVITIES (8) (29) ------- ------- EFFECT OF EXCHANGE RATE DIFFERENCES 9 16 ------- ------- INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 423 (4,952) CASH AND CASH EQUIVALENTS- BEGINNING OF PERIOD 2,732 7,731 ------- ------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,155 $ 2,779 ======= ======= INCOME TAXES PAID $ 63 $ 3 ======= ======= INTEREST EXPENSE PAID $ 5 $ 17 ======= ======= See Note to Condensed Consolidated Financial Statements. NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 2003 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 Article 10 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, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The balance sheet at December 31, 2002 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, 2002. Inventories (in thousands): September 30, December 31, 2003 2002 ------------- ------------ Finished and in process $2,278 $2,273 Materials and purchased parts 956 1,414 ------ ------ $3,234 $3,687 ====== ====== Other Non-Current Liabilities (in thousands): September 30, December 31, 2003 2002 ------------- ----------- Accrued supplemental pension plan $ 433 $ 466 Accrued deferred compensation 238 254 Deferred directors' fees 379 332 Accrued pension expense 677 777 Accrued post-retirement benefit 22 856 ------ ------ 1,749 2,685 Less current portion 282 272 ------ ------ $1,467 $2,413 ====== ====== In June 2003, the Board of Directors voted to terminate the Company's post-retirement health benefits plan (the "Plan") and notified the effected retirees. Termination of the Plan resulted in a non-cash gain of $834,000. 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. 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 Financial Accounting Standards Board Statement ("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 plan been determined in accordance with the fair value-based method prescribed under SFAS 123, the Company's net loss and basic and diluted net 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, ------------------ ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net loss as reported $(466) $(1,251) $(2,117) $(2,680) Add: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects. (67) (71) (256) (210) ----- ------- ------- ------- Pro forma $(533) $(1,322) $(2,373) $(2,890) ===== ======= ======= ======= Net loss per share As reported Basic $(.08) $(.23) $(.37) $(.49) Diluted $(.08) $(.23) $(.37) $(.49) Pro forma Basic $(.09) $(.24) $(.42) $(.53) Diluted $(.09) $(.24) $(.42) $(.53) The fair value of stock options used to compute pro forma net loss and net loss per share disclosures was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of 0% for 2003 and 2002; expected volatility factor of .76% for 2003 and .62% for 2002; average risk-free interest rate of 3.38% for 2003 and 2.28% for 2002; and an expected option holding period of 7.5 years for 2003 and 2002. Operations by Industry Segments and Geographic Areas: Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2003 2002 2003 2002 Net Sales ---- ---- ---- ---- United States $ 1,979 $ 959 $ 4,298 $ 4,549 Europe 1,519 1,419 4,144 4,327 Intercompany eliminations ------- ------ ------- ------- $ 3,498 $2,378 $ 8,442 $ 8,876 Operating Income\(Loss) United States $ 35 $(1,687) $(1,738) $(3,192) Europe (146) (40) (236) (84) Intercompany eliminations 2 8 ------- ------- ------- ------- (111) (1,725) (1,974) (3,268) General Corporate Expense 380 336 1,058 1,025 Other (income), net (40) (71) (126) (163) Gain on termination of post- retirement benefit plan (834) ------- ------- ------- ------- Loss before income taxes $ (451) $(1,990) $(2,072) $(4,130) ======= ======= ======= ======= Total Assets United States $17,927 $24,052 Europe 2,622 2,682 Intercompany eliminations (11) (17) ------- ------- $20,538 $26,717 ======= ======= Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The net loss was $466,000 and $2,117,000, respectively, for the three and nine-month periods ended September 30, 2003 versus a net loss of $1,251,000 and $2,680,000, respectively, in the prior year periods. Included in the nine-month period ended September 30, 2003 was a non-cash gain on termination of the post-retirement benefit plan of $834,000. Consolidated sales for the quarter ended September 30, 2003 increased $1.1 million (47%) to $3.5 million due to sales increases in both the domestic and UK distributorship operations. The sales in the domestic operations increased $1 million (106%) to $2.0 million due to an increase of $1.2 million in sales to a large telecommunication service provider, offset, in part, by decreased sales to equipment manufacturers. Sales of the Company's UK distributorship operations increased $.1 million (7%) due to a favorable exchange rate. Consolidated sales for the nine months ended September 30, 2003 decreased $.4 million (5%) primarily due to sales decreases in both the domestic and UK distributorship operations. The domestic operations' sales decreased $.2 million (6%) in spite of an increase in sales of $1.2 million to a large telecommunication service provider due to the continuing soft demand in the Company's announcer business. In the Company's UK distributorship operations, sales decreased $.2 million (4%) in spite of an 8% favorable exchange rate fluctuation, due to lower volume. In the three and nine-month periods ended September 30, 2003, the Company's domestic operations had increased sales to a large telecommunication service provider. While management believes that this increased volume of sales will continue in the future, this favorable variance may not occur in the fourth quarter. Gross margin percentage was 53% for the three months and 45% for the nine months ended September 30, 2003 and 16% and 34%, respectively, in the comparable 2002 periods. The improvement in gross margin percentage for the quarter ended September 30, 2003 versus the prior year quarter was primarily due to the higher sales volume in the domestic operations with the concomitant greater absorption of fixed cost. The improvement for the nine months ended September 30, 2003 versus the prior year period is due to favorable product mix and lower fixed costs in the domestic operations and favorable impact of exchange rate on the UK distributorship operations. Research and development expenses decreased $174,000 (20%) and $603,000 (23%), respectively, in the three-month and nine-month periods ended September 30, 2003 versus the comparable periods in 2002 primarily due to lower consultancy expenses and personnel costs. Selling, general and administrative expenses increased $72,000 (4%) and $49,000 (1%), respectively, for the three and nine-month periods ended September 30, 2003 from the comparable prior year periods. Included in both current year periods are $220,000 for the estimated settlement of a rent dispute in the UK distributorship operations, offset by the release of a reserve of $86,000. With regard to the UK rent dispute, the Company has a potential claim against a third party for which no benefit has been recorded. In June 2003, the Board of Directors voted to terminate the Company's post-retirement health benefits plan (the "Plan") and notified the effected retirees. Termination of the Plan resulted in a non-cash gain of $834,000 which was recorded in the nine months ended September 30, 2003. No tax benefits were recorded for losses incurred in 2003 since the Company cannot determine that the realization of net deferred tax assets is more likely than not. Liquidity and Sources of Capital Net cash used by operations for the nine months ended September 30, 2003 increased to $2,103,000 primarily due to an increase in accounts receivable and lower reduction of inventory. The cash provided by investing activities in 2003 primarily reflects the net decrease in marketable securities. Working capital and the ratio of current assets to current liabilities were $15.3 million and 5.2:1 at September 30, 2003 compared to $17.8 million and 6.8:1 at December 31, 2002. The decrease in working capital in 2003 is mainly due to the results of operations. During the remainder of 2003, 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 and marketable securities 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 September 30, 2003, the UK distributorship operations had net assets of $1.3 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 in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. PART II Item 6. Exhibits and reports on Form 8-K (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 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) One report on Form 8-K was filed during the current quarter. On August 15, 2003, the Company filed a Current Report on Form 8-K pursuant to Item 9 (Regulation FD Disclosures) to furnish a press release reporting results of our second quarter of 2003. 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, 2003 By /s/ Garrett Sullivan Garrett Sullivan, Treasurer and Chief Financial Officer