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, 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 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 June 30, 2003. Common Stock, par value $0.20 per share 5,564,241 shares Part I, Item 1. COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) June 30, December 31, 2003 2002 (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,164 $ 2,732 Marketable securities 7,189 8,387 Accounts receivable, net 2,531 2,038 Inventories 3,550 3,687 Taxes recoverable 2,028 2,028 Other current assets including loans to officers of $1,917 and $1,906 2,025 1,982 ------- ------- TOTAL CURRENT ASSETS 18,487 20,854 PROPERTY, PLANT AND EQUIPMENT, NET 1,152 1,315 GOODWILL, NET 319 319 OTHER ASSETS 242 324 ------- ------- $20,200 $22,812 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 467 $ 952 Accrued compensation and benefits 1,272 1,252 Income taxes payable 407 441 Current maturities of debt 26 Other accrued expenses 683 394 ------- ------- TOTAL CURRENT LIABILITIES 2,829 3,065 OTHER NON-CURRENT LIABILITIES 1,525 2,413 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 12,374 12,374 Retained earnings 5,318 6,969 Cumulative other comprehensive loss (252) (298) Unearned compensation (395) (512) ------- ------- 18,218 19,706 Less cost of 298,988 common shares in treasury (2,372) (2,372) ------- ------- TOTAL STOCKHOLDERS' EQUITY 15,846 17,334 ------- ------- $20,200 $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 Six Months Ended June 30, June 30, ------------------ ---------------- 2003 2002 2003 2002 ---- ---- ---- ---- NET SALES $2,448 $3,356 $4,944 $6,498 ------ ------ ------ ------ COST AND EXPENSES: Cost of products sold 1,458 1,889 3,036 3,829 Research and development 646 890 1,319 1,748 Selling, general and administrative 1,521 1,509 3,130 3,153 Other (income), net (47) (43) (86) (92) Gain on termination of post-retirement benefit plan (834) (834) ------ ------ ------ ------ 2,744 4,245 6,565 8,638 ------ ------ ------ ------ Loss before income taxes (296) (889) (1,621) (2,140) PROVISION(BENEFIT) FOR INCOME TAXES 30 (274) 30 (711) ------ ------ ------ ------ NET LOSS (326) (615) (1,651) (1,429) Currency translation adjustment 29 18 46 1 ------- ------ ------- -------- COMPREHENSIVE LOSS $ (297) $ (597) $(1,605) $ (1,428) ======= ====== ======= ======== NET LOSS PER SHARE: Basic $(.06) $(.11) $(.29) $(.26) ===== ===== ===== ===== Diluted $(.06) $(.11) $(.29) $(.26) ===== ===== ===== ===== Weighted average number of outstanding shares: Basic 5,697,052 5,416,999 5,676,357 5,414,757 ========= ========= ========= ========= Diluted 5,697,052 5,416,999 5,676,357 5,414,757 ========= ========= ========= ========= See Note to Condensed Consolidated Financial Statements. COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands) Six Months Ended June 30, ----------------- 2003 2002 ---- ---- NET CASH USED BY OPERATIONS $(2,694) $ (575) ------- ------ INVESTING ACTIVITIES Purchases of marketable securities (1,328) (7,620) Sales of marketable securities 2,506 6,400 Loans to employees (84) Additions to property, plant and equipment, net (35) (301) ------- ------ NET CASH PROVIDED(USED) BY INVESTING ACTIVITIES 1,143 (1,605) ------- ------ FINANCING ACTIVITIES Repurchase of 1,500 shares for treasury (5) Principal payment of debt (26) (33) ------- ------ NET CASH USED BY FINANCING ACTIVITIES (26) (38) ------- ------ EFFECT OF EXCHANGE RATE DIFFERENCES 9 16 ------- ------ DECREASE IN CASH AND CASH EQUIVALENTS (1,568) (2,202) CASH AND CASH EQUIVALENTS- BEGINNING OF PERIOD 2,732 7,731 ------- ------ CASH AND CASH EQUIVALENTS - END OF PERIOD $1,164 $5,529 ======= ====== INCOME TAXES PAID $ 63 $ 3 ====== ====== INTEREST PAID $ 5 $ 15 ====== ====== See Note to Condensed Consolidated Financial Statements. NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2003 The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 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, 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): June 30, December 31, 2003 2002 ---- ---- Finished and in process $2,424 $2,273 Materials and purchased parts 1,126 1,414 ------ ------ $3,550 $3,687 ====== ====== Other Non-Current Liabilities (in thousands): June 30, December 31, 2003 2002 ---- ---- Accrued supplemental pension plan $ 444 $ 466 Accrued deferred compensation 244 254 Deferred directors' fees 371 332 Accrued pension expense 727 777 Accrued post-retirement benefit 22 856 ------ ------ 1,808 2,685 Less current portion 283 272 ------ ------ $1,525 $2,413 ====== ====== In June 2003, the Board of Directors voted to terminate the 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 quarter ended June 30, 2003. 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. If the Company had elected to recognize compensation expense for the 1990 Stock Option Plan and the 1967 Stock Purchase Plan based on the fair value at the grant date , consistent with the method presented by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation", the pro forma net loss and per share amounts would be as follows (in thousands except per share information): Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2003 2002 2002 2002 ---- ---- ---- ---- Net loss As reported $(326) $(615) $(1,651) $(1,429) ===== ===== ======= ======= Pro forma $(397) $(725) $(1,832) $(1,567) ===== ===== ======= ======= Net loss per share As reported Basic $(.06) $(.11) $(.29) $(.26) ===== ===== ===== ===== Diluted $(.06) $(.11) $(.29) $(.26) ===== ===== ===== ===== Pro forma Basic $(.07) $(.13) $(.32) $(.29) ===== ===== ===== ===== Diluted $(.07) $(.13) $(.32) $(.29) ===== ===== ===== ===== Operations by Industry Segments and Geographic Areas: Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net Sales United States $1,639 $2,033 $ 2,319 $ 3,590 Europe 809 1,323 2,625 2,908 Intercompany eliminations ------ ------ ------- ------- $2,448 $3,356 $ 4,944 $ 6,498 ====== ====== ======= ======= Operating Loss United States $ (563) $ (537) $(1,773) $(1,505) Europe (279) (58) (90) (44) Intercompany eliminations 3 6 ------ ------ ------- ------- (842) (592) (1,863) (1,543) General Corporate Expense 335 340 678 689 Other (income), net (47) (43) (86) (92) Gain on termination of post- retirement benefit plan (834) (834) ------ ------ ------- ------- Loss before income taxes $ (296) $ (889) $(1,621) $(2,140) ====== ====== ======= ======= Total Assets United States $18,163 $25,135 Europe 2,048 2,477 Intercompany eliminations (11) (19) ------- ------- $20,200 $27,593 ======= ======= Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net loss was $326,000 and $1,651,000, respectively, for the three and six-month periods ended June 30, 2003 versus net loss of $615,000 and $1,429,000, respectively, in the prior year periods. Included in the three-month and six-month periods ended June 30, 2003 was a non-cash gain on termination of a post-retirement benefit plan of $834,000. Consolidated sales for the quarter ended June 30, 2003 decreased $.9 million (27%) to $2.4 million due to sales decreases in both the domestic and the UK distributorship operations. The sales in the domestic operations decreased $.4 million (19%) to $1.6 million due to the continuing reduction in capital expenditures by major telecommunication providers as previously noted by the Company. Domestic operations' 2003 sales included $1.1 million to a large telecommunication service provider. Sales of the Company's UK distributorship operations decreased $.5 million (39%), in spite of an 8% favorable exchange rate fluctuation, due to lower volume. Consolidated sales for the six months ended June 30, 2003 decreased $1.6 million (24%) primarily due to a sales decrease of $1.3 million (35%)in the domestic operations and a decrease of $.3 million (10%) in its UK distributorship operations due to the reasons stated above. Gross margin percentage was 40% for the three months and 39% for the six months ended June 30, 2003 and 44% and 41%, respectively, in the comparable 2002 periods. The three and six-month periods ended June 30, 2003 versus the prior year periods were adversely impacted by lower sales and the concomitant lower absorption of fixed costs and an increase for obsolete inventory expense of $200,000 offset, in part, by favorable product mix and cost reductions in the US operations. Research and development expenses decreased $244,000 (27%) and $429,000 (25%), respectively, in the three-month and six-month periods ended June 30, 2003 versus the comparable periods in 2002 primarily due to lower consultancy expenses and personnel costs. In June 2003, the Board of Directors voted to terminate the 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 quarter ended June 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. In response to the continuing adverse industry-wide trend, the Company implemented cost and expense reductions in its domestic operations, including an 11% reduction in workforce and an across-the-board ten percent salary reductions for most employees, in the second quarter of 2003. As a result, future expenses will be reduced by approximately $800,000 annually beginning in the second half of 2003. Liquidity and Sources of Capital Net cash used by operations for the six months ended June 30, 2003 increased to $2,694,000 primarily due to higher losses from operations. 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 $15.7 million and 6.5:1 at June 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 June 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 4. Submission of Matters to a Vote of Security Holders (a) The Registrant's Annual Meeting of Stockholders was held on May 8, 2003. (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 4,676,926 250,891 180,678 Edward S. Davis 4,669,555 258,262 180,678 Brian J. Kelley 4,663,586 264,231 180,678 Jack Meehan 4,676,931 250,886 180,678 William A. Merritt 4,678,236 249,581 180,678 William J. Stuart 4,694,036 233,781 180,678 2. To approve a proposal to amend the Company's 1990 Stock Option Plan 4,736,438 180,158 11,221 180,678 3. To approve a proposal to amend the Company's Restricted Stock Plan 4,543,066 371,448 13,283 180,678 4. To approve a proposal to amend the Company's Directors' Stock Option Plan 4,729,482 186,236 12,099 180,678 5. To approve the selection of Ernst & Young LLP as independent auditors 4,882,225 35,296 10,296 180,678 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). 10.3 The Directors' Stock Option Plan, as amended (attached as Exhibit 10.3 to this Quarterly Report on Form 10-Q). 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 May 9, 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 first 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: August 14, 2003 By /s/ Garrett Sullivan Garrett Sullivan, Treasurer and Chief Financial Officer