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, 2001 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, 2001. Common Stock, par value $0.20 per share 5,433,429 shares Part I, Item 1. COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) June 30, December 31, 2001 2000 -------- ------------ (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 6,495 $ 3,499 Marketable securities 8,200 9,400 Accounts receivable, net 3,170 7,760 Inventories 6,542 6,557 Deferred income taxes 727 746 Other current assets including loans to officers of $1,445 and $1,062 2,161 1,783 ------- ------- TOTAL CURRENT ASSETS 27,295 29,745 PROPERTY, PLANT AND EQUIPMENT, NET 1,384 1,373 GOODWILL, NET 485 651 DEFERRED INCOME TAXES 782 762 OTHER ASSETS 572 467 ------- ------- $30,518 $32,998 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,055 $ 1,560 Accrued compensation and benefits 751 1,128 Income taxes payable 15 532 Current maturities of debt 35 43 Other accrued expenses 1,000 652 ------- ------- TOTAL CURRENT LIABILITIES 2,856 3,915 LONG-TERM DEBT 29 47 OTHER NON-CURRENT LIABILITIES 2,023 2,048 STOCKHOLDERS' EQUITY Common Stock, par value $.20 a share, authorized 10,000,000 shares; issued 5,863,229 and 5,863,229 1,173 1,173 Additional paid-in capital 13,837 14,123 Retained earnings 15,253 15,218 Cumulative other comprehensive loss (222) (182) Unearned compensation (638) (332) ------- ------- 29,403 30,000 Less cost of 429,800 and 300,550 common shares in treasury (3,793) (3,012) ------- ------- TOTAL STOCKHOLDERS' EQUITY 25,610 26,988 ------- ------- $30,518 $32,998 ======= ======= See Note to Condensed Consolidated Financial Statements. COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) (dollars in thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2001 2000 2001 2000 ---- ---- ---- ---- NET SALES $5,848 $8,437 $10,787 $14,362 COST AND EXPENSES: Cost of products sold 2,981 3,610 5,604 6,452 Research and development 915 604 1,619 1,189 Selling, general and administrative 1,923 1,842 3,658 3,603 Amortization of goodwill 83 83 166 166 Other (income), net (141) (134) (310) (235) ------ ------ ------- ------- 5,761 6,005 10,737 11,175 ------ ------ ------- ------- Income before income taxes 87 2,432 50 3,187 PROVISION FOR INCOME TAXES 29 916 15 1,196 ------ ------ ------- ------- NET INCOME 58 1,516 35 1,991 Currency translation adjustment (40) (116) (40) (174) ------ ------ ------- ------- COMPREHENSIVE INCOME(LOSS) $ 18 $1,400 $ (5) $ 1,817 ====== ====== ======= ======= NET INCOME PER SHARE: Basic $.01 $.26 $.01 $.34 ==== ==== ==== ==== Diluted $.01 $.25 $.01 $.32 ==== ==== ==== ==== Weighted average number of outstanding shares: Basic 5,365,157 5,814,685 5,442,719 5,829,322 ========= ========= ========= ========= Diluted 5,502,900 6,106,288 5,613,941 6,182,278 ========= ========= ========= ========= 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, ---------------- 2001 2000 ---- ---- NET CASH PROVIDED BY OPERATIONS $4,124 $ 63 INVESTING ACTIVITIES Purchases of marketable securities (1,200) Sales of marketable securities 2,400 2,000 Loans to employees (383) (638) Additions to property, plant and equipment, net (247) (241) Purchase of software licenses (192) ------ ------ NET CASH PROVIDED BY INVESTING ACTIVITIES 378 1,121 ------ ------ FINANCING ACTIVITIES Repurchase of 206,650 and 128,200 shares for treasury (1,461) (1,235) Principal payment of debt (46) (24) Common stock issued pursuant to employee stock plans, 900 and 25,026 shares 6 96 ------ ------ NET CASH USED BY FINANCING ACTIVITIES (1,501) (1,163) ------ ------ EFFECT OF EXCHANGE RATE DIFFERENCES (5) (19) ------ ------ INCREASE IN CASH AND CASH EQUIVALENTS 2,996 2 CASH AND CASH EQUIVALENTS- BEGINNING OF PERIOD 3,499 3,992 ------ ------ CASH AND CASH EQUIVALENTS - END OF PERIOD $6,495 $3,994 ====== ====== INCOME TAXES PAID $ 536 $1,385 ====== ====== INTEREST PAID $ 13 $ 12 ====== ====== See Note to Condensed Consolidated Financial Statements. NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2001 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, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The balance sheet at December 31, 2000 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, 2000. Inventories (in thousands): June 30, December 31, 2001 2000 ---- ---- Finished and in process $4,180 $4,320 Materials and purchased parts 2,362 2,237 ------ ------ $6,542 $6,557 ====== ====== Other Non-Current Liabilities (in thousands): June 30, December 31, 2001 2000 ---- ---- Accrued supplemental pension plan $ 534 $ 553 Accrued deferred compensation 282 291 Accrued pension 577 568 Accrued post-retirement benefit 831 825 ------ ------ 2,224 2,237 Less current portion 201 189 ------ ------ $2,023 $2,048 ====== ====== Common Stock During the three months ended June 30, 2001 and June 30, 2000, the company granted 76,500 and 26,000 shares of common stock under the Restricted Stock Plan and recorded $382,500 and $236,000 of unearned compensation expense, respectively. For the six months ended June 30, 2001 and 2000, 900 and 25,026 stock options were exercised. 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 Six Months Ended June 30, June 30, ------------------ ---------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net Sales United States: Unaffiliated Customers (North America) $4,144 $6,980 $ 7,243 $10,701 Intercompany transfers 55 55 ------ ------ ------- ------- 4,144 7,035 7,243 10,756 Europe 1,704 1,457 3,544 3,661 Intercompany eliminations (55) (55) ------ ------ ------- ------- $5,848 $8,437 $10,787 $14,362 Operating Profit United States $ 447 $2,901 $ 530 $ 3,743 Europe (177) (238) (187) (114) Intercompany eliminations 3 (42) 6 (42) ------ ------ ------- ------- 273 2,621 349 3,587 General Corporate Expense 327 323 609 635 Other (income), net (141) (134) (310) (235) ------ ------ ------- ------- Income before income taxes $ 87 $2,432 $ 50 $ 3,187 ====== ====== ======= ======= Total Assets United States $27,327 $28,230 Europe 3,229 3,943 Intercompany eliminations (38) (65) ------- ------- $30,518 $32,108 ======= ======= Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net income was $58,000 and $35,000, respectively, for the three and six-month periods ended June 30, 2001 versus $1,516,000 and $1,991,000, respectively, in the prior year periods. Consolidated sales for the quarter ended June 30, 2001 decreased $2.6 million (31%) to $5.8 million due to sales decreases by domestic operations of $2.8 million offset, in part, by higher sales volume by the UK distributorship operations. The domestic sales were adversely affected by a general slowdown in capital expenditures in the telecommunications industry. Sales of the Company's UK distributorship operations increased $.2 million due to higher sales of the Transcend product line offset, in part, by lower volume to its largest customer and an unfavorable exchange rate. Consolidated sales for the six months ended June 30, 2001 decreased $3.6 million (25%) due to a sales decrease in the domestic operations. Gross margin percentage was 49% for the three months and 48% for the six months ended June 30, 2001 and 57% and 55%, respectively, in the comparable 2000 periods. The decrease in the three and six-month periods ended June 30, 2001 versus the prior year periods is due to lower sales and the concomitant lower absorption of fixed costs in the US operations and an unfavorable product mix in the UK distributorship operations. Research and development expenses increased $311,000 (51%) and $430,000 (36%) in the three and six-month periods ended June 30, 2001 primarily due to higher headcount and an increase in wage rates for technical staff, consultancy expenses and higher purchased material. Other (income) increased due to interest earned on higher available cash balances and marketable securities. The Company's effective tax rate for the three and six-month periods ended June 30, 2001 were 33% and 30%, respectively, versus 38% for each of the 2000 periods. This decrease is due to the higher proportion of pretax income attributable to tax advantaged interest income. Liquidity and Sources of Capital Net cash flow from operations for the six months ended June 30, 2001 was $4.1 million versus $.1 million in 2000. In 2000, cash flow from operations was adversely impacted by a reduction of $3.2 million in accounts payable. The increase in cash provided by investing activities reflects the net decrease in marketable securities offset by an increase in employee loans and purchase of software licenses. The net cash used for financing activities in both periods presented primarily reflects the repurchase of shares for treasury. Working capital and the ratio of current assets to current liabilities were $24.4 million and 9.6:1 at June 30, 2001 compared to $25.8 million and 7.6:1 at December 31, 2000. The decrease in working capital in 2001 is mainly due to the repurchase of treasury shares. During the remainder of 2001, the Company may repurchase up to an additional 356,350 shares of its common stock and anticipates purchasing $.5 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 2001 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, 2001, the UK distributorship operations had net assets of $1.9 million. During 2001, the UK pound depreciated versus the US dollar. The impact of this rate change was reflected in the currency translation adjustment. 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 17, 2001. (c) The following matters were voted upon by stockholders: Withheld Broker For or Against Abstain Non-votes 1. Election of seven Directors - John T. Connors 4,539,316 230,730 179,514 Edward S. Davis 4,540,661 229,385 179,514 Brian J. Kelley 4,428,657 341,389 179,514 Jack Meehan 4,540,561 229,485 179,514 William A. Merritt 4,542,056 227,990 179,514 William J. Stuart 4,546,168 223,878 179,514 2. To approve a proposal to amend the Company's 1990 Stock Option Plan 4,378,546 372,958 18,542 179,514 3. To approve a proposal to amend the Company's Restricted Stock Plan 4,369,479 380,205 20,362 179,514 4. To approve a proposal to amend the Company's Directors' Stock Option Plan 4,399,473 352,535 18,038 179,514 5. To approve the selection of Ernst & Young LLP as independent auditors 4,737,190 24,531 8,325 179,514 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). (b) No reports on Form 8-K 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: August 14, 2001 By /s/ Garrett Sullivan Garrett Sullivan, Treasurer and Chief Financial Officer