PAGE 1 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, 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 September 30, 2001. Common Stock, par value $0.20 per share - 5,408,004 shares PAGE 2 Part I, Item 1. COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) September 30, December 31, 2001 2000 (Unaudited) ------------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 6,201 $ 3,499 Marketable securities 6,800 9,400 Accounts receivable, net 3,863 7,760 Inventories 6,846 6,557 Deferred income taxes 725 746 Other current assets including loans to officers of $1,545 and $1,062 2,753 1,783 ------- ------- TOTAL CURRENT ASSETS 27,188 29,745 PROPERTY, PLANT AND EQUIPMENT, NET 1,484 1,373 GOODWILL, NET 402 651 DEFERRED INCOME TAXES 781 762 OTHER ASSETS 514 467 ------- ------- $30,369 $32,998 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,236 $ 1,560 Accrued compensation and benefits 881 1,128 Income taxes payable 342 532 Current maturities of debt 35 43 Other accrued expenses 707 652 ------- ------- TOTAL CURRENT LIABILITIES 3,201 3,915 LONG-TERM DEBT 21 47 OTHER NON-CURRENT LIABILITIES 1,972 2,048 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 13,835 14,123 Retained earnings 14,825 15,218 Cumulative other comprehensive income (182) (182) Unearned compensation (571) (332) ------- ------- 29,080 30,000 Less cost of 455,225 and 300,550 shares in treasury (3,905) (3,012) ------- ------- TOTAL STOCKHOLDERS' EQUITY 25,175 26,988 ------- ------- $30,369 $32,998 ======= ======= See Note to Condensed Consolidated Financial Statements. PAGE 3 COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) (dollars in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2001 2000 2001 2000 ---- ---- ---- ---- NET SALES $4,807 $8,404 $15,594 $22,766 ------ ------ ------- ------- COST AND EXPENSES: Cost of products sold 2,612 3,774 8,216 10,226 Research and development 1,069 595 2,688 1,784 Selling, general and administrative 1,836 1,802 5,494 5,405 Amortization of goodwill 83 83 249 249 Other (income), net (115) (189) (425) (424) ------ ------ ------- ------- 5,485 6,065 16,222 17,240 ------ ------ ------- ------- Income(loss) before income taxes (678) 2,339 (628) 5,526 PROVISION(BENEFIT) FOR INCOME TAXES (250) 834 (235) 2,030 ------ ------ ------- ------- NET INCOME(LOSS) (428) 1,505 (393) 3,496 Currency translation adjustment 40 (74) (248) ------ ------ ------- ------- COMPREHENSIVE INCOME(LOSS) $ (388) $1,431 $ (393) $ 3,248 ====== ====== ======= ======= NET INCOME(LOSS) PER SHARE: Basic $(.08) $.26 $(.07) $.60 ===== ==== ===== ==== Diluted $(.08) $.25 $(.07) $.57 ===== ==== ===== ==== Weighted average number of outstanding shares: Basic 5,356,975 5,730,585 5,417,044 5,798,452 ========= ========= ========= ========= Diluted 5,356,975 6,111,467 5,417,044 6,168,835 ========= ========= ========= ========= See Note to Condensed Consolidated Financial Statements. PAGE 4 COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands) Nine Months Ended September 30, ----------------- 2001 2000 ---- ---- NET CASH PROVIDED BY OPERATIONS $2,842 $3,868 ------ ------ INVESTING ACTIVITIES Purchases of marketable securities (3,800) (2,000) Sales of marketable securities 6,400 2,600 Loans to employees (483) (638) Additions to property, plant and equipment, net (457) (276) Purchase of software licenses (192) ------ ------ NET CASH PROVIDED(USED) BY INVESTING ACTIVITIES 1,468 (314) ------ ------ FINANCING ACTIVITIES Repurchase of 232,450 and 166,880 shares for treasury (1,576) (1,681) Principal payment of debt (34) (36) Shares issued pursuant to employee stock option plans, 1,275 and 26,376 shares 7 105 ------ ------ NET CASH (USED) BY FINANCING ACTIVITIES (1,603) (1,612) ------ ------ EFFECT OF EXCHANGE RATE DIFFERENCES (5) (37) ------ ------ INCREASE IN CASH AND CASH EQUIVALENTS 2,702 1,905 CASH AND CASH EQUIVALENTS- BEGINNING OF PERIOD 3,499 3,992 ------ ------ CASH AND CASH EQUIVALENTS - END OF PERIOD $6,201 $5,897 ====== ====== INCOME TAXES PAID $ 538 $2,272 ====== ====== INTEREST EXPENSE PAID $ 9 $ 15 ====== ====== See Note to Condensed Consolidated Financial Statements. PAGE 5 NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 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 nine-month periods ended September 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): September 30, December 31, 2001 2000 ------------- ------------ Finished and in process $4,497 $4,320 Materials and purchased parts 2,349 2,237 ------ ------ $6,846 $6,557 ====== ====== Other Non-Current Liabilities (in thousands): September 30, December 31, 2001 2000 ------------- ------------ Accrued supplemental pension plan $ 524 $ 553 Accrued deferred compensation 278 291 Accrued pension 525 568 Accrued other post-employment benefit 834 825 ------ ------ 2,161 2,237 Less current portion 189 189 ------ ------ $1,972 $2,048 ====== ====== Common Stock During the nine months ended September 30, 2001 and September 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. Income Per Share In computing basic earnings per share, the dilutive effect of stock options and restricted stock are excluded; whereas, for dilutive earnings per share, the dilutive effect, if any, is included. PAGE 6 Recent Pronouncements In October 2001, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which provides a single accounting model for long-lived assets to be disposed of. In August 2001, the FASB issued SFAS No. 143, "Accounting for Assets Retirement Obligations", which focuses on accounting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets". Under SFAS Nos. 141 and 142, all acquisitions subsequent to June 30, 2001 must be accounted for under the purchase method of accounting, and purchased goodwill will no longer be amortized over its useful life. Rather, goodwill will be subject to a periodic impairment test based upon its fair value. SFAS Nos. 142 and 144 are effective in 2002 and SFAS No. 143 is effective in 2003. During the three months and nine months ended September 30, 2001, the Company recognized goodwill amortization expense of $83,000 and $249,000, respectively. With the exception of the impact on the Company's amortization of goodwill, these Statements are not expected to have a material impact on the Company's financial condition or results of operations. Operations by Industry Segments and Geographic Areas: Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2001 2000 2001 2000 Net Sales United States: Unaffiliated Customers (North America) $3,454 $6,321 $10,697 $17,022 Intercompany transfers 55 ------ ------ ------- ------- 3,454 6,321 10,697 17,077 Europe 1,353 2,083 4,897 5,744 Intercompany eliminations (55) ------ ------ ------- ------- $4,807 $8,404 $15,594 $22,766 ====== ====== ======= ======= Operating Profit (Loss) United States $ (24) $2,477 $ 506 $ 6,220 Europe (378) (15) (565) (129) Intercompany eliminations 20 69 26 27 ------ ------ ------- ------- (382) 2,531 (33) 6,118 General Corporate Expense 411 381 1,020 1,016 Other (income), net (115) (189) (425) (424) ------ ------ ------- ------- Income (loss) before taxes $ (678) $2,339 $ (628) $ 5,526 ====== ====== ======= ======= Total Assets United States $26,459 $29,515 Europe 3,945 4,121 Intercompany eliminations (35) (37) ------- ------- $30,369 $33,599 ======= ======= PAGE 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company reported a net loss of $428,000 and $393,000, respectively, for the three and nine-month periods ended September 30, 2001 versus net income of $1,505,000 and $3,496,000, respectively, in the prior year periods. Consolidated sales for the quarter ended September 30, 2001 decreased $3.6 million (43%) to $4.8 million versus the prior year period. In the third quarter, domestic sales decreased $2.9 million (45%), reflecting the continued decreased spending in the telecommunication industry. Sales by the UK distributorship operations decreased by $.7 million due to lower sales to its principal customer. Consolidated sales for the nine months ended September 30, 2001 decreased $7.2 million (32%) from the prior year period. Sales of the domestic operations decreased $6.3 million (37%) due to the previously mentioned decreased spending in the telecommunication industry. The demand in the U.S. for telecommunication equipment continues to be soft and the Company is unable to determine when the telecommunication equipment market will improve. The sales of the Company's UK distributorship operations decreased $.8 million (15%) from the prior year period primarily due to lower sales to its principal customer. For the past two years, the company's UK distributorship operations has experienced significant decreases in sales to its principal customer. The Company is unable to determine whether this trend will continue. Gross margin percentage was 46% and 47%, respectively, for the three months and nine months ended September 30, 2001 and 55% in each of the comparable 2000 periods. The decreases in the current year periods versus the prior year periods are primarily due to the lower volume in the US operations. Research and development expenses increased $474,000 (80%) and $904,000 (51%), respectively, in the three-month and nine-month periods ended September 30, 2001 when compared to the prior year periods. The increases are due to contracted engineering services expenses, increased salaries attributable to increased headcount and wage rates, higher purchased parts and increased overhead expenses. The Company's increased research and development efforts reflect work on next generation equipment. The Company anticipates the continuance of this level of expenditures. Selling, general and administrative expenses increased $34,000 (2%) and $89,000 (2%), respectively, for the three and nine months ended September 30, 2001, when compared to the prior year periods. These increases are attributable to increases of $26,000 (3.3%) and $184,000 (8%), respectively, in the Company's UK distributorship operations. Included in both the three-month and nine-month periods is $77,000 related to termination expenses at the Company's UK distributorship operations. Other (income) decreased due to lower interest rates on cash balances and marketable securities in the three month period ended September 30, 2001. Liquidity and Sources of Capital Net cash flow from operations for the nine months ended September 30, 2001 was $2.8 million versus $3.9 million in 2000. In 2000, cash flow from PAGE 8 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 property, plant and equipment and 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 million and 8.5:1 at September 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 330,550 shares of its common stock and anticipates purchasing $.3 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, third party suppliers and 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, 2001, the UK distributorship operations had net assets of $1.6 million. The Company does not hedge this foreign currency net asset exposure. PART II Item 6. Exhibits and reports on Form 8-K No exhibits or reports on Form 8-K were filed during the current quarter. PAGE 9 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, 2001 By /s/ Garrett Sullivan Garrett Sullivan, Treasurer and Chief Financial Officer