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 March 31, 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 March 31, 2001. Common Stock, par value $0.20 per share -- 5,415,793 shares Part I, Item 1. 2 COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) March 31, December 31, 2002 2001 (Unaudited) ----------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 8,050 $ 7,731 Marketable securities 5,900 6,400 Accounts receivable, net 2,157 2,035 Inventories 5,368 5,682 Deferred income taxes 1,115 1,110 Other current assets including loans to officers of $1,566 and $1,516 2,642 2,431 ------- ------- TOTAL CURRENT ASSETS 25,232 25,389 PROPERTY, PLANT AND EQUIPMENT, NET 1,616 1,514 GOODWILL, NET 319 319 DEFERRED INCOME TAXES 811 812 OTHER ASSETS 483 539 ------- ------- $28,461 $28,573 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,115 $ 871 Accrued compensation and benefits 1,167 1,109 Income taxes payable 379 290 Current maturities of debt 46 46 Other accrued expenses 592 319 ------- ------- TOTAL CURRENT LIABILITIES 3,299 2,635 LONG-TERM DEBT 14 26 OTHER NON-CURRENT LIABILITIES 2,327 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 12,600 13,413 Cumulative other comprehensive loss (277) (260) Unearned compensation (448) (506) ------- ------- 26,370 27,142 Less cost of 447,436 and 445,936 common shares in treasury (3,549) (3,544) ------- ------- TOTAL STOCKHOLDERS' EQUITY 22,821 23,598 ------- ------- $28,461 $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 March 31, 2002 2001 ---- ---- SALES $ 3,142 $4,939 ------- ------ COST AND EXPENSES: Cost of products sold 1,939 2,623 Research and development 858 704 Selling, general and administrative 1,644 1,735 Amortization of goodwill 83 Other (income)expense, net ( 49) (169) ------ ------ 4,392 4,976 ------ ------ Income(loss) before income taxes (1,250) (37) PROVISION(BENEFIT) FOR INCOME TAXES (437) (14) ------ ------ NET INCOME(LOSS) (813) (23) Currency translation adjustment (17) ------ ------ COMPREHENSIVE INCOME(LOSS) $ (830) $ (23) ====== ====== NET INCOME(LOSS) PER SHARE: Basic $(.15) $.00 ===== ==== Diluted $(.15) $.00 ===== ==== Weighted average number of shares outstanding: Basic 5,411,890 5,508,111 ========= ========= Diluted 5,411,890 5,508,111 ========= ========= See Note to Condensed Consolidated Financial Statements. 4 COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands) Three Months Ended March 31, 2002 2001 ---- ---- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 125 $3,919 ------ ------ INVESTING ACTIVITIES Purchase of marketable securities (1,600) (1,200) Sales of marketable securities 2,100 2,400 Loans to employees (34) (331) Additions to property, plant and equipment, net (253) (138) ------ ------ NET CASH PROVIDED BY INVESTING ACTIVITIES 213 731 ------ ------ FINANCING ACTIVITIES Repurchase of 1,500 and 167,750 shares for treasury (5) (1,225) Issuance of debt 34 Principal payments on debt (12) (13) Common stock issued pursuant to employee stock plans, 900 shares 6 ------ ------ NET CASH PROVIDED(USED) BY FINANCING ACTIVITIES (17) (1,198) ------ ------ EFFECT OF EXCHANGE RATE DIFFERENCES (2) ------ ------ INCREASE IN CASH AND CASH EQUIVALENTS 319 3,452 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 7,731 3,499 ------ ------ CASH AND CASH EQUIVALENTS - END OF PERIOD $8,050 $6,951 ====== ====== INCOME TAXES PAID $ 3 $ 144 ====== ====== INTEREST PAID $ 10 $ 4 ====== ====== See Note to Condensed Consolidated Financial Statements. 5 NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 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 period ended March 31, 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): March 31, December 31, 2002 2001 ---- ---- Finished and in process $3,484 $3,455 Materials and purchased parts 1,884 2,227 ------ ------ $5,368 $5,682 ====== ====== Other Non-Current Liabilities (in thousands): March 31, December 31, 2002 2001 ---- ---- Accrued supplemental pension plan $ 501 $ 511 Accrued deferred compensation 269 274 Deferred directors' fees 289 269 Accrued pension expense 665 658 Accrued post-retirement benefit 844 843 ------ ------ 2,568 2,555 Less current portion 241 241 ------ ------ $2,327 $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. If FAS 142 was effective as of January 1, 2001, then the pro forma results of operations would have been 6 as follows (dollars in thousands): As Reported Adjustment Pro Forma Pretax Income $(37) $83 $46 ==== === === Net Income $(23) $76 $53 ==== === === Earnings per share: Basic $.00 $.01 ==== ==== Diluted $.00 $.01 ==== ==== Operations by Industry Segments and Geographic Areas: Three Months Ended March 31, 2002 2001 ---- ---- Net Sales United States $ 1,557 $ 3,099 Europe 1,585 1,840 Intercompany eliminations ------- ------- $ 3,142 $ 4,939 ======= ======= Operating Profit(loss) United States $ (967) $ 83 Europe 14 (10) Intercompany eliminations 3 3 ------- ------- (950) 76 General corporate expense 349 282 Other (income)expense (49) (169) ------- ------- Income(loss) before income taxes $(1,250) $ (37) ======= ======= Total Assets United States $25,780 $27,718 Europe 2,703 3,904 Intercompany eliminations (22) (41) ------- ------- $28,461 $31,581 ======= ======= Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations For the quarter ended March 31, 2002, the Company reported a loss of $813 thousand ($.15 per diluted share), versus a loss of $23 thousand ($.00 per diluted share) in the comparable 2001 quarter. 7 Consolidated sales for the first quarter of 2002 decreased $1.8 million, or 36%, from the prior year period. Sales of domestic operations decreased $1.5 million, or 50%, due to the reduction in infrastructure buildout, particularly by CLEC's, and capex reduction by the major telecommunication service providers as previously noted by the Company. The UK distributorship operations sales for the quarter ended March 31, 2002 decreased $.3 million (14%) from the prior year period. This is attributable to decreased sales volume to its largest customer and unfavorable foreign exchange variation. The gross margin percentage was approximately 38% in the 2002 quarter versus 47% in the prior year. This decrease is attributable to decrease in the sales volume of the domestic operations. Research and development expense increased 22% from the same period in 2001 primarily due to higher salaries attributable to higher headcount expenses and higher contract engineering services expenses. The Company's increased research and development efforts reflect work on next generation equipment. Selling, general and administrative expense decreased $91,000, or 5%, due to lower expenses at the Company's UK distributorship operations due to lower personnel and related expenses. Other (income) expense decreased due to lower interest earned on cash balances and marketable securities, reflecting lower interest rates. The Company's effective tax benefit rate decreased to 35% in 2002 from 38% in 2001. This reduction reflects lower tax-free income, offset, in part, by lower goodwill expense. Under Statement of Financial Accounting Standards No. 109, the Company has recognized future tax benefits that management believes will be realized. Liquidity and Sources of Capital Net cash flow from operations for the three months ended March 31, 2002 was $.1 million versus $3.9 million in 2001; this decrease in cash flow is attributable to higher loss. The decrease in cash provided by investing activities of $.2 million in 2002 versus $.7 million in 2001 reflects lower net sales of marketable securities in 2002. Working capital and the ratio of current assets to current liabilities was $21.9 million and 7.6:1 at March 31, 2002 compared to $22.8 million and 9.6:1 at December 31, 2001. The decrease in working capital in the three months ended March 31, 2002 is primarily 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 $.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 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 8 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 from 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 operation and the net assets of the Company's UK distributorship operations. At March 31, 2002, the UK distributorship operations had net assets of $1.3 million. Part II Item 6. Exhibits and Reports on Form 8-K (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: May 15, 2002 By /s/ Garrett Sullivan Garrett Sullivan, Treasurer and Chief Financial Officer