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 quarterly period ended June 30, 2005 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 1-8496 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 the past 90 days. Yes x No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No x The Registrant has 5,747,070 shares of Common Stock, $.20 par value per share outstanding at June 30, 2005. Part I, Item 1. COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) June 30, December 31, 2005 2004 (Unaudited) ----------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,953 $ 2,836 Marketable securities 7,026 5,847 Accounts receivable, net 1,144 4,466 Inventories 2,062 2,303 Other current assets 166 148 ------- ------- TOTAL CURRENT ASSETS 13,351 15,600 LOANS TO OFFICERS 1,996 1,968 PROPERTY, PLANT AND EQUIPMENT, NET 790 922 GOODWILL 319 319 OTHER ASSETS 91 147 ------- ------- $16,547 $18,956 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 268 $ 348 Accrued compensation and benefits 829 842 Deferred service revenue 782 576 Other accrued expenses 987 1,137 ------- ------- TOTAL CURRENT LIABILITIES 2,866 2,903 OTHER NON-CURRENT LIABILITIES 918 1,038 STOCKHOLDERS' EQUITY Common Stock, par value $.20 a share, authorized 20,000,000 shares; issued 5,866,878 shares 1,173 1,173 Additional paid-in capital 12,584 12,586 Retained earnings 415 2,865 Accumulated other comprehensive loss (250) (225) Unearned compensation (222) (303) ------- ------- 13,700 16,096 Less cost of 119,808 and 138,308 common shares in treasury (937) (1,081) TOTAL STOCKHOLDERS' EQUITY 12,763 15,015 ------- ------- $16,547 $18,956 ======= ======= See Note to Condensed Consolidated Financial Statements. COGNITRONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (dollars in thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 REVENUES: Sales $1,068 $4,009 $3,298 $6,056 Service 567 234 1,066 448 ------ ------ ------ ------ 1,635 4,243 4,364 6,504 COST AND EXPENSES: Cost of products sold and services 991 1,744 2,223 3,257 Research and development 791 635 1,509 1,230 Selling, general and administrative 1,609 1,505 3,189 3,025 Other (income), net (76) (32) (137) (63) ------ ------ ------ ------ 3,315 3,852 6,784 7,449 Income(loss) before income taxes (1,680) 391 (2,420) (945) PROVISION FOR INCOME TAXES 15 15 30 30 ------ ------ ------ ------ NET INCOME (LOSS) (1,695) 376 (2,450) (975) Currency translation adjustment (46) (10) (25) 78 ------- ------ ------- ------ COMPREHENSIVE INCOME(LOSS) $(1,741) $ 366 $(2,475) $ (897) ======= ====== ======= ====== NET INCOME(LOSS)PER SHARE: Basic $(.30) $ .07 $(.43) $(.18) Diluted $(.30) $ .06 $(.43) $(.18) Weighted average number of outstanding shares: Basic 5,653,173 5,548,811 5,643,571 5,541,034 Diluted 5,653,173 6,278,428 5,643,571 5,541,034 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, 2005 2004 ---- ---- NET CASH PROVIDED(USED) BY OPERATIONS $1,338 $ (245) ------ ------ INVESTING ACTIVITIES Purchases of marketable securities (5,529) (4,463) Sales of marketable securities 4,325 4,660 Additions to property, plant and equipment, net (32) (84) ------ ------ NET CASH PROVIDED(USED) BY INVESTING ACTIVITIES (1,236) 113 ------ ------ FINANCING ACTIVITIES Shares issued pursuant to employee stock plans 30 14 ------ ------ NET CASH PROVIDED BY FINANCING ACTIVITIES 30 14 ------ ------ EFFECT OF EXCHANGE RATE DIFFERENCES (15) (2) ------ ------ INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 117 (120) CASH AND CASH EQUIVALENTS- BEGINNING OF PERIOD 2,836 2,877 ------ ------ CASH AND CASH EQUIVALENTS - END OF PERIOD $2,953 $2,757 ====== ====== INCOME TAXES PAID $ 2 $ 63 ====== ====== INTEREST PAID $ 2 $ 5 ====== ====== See Note to Condensed Consolidated Financial Statements. NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2005 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 Rule 10-01 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 six-month periods ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. The balance sheet at December 31, 2004 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, 2004. Inventories (in thousands): June 30, December 31, 2005 2004 ------- ------------ Finished and in process $1,612 $1,572 Materials and purchased parts 450 731 ------ ------ $2,062 $2,303 ====== ====== Other Non-Current Liabilities (in thousands): June 30, December 31, 2005 2004 -------- ------------ Accrued supplemental pension plan $ 345 $ 368 Accrued deferred compensation 194 207 Accrued pension expense 680 740 ------ ------ 1,219 1,315 Less current portion 301 277 ------ ------ $ 918 $1,038 ====== ====== 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 the Statement of Financial Accounting Standards Board ("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 plans been determined in accordance with the fair value-based method prescribed under SFAS 123, the Company's net income(loss) and basic and diluted net income(loss) per share would have approximated the pro forma amounts indicated below (dollars in thousands except per share amounts): Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- Net income(loss) as reported $(1,695) $ 376 $(2,450) $(975) Add: Stock-based compensation expense included therein 77 96 157 192 Deduct: Total stock-based compensation expense determined under the fair value based method (117) (171) (259) (400) ------- ----- ------- ------- Pro forma net income(loss) $(1,735) $ 301 $(2,552) $(1,183) ======= ===== ======= ======= Net income(loss) per share As reported Basic $(.30) $ .07 $(.43) $(.18) Diluted $(.30) $ .06 $(.43) $(.18) Pro forma Basic $(.31) $ .05 $(.46) $(.21) Diluted $(.31) $ .05 $(.46) $(.21) There were no options granted in the periods ended June 30, 2005 and 2004. In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised 2004), "Share-based Payment" that will require the Company to expense costs related to share-based payment transactions with employees. With limited exceptions, SFAS No. 123(R) requires that the fair value of share-based payments to employees be expensed over the period service is received and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB No. 25, and allowed under the original provisions of SFAS No. 123. SFAS No. 123(R) becomes mandatorily effective for the Company on January 1, 2006. SFAS No. 123(R) allows for either prospective recognition of compensation expense or retrospective recognition, which may be back to the original issuance of SFAS No. 123 or only to interim periods in the year of adoption. The Company is currently evaluating these transition methods. Pension Plan The Company and its domestic subsidiaries have a defined benefit pension plan. No additional service cost benefits were earned subsequent to June 30, 1994. The Company's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate from time to time. The components of net periodic benefit cost of the plan for the three and six months ended June 30 are as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- Interest cost on projected benefit obligation $22 $23 $45 $46 Expected return on plan assets (14) (15) (29) (28) Amortization of net loss 8 2 15 5 --- --- --- --- Net periodic pension cost $16 $10 $31 $23 === === === === The Company expects the funding requirement to be $211,000 in 2005 of which $88,000 was funded during the six months ended June 30, 2005. Operations by Industry Segments and Geographic Areas: Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- Net Revenues United States $1,054 $2,568 $ 2,775 $ 2,999 Europe 581 1,675 1,589 3,505 ------ ------ ------- ------- $1,635 $4,243 $ 4,364 $ 6,504 ====== ====== ======= ======= Operating Profit(Loss) United States $ (960) $ 577 $(1,164) $ (638) Europe (457) 93 (714) 277 ------ ------ ------- ------- (1,417) 670 (1,878) (361) General Corporate Expense 339 311 679 647 Other (income), net (76) (32) (137) (63) ------- ------ ------- ------- Income(loss) before income taxes $(1,680) $ 391 $(2,420) $ (945) ======= ====== ======= ======= Total Assets United States $15,516 $15,757 Europe 1,041 3,073 Intercompany eliminations (10) ------- ------- $16,547 $18,830 ======= ======= Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain Factors That May Affect Future Results The following information, including, without limitation, the Quantitative and Qualitative Disclosures About Market Risk that are not historical facts, may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements generally are characterized by the use of terms such as "believe", "expect" and "may". Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company's actual results could differ materially from those set forth in the forward-looking statements. Factors that might cause such a difference include, but are 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. Results of Operations The Company reported net losses of $1,695,000 for the three months ended June 30, 2005 and $2,450,000 for the six months ended June 30, 2005 versus net income of $376,000 and a net loss of $975,000, respectively, in the prior year periods. Consolidated revenues for the quarter ended June 30, 2005 decreased $2.6 million (61%) to $1.6 million due to sales decreases in both the domestic and the UK distributorship operations. The revenues in the domestic operations decreased $1.5 million (59%) to $1.1 million due to a decrease of $1.7 on sales, offset, in part, by an increase of $.2 million in service income. Included in the 2004 revenues were sales of $1.7 million to a large telecommunication service provider. The increase in service income reflects an increasing base. Sales of the Company's UK distributorship operations decreased $1.1 million (65%) due to lower volume. Consolidated revenues for the six months ended June 30, 2005 decreased $2.1 million (33%) primarily due to sales decrease of $1.9 (55%) in the UK distributorship operations due to lower volume. The domestic sales decreased $.6 (22%) offset by an increase of $.4 in maintenance income. Included in sales in 2004 was $1.7 million to a large telecommunication service provider versus $.3 million in the current year period; however, the Company has received in July orders of approximately $2 million from this customer. Offsetting lower sales to this customer in 2005 were increased sales of $.7 million to a world-wide telecommunication system integrator. Gross margin percentage was 39% for the three months and 49% for the six months ended June 30, 2005 and 59% and 50%, respectively, in the comparable 2004 periods. The three-month period ended June 30, 2005 versus the prior year period was unfavorably impacted by lower sales volume and the concomitant lower absorption of fixed costs. Research and development expenses for the three and six-month periods ended June 30, 2005 increased $.2 million (25%) and $.3 million (23%), respectively, from the comparable 2004 periods due to higher material costs and increased personnel costs due to increased salaries and headcount. Selling, general and administrative expenses increased $.1 million (7%) and $.2 million (5%) for the three and six-month periods ended June 30, 2005 versus the prior year periods due to higher professional fees, travel expense and personnel costs. Other income, net increased due to higher interest earned on cash balances and marketable securities due to higher interest rates. Liquidity and Sources of Capital Net cash provided by operations for the six months ended June 30, 2005 was $1.3 million versus the net cash used of $.2 million in the 2004 period. In the 2005 period the positive cash flow from operations was primarily due to the reduction of accounts receivable by $3.3, offset by a loss from operations. Working capital and the ratio of current assets to current liabilities were $10.5 million and 4.7:1 at June 30, 2005 compared to $12.7 million and 5.4:1 at December 31, 2004. During the remainder of 2005, the Company may repurchase up to an additional 253,792 shares of its common stock and anticipates purchasing $.4 million of equipment. Management believes that its cash and cash equivalents and marketable securities will be sufficient to meet these needs in 2005. Item 3. Quantitative and Qualitative Disclosures About 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 should 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. The UK pound was stronger against the US dollar during the three-month and six-month periods ended June 30, 2005 as compared to the comparable periods of 2004, so the losses of the UK distributorship operations were translated into more dollars than they would have in the 2004 periods. The relative value of the UK pound to US dollar decreased by 7% from December 31, 2004 to June 30, 2005. At June 30, 2005, the UK distributorship operations had net assets of $.5 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 as of the end of the period covered by this report in ensuring that all material information required to be disclosed in this quarterly report and all information required to be disclosed by the Company under the Securities Exchange Act of 1934 has been made known to them in a timely fashion. During the three months ended June 30, 2005, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal controls for financial reporting. 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 12, 2005. (b) Messrs. John T. Connors, Brian J. Kelley, Jack Meehan, William A. Merritt and William J. Stuart were elected directors at the meeting. (c) The following matters were voted upon by stockholders: Withheld Broker For or Against Abstain Non-votes 1. Election of five Directors - John T. Connors 5,267,825 104,820 378,328 Brian J. Kelley 5,353,395 19,250 378,328 Jack Meehan 5,360,717 11,928 378,328 William A. Merritt 5,360,917 11,728 378,328 William J. Stuart 5,362,217 10,428 378,328 2. To approve the selection of Carlin, Charron & Rosen, LLP as independent auditors 5,341,842 23,325 7,478 378,328 Item 6. Exhibits (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. 32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 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 15, 2005 By /s/ Garrett Sullivan Garrett Sullivan, Treasurer and Chief Financial Officer