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1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000,
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
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 830-3400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, par value $0.20 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 1, 2001:
Common Stock, par value $0.20 per share -- $38,113,000
The number of shares outstanding of each of the issuer's classes of common
stock as of March 1, 2001:
Common Stock, par value $0.20 per share --5,519,378 shares
Documents incorporated by reference: Portions of the Proxy Statement for
the annual meeting of stockholders to be held on May 17, 2001 are incorporated
by reference into Part III.
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TABLE OF CONTENTS
PART I
Item Page
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 5
4. Submission of Matters to a Vote of Security Holders. . . . . . 5
Executive Officers of the Company. . . . . . . . . . . . . . . 6
PART II
5. Market for Company's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . 7
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . 7
7a. Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . .10
8. Financial Statements and Supplementary Data. . . . . . . . . .10
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . .24
PART III
10. Directors and Executive Officers of the Company. . . . . . . .24
11. Executive Compensation . . . . . . . . . . . . . . . . . . . .24
12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . . .24
13. Certain Relationships and Related Transactions . . . . . . . .24
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
McIAS is a trademark of Cognitronics Corporation.
UNIX is a registered trademark of Santa Cruz Operation, Inc.
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PART I
Item 1. Business
(a) Cognitronics Corporation (the "Company") was incorporated in January
1962 under the laws of the State of New York. The Company designs, manufactures
and markets voice processing systems.
(b) The Company operates in two segments of the voice processing industry.
In the United States, the Company designs, manufactures and sells equipment for
use in telephone central offices. In Europe, the Company distributes equipment
for use on customers' premises.
(c) (i) A description of the fields of voice processing in which the Company
operates and its products are as follows:
Domestic Operations. These products are sold directly to telecommunication
service providers or through switch manufacturers who distribute the Company's
products.
Intelligent Announcers. The Company's McIAS(TM) 16xx product family has
been primarily used by Incumbent Local Exchange Carriers (ILECs) and
Competitive Local Exchange Carriers (CLECs) to provide voice announcements in
connection with custom calling features (CLASS), such as selective call
forwarding and caller originator trace. Number change intercept is another
important feature provided.
The 16xx is available in two versions: a lower cost configuration which
provides network announcement functionality, is available as a 1607/68 (1 T-1
span capacity) and a 1610/68 (3 T-1 span capacity). The second version of this
series is a UNIX(R)-based platform which utilizes many of the same components as
the /68 series and is known as McIAS 16xx/IP. "IP" designates an Intelligent
Peripheral, indicating the ability to serve as a voice peripheral to any
manufacturer's switch and delivering multiple application capability.
The McIAS 16xx/IP is available as a 1607/IP, a 1610/IP, and a 1623/IP.
Features include an open architecture, scalable processing power and disk
drives, and centralized administration. Application examples include number
change with call completion, automated attendant, voice mail and time and
temperature announcements.
A new product line, the CX Series, was announced and sales began in 1999.
This family of products provides greater capacity and increased functionality to
meet telecommunication service providers' network needs in Advanced Intelligent
Network ("AIN") and packet switched environments. Included in the CX
capabilities are a new MultiResource Line Card and support for several key AIN
protocols such as SS7, SR-3511, GR-1129-CORE and ISDN-PRI. The CX is also
designed and planned to be IP Telephony and ATM ready by providing key packet
switched network support such as MGCP, MEGACO, RTP/RTCP, H. 323, SIP and others.
Passive Announcers. These announcers are used by the ILECs and CLECs to
inform callers about network conditions or procedures to invoke the use of a
service. The Company has been a major supplier to the industry of passive
announcers and incorporates these features in products such as the Model 688
Automatic Number Announcer, McIAS 950, and the McIAS 16xx product family.
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Call Processors. The Company's McIAS 950 is also an automated attendant
and audiotext system with the flexibility to offer the caller various choices
(dial an extension, revert to an operator, etc.). The system also offers a wide
variety of menu-selected information to callers. The McIAS 950 is designed for
use in both telephone network environments and the commercial business market.
European Distributorship Operations. Dacon Electronics Plc., based in
Hertfordshire, England, distributes call management and voice processing
products, including products manufactured by the Company, in Europe.
(ii) Status of publicly announced new products or industry segments
requiring material investment. Inapplicable.
(iii) The Company has adequate sources for obtaining raw materials,
components and supplies to meet production requirements and did not experience
difficulty during 2000 in obtaining such materials, supplies and components.
(iv) The Company relies on technological expertise, responsiveness to
users' needs and innovations and believes that these are of greater significance
in its industry than patent protection. There can be no assurance that patents
owned or controlled by others will not be encountered and asserted against
the Company's voice processing products or that licenses or other rights under
such patents would be available, if needed. The Company has registered
trademarks and names which the Company considers important in promoting the
business of the Company and its products.
(v) Seasonality. Inapplicable.
(vi) The discussion of liquidity and sources of capital as set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations is included in Item 7 of this Annual Report on Form 10-K and is
incorporated herein by reference.
(vii) In 2000, revenues included sales of $12.6 million to Siemens
Carrier Networks LLC. and $2.8 million to Nortel Inc. The Company's U.K.
operations had sales of $3.7 million to British Telecommunications Plc in 2000.
Over the past several years, a major portion of the revenues of the domestic
operations has come from two or three large customers, and a significant portion
of the revenues of the UK operations has come from one customer. Accordingly,
the loss of any of these customers could have a material adverse impact on the
Company's results of operations.
(viii) The dollar amount of orders believed by the Company to be firm as
of December 31, 2000 and 1999, amounted to $1.1 million and $.5 million,
respectively. Substantially all of the orders as of December 31, 2000, can
reasonably be expected to be filled during 2001.
(ix) Business subject to renegotiation. Inapplicable.
(x) The Company competes, and expects to compete, in fields noted for
rapid technological advances and the frequent introduction of new products and
services. The Company's products are similar to those manufactured, or capable
of being manufactured, by a number of companies, some of which are well-
established corporations with financial, personnel and technical resources
substantially larger than those of the Company. The Company's ability to
compete in the future depends on its ability to maintain the technological and
performance advantages of its current products and to introduce new products
and applications that achieve market acceptance. Future research and development
expenditures will be based, in part, on future results of operations. There are
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no assurances that the Company will be able to successfully develop and market
new products and applications.
(xi) Expenditures for research and development activities, as determined
in accordance with generally accepted accounting principles, amounted to $2.4
million in 2000, $2.1 million in 1999 and $2.0 million in 1998. In addition,
the estimated dollar amount spent on the improvement of existing products or
techniques was $.2 million in each of the years.
(xii) Material effects of compliance with Federal, State or local
provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. Inapplicable.
(xiii) At December 31, 2000, the Company and its subsidiaries
employed 103 people.
(d) Sales to foreign customers primarily represent sales of Dacon Electronics
Plc. (incorporated in the United Kingdom) of $7.3 million in 2000, $7.2 million
in 1999 and $8.3 million in 1998. Additional information about foreign
operations is included in Note K to Consolidated Financial Statements included
in Item 8 of this Annual Report on Form 10-K and is incorporated herein by
reference.
Further, there were export-type sales (primarily North America) of
approximately $.2 million in 2000, $3.5 million in 1999 and $2.4 million in
1998. Export sales do not involve any greater business risks than do sales to
domestic customers and, in certain instances, the Company obtains an irrevocable
letter of credit or payment prior to shipment of products to the customer.
Selling prices and gross profit margins on export-type sales are comparable
to sales to domestic customers.
Item 2. Properties
The facilities of the Company and its subsidiaries are
located as follows:
LOCATION DESCRIPTION FEET DATE
- -------- ----------- ------ ----------------
Danbury, Connecticut: Office, engineering, 40,000 10/31/03
3 Corporate Drive production and service
facility
Hemel Hempstead Office, distribution 12,000 7/31/01
Hertfordshire, and service facility
United Kingdom
1 Enterprise Way
The Company considers each of these facilities to be in good condition
and adequate for the Company's business.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is a party or of which any of their property is the
subject.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
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Executive Officers of the Company
The executive officers of the Company, their positions with the Company and
ages as of March 1, 2001 are as follows:
NAME POSITION(S) AND OFFICE(S) AGE
---- ------------------------- ---
Brian J. Kelley President and Chief Executive
Officer; Director 49
Kenneth G. Brix Vice President 54
Harold F. Mayer Secretary 71
Michael N. Keefe Vice President 45
Roy A. Strutt Vice President; Director 44
Garrett Sullivan Treasurer and Chief Financial Officer 55
Emmanuel A. Zizzo Vice President 60
No family relationships exist between the executive officers of the
Company. Each of the executive officers was elected to serve until the next
annual meeting of the Board of Directors or until his successor shall have been
elected and qualified.
Mr. Kelley has been President and Chief Executive Officer of the Company
since 1994. Prior to that he held senior management positions with
TIE/Communications, Inc. from 1986 to 1994.
Mr. Brix has been a Vice President of the Company since 1994 with
responsibility for U.S. sales and marketing. Prior to that he held senior
management positions from 1987 to 1994.
Mr. Mayer has been Secretary of the Company since 1975. He was Treasurer
from 1974 to 1989 and a Vice President of the Company from 1986 to 1996.
Mr. Keefe has been a Vice President of the Company since 1993 with
responsibility for engineering, prior to which he was Manager of Software
Planning and Development from 1992 until 1993 and senior engineer for more than
five years. He has been employed by the Company since 1980.
Mr. Strutt has been a Vice President of the Company since 1994 with
responsibility for European operations. Since 1992, he has been Managing
Director of Dacon Electronics Plc, which was acquired by the Company in 1992,
and Director of Sales and Operations from 1990 to 1992. Prior to that he was
Managing Director of Automatic Answering Ltd. for four years.
Mr. Sullivan has been Treasurer and Chief Financial Officer of the
Company since 1989. Prior to that he was Treasurer and Chief Financial Officer
of Fundsnet, Inc., an electronic funds transfer company, from 1986 until 1989.
He was employed by The Singer Co. from 1977 to 1986, where his most recent
position was Vice President-Finance, Asia Division.
Mr. Zizzo has been a Vice President of the Company since 1995 with
responsibility for operations, primarily manufacturing, purchasing and physical
facilities, prior to which he had been Director of Operations since 1994. He
was an independent consultant from 1993 to 1994. Prior to that he held senior
management positions with TIE/Communications, Inc.for more than five years.
7
PART II
Item 5. Market for Company's Common Equity and Related Stockholder
Matters
(a) and (b) Cognitronics' Common Stock is traded on the American Stock
Exchange under the symbol CGN. On March 1, 2001, there were 711 stockholders of
record; the Company estimates that the total number of beneficial owners was
approximately 3,200. Information on quarterly stock prices is set forth in
Item 8 of this Annual Report on Form 10-K and is incorporated herein by
reference.
(c) The Company has never paid a cash dividend on its Common Stock and has
used its cash for the development of its business. In 1998, 2000 and 2001,
the Company announced its intention to repurchase up to 300,000, 200,000 and
500,000 shares, respectively, of its Common Stock. The Company repurchased 150
shares of its Common Stock in 1998, 105,750 in 1999 and 331,000 in 2000. The
Company has no present intention of paying a cash dividend, and payment of any
future dividends will depend upon the Company's earnings, financial condition
and other relevant factors.
Item 6. Selected Financial Data
Year ended December 31,
(in thousands except per share data)
OPERATING RESULTS 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenues $31,836 $31,693 $28,917 $29,521 $17,343
Net income 4,530 5,346 4,689 3,622 1,099
Net income per share:
Basic $.79 $.94 $.85 $.69 $.22
Diluted .74 .88 .78 .62 .20
Weighted average number of basic
shares outstanding 5,754 5,670 5,543 5,233 5,074
Weighted average number of diluted
shares outstanding 6,092 6,048 5,993 5,840 5,378
FINANCIAL POSITION
Working capital $25,830 $24,130 $18,281 $13,112 $ 8,745
Total assets 32,998 35,102 27,080 23,123 17,511
Stockholders' equity 26,988 25,729 20,033 15,014 10,612
Stockholders' equity per share $4.85 $4.40 $3.58 $2.73 $2.04
Cash dividends paid None None None None None
Included in 1997 is $956,000 (net of tax $598,000 or $.11 per basic share and
$.10 per diluted share) of settlement costs and legal fees related to class
action litigation.
The above Selected Financial Data should be read in conjunction with the
Consolidated Financial Statements of the Company, including the notes thereto,
and the unaudited quarterly financial data included in Item 8 of this Annual
Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company reported net income of $4.5 million, $5.3 million and $4.7
million for 2000, 1999 and 1998, respectively.
8
In 2000, sales value of the Company's domestic operations and its UK
distributorship operations were essentially the same as 1999. The unit volume
in the domestic operations increased approximately 20% while the sales value
increased only $.1 million. This was due to unfavorable distribution channel
mix and a volume discount given for a large purchase of McIAS 1623/IPs ($5.9
million) in the fourth quarter of 2000. The increased sales due to this large
purchase were offset by lack of sales to Mexico in 2000 ($2.9 million in 1999)
and lower shipments to CLEC's. The Company's backlog at December 31, 2000 was
$1.1 million versus $.5 million in 1999. Recently, there have been reductions
in telecommunication infrastructure buildout, as reported by major
telecommunication equipment suppliers, and this is reflected in the Company's
sales order flow. In both 2000 and 1999, a major portion of the Company's
domestic revenue came from one customer and a significant portion of its UK
distributorship revenue came from one customer. The loss of either of these
customers would have a material adverse impact on the Company.
Consolidated gross margin decreased 4% to 52% in 2000 from 56% in 1999
primarily due to a decrease of 4% in the domestic operation's gross margin
attributable to channel mix and a discount given on a large purchase.
In 1999, sales increased 10% to $31.7 million due to increased sales of
$3.9 million (19%) by the Company's domestic operations, offset by decreased
sales of $1.1 million (13%) in its UK distributorship operations. The
increased sales in the U.S. operations were due to increased direct sales of
$3.0 million and $.9 million of indirect sales. The increase in direct sales
was primarily attributable to two customers and the increase in indirect sales
was attributable to increased sales of $5.7 million to three customers,
offset by a decrease of $4.9 million sales to another customer. In 1999,
primarily in the third quarter, the Company sold $2.9 million to Alcatel Indetel
Industria de Telecomunicacion S.A. de C.V., up from $2.0 million in the fourth
quarter of 1998. This completed the project which began in the fourth quarter
of 1998. The decreased sales in UK distributorship operations were due to
decreased demand from its primary customer, reflecting increased competition
faced by this customer and obsolescence of certain products distributed by the
Company.
In 1999, consolidated gross margin percentage improved 1% to 56% from 55%
in 1998, primarily due to an increase of 2.7% in the domestic operations' gross
margin attributable to improved product mix and higher volume. This was offset,
in part, by a 3.5% decrease in the UK distributorship's gross margin due to
unfavorable product mix and exchange rates.
In 2000 and 1999, research and development increased $.3 million (15%)
and $.1 million (7%), respectively, in each year versus the prior year due to
higher personnel costs. The Company anticipates an acceleration in the rate of
increase in spending for research and development.
Selling, general and administrative expenses for 2000 was approximately
the same as the prior year. In 1999, these costs increased $.9 million (13%)
due to an increase of $.7 million (20%) in the domestic operations and $.1
million (5%) in the UK distributorship operations. The increase in the domestic
operations was due to higher sales commissions and bonuses.
Other income of $.6 million in 2000 and $.4 million in 1999 and 1998 is
primarily interest income. The increase in 2000 from 1999 is due to higher
interest rates and higher balances of cash and marketable securities.
The Company's effective tax rate for 2000 was 34% versus 36% for 1999 and
9
1998. The reduction in the effective rate in 2000 from 1999 is attributable to
a reversal of a $156,000 tax reserve. The provision for income taxes is
discussed in Note G to Consolidated Financial Statements. Under Financial
Accounting Standards Board ("FASB") Statement No. 109, the Company has
recognized future tax benefits that management believes will be realized. In
order to realize these benefits, the Company, exclusive of the results of
Dacon Electronics Plc, will have to generate pretax income of $4.1 million. The
current deferred tax benefit of $.7 million is primarily attributable to
inventory provisions, the recognition of such loss, for tax purposes, is, in
large measure, within the control of the Company. The non-current tax benefit,
$.8 million, primarily relates to deferred compensation and benefit plans and,
as such, would be recognized over a long period of time. The Company's U.S.
pretax income was $7.4 million, $8.4 million and $6.0 million in 2000, 1999 and
1998, respectively. Based on this, management anticipates that the Company
will generate sufficient taxable income in the future to realize these benefits.
The effect of inflation has not had a major impact on the operating results of
the Company over the past few years. Technological advances and productivity
improvements are continually being applied to reduce costs, thus reducing
inflationary pressures on the operating results of the Company.
Exchange rate changes will impact the reported dollar sales and cost of
sales of the Company's UK distributorship operations. In addition, at December
31, 2000, the Company's UK distributorship operations had net assets of $1.9
million, which would be impacted by changes in foreign exchange rates. However,
the impact of such rate change would be reflected in the translation adjustment
recorded in the equity section of the balance sheet. The Company does not hedge
this foreign currency net asset exposure.
Liquidity and Sources of Capital
Net cash provided by operations was $3.5 million, $3.0 million and $3.7
million in 2000, 1999 and 1998, respectively, primarily due to the results of
operations. In 2000, cash provided by operating activities increased from 1999
due to a smaller net increase in working capital accounts. In 1999, cash
provided by operating activities decreased from 1998 due to increased accounts
receivable, inventories and tax payments, offset, in part, by increases in
accounts payable. Cash used by investing activities was $.7 million, $6.1
million and $1 million in 2000, 1999 and 1998, respectively. Cash used for
investing activities included additions to property, plant and equipment of $.5
million in all years. Also included in 2000 were loans to officers of $.7
million. The Company had net sales of marketable securities of $.6 million in
2000 and net purchases of $5.6 million and $.5 million in 1999 and 1998,
respectively. Cash used by financing activities of $3.2 million in 2000
primarily relates to the repurchase of the Company's common stock. Cash
provided by financing activities was $.1 million in 1999 and 1998.
Working capital increased to $25.8 million at December 31, 2000 from $24.1
million at December 31, 1999 and $18.3 million at December 31, 1998. The ratio
of current assets to current liabilities was 7.6:1 at December 31, 2000 versus
4.4:1 at December 31, 1999 and 4.9:1 at December 31, 1998. The increase in 2000
is due to the results of operations and the reduction in accounts payable,
offset, in part, by the repurchase of Company shares and reduction in inventory
levels. The decrease in 1999 was due to a volume purchase of inventory items at
a favorable price occurring in the last quarter of 1999.
The Company anticipates making capital expenditures of approximately $1
million, incurring increased research and development expenditures and the
10
repurchase of up to 563,100 shares of its Common Stock in 2001. Management
believes that the cash and cash equivalents at December 31, 2000 and the cash
flow from operations in 2001 will be sufficient to meet its 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-K) 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:
Product demand fluctuations in the timing and volume of customer requests
for our products.
Telecommunication systems industry and general economic conditions.
Competitive pressure on selling prices.
Market acceptance of our products and our customer's products.
Costs associated with possible litigation or settlement, including those
related to the use of ownership of intellectual property.
Loss of a major customer. A few customers account for a major portion
of the Company sales. A loss of such a customer would have a major
adverse impact on the Company's results.
Third party suppliers increase the risk that we may not have adequate
supply to meet demand.
Introduction of new products. Our markets are subject to technological
change, so our success depends on our ability to develop and introduce
new products.
The markets in which we compete are highly competitive. Some of our
competitors have significantly greater financial and other resources
than us.
Our future success is dependent on our ability to attract and retain our
key design engineering, sales and executive personnel. There is intense
competition for qualified personnel, in particular, design engineers,
and we may not be able to attract and train engineers and other
qualified personnel necessary for the development and introduction of
new products or to replace engineers or other qualified personnel that
may leave our employ.
Our expense levels, in the short term, are fixed. Sales variances from
quarter to quarter would have a significant effect on the results of
operations.
Other risk factors detailed in this Annual Report on Form 10-K and in
the Company's other Securities and Exchange Commission Filings.
11
Item 7.a Market Risk
The Company does not use derivative financial instruments. The Company
is exposed to changes in interest rates. The Company's marketable securities
consist of short-term and/or variable rate instruments and therefore a change
in interest rates would not have a material impact on the value of these
securities.
Item 8. Financial Statements and Supplementary Data
QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands except per share amounts)
2000 FIRST SECOND THIRD FOURTH
- ---- ----- ------ ----- ------
Sales $5,925 $8,437 $8,404 $9,070
Gross profit 3,083 4,827 4,630 3,876
Net income 475 1,516 1,505 1,034
Net income per share:
Basic $.08 $.26 $.26 $.18
Diluted $.08 $.25 $.25 $.18
Common Stock price range:
High $27.25 $15.00 $15.50 $11.51
Low 11.13 8.63 10.75 8.00
1999 FIRST SECOND THIRD FOURTH
- ---- ----- ------ ----- ------
Sales $7,804 $8,334 $9,662 $5,893
Gross profit 4,401 4,738 5,560 3,095
Net income 1,283 1,512 1,873 678
Net income per share:
Basic $.23 $.27 $.33 $.12
Diluted $.22 $.25 $.31 $.11
Common Stock price range:
High $6.20 $12.17 $14.38 $18.63
Low 4.88 5.42 9.38 9.75
The gross margin percentage in the fourth quarter of 2000 was 43% versus
55% for the nine months ended September 30, 2000 and 53% in the fourth quarter
of 1999 primarily due to channel mix and a discount given on a large purchase.
The effective tax rates for the fourth quarter of 2000 and 1999 were
24.5% and 25.2%, respectively, versus the estimated effective rates of 36.7%
and 37.3% for the first nine months of 2000 and 1999, respectively.
The above financial information should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto.
12
Report of Independent Auditors
Stockholders and Board of Directors
Cognitronics Corporation
We have audited the accompanying consolidated balance sheets of Cognitronics
Corporation and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income and comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cognitronics
Corporation and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 2, 2001
13
CONSOLIDATED BALANCE SHEETS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(dollars in thousands)
December 31,
2000 1999
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,499 $ 3,992
Marketable securities 9,400 10,000
Accounts receivable, less allowances of $53 and $37 7,760 6,752
Inventories 6,557 9,079
Deferred income taxes 746 889
Other current assets including loans to officers
of $1,062 and $377 1,783 591
------- -------
TOTAL CURRENT ASSETS 29,745 31,303
PROPERTY, PLANT AND EQUIPMENT, net 1,373 1,370
GOODWILL, less amortization of $2,726 and $2,394 651 983
DEFERRED INCOME TAXES 762 685
OTHER ASSETS, less amortization of $148 and $11 467 761
------- -------
$32,998 $35,102
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,560 $ 4,312
Accrued compensation and benefits 1,128 1,176
Income taxes payable 532 734
Current maturities of debt 43 49
Other accrued expenses 652 902
------- -------
TOTAL CURRENT LIABILITIES 3,915 7,173
LONG-TERM DEBT 47 90
OTHER NON-CURRENT LIABILITIES 2,048 2,110
COMMITMENTS AND CONTINGENCIES (Note I)
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a share; authorized
10,000,000 shares; issued 5,863,829 and 5,841,153 shares 1,173 1,168
Additional paid-in capital 14,123 14,050
Retained earnings 15,218 10,688
Cumulative other comprehensive income/(loss) (182) 66
Unearned compensation (332) (243)
------- -------
30,000 25,729
Less cost of 300,550 common shares in treasury in 2000 (3,012)
------- -------
TOTAL STOCKHOLDERS' EQUITY 26,988 25,729
------- -------
$32,998 $35,102
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
14
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
COGNITRONICS CORPORATION AND SUBSIDIARIES
(in thousands except per share data)
Year ended December 31,
2000 1999 1998
---- ---- ----
SALES $31,836 $31,693 $28,917
COSTS AND EXPENSES
Cost of products sold 15,420 13,899 13,083
Research and development 2,445 2,132 1,997
Selling, general and administrative 7,351 7,422 6,564
Amortization of goodwill 332 333 332
Other (income) expense, net (619) (441) (404)
------- ------- -------
24,929 23,345 21,572
------- ------- -------
Income before income taxes 6,907 8,348 7,345
PROVISION FOR INCOME TAXES 2,377 3,002 2,656
------- ------- -------
NET INCOME 4,530 5,346 4,689
Currency translation adjustment (248) (100) 142
------- ------- -------
COMPREHENSIVE INCOME/(LOSS) $ 4,282 $ 5,246 $ 4,831
======= ======= =======
NET INCOME PER SHARE:
Basic $.79 $.94 $.85
Diluted $.74 $.88 $.78
15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1999 and 2000
(dollars in thousands)
Common Stock Additional Compre- Unearned Treasury
Shares Paid-In Retained hensive Compensa- Shares
Issued Amount Capital Earnings Income tion Amount
------ ------ ---------- -------- -------- --------- --------
Balance at January 1, 1998 5,500,861 $1,100 $13,209 $ 700 $ 24 $ (19)
Shares issued pursuant to
employee stock plans 48,501 10 369 (3) (260)
Shares returned to pay
statutory withholding tax (5,800) (1) (29) (23)
Repurchase of common shares $ (1)
Exercise of Warrants 54,307 11 79 (4)
Currency translation adjustment 142
Net income 4,689 40
--------- ------ ------- ------- ----- ----- -------
Balance at December 31, 1998 5,597,869 1,120 13,628 5,359 166 (239) (1)
Shares issued pursuant to
employee stock plans 243,284 48 422 (17) (188) 589
Repurchase of common shares (588)
Currency translation adjustment (100)
Net income 5,346 184
--------- ------ ------- ------- ----- ----- -------
Balance at December 31, 1999 5,841,153 1,168 14,050 10,688 66 (243) 0
Shares issued pursuant to
employee stock plans 22,676 5 73 (235) 294
Repurchase of common shares (3,306)
Currency translation adjustment (248)
Net income 4,530 146
--------- ------ ------- ------- ----- ----- -------
Balance at December 31, 2000 5,863,829 $1,173 $14,123 $15,218 $(182) $(332) $(3,012)
========= ====== ======= ======= ====== ====== =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(in thousands)
Year ended December 31,
2000 1999 1998
---- ---- ----
OPERATING ACTIVITIES
Net income $4,530 $5,346 $4,689
Adjustments to reconcile net income to net cash
provided by operating activities:
Income tax expense 2,377 3,002 2,656
Depreciation and amortization 943 802 769
(Gain) loss on disposition of assets (5) (15) 6
Shares issued as compensation 146 185 40
Net (increase) decrease in:
Accounts receivable (1,108) (1,820) (605)
Inventories 2,363 (4,111) (569)
Other assets 215 (169) 284
Net increase (decrease) in:
Accounts payable (2,698) 2,738 (802)
Accrued compensation and benefits (107) 34 (60)
Other accrued expenses (217) (62) (793)
------ ------ ------
6,439 5,930 5,615
Income taxes paid (2,971) (2,760) (1,956)
NET CASH PROVIDED BY OPERATING ACTIVITIES ------ ------ ------
3,468 3,170 3,659
------- ------ ------
INVESTING ACTIVITIES
Purchase of marketable securities (2,800) (11,200) (3,700)
Sale of marketable securities 3,400 5,600 3,200
Loans to officers (712) (127)
Proceeds from disposition of assets 20 10 24
Additions to property, plant and equipment (534) (483) (539)
Purchase of software licenses (50)
------ ------ ------
NET CASH USED BY INVESTING ACTIVITIES (676) (6,200) (1,015)
------ ------ ------
FINANCING ACTIVITIES
Principal payments on debt (49) (111) (174)
Issuance of debt 196
Shares issued pursuant to employee stock plans 107 783 22
Shares issued pursuant to warrants 86
Shares repurchased for treasury,331,000,
105,750 and 150 (3,306) (588) (1)
Shares returned to pay statutory withholding
tax upon vesting of restricted stock (53)
------ ------ ------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (3,248) 84 76
------ ------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES (37) (53) 83
------ ------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (493) (2,999) 2,803
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 3,992 6,991 4,188
------ ------ ------
CASH AND CASH EQUIVALENTS - END OF YEAR $3,499 $3,992 $6,991
====== ====== ======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COGNITRONICS CORPORATION AND SUBSIDIARIES
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. The Company designs, manufactures and markets voice processing
products in the United States and, through a subsidiary, distributes call
management and voice processing equipment in Europe.
Risks and Uncertainties. A major portion of the Company's domestic revenues is
generated by sales to two customers, and a significant portion of its European
distributorship revenue comes from one customer. The loss of any of these
customers would have a material adverse impact on the Company. The Company's
receivables are primarily from major, well-established companies in the
telecommunications industry, and at December 31, 2000, one such company
accounted for 75% of the Company's accounts receivable. The Company's markets
are subject to rapid technological change and frequent introduction of new
products. The Company's products are similar to those manufactured, or capable
of being manufactured, by a number of companies, some of which are well
established with financial, personnel and technical resources substantially
larger than those of the Company. The Company's ability to compete in the
future depends on its ability to maintain the technological and performance
advantages of its current products and to introduce new products and
applications that achieve market acceptance.
Principles of Consolidation. The financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly-owned. Intercompany
accounts and transactions have been eliminated in consolidation.
Revenue. Revenue is recognized when earned. The Company generally recognizes
revenue from product sales upon shipment and in certain instances upon
acceptance by the customer.
Use of Estimates. The preparation of the financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates.
Fair Value of Financial Instruments. The carrying amounts of the Company's
financial instruments (trade receivables/payables and other short-term and
long-term debt) due to their terms and maturities approximate fair value.
Cash and Cash Equivalents. The Company considers financial instruments with a
maturity of three months or less from the date of purchase to be cash
equivalents. At December 31, 2000, essentially all of the Company's cash and
cash equivalent balances were with two financial institutions.
Marketable Securities. Marketable securities are classified as available for
sale and are reported at cost. Due to their short maturities and/or reset
provisions, their carrying value approximates fair value.
Inventories. Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property, Plant and Equipment. Property, plant and equipment is carried at
cost less allowances for depreciation, computed in accordance with the straight-
line method based on estimated useful lives. The estimated lives for machinery
and equipment are 5 to 12 years and for furniture and fixtures are 4 to 10
years. Repairs and maintenance are expensed when incurred.
18
Foreign Exchange. Results of operations for the Company's foreign subsidiary
were translated into U.S. dollars using average exchange rates during the
period, while assets and liabilities were translated using current rates at
the end of the period.
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.
Income Per Share. In computing basic earnings per share, the dilutive effect
of stock options and warrants are excluded, whereas for diluted earnings per
share they are included. The shares used in the basic earnings per share
calculations were 5,753,734, 5,670,023 and 5,542,804 and in the diluted
earnings per share were 6,091,964, 6,047,636 and 5,993,077 for 2000, 1999 and
1998, respectively.
Goodwill. The Company has classified as goodwill the cost in excess of fair
value of the net assets of companies acquired in purchase transactions.
Goodwill is amortized using the straight-line method over its estimated useful
life (10 years). Goodwill in excess of associated expected operating cash flows
is considered to be impaired and is written down to fair value.
Stock Split. All share and per share amounts have been restated to give
retroactive effect to a 3 for 2 split in the form of a dividend declared in
July 1999. The par value of the additional shares of common stock issued in
connection with the stock split was credited to common stock and charged to
retained earnings.
NOTE B. VALUATION AND QUALIFYING ACCOUNTS
The allowance for doubtful accounts was increased by $16,000, $10,000 and
$24,000 in 2000, 1999 and 1998, respectively, by charges to costs and
expenses. The Company wrote off uncollectible accounts, net of recoveries, of
$10,000 and $18,000 in 1999 and 1998, respectively.
NOTE C. INVENTORIES (IN THOUSANDS):
2000 1999
---- ----
Finished and in process $4,320 $3,947
Materials and purchased parts 2,237 5,132
------ ------
$6,557 $9,079
====== ======
NOTE D. PROPERTY, PLANT AND EQUIPMENT (IN THOUSANDS):
2000 1999
---- ----
Machinery and equipment $1,995 $1,768
Furniture and fixtures 2,110 2,100
------ ------
4,105 3,868
Less allowances for depreciation 2,732 2,498
------ ------
$1,373 $1,370
====== ======
19
NOTE E. OTHER NON-CURRENT LIABILITIES (IN THOUSANDS):
2000 1999
---- ----
Accrued officers' supplemental pension $ 553 $ 593
Accrued deferred compensation 291 305
Accrued pension 568 607
Accrued postretirement benefit 825 800
------ ------
2,237 2,305
Less current portion 189 195
------ ------
$2,048 $2,110
====== ======
NOTE F. DEBT AND CREDIT ARRANGEMENTS
Dacon Electronics Plc has a bank line of credit of $145,000 expiring in 2001.
During 2000 and 1999, no amounts were borrowed under this facility.
Long term debt (in thousands):
2000 1999
---- ----
Installment finance agreements, interest at 8% to 12% per annum
expiring through 2003 $90 $139
Less current maturities of debt 43 49
--- ----
$47 $ 90
=== ====
Payments on the installment finance agreements in each of the three years in
the period ending December 31, 2003 are $43,000, $35,000 and $12,000,
respectively.
Interest of $31,000, $30,000 and $42,000 was paid in 2000, 1999 and 1998,
respectively.
NOTE G. INCOME TAXES
At December 31, 2000, consolidated retained earnings included approximately
$1.1 million of retained earnings applicable to Dacon Electronics Plc, a
foreign subsidiary. If the undistributed earnings were remitted, any resulting
federal tax would be substantially reduced by foreign tax credits.
20
The components of the provision (benefit) for income taxes for the years ended
December 31 are as follows (in thousands):
2000 1999 1998
---- ---- ----
Current:
Federal $1,989 $2,428 $1,565
Foreign (24) 62 377
State 346 419 370
------ ------ ------
Total current 2,311 2,909 2,312
------ ------ ------
Deferred:
Federal 55 84 344
State 11 9
------ ------ ------
Total deferred 66 93 344
------ ------ ------
$2,377 $3,002 $2,656
====== ====== ======
Not reflected in the 2000, 1999 and 1998 tax provisions are $29,000, $73,000
and $94,000, respectively, of income tax benefits related to employee stock
plans; such amounts were credited to additional paid-in capital. The provision
for 2000 reflects the reversal of a $156,000 tax reserve.
Domestic and foreign pretax income (loss) for the years ended December 31 are
as follows (in thousands):
2000 1999 1998
---- ---- ----
Domestic operations $7,439 $8,484 $6,357
Foreign Operations (532) (136) 988
------ ------ ------
$6,907 $8,348 $7,345
====== ====== ======
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 2000 and
1999 are as follows (in thousands):
2000 1999
---- ----
Deferred tax liabilities $ 187 $ 238
------ ------
Deferred tax assets:
Inventory valuation 504 701
Accrued liabilities and employee benefits 445 380
Accrued deferred compensation 309 333
Other postretirement benefits 312 304
Separate return federal operating loss carryforwards
expiring in 2008 and 2009 445 445
Other 125 94
------ ------
Total deferred tax assets 2,140 2,257
Valuation allowance (445) (445)
------ ------
1,695 1,812
------ ------
Net deferred tax assets $1,508 $1,574
====== ======
21
No amounts have been credited or charged to tax expense for the valuation
allowance in 2000 or 1999.
A reconciliation of the statutory federal income tax rate to the effective tax
rate on income for the years ended December 31, is as follows:
2000 1999 1998
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 3.4 3.4 3.6
Lower foreign tax rate (0.1) (1.0)
Research & Development Credit (0.3) (1.0) (1.6)
Nontaxable interest income (1.7) (1.2) (0.7)
Goodwill amortization 1.2 1.0 1.5
Other (2.2) (.1) 0.4
---- ---- ----
34.4% 36.0% 36.2%
==== ==== ====
NOTE H. OTHER (INCOME) EXPENSE, NET (IN THOUSANDS):
Year Ended December 31,
2000 1999 1998
---- ---- ----
Interest expense $ 50 $ 49 $ 73
Interest income (669) (490) (477)
----- ----- -----
$(619) $(441) $(404)
===== ===== =====
NOTE I. COMMITMENTS
Leases. Total rental expense amounted to $500,000 in 2000, $532,000 in 1999
and $465,000 in 1998. Future annual payments for long-term noncancellable
leases for each of the five years in the period ending December 31, 2006 are
approximately $424,000, $327,000,$253,000, $4,000 and $0, respectively, and
no amounts thereafter.
Pension Plan. The Company and its domestic subsidiaries have a defined benefit
pension plan covering substantially all employees. The benefits are based on
years of service and the employee's compensation. 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 cost of the plan for the years ended December 31 are as
follows (in thousands):
2000 1999 1998
---- ---- ----
Interest cost on projected benefit obligation $116 $117 $115
Actual (return)/loss on plan assets 25 (50) (120)
Net amortization and deferral (123) (44) 31
---- ---- ----
Net periodic pension cost $ 18 $ 23 $ 26
==== ==== ====
22
The following table sets forth the plan's funded status and the accrued pension
liability recognized in the Company's Consolidated Balance Sheets at
December 31 (in thousands):
2000 1999
---- ----
Projected benefit obligation for services rendered to date
Beginning of year $1,586 $1,773
Gain due to change in estimates (33) (152)
Interest cost 116 116
Less benefits paid (102) (151)
------ ------
End of year 1,567 1,586
------ ------
Plan assets at fair value
Beginning of year 1,220 1,258
Actual return on plan assets (25) 50
Contribution 56 63
Less benefits paid (102) (151)
------ ------
End of year 1,149 1,220
------ ------
Plan assets less than projected benefit obligation (418) (366)
Unrecognized net asset, less accumulated amortization
of $172 and $164 (8) (17)
Unrecognized net gain (142) (224)
------ ------
Accrued pension liability (included in other non-current
liabilities) $ (568) $ (607)
====== ======
The discount rates used in determining the projected benefit obligation were
7.5 % in 2000 and 7.75% in 1999. The expected long-term rate of return on
plan assets used in determining the net periodic pension cost was 7% for all
years presented.
The plan assets at December 31, 2000 and 1999 were principally invested in
corporate debt and equity securities.
401(k) Retirement Plan. The Company has a defined contribution plan covering
substantially all domestic employees. The Company's contribution is based upon
the participants' contributions. The expense was $54,000, $53,000 and $52,000
in 2000, 1999 and 1998, respectively.
Officers' Supplemental Pension Plan. The Company has an unfunded,
noncontributory defined benefit pension plan covering certain retired officers.
The components of net pension cost of the plan for the years ended December 31
are as follows (in thousands):
2000 1999 1998
---- ---- ----
Interest cost on projected benefit obligation $32 $34 $35
Amortization of actuarial gains (3) (2) (3)
--- --- ---
Net periodic pension cost $29 $32 $32
=== === ===
23
The following table sets forth the plan's status and the accrued pension
liability recognized in the Company's Consolidated Balance Sheets at
December 31 (in thousands):
2000 1999
---- ----
Projected benefit obligations
Balance at beginning of period $508 $543
Interest expense 32 34
Less benefits paid (68) (69)
---- ----
Balance at end of period 472 508
Unrecognized net gain 81 85
---- ----
Accrued pension liability (included in other non-current
liabilities) $553 $593
==== ====
The discount rate used in determining the projected benefit obligation was
6.75% for all three years presented. All participants are retired and
receiving benefits under the Plan and therefore future increases in
compensation are not applicable.
Other Postretirement Benefit Plans. In addition to the Company's pension
plans, the Company has a contributory, unfunded defined benefit plan providing
certain health care benefits for domestic employees who retired prior to
March 31, 1996. The participants' contributions are adjusted periodically and
are based on age and length of service at time of retirement. The assumed rate
of increase in the per capita cost of covered benefits used for 1999 was 9%
decreasing to 5% after 8 years and for 2000 was 10% decreasing to 5% after 10
years. Increasing the health care cost trend rate by one percentage point each
year would increase the accumulated postretirement benefit obligation by
$83,000 at December 31, 2000 and the aggregate service and interest cost
component of net periodic postretirement benefit cost for 2000 by $6,000.
The corresponding impact for a 1% decrease are $73,000 and $5,000,
respectively. The weighted average discount rates used in determining the net
periodic postretirement benefit cost and accumulated benefit obligation were
7.5% and 7.75% for 2000 and 1999, respectively.
The following sets forth the plan's status and accrued postretirement benefit
liability recognized in the Company's Consolidated Balance Sheets at
December 31 (in thousands):
2000 1999
---- ----
Actuarial present value of accumulated postretirement benefit
obligation: $834 $733
Unrecognized net gain/(loss) (9) 67
---- ----
Accrued postretirement benefit liability (included in other
non-current liabilities) $825 $800
==== ====
The components of postretirement benefit cost for the years ended December 31,
are as follows (in thousands):
2000 1999 1998
---- ---- ----
Interest cost $61 $53 $42
Net amortization (8)
--- --- ---
Net periodic cost $61 $53 $34
=== === ===
24
Deferred Compensation. At December 31, 2000 and 1999, the liability relating to
a deferred compensation arrangement between the Company and a director and
former officer of the Company was $291,000 and $305,000, respectively.
NOTE J. STOCK PLANS
At December 31, 2000, the Company has reserved 176,575 shares of its common
stock for grant to key employees under the 1990 Stock Option Plan. The plan
provides for the grant, at fair market value on the date of grant, of
nonqualified stock options and incentive stock options. Options generally
become exercisable in three equal annual installments on a cumulative basis
commencing six months from the date of grant and expire five years (ten years
for awards granted after 1999) after the date granted.
The Company also has the 1967 Employee Stock Purchase Plan under which 52,478
shares were reserved for grant at December 31, 2000 The purchase price is 85%
of the fair market value of the stock on the date offered. Generally, rights
to purchase shares under this plan expire 12 months (maximum 27 months) after
the date of grant.
The Company also has a time accelerated restricted stock plan ("Restricted
Stock Plan") under which 14,687 shares are available for grant. The plan
provides for the award of shares to key employees; generally, the awards vest
in five equal annual installments commencing two years after the date of the
award. Vesting may be accelerated based on the achievement of certain
financial performance goals.
Share information pertaining to these plans is as follows:
Restricted
Option Purchase Stock
Plan Plan Plan
------ -------- ----------
Outstanding at January 1, 1998 521,826 0 22,950
Granted 175,725 28,603 39,000
Cancelled or expired (2,000)
Vested (20,550)
Exercised (9,501)
------- ------ ------
Outstanding at December 31, 1998 686,050 28,603 41,400
Granted 142,875 21,000
Cancelled or expired (4,101) (913)
Vested (12,480)
Exercised (300,497) (27,690)
------- ------ ------
Outstanding at December 31, 1999 524,327 0 49,920
Granted 202,900 26,000
Cancelled or expired (5,225) (600)
Vested (8,280)
Exercised (27,126)
------- ------ ------
Outstanding at December 31, 2000 694,876 0 67,040
======= ====== ======
The exercise price for options granted in 1998 was $6.67, for options granted
in 1999 was $9.00 and for options granted in 2000 ranged from $9.06 to $9.70.
25
The weighted average exercise price for the 694,876 options outstanding under
the Option Plan is $6.73 with expiration dates ranging from 2001 to 2010.
Options were exercised under the Option Plan at weighted average exercise
prices of $1.98, $2.08 and $3.95 in 1998, 1999 and 2000, respectively. Shares
exercisable under the Option Plan at December 31, 1998, 1999 and 2000 were
419,577, 316,027 and 457,943, respectively.
Rights were granted under the Purchase Plan at an exercise price of $5.67 in
1998. Shares were exercised under the Purchase Plan at a weighted average
price of $5.67 in 1999.
Under the Restricted Stock Plan compensation expense was $146,000, $184,000
and $30,000 in 2000, 1999 and 1998, respectively.
During 1998, the Company established a stock option plan for non-employee
directors and officers. The plan provided for an initial grant of options to
purchase 3,000 shares to each participant (18,000 in total) at $5.50, the
fair market value on the date of grant, and additional grants of 1,500 shares
for each participant on August 1st of subsequent years at the then fair market
value. Effective August 1, 1999, an additional 1,500 shares were granted to
each participant (9,000 in all) at an exercise price of $11.17. In 2000, an
additional grant of 3,000 shares (18,000 in all) was awarded at an exercise
price of $12.63. Through December 31, 2000, no grants under this plan have
been exercised. At December 31, 2000, the Company has reserved 7,500 shares
of its Common Stock for grant.
The Company has elected to follow APB No. 25 and related interpretations in
accounting for its stock option plans, and has adopted the disclosure-only
provisions of SFAS No. 123. 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 SFAS No. 123, the pro forma net income and net income per share
would be as follows (in thousands except per share information):
2000 1999 1998
---- ---- ----
Net income As reported $4,530 $5,346 $4,689
====== ====== ======
Pro forma $3,928 $4,859 $4,442
====== ====== ======
Net income per share As reported Basic $.79 $.94 $.85
==== ==== ====
Diluted $.74 $.88 $.78
==== ==== ====
Pro forma Basic $.68 $.86 $.80
==== ==== ====
Diluted $.65 $.81 $.75
==== ==== ====
The estimated weighted average fair value per share of stock options granted
were $4.82, $5.16 and $3.21 for 2000, 1999 and 1998, respectively. The fair
value for the stock options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions
for 2000, 1999 and 1998, respectively: risk-free interest rates of 5.1%, 5.5%
and 4.5%; no dividend yields; volatility factors of the expected market price
of the Company's common stock of .74 in 2000, .61 in 1999 and .64 in
26
1998; and a weighted average expected life of the option of 3.8 in
all years, and 5 years for the Directors and Officers Plan.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
In 1998, warrants to purchase 54,307 shares of common stock at $1.58 per share
were exercised and 20,693 expired.
27
NOTE K. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREAS
The Company operates in two segments of the voice processing industry. In
the United States, the Company designs, manufactures and sells equipment for
use in telephone central offices. In Europe (United Kingdom), the Company
distributes equipment for use in customers' premises. Information about the
Company's operations by segment and geographic area for the years ended
December 31, is as follows (in thousands):
2000 1999 1998
---- ---- ----
Net sales
United States:
Unaffiliated customers (North America) $24,511 $24,462 $20,603
Intercompany transfers 55 194 98
------- ------- -------
24,566 24,656 20,701
Europe 7,325 7,231 8,314
Eliminations (55) (194) (98)
------- ------- -------
$31,836 $31,693 $28,917
======= ======= =======
Operating profit
United States $ 8,139 $ 9,433 $ 7,247
Europe (529) (138) 878
Intercompany eliminations 8 (10) 18
------- ------- -------
7,618 9,285 8,143
General corporate expenses 1,330 1,378 1,202
Other (income) expense, net (619) (441) (404)
------- ------- -------
Income before income taxes $ 6,907 $ 8,348 $ 7,345
======= ======= =======
Total assets
United States $29,262 $31,238 $21,461
Europe 3,779 3,919 5,670
Intercompany eliminations (43) (55) (51)
------- ------- -------
$32,998 $35,102 $27,080
======= ======= =======
Long-lived assets
United States $ 1,545 $ 1,718 $ 1,531
Europe 973 1,432 1,757
Intercompany eliminations (27) (36) (16)
------- ------- -------
$ 2,491 $ 3,114 $ 3,272
======= ======= =======
Expenditures for long-lived assets
United States $ 486 $ 300 $ 384
Europe 98 246 155
Intercompany eliminations 0 (63) 0
------- ------- -------
$ 584 $ 483 $ 539
======= ======= =======
Depreciation and amortization
United States $ 452 $ 279 $ 261
Europe 494 540 525
Intercompany eliminations (3) (17) (17)
------- ------- -------
$ 943 $ 802 $ 769
======= ======= =======
28
Gross profit margin on intercompany transfers are comparable to sales to third
parties. The United States operations had net sales of $2.8 million, $1.9
million and $6.8 million in 2000, 1999 and 1998, respectively, to one major
customer; sales of $12.6 million, $7.3 million and $5.2 million in 2000, 1999
and 1998, respectively, to another major customer; sales of $2.9 million in
1999 to another customer and export sales of $2.9 million and $2.0 million in
1999 and 1998, respectively, to another customer. The European operations had
sales of $3.7 million, $4.6 and $5.2 million in 2000, 1999 and 1998,
respectively, to one customer.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
1. (a) The identification of the directors of the Company as of
March 1, 2001 and persons nominated to become directors set forth under the
caption Information Concerning Nominees in the Proxy Statement for the annual
meeting of stockholders to be held on May 17, 2001 is incorporated herein by
reference.
(b) The identification of the executive officers of the Company and
their positions with the Company and ages as of March 1, 2001 is set forth
under the caption Executive Officers of the Company in Part I of this Annual
Report on Form 10-K.
2. The information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 set forth under the caption Section 16(a)
Beneficial Ownership Reporting Compliance in the Proxy Statement for the
annual meeting of stockholders to be held on May 17, 2001 is incorporated
herein by reference.
Item 11. Executive Compensation
The information on executive compensation set forth under the caption
Executive Compensation in the Proxy Statement for the annual meeting of
stockholders to be held on May 17, 2001 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) and (b) Security ownership of certain beneficial owners and
management set forth under the caption Security Ownership in the Proxy
Statement for the annual meeting of stockholders to be held on May 17, 2001 is
incorporated herein by reference.
(c) Changes in Control. None.
Item 13. Certain Relationships and Related Transactions
The information on certain relationships and related transactions set
forth under the caption Certain Relationships and Related Transactions in the
Proxy Statement for the annual meeting of stockholders to be held on May 17,
2001 is incorporated herein by reference.
29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) and (2) and (d) The response to this portion of Item 14 is submitted
as a separate section beginning on page 26 of this Annual Report on Form 10-K.
(a)(3) and (c) The response to this portion of Item 14 is submitted as a
separate section beginning on page 27 of this Annual Report on Form 10-K.
(b) There were no reports filed on Form 8-K during the fourth quarter of 2000.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 23, 2001.
COGNITRONICS CORPORATION
Registrant
by /s/ Garrett Sullivan
-------------------------
Garrett Sullivan
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 23, 2001.
Signature Title
--------- -----
Chief Executive Officer:
/s/ Brian J. Kelley
------------------- President and Chief
Brian J. Kelley Executive Officer
Chief Financial and Accounting Officer:
/s/ Garrett Sullivan Treasurer
--------------------
Garrett Sullivan
A Majority of the Board of Directors:
/s/ John T. Connor Director
------------------
John T. Connor
/s/ Edward S. Davis Director
-------------------
Edward S. Davis
/s/ William A. Merritt Director
----------------------
William A. Merritt
/s/ Timothy P. Murphy Director
---------------------
Timothy P. Murphy
/s/ David H. Shepard Director
---------------------
David H. Shepard
31
Form 10-K -- Item 14 (a) (1) and (2) and (d)
(a) (1) Financial Statements
The following financial statements of the Company are included in Item 8.
Financial Statements Covered by Report of Independent Auditors: PAGE
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 11
Consolidated Balance Sheets, December 31, 2000 and December 31, 1999 . . . 12
Consolidated Statements of Income and Comprehensive Income for each
of the three years in the period ended December 31, 2000. . . . . . . . . 13
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 2000 . . . . . . . . . . . . 13
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2000. . . . . . . . . . . . . . . . . . . . 14
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 15
(2) and (d) Financial Statement Schedules
Schedules for which provision is made in the applicable accounting regulation
of the Securities and Exchange Commission are not required under the related
instructions, are inapplicable, or the information has been included in the
Company's financial statements. and, therefore, have been omitted.
32
Item 14(a)(3) and (c)
INDEX TO EXHIBITS
Exhibit
3.1 Certificate of Incorporation as filed on January 2, 1962 (Exhibit
3-1-A to Form S-1 Registration Statement No. 2-27439 and incorporated
herein by reference).
3.2 Amendment, dated June 28, 1965 (Exhibit 3-1-B to Form S-1 Registration
Statement No. 2-27439 and incorporated herein by reference).
3.3 Amendment, dated October 3, 1966 (Exhibit 3-1-C to Form S-1
Registration Statement No. 2-27439 and incorporated herein by
reference).
3.4 Amendment, dated October 30, 1967 (Exhibit 3-1-D to Form S-1
Registration Statement No. 2-27439 and incorporated herein by
reference).
3.5 Amendment, dated July 27, 1981 (Exhibit 3.5 to Annual Report on
Form 10-K for the fiscal year ended December 31, 1983 and incorporated
herein by reference).
3.6 Amendment, dated September 27, 1984 (Exhibit 3.6 to Annual Report on
Form 10-K for the fiscal year ended December 31, 1984 and incorporated
herein by reference).
3.7 Amendment dated June 13, 1988 (Exhibit 3.7 to Annual Report on
Form 10-K for the fiscal year ended December 31, 1988 and incorporated
herein by reference).
3.8 Amendment dated November 3, 1994 (Exhibit 3.8 to Annual Report on
Form 10-K for the year ended December 31, 1994 and incorporated
herein by reference).
3.9 Amendment, dated July 25, 2000 (Exhibit 3.1 to Quarterly
Report on Form 10-Q for the period ended June 30, 2000 and
incorporated herein by reference)
3.10 By-laws of the Company (Exhibit 3.9 to Annual Report on
Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
4. Specimen Certificate for Common Stock (Exhibit 4-1 to Form
S-1 Registration Statement No. 2-27439 and incorporated
herein by reference).
10.1 1990 Stock Option Plan, as amended (Exhibit 10.1 to
Quarterly Report on Form 10-Q for the period ended June 30,
2000 and incorporated herein by reference).
10.2 Lease, dated April 30, 1993, between Seymour R. Powers and The Danbury
Industrial Corporation, landlord, and Cognitronics Corporation, tenant
(Exhibit 10.3 to Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference).
33
EXHIBIT
10.3 Form of Indemnity Agreement, dated October 27, 1986, between each
Director (with equivalent form for each Officer) and Cognitronics
Corporation (Exhibit 10.7 to Annual Report on Form 10-K for the year
ended December 31, 1986 and incorporated herein by reference).
10.4 Supplemental Pension Plan for Officers, as amended November 2, 1993
(Exhibit 10.6 to Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference).
10.5 2000 Executive Bonus Plan (attached as Exhibit 10.5 to this
Annual Report on Form 10-K).
10.6 Cognitronics Corporation Restricted Stock Plan (Exhibit
10.2 to Quarterly Report on Form 10-Q for the period ended
June 30, 2000 and incorporated herein by reference).
10.7 Form of Executive Severance Agreement between certain
officers and Cognitronics Corporation ( Exhibit 10.8 to
Annual Report on Form 10-K for the year ended December 31,
1997 and incorporated herein by reference).
10.8 Addendum to Executive Severance Agreement between certain
officers and Cognitronics Corporation (Exhibit 10.8 to
Annual Report on Form 10-K for the year ended December 31,
1999 and incorporated herein by reference).
10.9 The Directors' Stock Option Plan, as amended (attached as
Exhibit 10.3 to Quarterly Report on Form 10-Q for the
period ended June 30, 2000 and incorporated herein by
reference).
22. List of subsidiaries of the Company as of December 31, 2000
(attached as Exhibit 22 to this Annual Report on Form 10-K).
23. Consent of Independent Auditors, dated April 2, 2001
(attached as Exhibit 23 to this Annual Report on Form 10-K).
Copies of the Exhibits to this Annual Report on Form 10-K are
available upon written request to the Secretary of the Company at 3
Corporate Drive, Danbury, CT 06810-4130 and payment of $35.00 for a
complete set of the Exhibits or $.25 per page for any part thereof
(minimum $5.00).