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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, 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
(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:
Title of each class Name of each exchange on which registered
Common Stock, par value American Stock Exchange
$0.20 per share
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. [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes No x
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 1, 2003:
Common Stock, par value $0.20 per share -- $8,865,000
The number of shares outstanding of each of the issuer's classes of
common stock as of March 1, 2003:
Common Stock, par value $0.20 per share 5,564,241 shares
Documents incorporated by reference: Portions of the Proxy
Statement for the annual meeting of stockholders to be held on May
8, 2003 are incorporated by reference into Part III.
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. . . . . . . . . . . . . . . . . . . . . . . . . .11
8. Financial Statements and Supplementary Data. . . . . . . . . .11
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . .26
PART III
10. Directors and Executive Officers of the Company. . . . . . . .26
11. Executive Compensation . . . . . . . . . . . . . . . . . . . .26
12. Security Ownership of Certain Beneficial Owners and Management26
13. Certain Relationships and Related Transactions . . . . . . . .26
14. Controls and Procedures. . . . . . . . . . . . . . . . . . . .26
PART IV
15. Exhibits, Financial Statements, Schedules and Reports on Form
8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
McIAS is a trademark of Cognitronics Corporation.
UNIX is a registered trademark of Santa Cruz Operation, Inc.
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.
Network Media Servers and Intelligent Announcers. The Network
Media Servers, the Cognitronics Exchange (CX) Series, include a
total of four (4) models: CX500, CX1000, CX3000 and CX4000. This
family of products facilitates the deployment of voice resources in
service provider networks, both the traditional circuit-switched
networks as well as the next generation of packet-based networks.
The CX platforms provide greater capacity and increased
functionality with significantly better price performance. Included
in the CX Series capabilities are a new set of Media Server Boards,
delivering the power of a media server within a single board. CX
supports AIN protocols such as SR-3511, GR-1129CORE and ISDN-PRI.
The CX is also designed to interface with softswitches, media
gateways and application servers, supporting industry standard
protocols such as MGCP, RTP/RTCP and SIP. Other protocols will be
supported as market demand dictates.
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 1607/IP and 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.
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.
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 2002 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 2002, revenues included sales of $1.6 million to
Verizon Communications Inc. and $1.4 million to Siemens Carrier
Networks LLC. The Company's European operations had sales of $2.2
million to British Telecommunications Plc in 2002. 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 European 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, 2002 and 2001, amounted to $.4 million
and $.5 million, respectively. Substantially all of the orders as
of December 31, 2002, can reasonably be expected to be filled during
2003.
(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 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 $3.3 million in 2002, $3.6 million in 2001
and $2.4 million in 2000. In addition, the estimated dollar amount
spent on the improvement of existing products or techniques was $.1
million in 2001 and $.2 million in 2000.
(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, 2002, the Company and its subsidiaries
employed 81 people.
(d) Sales to foreign customers primarily represent sales of Dacon
Electronics Plc. (incorporated in the United Kingdom) of $5.8
million in 2002, $5.9 million in 2001 and $7.3 million in 2000.
Additional information about foreign operations is included in Note
N 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 $.1 million in 2002 and 2001 and $.2
million in 2000. 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:
SQUARE LEASE EXPIRATION
LOCATION DESCRIPTION FEET DATE
Danbury, Connecticut Office, engineering, 27,600 10/31/08
3 Corporate Drive production and
service facility
Hemel Hempstead Office, distribution 12,000 7/31/06
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.
Executive Officers of the Company
The executive officers of the Company, their positions with the
Company and ages as of March 1, 2003 are as follows:
NAME POSITION(S) AND OFFICE(S) AGE
Brian J. Kelley President and Chief Executive 51
Officer; Director
Kenneth G. Brix Vice President 56
Harold F. Mayer Secretary 73
Michael N. Keefe Vice President 47
Roy A. Strutt Vice President 46
Garrett Sullivan Treasurer and Chief Financial Officer 57
Emmanuel A. Zizzo Vice President 62
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.
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, 2003, there were
563 stockholders of record; the Company estimates that the total
number of beneficial owners was approximately 2,700. 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, 331,000 in 2000, 307,808 in 2001 and 1,500
in 2002. 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.
8
Item 6. Selected Financial Data
Year ended December 31,
(in thousands except pershare data)
OPERATING RESULTS 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenues $11,299 $18,875 $31,836 $31,693 $28,917
Net income (loss) (6,444) (1,805) 4,530 5,346 4,689
Net income (loss)
per share:
Basic $(1.18) $(.33) $.79 $.94 $.85
Diluted (1.18) (.33) .74 .88 .78
Weighted average number of
basic shares outstanding 5,472 5,417 5,754 5,670 5,543
Weighted average number of
diluted shares outstanding 5,472 5,417 6,092 6,048 5,993
FINANCIAL POSITION
Working capital $17,789 $22,754 $26,107 $24,130 $18,281
Total assets 22,812 28,573 32,998 35,102 27,080
Stockholders' equity 17,334 23,598 26,988 25,729 20,033
Stockholders' equity
per share $3.12 $4.36 $4.85 $4.40 $3.58
Cash dividends paid None None None None None
Included in 2002 is an inventory provision of $951,000 ($.11 per
basic and diluted share) and provisions for impairment of fixed
assets of $275,000 ($.03 per basic and diluted share) and an
increase in the deferred tax valuation allowance of $2,425,000 ($.44
per basic and diluted shares).
Net (loss) in 2002 did not include amortization of goodwill of
$332,000 ($.05 per basic and diluted share). This expense was
included in all other years presented.
Included in 2001 is an inventory provision of $510,000 ($.07 per
basic and diluted share) and a tax benefit due to an adjustment to
the tax provision of $155,000 ($.03 per basic and diluted share).
Included in 2000 is a tax benefit due to an adjustment to the tax
provision of $156,000 ($.03 per basic and diluted share).
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 a net loss of $6.4 million and $1.8
million in 2002 and 2001, respectively, and net income of $4.5
million in 2000.
In 2002, sales declined $7.6 million (40%) from 2001. The
sales of the Company's domestic operations declined $7.4 million
(57%). This decrease was primarily in the indirect channel and
reflects significant reduction in capital spending by
telecommunication companies. The UK distributorship operations'
sales decreased $.1 million (2%). The Company's backlog at December
31, 2002 was $.4 million versus $.5 million in 2001. In both 2002
and 2001, a major portion of the Company's domestic revenue came
from two customers and a significant portion of the UK
distributorship revenue came from one customer. The loss of either
of these customers would have a material adverse impact on the Company.
In 2001, sales declined $13.0 million (41%) from 2000. The
sales of the Company's domestic operations declined $11.5 million
(47%). This decrease occurred in both the direct and indirect
channels and reflects a significant decline in the CLEC market and
significant reduction in capital spending by ILECs. The Company's
UK distributorship operations' sales decreased $1.4 million (19%).
This is primarily attributable to a decrease of $.9 million in sales
to its largest customer and an unfavorable exchange rate.
Consolidated gross margin was 28% in 2002, 44% in 2001 and 52%
in 2000. The 16% and 8% decrease in 2002 from 2001 and 2001 from
2000, respectively, was due to the lower volume of domestic sales
and the concomitant higher portion of cost of sales being attributed
to fixed costs. In addition, included in cost of products sold were
fixed asset impairment and inventory obsolescence charges of $1.2
million in 2002, and inventory obsolescence charges of $.5 million
and $.1 million in 2001 and 2000, respectively.
Research and development decreased $.3 million (9%) in 2002
and increased $1.2 million (49%) in 2001 from the prior year. The
decrease in 2002 reflects lower material costs and recruiting
expenses. The increase in 2001 was due to higher personnel costs
and contracted engineering services.
Selling, general and administrative expense decreased $1.2
million (16%) in 2002 from the prior year and was approximately the
same for 2001 and 2000. The decrease in 2002 was due to a $.4
million (10%) decrease in the US reflecting lower commissions and
bonuses and a decrease of $.8 million (23%) in the UK reflecting
personnel cost reductions. In 2001, the domestic operations'
selling, general and administrative expense declined $.2 million
(4%) due to lower commissions, offset, in part, by a $.1 million
increase in bad debts. The selling, general and administrative
expense for the UK distributorship, in 2001, increased $.1 million
(4%) primarily due to severance expenses.
Other income of $.2 million in 2002, $.5 million in 2001 and
$.6 million in 2000 is primarily interest income. The decrease in
2002 from 2001 is primarily due to lower interest rates and lower
average invested balances. The decrease in 2001 from 2000 is
primarily due to lower interest rates.
The Company's effective tax rate for 2002 was 6% versus (30%) for
2001 and 34% for 2000. Included in the 2002 tax expense is a
$2,425,000 increase in the deferred tax valuation allowance.
Forming a conclusion that such an allowance is not needed is
difficult when there is evidence such as cumulative losses in recent
years. The reduction in the effective tax rate in 2001 from 2000 is
attributable to losses for which there were no benefits, offset, in
part, by a favorable adjustment of $155,000 to the tax provision.
The effective rate in 2000 included a favorable adjustment of
$156,000 to the tax provision. The adjustments in 2001 and 2000 are
attributable to actual amounts differing from previously recorded
estimates. The provision for income taxes is discussed in Note H to
the Consolidated Financial Statements.
The effect of inflation has not had a significant 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, 2002, the Company's UK distributorship
operations had net assets of $1.3 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
In 2002, net cash used by operations was $2.0 million and net cash
provided by operations was $4.2 million and $3.5 million in 2001 and
2000, respectively. The use of cash by operations in 2002 versus
cash provided by operations in 2001 is reflective of the increase in
net loss. In 2001, cash from operating activities increased from
2000 due to a reduction in accounts receivable and lower taxes paid.
Cash (used) provided by investing activities was ($2.9) million in
2002, $1.8 million in 2001 and($.7) million in 2000. The Company
had net purchases of marketable securities of $2.0 million in 2002
and net sales of marketable securities of $3.0 million and $.6
million in 2001 and 2000, respectively. There were purchases of
property, plant and equipment and software of $.6 million, $.9
million and $.6 million 2002, 2001 and 2000, respectively. Included
in all three years were loans to officers, net of repayments, of $.3
million, $.4 million and $.7 million, respectively. Cash used by
financing activities of $1.7 million in 2001 and $3.2 million in
2000 primarily relates to the repurchase of the Company's common stock.
Working capital decreased to $17.8 million at December 31,
2002 from $22.8 million at December 31, 2001 and $26.1 million at
December 31, 2000. The ratio of current assets to current
liabilities was 6.8:1 at December 31, 2002 versus 9.6:1 at December
31, 2001 and 8.2:1 at December 31, 2000. The decreases in working
capital in 2002 and 2001 from the prior year is due to the results
of operations, the repurchase of Company shares and the purchase of
property, plant and equipment and software.
The Company anticipates making capital expenditures of
approximately $.5 million, maintaining the current level of
expenditures for research and development and may repurchase of up
to 253,792 shares of its Common Stock in 2003. Management believes
that the cash and cash equivalents at December 31, 2002 and the
cash flow, if any, from operations will be sufficient to meet its
needs in 2003.
Assumptions and Estimates Used in Critical Accounting Policies
In the preparation of the financial statements in conformity
with accounting principles generally accepted in the United States,
management must make critical decisions regarding accounting
policies and judgments regarding their application. Materially
different amounts could be reported under different circumstances
and conditions.
Revenue
Revenue is recognized when earned. The Company generally
recognizes revenue from product sales upon shipment and in
certain circumstances upon acceptance by the customers.
Inventories - Slow-moving and Obsolescence
In 2002, due to a prolonged slow down in spending by
telecommunication providers, inventory turnover has slowed.
The Company recorded charges of $1 million and $.5 million in
2002 and 2001 to reduce its carrying value of inventory to the
lower of cost or market. If future capital expenditures by
telecommunication service providers do not increase or
decrease further, additional charges may be required.
Deferred Tax Assets
As of December 31, 2002, the Company has a valuation
allowance of $2.9 million for net deferred tax assets. In
making such a determination, the Company considers its current
and past performance, the market environment in which it
operates, estimated future earnings, tax planning strategies
and other factors. In the future, as these factors change, a
change in the valuation reserve may be required.
Pensions
The Company accounts for its defined benefit pension plans in
accordance with SFAS No. 87, "Employers' Accounting for
Pensions" which requires that amounts recognized in financial
statements be determined on an actuarial basis.
The most significant element in determining the Company's
pension income (expense) in accordance with SFAS No. 87 is the
expected return on plan assets. The Company has assumed that
the expected long-term rate of return on plan assets will be
7.0%. Over the long term, the Company's pension plan assets
have earned in excess of 7.0%; therefore, the Company believes
that its assumption of future returns of 7.0% is reasonable.
The assumed long-term rate of return on assets is applied to
the value of plan assets. This produces the expected return
on plan assets that is included in pension income (expense).
The difference between this expected return and the actual
return on plan assets is deferred. The net deferral of gains
(losses) are amortized to expense in accordance with SFAS No.
87. The plan assets earned a rate of return substantially
less than the assumed rate of return in 2002 and 2001. Should
this trend continue, future pension expense will likely increase.
At the end of each year, the Company determines the discount
rate to be used to discount plan liabilities. The discount
rate reflects the current rate at which the pension
liabilities could be effectively settled at the end of the
year. At December 31, 2002, the Company used a rate of 6.75%.
Changes in discount rates over the past three years have not
materially affected pension income (expense), and the net
effect of changes in the discount rate, as well as the net
effect of other changes in actuarial assumptions and
experience, have been deferred as allowed by SFAS No. 87.
Other Post Employment Benefits
The Company provides retiree health benefits for domestic
employees who retired prior to March 31, 1996 under its
pension plan.
Various actuarial assumptions including the discount rate and
the expected trend in health care costs are used to estimate
the costs and benefit obligations for the retiree health plan.
The discount rate is the same as used for the defined benefit
pension plan. At December 31, 2002, the Company assumed a
discount rate of 6.75%.
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 its products.
Telecommunication systems industry and general economic
conditions.
Competitive pressure on selling prices.
Market acceptance of the Company's products and its
customer's products and services.
Costs associated with possible litigation or settlement,
including those related to the use or 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 the Company may
not have adequate supply to meet demand.
Introduction of new products. The Company's markets are
subject to technological change, so its success depends
on its ability to develop and introduce new products.
The markets in which the Company competes are highly
competitive. Some of its competitors have significantly
greater financial and other resources.
The Company's future success is dependent on its ability
to attract and retain key design engineering, sales and
executive personnel. There is intense competition for
qualified personnel, in particular, design engineers, and
the Company may not be able to attract and retain
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 its employ.
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.
Item 7.a Market Risk
The Company does not use derivative financial instruments.
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)
2002 FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Sales $3,142 $3,356 $2,378 $2,423
Gross profit 1,203 1,467 392 126
Net loss (813) (616) (1,251) (3,764)
Net loss per share:
Basic $(.15) $(.11) $(.23) $(.67)
Diluted $(.15) $(.11) $(.23) $(.67)
Common Stock price range:
High $5.00 $3.65 $2.76 $2.75
Low 3.20 2.71 1.30 1.36
2001 FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Sales $4,939 $5,848 $4,807 $3,281
Gross profit 2,316 2,867 2,195 841
Net income(loss) (23) 58 (428) (1,412)
Net income(loss)
per share:
Basic $.00 $.01 $(.08) $(.26)
Diluted $.00 $.01 $(.08) $(.26)
Common Stock price range:
High $11.10 $7.00 $6.45 $5.20
Low 5.75 4.50 3.90 3.90
The gross margin percentage in the fourth quarter of 2002 was
5% versus 34% for the nine months ended September 30, 2002 primarily
due to increased provisions for inventory obsolescence and provisions
for fixed assets impairment. The gross margin percentage for the
fourth quarter of 2001 was 26% versus 47% for the first nine months of
2001 primarily due to lower volume and lower absorption of overhead
and an inventory provision. The unfavorable variance in gross margin
percentage for the fourth quarter of 2002 as compared to the
comparable period of 2001 is primarily due to lower volume and a
provision for impairment of fixed assets of $275,000.
The effective tax rates for the fourth quarter of 2002 and
2001 were 95% and (27.1%), respectively, versus the estimated
effective rates of (35.1%) and (37.4%) for the first nine months of
2002 and 2001, respectively. Included in the fourth quarter of 2002
tax provision is an increase in the deferred tax asset valuation
allowance of $2,425,000. Included in the fourth quarter of 2001 is
$155,000 of tax benefits related to an adjustment to the tax
provision attributable to actual amounts differing from previously
recorded estimates.
The above financial information should be read in conjunction
with the Consolidated Financial Statements, including the notes
thereto.
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, 2002
and 2001, and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2002.
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, 2002 and 2001, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note A to the financial statements,on January 1,
2002, Cognitronics Corporation adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," which changed the method of accounting for goodwill and
other intangible assets.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 7, 2003
CONSOLIDATED BALANCE SHEETS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(dollars in thousands)
December 31,
2002 2001
ASSETS ---- ----
CURRENT ASSETS
Cash and cash equivalents $ 2,732 $ 7,731
Marketable securities 8,387 6,400
Accounts receivable, less allowances of $68 and $194 2,038 2,035
Inventories 3,687 5,682
Deferred income taxes 1,110
Tax recoverable 2,028 751
Other current assets, including loans to
officers of $1,906 and $1,516 1,982 1,680
------- -------
TOTAL CURRENT ASSETS 20,854 25,389
PROPERTY, PLANT AND EQUIPMENT, net 1,315 1,514
GOODWILL, less amortization of $3,058 319 319
DEFERRED INCOME TAXES 812
OTHER ASSETS, less amortization of $533 and $311 324 539
------- -------
$22,812 $28,573
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 952 $ 871
Accrued compensation and benefits 1,252 1,109
Income taxes payable 441 290
Current maturities of debt 26 46
Other accrued expenses 394 319
------ -------
TOTAL CURRENT LIABILITIES 3,065 2,635
LONG-TERM DEBT 26
OTHER NON-CURRENT LIABILITIES 2,413 2,314
COMMITMENTS AND CONTINGENCIES (Note J)
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 12,374 13,322
Retained earnings 6,969 13,413
Cumulative other comprehensive loss (298) (260)
Unearned compensation (512) (506)
------- -------
19,706 27,142
Less cost of 298,988 and 445,936 common shares
in treasury (2,372) (3,544)
------- -------
TOTAL STOCKHOLDERS' EQUITY 17,334 23,598
------- -------
$22,812 $28,573
======= =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
COGNITRONICS CORPORATION AND SUBSIDIARIES
(in thousands except per share data)
Year ended December 31,
2002 2001 2000
---- ---- ----
SALES $11,299 $18,875 $31,836
COSTS AND EXPENSES
Cost of products sold 8,111 10,656 15,420
Research and development 3,300 3,631 2,445
Selling, general and administrative 6,153 7,325 7,351
Amortization of goodwill 332 332
Other (income) expense, net (206) (504) (619)
------- ------- -------
17,358 21,440 24,929
------- ------- -------
Income (loss) before income taxes (6,059) (2,565) 6,907
PROVISION (BENEFIT) FOR INCOME TAXES 385 (760) 2,377
------- ------- -------
NET INCOME (LOSS) (6,444) (1,805) 4,530
Currency translation adjustment and
minimum pension liability (38) (78) (248)
------- ------- -------
COMPREHENSIVE INCOME (LOSS) $(6,482) $(1,883) $ 4,282
======= ======= =======
NET INCOME (LOSS) PER SHARE:
Basic $(1.18) $(.33) $.79
====== ===== ====
Diluted $(1.18) $(.33) $.74
====== ===== ====
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2000, 2001 and 2002
(dollars in thousands)
Common Stock Additional Compre- Unearned Treasury
Share Paid-In Retained hensive Compensa- Shares
Issued Amount Capital Earnings (Loss) tion Amount
Balance at January 1, 2000 5,841,153 $1,168 $14,050 $10,688 $ 66 $(243) $ 0
Shares issued pursuant to
employee stock plans 22,076 5 73 (89) 294
Repurchase of common shares (3,306)
Currency translation adjustment (248)
Net income 4,530
--------- ----- ------ ------ --- --- -------
Balance at December 31, 2000 5,863,229 1,173 14,123 15,218 (182) (332) (3,012)
Shares issued pursuant to
employee stock plans (799) (174) 1,386
Shares issued to directors (2) 7
Repurchase of common shares (1,925)
Currency translation adjustment (1)
Minimum pension liability
net of tax of $44 (77)
Net loss (1,805)
--------- ----- ------ ------ --- --- -------
Balance at December 31, 2001 5,863,229 1,173 13,322 13,413 (260) (506) (3,544)
Shares issued pursuant to
employee stock plans (925) (6) 1,150
Shares issued to directors (23) 27
Repurchase of common shares (5)
Currency translation adjustment 104
Minimum pension liability
net of tax of $85 (142)
Net loss (6,444)
--------- ----- ------- ------ ----- ----- -------
Balance at December 31, 2002 5,863,229 $1,173 $12,374 $6,969 $(298) $(512) $(2,372)
========= ====== ======= ====== ===== ===== =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(dollars in thousands)
Year ended December 31,
2002 2001 2000
OPERATING ACTIVITIES ---- ---- ----
Net income (loss) $(6,444) $(1,805) $4,530
Adjustments to reconcile net income (loss)
to net cash (used) provided by operating
activities:
Income tax expense (benefit) 385 (760) 2,377
Depreciation and amortization 743 987 943
(Gain) loss on disposition of assets 36 13 (5)
Shares issued as compensation 219 206 146
Net (increase) decrease in:
Accounts receivable 88 5,727 (1,108)
Inventories 2,063 876 2,363
Other assets 723 26 215
Net increase (decrease) in:
Accounts payable 10 (695) (2,698)
Accrued compensation and benefits 14 (151) (107)
Other accrued expenses 167 (116) (217)
------ ----- ------
(1,996) 4,308 6,439
Income taxes paid (40) (121) (2,971)
------ ----- ------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (2,036) 4,187 3,468
------ ------ ------
INVESTING ACTIVITIES
Purchase of marketable securities (16,071) (5,500) (2,800)
Sale of marketable securities 14,104 8,500 3,400
Loans to officers, net (341) (357) (712)
Proceeds from disposition of assets 14 20
Additions to property, plant and equipment (617) (656) (534)
Purchase of software licenses (6) (230) (50)
------- ------ ------
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES (2,931) 1,771 (676)
------- ------ ------
FINANCING ACTIVITIES
Principal payments on debt (46) (52) (49)
Proceeds from debt 34
Shares issued pursuant to employee stock plans 5 213 107
Shares repurchased for treasury, 1,500,
307,808 and 331,000 (5) (1,926) (3,306)
------- ------ ------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (46) (1,731) (3,248)
------- ------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES 14 5 (37)
------- ------ ------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (4,999) 4,232 (493)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 7,731 3,499 3,992
------- ------ ------
CASH AND CASH EQUIVALENTS - END OF YEAR $2,732 $7,731 $3,499
======= ====== ======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
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, 2002, one such
company accounted for 14% 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, 2002, 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 which approximates fair
value. They are comprised of investments in municipal bond funds
and high grade corporate debt and equity securities. The maturities
are short term or have reset provisions.
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.
Foreign Exchange. The functional currency of the Company's foreign
subsidiary, the European distributorship operations, is the Pound
Sterling. Results of operations for the Company's foreign
subsidiary were translated from Pounds Sterling 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. The difference from historical exchange rates are recorded
as comprehensive income (loss) and are included as a component of
cumulative other comprehensive loss.
Income Taxes. Income taxes are provided on all revenue and expense
items included in the consolidated statement of operations,
regardless of the period in which such items are recognized for
income tax purposes, adjusted for items representing permanent
differences between pretax accounting income and taxable income.
Deferred income taxes result from the future tax consequences
associated with temporary differences between the carrying amounts
of assets and liabilities for tax and financial reporting purposes.
A valuation allowance is provided to the extent the Company cannot
determine that the ultimate realization of net deferred tax assets
is more likely than not.
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.
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 Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock Based Compensation", the pro forma net income
(loss) and net income (loss) per share would be as follows (in
thousands except per share information):
2002 2001 2000
---- ---- ----
Net income (loss) As reported $(6,444) $(1,805) $4,530
======= ======= ======
Pro forma $(6,360) $(2,447) $3,928
======= ======= ======
Net income (loss) per share As reported
Basic $(1.18) $(.33) $.79
====== ===== ====
Diluted $(1.18) $(.33) $.74
====== ===== ====
Pro forma
Basic $(1.16) $(.45) $.68
====== ===== ====
Diluted $(1.16) $(.45) $.65
====== ===== ====
The estimated weighted average fair value per share of stock options
granted were $1.01, $5.07 and $4.82 for 2002, 2001 and 2000,
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 2002, 2001and 2000,
respectively: risk-free interest rates of 2.28%, 4.75% and 5.1%; no
dividend yields; volatility factors of the expected market price of
the Company's common stock of .61 in 2002, .70 in 2001 and .74 in
2000; and a weighted average expected life of the option of 7.5
years in 2002 and 2001 and 3.8 years for 2000 for the Option Plan
and 5 years for the Directors' Option 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 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 stock options.
Income (Loss) Per Share. In computing basic earnings (loss) 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
5,471,752, 5,416,729 and 5,753,734 and in the diluted earnings per
share were 5,471,752, 5,416,729 and 6,091,964 for 2002, 2001 and
2000, 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. Through December 31, 2001 goodwill was amortized using
the straight-line method over its estimated useful life (10 years).
Goodwill and other long-lived assets were reviewed for impairment
whenever events such as product discontinuances, plant closures,
product dispositions or other changes in circumstances indicate that
the carrying amount may not be recoverable.
Effective January 1, 2002, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets". Under SFAS No. 142,
goodwill is no longer amortized, rather it is subject to a periodic
impairment test based on its fair value. The Company performed the
transitional goodwill impairment test (as of January 1, 2002) and
the annual impairment test on the applicable reporting unit. As the
estimated fair value of this reporting unit exceeded its net book
value including goodwill, no impairment charge was recognized. If
SFAS No.142 was effective as of January 1, 2000, then the pro forma
results of operations for years ended December 31, 2001 and 2000
would have been as follows (in thousands):
As Reported Adjustment Pro Forma
2001 ----------- ---------- ---------
Pretax Income $(2,565) $332 $(2,233)
======= ==== =======
Net Income $(1,805) $305 $(1,500)
======= ==== =======
Earnings per share
Basic $(.33) $(.28)
===== =====
Diluted $(.33) $(.28)
===== =====
2000
Pretax Income $6,907 $332 $ 7,239
====== ==== =======
Net Income $4,530 $305 $ 4,835
====== ==== =======
Earnings per share
Basic $.79 $.84
==== ====
Diluted $.74 $.79
==== ====
Reclassifications. Certain prior year amounts have been
reclassified to conform with current year classifications.
NOTE B. MARKETABLE SECURITIES (IN THOUSANDS):
The following table summarizes the Company's marketable securities.
2002 2001
---- ----
Corporate bonds and auction rate preferred stock $7,699 $6,400
Medium and short term notes 688
------ ------
$8,387 $6,400
====== ======
NOTE C. VALUATION AND QUALIFYING ACCOUNTS
The allowance for doubtful accounts was increased by $87,000,
$250,000 and $16,000 in 2002, 2001 and 2000, respectively, by
charges to costs and expenses. The Company wrote off uncollectible
accounts, net of recoveries, of $213,000 , $109,000 and $10,000 in
2002, 2001 and 1999, respectively.
NOTE D. INVENTORIES (IN THOUSANDS):
2002 2001
---- ----
Finished and in process $2,273 $3,455
Materials and purchased parts 1,414 2,227
------ ------
$3,687 $5,682
====== ======
NOTE E. PROPERTY, PLANT AND EQUIPMENT,net (IN THOUSANDS):
2002 2001
---- ----
Machinery and equipment $2,279 $2,365
Furniture and fixtures 2,220 2,281
------ ------
4,499 4,646
Less allowances for depreciation 3,184 3,132
------ ------
$1,315 $1,514
====== ======
Due to the continuing downturn in the domestic telecommunication
equipment market, the Company recorded in 2002, based on estimated
cash flows, a provision of $275,000 for the impairment of certain
demonstration and test equipment.
NOTE F. OTHER NON-CURRENT LIABILITIES (IN THOUSANDS):
2002 2001
---- ----
Accrued officers' supplemental pension $ 466 $ 511
Accrued deferred compensation 254 274
Deferred directors' fees 332 269
Accrued pension 777 658
Accrued postretirement benefit 856 843
------ ------
2,685 2,555
Less current portion 272 241
------ ------
$2,413 $2,314
====== ======
NOTE G. DEBT AND CREDIT ARRANGEMENTS
Dacon Electronics Plc, a foreign subsidiary, has a bank line of credit
of $314,000 expiring in 2003. During 2002 and 2001, no amounts were
borrowed under this facility.
Long term debt (in thousands):
2002 2001
---- ----
Installment finance agreements, interest
at 8% to 11% per annum expiring through 2003 $26 $72
Less current maturities of debt 26 46
--- ---
$ 0 $26
=== ===
Interest of $19,000, $19,000 and $31,000 was paid in 2002, 2001 and
2000, respectively.
NOTE H. INCOME TAXES
At December 31, 2002, consolidated retained earnings included
approximately $.5 million of retained earnings applicable to Dacon
Electronics Plc. If the undistributed earnings were remitted, an
resulting federal tax would be substantially reduced by foreign
tax credits.
The components of the provision (benefit) for income taxes for the
years ended December 31 are as follows (in thousands):
2002 2001 2000
Current: ---- ---- ----
Federal $(1,714) $(452) $1,989
Foreign (24)
State 88 62 346
------- ----- ------
Total current (1,626) (390) 2,311
Deferred:
Federal 1,817 (330) 55
State 194 (40) 11
------- ----- ------
Total deferred 2,011 (370) 66
------- ----- ------
$ 385 $(760) $2,377
======= ===== ======
Not reflected in the 2000 tax provision was $29,000 of income tax
benefits related to employee stock plans; such amounts were credited
to additional paid-in capital. The provision (benefit) for 2001 and
2000 reflects favorable adjustments to the tax provision of
$155,000 and $156,000, respectively, attributable to actual amounts
differing from previously recorded estimates.
Domestic and foreign pretax income (loss) for the years ended
December 31 are as follows (in thousands):
2002 2001 2000
---- ---- ----
Domestic operations $(5,978) $(1,609) $7,439
Foreign operations (81) (956) (532)
------- ------- ------
$(6,059) $(2,565) $6,907
======= ======= ======
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, 2002 and 2001 are as
follows (in thousands):
2002 2001
---- ----
Deferred tax liabilities $ 78 $ 220
------ ------
Deferred tax assets:
Inventory valuation 906 687
Accrued liabilities and employee benefits 856 585
Accrued deferred compensation 260 284
Other postretirement benefits 319 316
Separate return federal operating loss carryforwards
expiring in 2008 and 2009 445 445
Other 162 271
------ ------
Total deferred tax assets 2,948 2,588
Valuation allowance (2,870) (445)
------ ------
78 2,143
------ ------
Net deferred tax assets $ 0 $1,923
====== ======
A valuation allowance of $2,425,000 and $0 have been charged to tax
expense in 2002 and 2001, respectively, as the Company cannot
determine that the ultimate realization of its net deferred tax
asset is more likely than not.
The Company has tax credits of $108,000 and $40,000 expiring in 2021
and 2022.
A reconciliation of the statutory federal income tax rate to the
effective tax rate on income (loss) for the years ended December 31,
is as follows:
2002 2001 2000
---- ---- ----
Statutory federal income tax rate (34.0)% (34.0)% 34.0%
State income taxes, net of federal tax benefi 0.6 0.5 3.4
Lower foreign tax rate 0.5 8.3
Research and development credit (0.3)
Nontaxable interest income (0.3) (2.9) (1.7)
Goodwill amortization (0.4) 3.4 1.2
Tax adjustment (6.0) (2.3)
Valuation allowance 40.0
Other 0.7 0.1
---- ---- ----
6.4% (30.0)% 34.4%
==== ==== ====
NOTE I. OTHER (INCOME) EXPENSE, NET (IN THOUSANDS):
Year Ended December 31,
2002 2001 2000
---- ---- ----
Interest expense $ 36 $ 55 $ 50
Interest income (242) (559) (669)
---- ----- -----
$(206) $(504) $(619)
===== ===== =====
NOTE J. COMMITMENTS AND CONTINGENCIES
Leases. Total rental expense amounted to $423,000 in 2002, $472,000
in 2001 and $500,000 in 2000. Future annual payments for long-term
noncancellable leases for each of the five years in the period
ending December 31, 2007 are approximately
$314,000, $288,000, $275,000, $262,000 and $229,000, respectively,
and $152,000 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):
2002 2001 2000
---- ---- ----
Interest cost on projected benefit obligation $120 $116 $116
Actual (return)/loss on plan assets 99 99 25
Net amortization and deferral (167) (184) (123)
---- ---- ----
Net periodic pension cost $ 52 $ 31 $ 18
==== ==== ====
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):
2002 2001
---- ----
Projected benefit obligation for services rendered to date
Beginning of year $1,667 $1,605
Loss (gain) due to change in estimates 61 48
Interest cost 120 116
Less benefits paid (111) (102)
------ ------
End of year 1,737 1,667
------ ------
Plan assets at fair value
Beginning of year 1,009 1,149
Actual return on plan assets (99) (99)
Contribution 160 61
Less benefits paid (110) (102)
------ ------
End of year 960 1,009
------ ------
Plan assets less than projected benefit obligation (777) (658)
Unrecognized net loss (gain) 348 121
Minimum pension liability adjustment (348) (121)
------ ------
Accrued pension liability (included in other
non-current liabilities) $ (777) $ (658)
====== ======
The discount rates used in determining the projected benefit
obligation were 6.75% in 2002 and 7.25 % in 2001. 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, 2002 and 2001 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 $52,000, $54,000 and $54,000 in 2002, 2001 and 2000,
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):
2002 2001 2000
---- ---- ----
Interest cost on projected benefit obligation $27 $30 $32
Amortization of actuarial gains (3) (3) (3)
--- --- ---
Net periodic pension cost $24 $27 $29
=== === ===
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):
2002 2001
Projected benefit obligations ---- ----
Balance at beginning of period $433 $472
Interest expense 27 30
Less benefits paid (69) (69)
---- ----
Balance at end of period 391 433
Unrecognized net gain 75 78
---- ----
Accrued pension liability (included in other
non-current liabilities) $466 $511
==== ====
The discount rate used in determining the projected benefit
obligation was 6.75% for all 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 2001
was 9.5% decreasing to 5% after 9 years and for 2002 was 9.0%
decreasing to 5% after 8 years. Increasing the health care cost
trend rate by one percentage point each year would increase the
accumulated postretirement benefit obligation by $62,000 at December
31, 2002 and the aggregate service and interest cost component of
net periodic postretirement benefit cost for 2002 by $4,000; the
corresponding impact for a 1% decrease are $55,000 and $3,000,
respectively. The weighted average discount rates used in
determining the net periodic postretirement benefit cost and
accumulated benefit obligation were 6.75% and 7.25% for 2002 and
2001, 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):
2002 2001
---- ----
Actuarial present value of accumulated postretirement
benefit obligation:
Balance at beginning of period $657 $834
Interest cost 47 47
Actuarial (gain)/loss 8 (206)
Benefits paid, net (23) (18)
---- ----
689 657
Unrecognized net gain 167 186
---- ----
Accrued postretirement benefit liability (included in
other non-current liabilities) $856 $843
==== ====
The components of postretirement benefit cost for the years ended
December 31, are as follows (in thousands):
2002 2001 2000
---- ---- ----
Interest cost $47 $47 $61
Net amortization (11) (11)
--- --- ---
Net periodic cost $36 $36 $61
=== === ===
The net benefits paid were $23,000, $18,000 and $36,000 for 2002,
2001 and 2000, respectively.
Deferred Compensation. At December 31, 2002 and 2001, the liability
relating to a deferred compensation arrangement between the Company
and a former director and officer of the Company was $254,000 and
$274,000, respectively.
NOTE K. STOCK PLANS
The 1990 Stock Option 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 which
provides for the grant to purchase shares at 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. For each of the three years in the period
ended December 31, 2002, no grants were granted, exercised or
cancelled. At December 31, 2002, there were no grants outstanding
and there were 52,478 shares available for future grant.
The Company also has a time accelerated restricted stock plan
("Restricted Stock Plan") which 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.
In 2002, the company granted to key employees the right to receive
395,000 common shares which vest on January 2, 2006. Such rights
are subject to immediate vesting in the event of change of control
of the Company and pro-rata vesting in the event of death or
involuntary termination of employment for reasons other than cause.
The total value of the rights at the date of grant was $612,000 and
was based on the market price of $1.55 per share. $150,000 was
charged to operations in 2002 related to this grant.
The Directors' Stock Option Plan provides for an annual grant of
options to non-employee officers and directors. This plan provides
for the automatic award of options to purchase 3,000 shares of
Common Stock at the fair market value at the date of grant to each
person who is a participant on August 1 of each year and pro-rated
awards in certain cases. The awards expire five years (ten years
for awards granted after 2000) after the date granted. In 2002, the
plan was amended to provide for grant on November 9, 2002 of options
to purchase 5,500 shares for each participant.
Share information pertaining to these plans is as follows:
1990 Restricted Directors'
Option Stock Option
Plan Plan Plan
------ ---------- ---------
Outstanding at January 1, 2000 524,327 49,920 27,000
Granted 202,900 26,000 20,000
Cancelled or expired (5,225) (600)
Vested (8,280)
Exercised (27,126)
--------- ------- -------
Outstanding at December 31, 2000 694,876 67,040 47,000
Granted 248,500 76,500 18,250
Cancelled or expired (2,302)
Vested (12,330)
Exercised (85,024)
--------- ------- -------
Outstanding at December 31, 2001 856,050 131,210 65,250
Granted 315,500 145,000 51,000
Cancelled or expired (125,858) (15,000)
Vested (17,530)
Exercised
--------- ------- -------
Outstanding at December 31, 2002 1,045,692 258,680 101,250
========= ======= =======
Available for future grant 10,705 3,187 1,250
========= ======= =======
The exercise price for options granted in 2000 ranged from $9.06 to
$9.70, for options granted in 2001 was $5.00 and for options granted
in 2002 was $1.55. The weighted average exercise price for the
options outstanding under the Option Plan is $5.50 with expiration
dates ranging from 2003 to 2012. Options were exercised under the
Option Plan at weighted average exercise prices of $3.95 and $2.46
in 2000 and 2001, respectively. Shares exercisable under the Option
Plan and weighted average exercise price at December 31, 2000, 2001
and 2002 were 457,943 and $5.80, 622,903 and $6.82 and 580,892 and
$7.32, respectively. The weighted average remaining lives for
options outstanding at December 31, 2000, 2001 and 2002 were 4.3,
5.4 and 6.6 years, respectively.
Under the Restricted Stock Plan compensation expense was $220,000,
$206,000 and $146,000 in 2002, 2001 and 2000, respectively.
The exercise price for options granted under the Directors' Stock
Option Plan in 2000 ranged from $10.80 to $12.63, for options
granted in 2001 ranged from $5.35 to $6.10 and for options granted
in 2002 ranged from $1.45 to $2.00. The weighted average exercise
price for the options outstanding under the plan is $4.38 with
expiration dates ranging from 2003 to 2011. No options have been
exercised. Shares exercisable at December 31, 2000, 2001 and 2002
were 27,000, 47,000 and 62,250, respectively. The weighted average
remaining lives for options outstanding at December 31, 2000, 2001
and 2002 were 3.7, 4.6 and 7.0 years, respectively.
NOTE L. CUMULATIVE OTHER COMPREHENSIVE LOSS
Cumulative other comprehensive loss consists of the following at
December 31 (in thousands):
2002 2001
---- ----
Cumulative translation adjustment $ (79) $(183)
Minimum pension liability net of tax of $129 and $44 (219) (77)
----- -----
$(298) $(260)
===== =====
NOTE M. RELATED PARTY TRANSACTIONS
The Company has advanced amounts to officers primarily for personal
income taxes related to various stock option plans. The amounts
outstanding at December 31, 2002 and 2001 of $1,906,000 and
$1,516,000 include interest accrued on the advances. This
indebtedness bears interest at rates approximating market rates and
is payable upon demand.
NOTE N. 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):
2002 2001 2000
Net sales ---- ---- ----
United States:
Unaffiliated customers (North America) $ 5,536 $12,977 $24,511
Intercompany transfers 55
------- ------- -------
5,536 12,977 24,566
Europe 5,763 5,898 7,325
Eliminations (55)
------- ------- -------
$11,299 $18,875 $31,836
======= ======= =======
Operating profit (loss)
United States $(5,115) $ (813) $ 8,139
Europe (75) (950) (529)
Intercompany eliminations 19 23 8
------- ------- -------
(5,171) (1,740) 7,618
General corporate expenses 1,094 1,329 1,330
Other (income) expense, net (206) (504) (619)
------- ------- -------
Income (loss) before income taxes $(6,059) $(2,565) $ 6,907
======= ======= =======
Total assets
United States $20,164 $26,153 $29,262
Europe 2,655 2,444 3,779
Intercompany eliminations (7) (24) (43)
------- ------- -------
$22,812 $28,573 $32,998
======= ======= =======
Long-lived assets
United States $ 1,485 $ 1,788 $ 1,545
Europe 473 600 973
Intercompany eliminations (16) (27)
------- ------- -------
$ 1,958 $ 2,372 $ 2,491
======= ======= =======
Expenditures for long-lived assets
United States $ 570 $ 756 $ 486
Europe 53 130 98
------- ------- -------
$ 623 $ 886 $ 584
======= ======= =======
Depreciation and amortization
United States $ 588 $ 504 $ 452
Europe 165 490 494
Intercompany eliminations (10) (7) (3)
------- ------- -------
$ 743 $ 987 $ 943
======= ======= =======
Gross profit margin on intercompany transfers are comparable to
sales to third parties. The United States operations had net sales
of $1.4 million, $7.5 million and $12.6 million in 2002, 2001 and
2000, respectively, to one major customer; sales of $1.6 million,
$1.9 million and $2.4 million in 2002, 2001 and 2000 to another
major customer; sales of $.2 million, $.5 million and $2.8 million
in 2002, 2001 and 2000 to another major customer; sales of $.1
million, $.5 million and $1.4 million in 2002, 2001 and 2000 to
another major customer and sales of $1.7 million in 2000 to another
major customer. The European operations had sales of $2.2 million,
$2.8 million and 3.7 million in 2002, 2001 and 2000, 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, 2003 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
8, 2003 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,
2003 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
8, 2003 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 8, 2003 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 8, 2003 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 8, 2003 is incorporated herein by
reference.
Item 14. Controls and Procedures
Within the 90-day period prior to the filing of this report,
the Company, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of
the design and operation of the Company's disclosure controls and
procedures as defined in Exchange Act Rule 13a-14(c). Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were
effective as of the date of that evaluation. There have been no
significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the
Chief Executive Officer and Chief Financial Officer completed their
evaluation.
PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K
(a)(1) and (2) and (d) The response to this portion of Item 15 is
submitted as a separate section beginning on page 29 of this Annual
Report on Form 10-K.
(a)(3) and (c) The response to this portion of Item 15 is
submitted as a separate section beginning on page 30 of this Annual
Report on Form 10-K.
(b) There were no reports filed on Form 8-K during the fourth
quarter of 2002.
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 28, 2003.
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
28, 2003.
Signature Title
Chief Executive Officer:
/s/ Brian J. Kelley President and Chief
-------------------- Executive Officer
Brian J. Kelley
Chief Financial and Accounting Officer:
/s/ Garrett Sullivan Treasurer
--------------------
Garrett Sullivan
A Majority of the Board of Directors:
/s/ John T. Connors Director
-------------------
John T. Connors
/s/ Edward S. Davis Director
-------------------
Edward S. Davis
/s/ Jack Meehan Director
---------------
Jack Meehan
/s/ William A. Merritt Director
----------------------
William A. Merritt
/s/ William J. Stuart Director
---------------------
William J. Stuart
40
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian J. Kelley certify that:
1. I have reviewed this annual report on Form 10-K of Cognitronics
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Brian J. Kelley
-------------------
Brian J. Kelley
Chief Executive Officer
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE
SECURITIES ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Garrett Sullivan certify that:
1. I have reviewed this annual report on Form 10-K of Cognitronics
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this annual report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Garrett Sullivan
--------------------
Garrett Sullivan
Treasurer
Form 10-K -- Item 15 (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 . . . . . . . . . . . . . . . .12
Consolidated Balance Sheets, December 31, 2002 and 2001. . . .13
Consolidated Statements of Operations and Comprehensive Income
(Loss) for each of the three years in the period ended
December 31, 2002 . . . . . . . . . . . . . . . . . . . . .14
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 2002. . . . .14
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2002. . . . . . . . . .15
Notes to Consolidated Financial Statements . . . . . . . . . .16
(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.
Item 15(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, 2002 and incorporated herein by reference).
10.2 Lease, dated April 30, 1993, between 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).
10.3 Lease amendment, dated as of January 27, 2003,
between the Danbury Industrial Corporation and
Cognitronics Corporation (attached as Exhibit 10.3 to
this Annual Report on Form 10-K).
10.4 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).
10.5 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).
Exhibit
10.6 Cognitronics Corporation Restricted Stock Plan
(Exhibit 10.2 to Quarterly Report on Form 10-Q for
the period ended June 30, 2002 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 10.9 to this Annual Report on
form 10-K).
22. List of subsidiaries of the Company as of December
31, 2002 (attached as Exhibit 22 to this Annual
Report on Form 10-K).
23. Consent of Independent Auditors, dated March 28, 2003
(attached as Exhibit 23 to this Annual Report on Form
10-K).
99.1 Certification Pursuant to 18 U.S.C. Section 1350 As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (attached as Exhibit 99.1 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).