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UNITED STATES
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, 2004,
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-8496
COGNITRONICS CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-1953544
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Corporate Drive, Danbury, Connecticut 06810
(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 Shares Outstanding
Title of each class on which registered as of March 1, 2005
- -------------------- --------------------- -------------------
Common Stock, par value
$0.20 per share American Stock Exchange 5,733,903
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 computed by reference to the price the stock was last sold
as of June 30, 2004, the last business day of the most recently completed
second fiscal quarter, was $18,655,000.
Documents incorporated by reference: Portions of the Proxy Statement for
the annual meeting of stockholders to be held on May 12, 2005 are
incorporated by reference into Part III.
TABLE OF CONTENTS
PART I
Item Page
1. Business 3
2. Properties 4
3. Legal Proceedings 4
4. Submission of Matters to a Vote of Security Holders 4
Executive Officers of the Company 5
PART II
5. Market for Company's Common Equity and Related
Stockholder Matters 6
6. Selected Financial Data 6
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 27
9a. Controls and Procedures 27
PART III
10. Directors and Executive Officers of the Company 30
11. Executive Compensation 30
12. Security Ownership of Certain Beneficial Owners
and Management 30
13. Certain Relationships and Related Transactions 30
14. Principal Accountant Fees and Services 30
PART IV
15. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 30
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 networks. In Europe, the Company
distributes equipment for use on customers' premises. See Note N of the
Company's Consolidated Financial Statements appearing in Item 8 of this
report for certain financial information about these two business segments.
(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, switch manufacturers, IP-based communications systems
manufacturers, systems integrators, and value added resellers (VAR) who
distribute the Company's products.
Network Media Servers and Intelligent Announcers. 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. The 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, SIP and Voice Mail. Other protocols will be supported as market
demand dictates. This family of products accounted for 15% or more of the
Company's consolidated revenues in each of the last three years.
Messaging Systems. CX Messaging Systems provide voice mail, unified
messaging, and automated attendant functions to target markets.
Capabilities include PSTN and IP interfaces, Voice XML scripting language,
scalable from a few hundred to more than a million mailboxes, and may be
configured for high availability and/or redundant performance.
European Distributorship Operations. Dacon Electronics Plc., based in
Hertfordshire, England, distributes call management and voice processing
products 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 2004 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 2004, revenues included sales of $6.8 million to Verizon
Communications Inc. The Company's European operations had sales of $2.9
million to British Telecommunications Plc in 2004. Over the past several
years, a major portion of the revenues of the domestic operations has come
from one or two 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, 2004 and 2003, amounted to $.7 million and $.2
million, respectively. Substantially all of the orders as of December 31,
2004, can reasonably be expected to be filled during 2005.
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 $2.5 million in 2004, $2.6 million in 2003 and $3.3 million in
2002. In addition, the estimated dollar amount spent on the improvement of
existing products or techniques was $.1 million in 2004 and 2003.
(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, 2004, the Company and its subsidiaries
employed 73 people.
(d) Sales to foreign customers primarily represent sales of Dacon
Electronics Plc. (incorporated in the United Kingdom) of $5.5 million in
2004, $5.1 million in 2003 and $5.8 million in 2002. 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 and
Europe) of approximately $.5 million in 2004 and $.1 million in 2003 and
2002. 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, 2005 are as follows:
Name Position(s) and Office(s) Age
Brian J. Kelley President and Chief Executive 53
Officer; Director
Kenneth G. Brix Vice President 58
Harold F. Mayer Secretary 75
Michael N. Keefe Vice President 49
Roy A. Strutt Vice President 48
Garrett Sullivan Treasurer and Chief Financial 59
Officer
Emmanuel A. Zizzo Vice President 64
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
sales 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.
Mr. Sullivan has been Treasurer and Chief Financial Officer of the Company
since 1989.
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.
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, 2005, there were 532 stockholders
of record; the Company estimates that the total number of beneficial owners
was approximately 1,900. 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.
(d) The equity compensation plan information set forth under the caption
Equity Compensation Plan Information in the Proxy Statement for the annual
meeting of stockholders to be held May 12, 2005 is incorporated herein by
reference.
Item 6. Selected Financial Data
Year ended December 31,
(in thousands except per share data)
OPERATING RESULTS 2004 2003 2002 2001 2000
- ----------------- ---- ---- ---- ---- ----
Revenues $14,225 $10,257 $11,299 $18,875 $31,836
Net income (loss) (554) (3,550) (6,444) (1,805) 4,530
Net income (loss) per share
Basic $(.10) $(.63) $(1.18) $(.33) $.79
Diluted (.10) (.63) (1.18) (.33) .74
Weighted average number of
basic shares outstanding 5,781 5,615 5,438 5,417 5,754
Weighted average number of
diluted shares outstanding 5,781 5,615 5,438 5,417 6,092
FINANCIAL POSITION
- ------------------
Working capital $12,697 $12,851 $16,321 $23,092 $26,107
Total assets 18,956 18,898 22,812 28,573 32,998
Stockholders' equity 15,015 15,268 18,152 24,204 27,265
Stockholders' equity per share $2.59 $2.72 $3.34 $4.46 $4.74
Cash dividends paid None None None None None
Included in 2004 is an inventory provision of $738,000 ($.13 per basic and
diluted share) and an increase in deferred tax valuation allowance of
$221,000 ($.04 per basic and diluted share).
Included in 2003 is an inventory provision of $482,000 ($.09 per basic and
diluted share) and an increase in deferred tax valuation allowance of
$1,151,000 ($.20 per basic and diluted share).
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 share).
Net (loss) in 2004, 2003 and 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
Certain Factors That May Affect Future Results
The following information, including, without limitation, the
Quantitative and Qualitative Disclosures About Market Risk that are not
historical facts, may be forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements generally are characterized by the
use of terms such as "believe", "expect" and "may". Although the Company
believes that the expectations reflected in such forward-looking statements
are based upon reasonable assumptions, the Company's actual results could
differ materially from these set forth in the forward-looking statements.
Factors that might cause such a difference include:
Loss of a major customer. In 2004, one customer accounted for
approximately 50% and another customer 20% of the Company's sales,
and at December 31, 2004, one of these customers accounted for 75%
of the Company's accounts receivable. A loss of either customer
would have a major adverse impact on the Company's results.
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.
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.
Given the uncertainties, the Company cautions readers not to place undue
reliance on such forward-looking statements.
Executive Summary
The Company operates in two segments. In the United States, the
Company designs, manufactures and sells voice processing equipment for use
in telephone central offices. In Europe (United Kingdom), the Company
distributes equipment and software for use in customer's premises, primarily
contact centers.
In the United States, the Company's products include Intelligent
Announcers and Network Media Servers. These products facilitate the
deployment of voice resources in service providers' networks, both
traditional circuit-switched networks, as well as the next generation of
packet-based networks.
Beginning in 2001, expenditures for network development decreased
significantly reflecting a decline in the competitive local exchange carrier
market and reduced capital spending by large service providers. This trend
intensified in 2002 and continued into 2003. The Company believes that the
market for telecommunication equipment has stabilized and is growing in
certain areas, but the timing of such spending continues to be uncertain and
may be adversely impacted by mergers and acquisitions among telecommunication
service providers.
Established service providers are looking for ways to offer additional
features on their legacy networks while they institute a multi-year plan to
transition to IP based multimedia services. To effectively compete, the
Company must expand its penetration in the market, increase the application
available on its intelligent peripherals and media servers and increase the
capacity of its media servers.
In the United Kingdom, the Company distributes products primarily used
in contact centers. Over the last several years, this market has declined due
to market saturation, general economic conditions, increased competition and
the relocation of large call centers to less developed countries. The Company
believes that in 2004 this trend has leveled off. To return to profitability,
the Company has to expand its product offerings to introduce new products, not
only to the contact center market, but also to new markets.
Capital spending in the markets the Company serves can vary over a
short period of time and change rapidly. In addition, the Company faces
intense competition from larger and better financed competitors and one
customer accounts for a significant portion of the Company's revenue. As a
result, the Company's performance is subject to large fluctuations. Because
of these uncertainties, it is difficult for the Company to make accurate
short and long-term projections of results of operations and cash flow.
As discussed more fully throughout the Management's Discussion and
Analysis:
* Results of operations improved in 2004 due to increased revenues
and improved gross margin percentage, calculated as revenues less
cost of products sold as a percentage of revenue.
* Revenues increased 39% in 2004 due to improved sales in the
Company's domestic operations.
* Gross margin percentage increased from 41% in 2003 to 55% in 2004.
Results
The Company reported net losses of $.6 million, $3.6 million and
$6.4 million in 2004, 2003 and 2002, respectively.
In 2004, revenues increased $4.0 million (39%) from 2003 levels
primarily due to an increase in the sales of the Company's domestic
operations of $3.6 million (71%). This increase was primarily due to an
increase in sales of the CX4000 to a large domestic telecommunication service
provider. Sales to this customer increased $3.7 million in 2004 from 2003,
continuing a trend commenced in 2003. The Company expects that it will
receive additional substantive orders from this customer in 2005. This
customer is using this equipment in its Advanced Intelligent Network ("AIN")
to provide services to their subscribers. In addition, the increased
revenues also resulted from an increase in service revenue resulting from the
commencement of software and hardware maintenance agreements with a large
customer. The Company anticipates this amount will increase in future years.
The UK distributorship operations sales only increased $.4 million (7%) in
spite of favorable exchange variance of 12% due to lower volume. To offset
this decrease, the Company has introduced additional products to the contact
center market. The Company's consolidated backlog at December 31, 2004 was
$1.0 million versus $.2 million in 2003. In both 2004 and 2003, a major
portion of the Company's domestic revenue came from one customer and a major
portion of the UK distributorship's revenue came from another customer. The
loss of either of these customers would have a material adverse impact on the
Company.
In 2003, sales decreased $1 million (9%) from 2002. The sales of the
Company's domestic operations declined $.4 million (8%) reflecting the
industry-wide trend of reduced capital spending. The decrease in sales was
in both the direct and indirect channels with the exception of sales of CX4000
o a large domestic telecommunication service provider. Sales to this customer
increased $1.2 million in 2003 from the prior year. The UK distributorship
operation decreased $.6 million (10%) in 2003 from the prior year, in spite
of a favorable foreign currency fluctuation of 8%. In addition, sales to its
largest customer increased in 2003 from 2002. Decreases in sales to its other
customers more than offset these improvements.
Consolidated gross margin was 55% in 2004 , 41% in 2003 and 28% in
2002. Included in cost of products sold were inventory obsolescence charges
of $.7 million in 2004 and $.4 million in 2003 and fixed asset impairment and
inventory obsolescence charges of $1.2 million in 2002. The improved gross
margin percentage was primarily due to increased sales volume and improved
product mix in the domestic operations. The increased sales for the domestic
operations in 2004 was for equipment used in an AIN environment. This
equipment has a higher sales price resulting in a higher gross margin
percentage.
Research and development decreased $.2 million (5%) in 2004 and $.7
million (21%) in 2003 from the prior year. The decrease in 2004 primarily
reflects lower personnel costs and in 2003 primarily reflects lower contract
engineering services and lower personnel costs. The company anticipates
increasing research and development expense in 2005.
Selling, general and administrative expense decreased $.1 million (1%)
in 2004 and 2003 from the prior year period. In 2004, domestic operations
decreased $.2 million due to lower professional fees and personnel costs
offset by an increase of $.1 in the UK operations due to exchange rate
variance. The decrease in 2003 was due to a $.4 million (10%) decrease in the
US operations primarily reflecting lower personnel costs offset by an increase
of $.3 million (11%) in the UK primarily reflecting exchange rate variance.
Other income of $1 million in 2003 includes a non-cash gain of $.8
million on the termination of the Company's postretirement health benefits
plan. Other income of $.2 million in 2004, $.2 million in 2003 and $.2
million in 2002 is primarily interest income.
The Company's effective tax rate for 2004 was (11%), for 2003 was (2%)
and (6%) for 2002. Deferred tax valuation allowances of $.1 million in 2004,
$1.2 million in 2003 and $2.4 million in 2002 were included in tax expense.
Forming a conclusion that such an allowance is not needed is difficult when
there is evidence such as cumulative losses in recent years. 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, 2004, 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.
Total rental expense amounted to $395,000 in 2004, $364,000 in 2003
and $423,000 in 2002. Future annual payments for long-term noncancellable
leases for each of the five years in the period ending December 31, 2009 are
approximately$482,000, $399,000, $277,000, $159,000 and $6,000, respectively,
and $0 thereafter.
Off-Balance Sheet Arrangements
None.
Liquidity and Sources of Capital
Net cash used by operations was $33,000 in 2004, $2.1 million in 2003
and $2.0 million in 2002. The reduction in use of cash by operations in 2004
versus 2003 and 2002 is due to the improvement in operating results. Cash
(used) provided by investing activities was ($.1) in 2004, $2.2 million in
2003 and ($2.9) million in 2002. The Company has net sales of marketable
securities of $.1 million in 2004 and $2.4 million in 2003 versus net purchases
of $2.0 million in 2002. There were purchases of property, plant
and equipment and software of $.2 million, $.2 million and $.6 million in
2004, 2003 and 2002, respectively. Included in 2002 were loans to officers,
net of repayments, of $.3 million.
Working capital was $12.7 million at December 31, 2004, $12.9 million
at December 31, 2003 and $16.3 million at December 31, 2002. The ratio of
current assets to current liabilities was 5.4:1 at December 31, 2004 versus
6.0:1 at December 31, 2003 and 7.2:1 at December 31, 2002. The decreases
in working capital in 2004 and 2003 from the prior year is due to the net
loss.
The Company's contractual obligations are as follows (amounts in
thousands):
Payments due by period
Total Less than More than
Contractual Obligation 1 year 1-3 Years 3-5 Years 5 years
- ---------------------- ------ --------- --------- --------- ---------
Operating leases $1,323 $482 $676 $165 $0
The Company anticipates making capital expenditures of approximately
$.3 million, increasing the current level of expenditures for research and
development and may repurchase up to 253,792 shares of its Common Stock in
2005. Based on current operating results, management believes that the cash
and cash equivalents at December 31, 2004 will be sufficient to fund the
Company's cash requirements for 2005 and 2006 and for subsequent years;
however, if the Company's operations deteriorate due to increased competition,
loss of a large customer or otherwise, it may be required to obtain additional
sources of funds through asset sales, capital market transactions or financing
from third parties or a combination thereof. The Company cannot provide
assurances that these additional sources of funds will be available or, if
available, what the terms would be.
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
We generally recognize product revenue, net of sales discounts
and allowances, when persuasive evidence of an arrangement exists,
shipment or delivery (dependent upon the terms of the sale) has
occurred, all significant contractual obligations have been satisfied,
the amount is fixed or determinable and collection is considered
probable. Sales of services and system support are deferred and
recognized ratably over the contract period.
Inventories - Slow-moving and Obsolescence
Due to a prolonged slow-down in spending by telecommunication
service providers, inventory turnover has slowed. The Company recorded
charges of $.7 million, $.4 million and $1 million 2004, 2003 and 2002,
respectively, 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, 2004, the Company has a valuation allowance
of $4.2 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 6.5%. Over the long term,
the Company's pension plan assets have earned in excess of 6.5%;
therefore, the Company believes that its assumption of future returns
of 6.5% 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 less than the assumed rate of return in 2004
and in excess of the assumed rate of return in 2003.
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, 2004,
the Company used a rate of 5.5%. 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.
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)
2004 First Second Third Fourth
- ---- ----- ------ ----- ------
Sales $2,261 $4,243 $1,889 $5,832
Gross profit 748 2,499 713 3,794
Net income (loss) (1,351) 376 (1,348) 1,769
Net income (loss) per share:
Basic $(.24) $.07 $(.23) $ .30
Diluted (.24) .06 (.23) .28
Common Stock price range:
High $4.30 $4.50 $4.16 $4.35
Low 3.00 3.40 3.00 3.01
2003 First Second Third Fourth
- ---- ----- ------ ----- ------
Sales $2,496 $2,448 $3,498 $1,815
Gross profit 918 990 1,860 428
Net loss (1,325) (326) (466) (1,433)
Net loss per share:
Basic $(.24) $(.06) $(.08) $(.25)
Diluted (.24) (.06) (.08) (.25)
Common Stock price range:
High $2.95 $2.50 $2.45 $3.97
Low 1.41 1.30 1.85 2.15
The gross margin percentage for the fourth quarter of 2004 was 65%
versus 47% for the first nine months of 2004 due to increased volume and an
improved product mix. The gross margin percentage for the fourth quarter of
2003 was 24% versus 45% for the first nine months of 2003 primarily due to
lower volume and lower absorption of overhead.
Included in the second quarter of 2003 was a non-cash gain of $.8
million due to the termination of the Company's postretirement health benefits
plan.
Included in the third quarter of 2003 was an expense of $.2 million
for the estimated settlement of a rent dispute in the UK distributorship
operations. Due to the satisfactory resolution of the company's claim against
a third party, this amount was reversed in the fourth quarter of 2003.
The above financial information should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Cognitronics Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cognitronics
Corporation and Subsidiaries (the Company) as of December 31, 2004 and 2003,
and the related consolidated statements of operations and comprehensive loss,
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Cognitronics Corporation as of December 31, 2004 and 2003, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ Carlin, Charron & Rosen, LLP
Glastonbury, Connecticut
March 14, 2005
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Cognitronics Corporation
We have audited the consolidated statements of operations and
comprehensive loss, stockholders' equity, and cash flows of
Cognitronics Corporation and subsidiaries for the year 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 audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (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 audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
results of operations and cash flows of Cognitronics Corporation
and subsidiaries for the year ended December 31, 2002, in
conformity with U. S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 7, 2003
CONSOLIDATED BALANCE SHEETS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(dollars in thousands)
December 31,
2004 2003
(See Note A)
ASSETS ---- ----
CURRENT ASSETS
Cash and cash equivalents $ 2,836 $ 2,877
Marketable securities 5,847 5,956
Accounts receivable, less allowances of $73 and $63 4,466 1,183
Inventories 2,303 2,987
Tax recoverable 2,028
Other current assets, including loans to
officers of $1,968 and $1,931 148 381
------- -------
TOTAL CURRENT ASSETS 15,600 15,412
LOANS TO OFFICERS 1,968 1,931
PROPERTY, PLANT AND EQUIPMENT, net 922 1,087
GOODWILL 319 319
OTHER ASSETS, less amortization of $217 and $533 147 149
------- -------
$18,956 $18,898
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 348 $ 778
Accrued compensation and benefits 842 658
Deferred service revenues 576 171
Other accrued expenses 1,137 954
------- -------
TOTAL CURRENT LIABILITIES 2,903 2,561
OTHER NON-CURRENT LIABILITIES 1,038 1,069
COMMITMENTS AND CONTINGENCIES (Note J)
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a share; authorized
20,000,000 shares; issued 5,866,879 and
5,863,229 shares 1,173 1,173
Additional paid-in capital 12,586 12,794
Retained earnings 2,865 3,419
Cumulative other comprehensive loss (225) (98)
Unearned compensation (303) (509)
------- -------
16,096 16,779
Less cost of 138,308 and 190,431 common shares
in treasury (1,081) (1,511)
------- -------
TOTAL STOCKHOLDERS' EQUITY 15,015 15,268
------- -------
$18,956 $18,898
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(in thousands except per share data)
Year ended December 31,
2004 2003 2002
---- ---- ----
REVENUES
Products $12,838 $ 9,393 $10,699
Services 1,387 864 600
------- ------- -------
14,225 10,257 11,299
COSTS AND EXPENSES
Cost of products sold 6,471 6,061 8,111
Research and development 2,438 2,619 3,300
Selling, general and administrative 5,966 6,071 6,153
Other (income) expense, net (151) (1,007) (206)
------- ------- -------
14,724 13,744 17,358
------- ------- -------
Loss before income taxes (499) (3,487) (6,059)
PROVISION FOR INCOME TAXES 55 63 385
------- ------- -------
NET LOSS (554) (3,550) (6,444)
Currency translation adjustment and
minimum pension liability (127) 200 (38)
------- ------- -------
COMPREHENSIVE LOSS (681) $(3,350) $(6,482)
======= ======= =======
NET LOSS PER SHARE:
Basic $(.10) $(.63) $(1.18)
Diluted $(.10) (.63) (1.18)
The accompanying notes to consolidated financial statements are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COGNITRONICS CORPORATION AND SUBSIDIARIES
Years ended December 31, 2002, 2003 and 2004 (See Note A)
(dollars in thousands)
Common Stock Additional Compre- Unearned Treasury
Shares Paid-In Retained hensive Compensa- Shares
Issued Amount Capital Earnings (Loss) tion Amount
Balance at January 1, 2002 5,863,229 $1,173 $13,928 $13,413 $(260) $(506) $(3,544)
Shares issued pursuant to
stock plans (925) (6) 1,150
Shares issued to directors (23) 27
Repurchase of common shares (5)
Directors' fees - common stock
to be issued 62
Officers' awards - common stock
to be issued 150
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 13,192 6,969 (298) (512) (2,372)
Shares issued pursuant to
stock plans (610) 3 842
Shares issued to directors (14) 19
Directors' fees - common stock
to be issued 75
Officers' awards - common stock
to be issued 151
Currency translation adjustment 129
Minimum pension liability 71
Net loss (3,550)
--------- ------ ------- ------- ----- ----- -------
Balance at December 31, 2003 5,863,229 1,173 12,794 3,419 (98) (509) (1,511)
Shares issued pursuant to
stock plans 3,650 (116) 206 137
Shares issued to directors (290) 293
Directors' fees - common stock
to be issued 47
Officers' awards - common stock
to be issued 151
Currency translation adjustment 121
Minimum pension liability (248)
Net loss (554)
--------- ------ ------- ------- ----- ----- -------
Balance at December 31, 2004 5,866,879 $1,173 $12,586 $ 2,865 $(225) $(303) $(1,081)
========= ====== ======= ======= ===== ===== =======
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,
2004 2003 2002
---- ---- ----
(See Note A>
OPERATING ACTIVITIES
Net loss $ (554) $(3,550) $(6,444)
Adjustments to reconcile net loss to net cash
used by operating activities:
Income tax expense 55 63 385
Depreciation and amortization 398 612 743
(Gain) loss on disposition of assets (1) 9 36
Shares issued as compensation 404 454 431
Net (increase) decrease in:
Accounts receivable (3,225) 961 88
Inventories 760 778 2,063
Other assets 2,205 (329) 723
Net increase (decrease) in:
Accounts payable (468) (255) 10
Accrued compensation and benefits (95) (1,047) (198)
Other accrued liabilities 569 253 167
------ ------- ------
48 (2,051) (1,996)
Income taxes paid (81) (60) (40)
------ -------- ------
NET CASH USED BY
OPERATING ACTIVITIES (33) (2,111) (2,036)
====== ======== ======
INVESTING ACTIVITIES
Purchase of marketable securities (7,646) (5,713) (16,071)
Sale of marketable securities 7,755 8,144 14,104
Loans to officers, net (341)
Additions to property, plant and equipment (153) (170) (617)
Purchase of software licenses (51) (36) (6)
------ ------- ------
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES (95) 2,225 (2,931)
------ ------- ------
FINANCING ACTIVITIES
Principal payments on debt (26) (46)
Shares issued pursuant to stock plans 24 10 5
Shares repurchased for treasury, 1,500 in 2002 (5)
------ ------- ------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 24 (16) (46)
------ ------- ------
EFFECT OF EXCHANGE RATE DIFFERENCES 63 47 14
------ ------- ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (41) 145 (4,999)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 2,877 2,732 7,731
------ ------- ------
CASH AND CASH EQUIVALENTS - END OF YEAR $2,836 $ 2,877 $ 2,732
====== ======= =======
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 one customer, and a significant portion of its
European distributorship revenue comes from one customer (See Note N). The
loss of either 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, 2004, 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 Recognition. We generally recognize product sales, net of sales
discounts and allowances, when persuasive evidence of an arrangement exists,
shipment or delivery (dependent upon the terms of the sale) has occurred,
all significant contractual obligations have been satisfied, the amount is
fixed or determinable and collection is considered probable. Sales of
services and system support are deferred and recognized ratably over the
contract period.
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, 2004, 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 fair value which approximates amortized cost. They
are comprised of investments in municipal bond funds and high grade corporate
debt and auction rate preferred 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. Provisions for slow moving and obsolete inventories are
provided based on historical experience and product demand. In November 2004,
the FASB issued SFAS No. 151, "Inventory Costs, an Amendment of ARB No. 43,
Chapter 4." The standard requires that abnormal amounts of idle capacity and
spoilage costs should be excluded from the cost of inventory and expensed when
incurred. SFAS No. 151 is effective for fiscal years beginning after June 15,
2005. The Company does not expect the adoption of this standard to have a
material effect on its financial position or results of operations.
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 (85% of
fair value for the Stock Purchase Plan) 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, the 1967 Stock Purchase Plan and the Directors' Stock
Option 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", as amended, the pro forma
net loss and net loss per share would be as follows (in thousands except per
share information):
2004 2003 2002
Net loss, as reported $(554) $(3,550) $(6,444)
Add: Stock-based compensation expense
included therein 359 380 370
Deduct: Total stock-based compensation
method (662) (769) (701)
----- ------- -------
Pro forma net loss $(857) $(3,939) $(6,775)
===== ======= =======
Net loss per share
As reported Basic $(.10) $(.63) $(1.18)
Diluted $(.10) $(.63) $(1.18)
Pro forma Basic $(.15) $(.70) $(1.25)
Diluted $(.15) $(.70) $(1.25)
The estimated weighted average fair value per share of stock options granted
were $2.56, $1.49 and $1.01 for 2004, 2003 and 2002, 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 2004, 2003 and 2002, respectively: risk-free interest rates of 4.4%, 2.2%
and 2.28%; no dividend yields; volatility factors of the expected market
price of the Company's common stock of .73 in 2004, .67 in 2003 and .61 in
2002; and a weighted average expected life of the option of 7.5 years in all
years 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.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-based
Payment" that will require the Company to expense costs related to share-based
payment transaction with employees. With limited exceptions, SFAS No. 123(R)
requires that the fair value of share-based payments to employees be expensed
over the period service is received and eliminates the ability to account for
these instruments under the intrinsic value method prescribed by APB No. 25,
and allowed under the original provisions of SFAS No. 123. SFAS No. 123(R)
becomes mandatorily effective for the Company on July 1, 2005. SFAS No.
123(R) allows for either prospective recognition of compensation expense or
retrospective recognition, which may be back to the original issuance of SFAS
No. 123 or only to interim periods in the year of adoption. The Company is
currently evaluating these transition methods.
SFAS No. 123(R) allows the use of both closed form models (e.g., Black-
Scholes Model) and open form models (e.g., lattice models) to measure the
fair value of the share-based payment as long as that model is capable of
incorporating all of the substantive characteristics unique to share-based
awards. In accordance with the transition provisions of SFAS No. 123 (R),
the expense attributable to an award will be measured in accordance with the
Company's measurement model at that award's date of grant.
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 both the
basic and diluted earnings per share calculations were 5,780,603, 5,614,825
and 5,438,126 for 2004, 2003 and 2002, 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. An
impairment charge is recognized if a reporting unit's goodwill carrying
amount exceeds its implied fair value.
Reclassification. Certain prior year amounts have been reclassified to
conform to the current year presentation, including reclassification of
approximately $606,000, $818,000 and $1,044,000 of accrued officers and
directors fees at January 1, 2002, December 31, 2002 and December 31, 2003,
respectively, as additional paid-in capital - common stock to be issued,
rather than accrued compensation and benefits and accrued deferred directors'
fees as previously reported. These reclassifications properly reflect these
amounts as equity based compensation in the consolidated balance sheets and
had no significant impact on the Company's financial position or results of
operations.
Note B. Marketable Securities:
The Company's marketable securities consist of corporate and municipal bonds
and auction rate preferred stock. Unrealized gains/losses on marketable
securities were immaterial in all years presented and therefore have not
impacted cumulative other comprehensive loss. Management believes that the
Company's marketable securities are sufficiently diversified to minimize risks
from individual and industry concentrations. However, marketable securities
are subject to fluctuations in market value due to risks of securities markets
as a whole.
Note C. Accounts Receivables
The allowance for doubtful accounts was increased by $45,000, $10,000 and
$87,000 in 2004, 2003 and 2002, respectively, by charges to costs and
expenses. The Company wrote off uncollectible accounts, net of recoveries,
of $35,000, $15,000 and $213,000 in 2004, 2003 and 2002, respectively.
Note D. Inventories (in thousands):
2004 2003
---- ----
Finished and in process $1,572 $2,172
Materials and purchased parts 731 815
------ ------
$2,303 $2,987
====== ======
Included in the above amounts is the Company's reserve for slow moving and
obsolete inventories totaling $3,528,000 and $2,765,000 at December 31, 2004
and 2003, respectively. The provision for slow moving and obsolete inventory
was increased by $738,000, $482,000 and $951,000 in 2004, 2003 and 2002,
respectively by charges to cost of goods sold.
Note E. Property, Plant and Equipment, net (in thousands):
2004 2003
---- ----
Machinery and equipment $2,391 $2,476
Furniture and fixtures 2,066 2,131
------ ------
4,457 4,607
Less allowances for depreciation 3,535 3,520
------ ------
$ 922 $1,087
====== ======
Note F. Other Non-current Liabilities (in thousands):
2004 2003
---- ----
Accrued officers' supplemental pension $ 368 $ 419
Accrued deferred compensation 207 232
Accrued pension 740 664
Accrued postretirement benefit 11
------ ------
1,315 1,326
Less current portion 277 257
------ ------
$1,038 $1,069
====== ======
Note G. Debt and Credit Arrangements
Dacon Electronics Plc's, a foreign subsidiary, bank line of credit expired
in 2003. During 2003, no amounts were borrowed under this facility.
Interest of $19,000 was paid in 2002.
Note H. Income Taxes
At December 31, 2004, consolidated retained earnings included approximately
$.2 million of retained earnings applicable to Dacon Electronics Plc. If the
undistributed earnings were remitted, any 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):
2004 2003 2002
---- ---- ----
Current:
Federal $ $ $(1,714)
Foreign
State 55 63 88
---- ---- -------
Total current 55 63 (1,626)
---- ---- -------
Deferred:
Federal 1,817
State 194
---- ---- -------
Total deferred 0 0 2,011
---- ---- -------
$ 55 $ 63 $ 385
==== ==== =======
Domestic and foreign pretax income (loss) for the years ended December 31 are
as follows (in thousands):
2004 2003 2002
---- ---- ----
Domestic operations $(286) $(3,419) $(5,978)
Foreign operations (213) (68) (81)
----- ------- -------
$(499) $(3,487) $(6,059)
===== ======= =======
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, 2004 and
2003 are as follows (in thousands):
2004 2003
---- ----
Deferred tax liabilities $ 96 $ 85
------ ------
Deferred tax assets:
Inventory valuation 1,252 1,026
Accrued liabilities and employee benefits 1,272 934
Accrued deferred compensation 199 233
Other postretirement benefits 4
Federal operating loss carryforward
expiring in 2019 981 1,257
Separate return federal operating loss
carryforwards expiring in 2008 and 2009 445 445
Other 195 207
------ ------
Total deferred tax assets 4,344 4,106
Valuation allowance (4,248) (4,021)
------ ------
96 85
------ ------
Net deferred tax assets $ 0 $ 0
====== ======
The Company has increased its valuation allowances by $227,000, $1,151,000
and $2,425,000 in 2004, 2003 and 2002, respectively, as the Company cannot
determine that the ultimate realization of its net deferred tax asset is
more likely than not.
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:
2004 2003 2002
---- ---- ----
Statutory federal income tax rate (34.0)% (34.0)% (34.0)%
State income taxes, net of federal tax benefit 7.3 1.8 0.6
Lower foreign tax rate 14.6 0.7 0.5
Nontaxable interest income (0.3)
Goodwill amortization (5.0) (0.8) (0.4)
Valuation allowance 25.9 33.2 40.0
Other 2.2 0.9
---- ---- ----
11.0% 1.8% 6.4%
==== ==== ====
Note I. Other (Income) Expense, Net (in thousands):
Year Ended December 31,
2004 2003 2002
---- ---- ----
Interest expense $ 24 $ 26 $ 36
Interest income (175) (184) (242)
Settlement gain in plan termination (849)
----- ------- -----
$(151) $(1,007) $(206)
===== ======= =====
Note J. Commitments and Contingencies
Leases. Total rental expense amounted to $396,000 in 2004, $364,000 in 2003
and $423,000 in 2002. Future annual payments for long-term noncancellable
leases for each of the five years in the period ending December 31, 2009 are
approximately $482,000, $399,000, $277,000, $159,000 and $6,000, respectively,
and $0 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. Because of
this curtailment of the Plan in 1994, at this time the Projected Benefit
Obligation and Accumulated Benefit Obligation are the same. 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):
2004 2003 2002
---- ---- ----
Interest cost on projected benefit obligation $ 92 $106 $120
Actual (return)/loss on plan assets (14) (109) 99
Net amortization and deferral (33) 63 (167)
Settlement loss 58
---- ---- ----
Net periodic pension cost $ 45 $118 $ 52
==== ==== ====
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):
2004 2003
---- ----
Projected and accumulated benefit obligation for
services rendered to date
Beginning of year $1,489 $1,737
Loss (gain) due to change in estimates 214 50
Interest cost 92 106
Less benefits paid (114) (404)
------ ------
End of year 1,681 1,489
------ ------
Plan assets at fair value
Beginning of year 825 960
Actual return on plan assets 14 109
Contribution 216 160
Less benefits paid (114) (404)
------ ------
End of year 941 825
------ ------
Plan assets less than benefit obligation (740) (664)
Unrecognized net loss (gain) 524 277
Minimum pension liability adjustment (524) (277)
------ ------
Accrued pension liability (included in other
non-current liabilities) $ (740) $ (664)
====== ======
The discount rates used in determining the projected benefit obligation were
5.5% in 2004 and 6.25% in 2003. The expected long-term rate of return on
plan assets used in determining the net periodic pension cost was 6.5% in
2004 and 2003. In determining the expected return on plan assets, the
Company considers the relative weighting of plan assets, the historical
performance of total plan assets and individual assets categories and economic
and other indicators of future performance. The Company may also consult with
other professionals in developing expected returns. The plan's weighted-
average asset allocation at December 31, 2004 and 2003 and target allocation
for 2005 by asset category, are as follows:
2005 Target
Asset Category Allocation 2004 2003
-------------- ----------- ---- ----
Equity Securities 45-60% 56% 60%
Debt Securities 30-45% 31% 33%
Cash and cash equivalents 5-15% 13% 7%
The Company intends to contribute approximately $170,000 in 2005 to this plan.
The following benefit payments are expected to be paid: $99,000 in 2005,
$132,000 in 2006, $95,000 in 2007, $93,000 in 2008, $150,000 in 2009 and an
aggregate of $645,000 for the five year period ending in 2014.
401(k) Retirement Plan. The Company has a defined contribution plan covering
substantially all domestic employees. The Company's contribution, until June
of 2003 was based upon the participants' contributions. In June of 2003, the
Company suspended its contribution. The expense was $23,000 and $52,000 in
2003 and 2002, respectively.
Officers' Supplemental Pension Plan. The Company has an unfunded, non-
contributory 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):
2004 2003 2002
---- ---- ----
Interest cost on projected benefit obligation $19 $24 $27
Amortization of actuarial gains (2) (3) (3)
--- --- ---
Net periodic pension cost $17 $21 $24
=== === ===
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):
2004 2003
---- ----
Projected benefit obligations
Balance at beginning of period $347 $391
Loss due to change in estimate 25
Interest expense 19 24
Less benefits paid (69) (68)
---- ----
Balance at end of period 322 347
Unrecognized net gain 46 72
---- ----
Accrued pension liability (included in other non-current
liabilities) $368 $419
==== ====
The discount rate used in determining the projected benefit obligation was
5.5% in 2004 and 6.75% in 2003. All participants are retired and receiving
benefits under the Plan and therefore future increases in compensation are
not applicable.
The following benefit payments and contributions are expected to be paid:
$69,000 in 2005, $69,000 in 2006, $69,000 in 2007, $65,000 in 2008, $51,000
in 2009 and an aggregate of $124,000 for the five year period ending in 2014.
Other Postretirement Benefit Plans. In addition to the Company's pension
plans, the Company had a contributory, unfunded defined benefit plan
providing certain health care benefits for domestic employees who retired
prior to March 31, 1996, which was terminated effective December 31, 2003.
The components of postretirement benefit cost for the year ended December 31,
2003 and 2002 are as follows (in thousands):
2003 2002
---- ----
Interest cost $ 45 $47
Net amortization (9) (11)
Settlement gain (849)
----- ---
Net periodic cost $(813) $36
===== ===
The net benefits paid were $32,000 for 2003.
Deferred Compensation. At December 31, 2004 and 2003, the liability relating
to a deferred compensation arrangement between the Company and a former
director and officer of the Company was $207,000 and $232,000, respectively.
The Company expects to make payments in 2005 totaling $42,000 under this
contract.
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 ten
years 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, 2004, no grants were granted, exercised
or cancelled. At December 31, 2004, 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.
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, and in 2003 the plan
was amended to increase the amount granted to 6,000 shares for each
participant.
Share information pertaining to these plans is as follows:
1990 Restricted Directors'
Option Stock Option
Plan Plan Plan
------ ---------- ----------
Outstanding at December 31, 2001 856,050 131,210 65,250
Granted 315,500 145,000 51,000
Cancelled or expired (131,225) (15,000)
Vested (17,530)
Exercised
--------- ------- -------
Outstanding at December 31, 2002 1,040,325 258,680 101,250
Granted 248,500 103,187 36,000
Cancelled or expired (154,525) (12,000)
Vested (32,830)
Exercised (3,000)
--------- ------- -------
Outstanding at December 31, 2003 1,131,300 329,037 125,250
Granted 30,000
Cancelled or expired (144,751) (12,000)
Vested (53,550)
Exercised (12,497) (14,500)
--------- ------- -------
Outstanding at December 31, 2004 974,052 275,487 128,750
========= ======= =======
Available for future grant 151,848 0 58,250
========= ======= =======
Under the 1990 Option Plan, the exercise price for options granted in 2002
and 2003 was $1.55 and $2.20, respectively. The weighted average exercise
price for the options outstanding under the Option Plan is $4.08 with
expiration dates ranging from 2010 to 2013. Options were exercised under the
Option Plan at weighted average exercise prices of $1.55 and $1.65 in 2003
and 2004, respectively. Shares exercisable under the Option Plan and weighted
average exercise price at December 31, 2002, 2003 and 2004 were 580,892 and
$7.32, 681,764 and $6.53 and 708,058 and 4.88, respectively. The weighted
average remaining lives for options outstanding at December 31, 2002, 2003
and 2004 were 6.6, 7.3 and 8.25 years, respectively.
Under the Restricted Stock Plan compensation expense was $208,000, $228,000
and $220,000 in 2004, 2003 and 2002, respectively.
The exercise price for options granted under the Directors' Stock Option Plan
in 2002 ranged from $1.45 to $2.00, for options granted in 2003 was $2.11 and
for options granted in 2004 was $3.50. The weighted average exercise price
for the options outstanding under the plan is $3.68 with expiration dates
ranging from 2005 to 2014. No options were exercised in 2002 and 2003; in
2004, options with a weighted average exercise price of $1.93 were exercised.
Shares exercisable at December 31, 2002, 2003 and 2004 were 62,250, 101,250
and 104,750, respectively. The weighted average remaining lives for options
outstanding at December 31, 2002, 2003 and 2004 were 7.0, 7.6 and 7.63 years,
respectively.
Note L. Cumulative Other Comprehensive Loss
Cumulative other comprehensive loss consists of the following at December 31
(in thousands):
2004 2003 2002
---- ---- ----
Cumulative translation adjustment $ 171 $ 50 $ (79)
Minimum pension liability net of tax of $128 (396) (148) (219)
----- ----- -----
$(225) $ (98) $(298)
===== ===== =====
Note M. Related Party Transactions
Prior to August 2002 the Company had advanced amounts to officers primarily
for personal income taxes related to various stock option plans. The amounts
outstanding at December 31, 2004 and 2003 of $1,968,000 and $1,931,000
include interest accrued on the advances. This indebtedness bears interest
at rates approximating market rates and is payable upon demand. No advances
have been made since July 2002.
Note N. Operations by Industry Segment and Geographic Areas
The Company operates in two segments. 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, primarily contact centers. Information about the
Company's operations by segment and geographic area for the years ended
December 31, is as follows (in thousands):
2004 2003 2002
---- ---- ----
Net sales
United States $ 8,699 $ 5,096 $ 5,536
Europe 5,526 5,161 5,763
------- ------- -------
$14,225 $10,257 $11,299
======= ======= =======
Operating profit (loss)
United States $ 739 $(3,047) $(5,115)
Europe (224) (68) (75)
Intercompany eliminations 11 19
------- ------- -------
515 (3,104) (5,171)
General corporate expenses 1,165 1,390 1,094
Other (income) expense, net (151) (1,007) (206)
------- ------- -------
Income (loss) before income taxes $ (499) $(3,487) $(6,059)
======= ======= =======
Total assets
United States $16,773 $16,042 $20,164
Europe 2,183 2,856 2,655
Intercompany eliminations (7)
------- ------- -------
$18,956 $18,898 $22,812
======= ======= =======
Long-lived assets
United States $ 953 $ 1,160 $ 1,485
Europe 435 395 473
------- ------- -------
$ 1,388 $ 1,555 $ 1,958
======= ======= =======
Expenditures for long-lived assets
United States $ 123 $ 180 $ 570
Europe 81 26 53
------- ------- -------
$ 204 $ 206 $ 623
======= ======= =======
Depreciation and amortization
United States $ 351 $ 502 $ 588
Europe 47 110 165
Intercompany eliminations (10)
------- ------- -------
$ 398 $ 612 $ 743
======= ======= =======
The United States operations had net sales of $6.8 million, $2.8 million and
$1.6 million in 2004, 2003 and 2002, respectively, to one major customer and
sales of $.4 million, $1.1 million and $1.4 million in 2004, 2003 and 2002
to another major customer. The European operations had sales of $2.9 million,
$3.0 million and $2.2 million in 2004, 2003 and 2002, respectively, to one
customer.
Note O. QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands except per
share amounts)
2004 First Second Third Fourth
- ---- ----- ------ ----- ------
Sales $2,261 $4,243 $1,889 $5,832
Gross profit 748 2,499 713 3,794
Net income (loss) (1,351) 376 (1,348) 1,769
Net income (loss) per share:
Basic $(.24) $.07 $(.23) $ .30
Diluted (.24) .06 (.23) .28
2003 First Second Third Fourth
- ---- ----- ------ ----- ------
Sales $2,496 $2,448 $3,498 $1,815
Gross profit 918 990 1,860 428
Net loss (1,325) (326) (466) (1,433)
Net loss per share:
Basic $(.24) $(.06) $(.08) $(.25)
Diluted (.24) (.06) (.08) (.25)
The gross margin percentage for the fourth quarter of 2004 was 65%
versus 47% for the first nine months of 2004 due to increased volume and an
improved product mix. The gross margin percentage for the fourth quarter of
2003 was 24% versus 45% for the first nine months of 2003 primarily due to
lower volume and lower absorption of overhead.
Included in the second quarter of 2003 was a non-cash gain of $.8
million due to the termination of the Company's postretirement health benefits
plan.
Included in the third quarter of 2003 was an expense of $.2 million
for the estimated settlement of a rent dispute in the UK distributorship
operations. Due to the satisfactory resolution of the company's claim against
a third party, this amount was reversed in the fourth quarter of 2003.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9a. Controls and Procedures
Quarterly Evaluation. The Company's management carried out an
evaluation as of December 31, 2004 of the effectiveness of the design and
operation of the Company's "disclosure controls and procedures," which the
Company refers to as the Company's disclosure controls. This evaluation was
done under the supervision and with the participation of Company management,
including the Chief Executive Officer and Chief Financial Officer. Rules
adopted by the Commission require that the Company present the conclusions of
the Chief Executive Officer and Chief Financial Officer about the
effectiveness of the Company's disclosure controls as of the end of the period
covered by this annual report.
CEO and CFO Certifications. Included as Exhibits 31.1 and 31.2 to
this Annual Report on Form 10-K are forms of "Certification" of the Company's
Chief Executive Officer and Chief Financial Officer. The forms of
Certification are required in accordance with Section 302 of the Sarbanes-
Oxley Act of 2002. This section of the Annual Report on Form 10-K is the
information concerning the evaluation referred to in the Section 302
certifications. This information should be read in conjunction with the
Section 302 certifications for a more complete understanding of the topics
presented.
Disclosure Controls and Procedures and Internal Control over Financial
Reporting. Disclosure controls and procedures are designed with the objective
of ensuring that information required to be disclosed in the Company's reports
filed or submitted under the Exchange Act, such as this Annual Report on Form
10-K, is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms. Disclosure controls and
procedures are also designed with the objective of ensuring that such
information is accumulated and communicated to Company management, including
the Company's Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Internal control over financial reporting is a process designed by, or
under the supervision of, the Company's Chief Executive Officer and Chief
Financial Officer, and effected by the Company's Board of Directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
* pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the Company's assets;
* provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
the Company's receipts and expenditures are being made only in
accordance with authorizations of management or the Company's Board
of Directors; and
* provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material adverse effect on the
Company's financial statements.
Limitations on the Effectiveness of Controls. Management, including
the Company's Chief Executive Officer and Chief Financial Officer, do not
expect that the Company's disclosure controls and procedures or internal
control over financial reporting will prevent all errors and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the company
have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more people, or by management's override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Scope of the Evaluation of the Company's Disclosure Controls and
Procedures. As of December 31, 2004, the Company carried out an evaluation
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. This evaluation of the Company's disclosure controls
and procedures included a review of the Company's internal audit procedures,
as well as discussions with members of management and others in the Company,
as appropriate. In the course of the evaluation, the Company sought to
identify data errors, control problems or acts of fraud and to confirm that
appropriate corrective action, including process improvements were being
undertaken. The overall goals of these various evaluation activities are to
monitor the company's disclosure controls and procedures and to make
modifications as necessary. The Company's intent in this regard is that the
disclosure controls and procedures will be maintained as systems that change
(including with improvements and corrections) as conditions warrant. Among
other matters, the Company sought in this evaluation to determine whether
there were any "significant deficiencies" or "material weaknesses" in the
company's internal control over financial reporting, or whether the Company
had identified any acts of fraud involving personnel who have a significant
role in the Company's internal control over financial reporting. The Company
also sought to deal with other control matters in the evaluation, and in any
case in which a problem was identified, management considered what revision,
improvement and/or correction was necessary to be made in accordance with the
Company's on-going procedures.
Periodic Evaluation and Conclusion of Disclosure Controls and
Procedures. As of December 31, 2004, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including its Chief Executive Officer and its Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that such controls and procedures were
effective as of December 31, 2004.
Scope of the Evaluation of the Company's Internal Control Over
Financial Reporting. As with the Company's evaluation of its disclosure
controls and procedures, the evaluation by the Company's Chief Executive
Officer and Chief Financial Office of the Company's internal control over
financial reporting included a review, in conjunction with the Company's
internal auditors and others in the Company's organization, of the Company's
procedures relating to the reliability of the Company's financial reporting
and preparation of the Company's financial statements in accordance with
generally accepted accounting principles ("GAAP"). Among other matters,
the Company sought in its evaluation to determine whether there were any
"significant deficiencies" or "material weaknesses" in its internal control
over financial reporting, or whether the Company had identified any acts of
fraud involving personnel who have a significant role in the Company's
internal control over financial reporting. This information is important
both for the evaluation generally and because the Section 302 certifications
require that the Company's Chief Executive Officer and Chief Financial Officer
disclose that information to the Audit Committee of the Board of Directors and
the Company's independent auditors and also require the Company to report on
related matters in this section of the report on Form10-K. In the
professional auditing literature, "significant deficiencies" are referred to
as "reportable conditions"; these are control issues that could have a
significant adverse effect on the company's ability to record, process,
summarize and report financial data reliably, in accordance with GAAP,
in the Company's external financial statements. A "material weakness" is
defined in the auditing literature as a significant deficiency where the
internal control does not reduce to a relatively low risk that misstatements
caused by error or fraud may occur in amounts that would be material in
relation to the financial statements and would not be detected within a timely
period by employees in the normal course of performing their assigned
functions. In addition to evaluating the Company's internal control over
financial reporting, the Company is documenting and testing the Company's
internal control over financial reporting so that management will be able to
report on, and the Company's independent auditors will be able to attest to,
the Company's internal control over financial reporting as of December 31,
2005, as required by applicable laws and regulations, and the Company will
continue to remediate its internal controls to the extent that the Company's
testing reveals inadequacies in its controls. Management believes that the
Company had adequate internal control over financial reporting but cannot be
certain that, since there is no precedent available by which the Company can
measure the adequacy of its control system in advance, the Company or the
Company's independent auditors will be able to complete all the required
testing of controls to attest to the Company's assessment of these controls
on a timely basis.
Changes in Internal Control Over Financial Reporting. During the
three months ended December 31, 2004, there were no changes in the Company's
internal control over financial reporting that has materially affected, or
are reasonably likely to materially affect, the Company's internal control
for financial reporting.
Item 9b. Other Information
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information appearing under the captions Information Concerning
Nominees, Qualification of Audit Committee Members, Code of Ethics, and
Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy
Statement for the annual meeting of stockholders to be held on May 12, 2005
is incorporated herein by reference.
The identification of the executive officers of the Company and their
positions with the Company and ages as of March 1, 2004 is set forth under
the caption Executive Officers of the Company in Part I of this Annual Report
on Form 10-K.
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 12, 2005 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security ownership of certain beneficial owners and management and
securities authorized for issuance under equity compensation plans set forth
under the captions Security Ownership and Equity Compensation Plan
Information, respectively, in the Proxy Statement for the annual meeting of
stockholders to be held on May 12, 2005 is incorporated herein by reference.
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 12, 2005 is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information on fees charged by the principal accountant set
forth under the caption Independent Auditors' Fees in the Proxy Statement
for the annual meeting of stockholders to be held on May 12, 2005 is
incorporated herein by reference.
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 31 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 31 of this Annual Report on Form 10-K.
(b) There was one report filed on Form 8-K during the fourth quarter
of 2004. On November 12, 2004, the Company filed a current report on
Form 8-K pursuant to Item 9 (Regulation F Disclosures) to furnish a press
release reporting results of the third quarter of 2004.
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 30, 2005.
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 30, 2005.
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. Connors Director
John T. Connors
/s/ Jack Meehan Director
Jack Meehan
/s/ William A. Merritt Director
William A. Merritt
/s/ William J. Stuart Director
William J. Stuart
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 Reports of Independent Registered Public
Accounting Firms: Page
Reports of Independent Registered Public Accounting Firms 12
Consolidated Balance Sheets, December 31, 2004 and 2003 14
Consolidated Statements of Operations and Comprehensive Loss
for each of the three years in the period ended December 31, 2004 15
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 2004 16
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2004 17
Notes to Consolidated Financial Statements 18
(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 September 29, 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 14, 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 August 15, 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 May 26, 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 September 1, 1999 (attached as Exhibit 3 to this
Annual Report on Form 10-K).
3.10 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).
3.11 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, 2003 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 (Exhibit 10.3 to
Annual Report on Form 10-K for the year ended December 31, 2002 and
incorporated herein by reference).
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).
10.6 Cognitronics Corporation Restricted Stock Plan (Exhibit 10.2 to
Quarterly Report on Form 10-Q for the period ended June 30, 2003 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 (Exhibit 10.3 to
Quarterly Report on form 10-Q for the period ended June 30, 2003 and
incorporated herein by reference).
21. List of subsidiaries of the Company as of December 31, 2004 (attached
as Exhibit 21 to this Annual Report on Form 10-K).
23.1 Consent of Independent Registered Public Accounting Firm, dated
March 30, 2005 (attached as Exhibit 23 to this Annual Report on
Form 10-K).
23.2 Consent of former Independent Registered Public Accounting Firm, dated
March 30, 2005 (attached as Exhibit 23.2 to this Annual Report on
Form 10-K).
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14 as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(attached as Exhibit 31.1 to this Annual Report on Form 10-K).
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14 as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(attached as Exhibit 31.2 to this Annual Report on Form 10-K).
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (attached as Exhibit 32.1 to this Annual Report on
Form 10-K).
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (attached as Exhibit 32.2 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).