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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee required)
For the fiscal year ended December 31, 1997,
or
[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from to
Commission file number 0-3035
COGNITRONICS CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-1953544
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Corporate Drive, Danbury, Connecticut 06810
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 830-3400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, par value $0.20 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1998:
Common Stock, par value $0.20 per share -- $ 55,777,000
The number of shares outstanding of each of the issuer's classes of common
stock as of March 1, 1998:
Common Stock, par value $0.20 per share -- 3,668,017 shares
Documents incorporated by reference: Portions of the Proxy Statement for the
annual meeting of stockholders to be held on May 14, 1998 are incorporated by
reference into Part III.
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TABLE OF CONTENTS
PART I
Item Page
1. Business 3
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
Executive Officers of the Company 6
PART II
5. Market for Company's Common Equity and Related
Stockholder Matters 7
6. Selected Financial Data 7
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
8. Financial Statements and Supplementary Data 10
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 23
PART III
10. Directors and Executive Officers of the Company 24
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners and Management 24
13. Certain Relationships and Related Transactions 24
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 24
McIAS is a trademark of Cognitronics Corporation.
UNIX is a registered trademark of Santa Cruz Operation, Inc.
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PART I
Item 1. Business
(a) Cognitronics Corporation (the "Company") was incorporated in January
1962 under the laws of the State of New York. The Company designs, manufactures
and markets voice processing systems.
(b) The Company operates in one industry segment: voice processing
products.
(c) (i) A description of the fields of voice processing in which the
Company operates and its products are as follows:
Passive Announcers. These announcers are used by the Incumbent Local
Exchange Carriers (ILECs) and Competitive Local Exchange Carriers (CLECs) to
inform callers about network conditions or procedures to invoke the use of a
service. The Company has been a major supplier to the industry of passive
announcers and incorporates these features in products such as the Model 688
Automatic Number Announcer, McIAS(TradeMark); 950, and the McIAS 16xx product
family. These products are purchased directly or through switch manufacturers
who distribute the Company's products.
Intelligent Announcers. The Company's McIAS 16xx product family has been
primarily used by ILECs and CLECs to provide voice announcements in connection
with custom calling features (CLASS), such as selective call forwarding and
caller originator trace. Number change intercept is another important feature
provided.
The Company's current generation of network-based voice information systems
is known as the McIAS 16xx series. The 16xx is available in two versions: a
lower cost configuration which provides network announcement functionality, is
available as a 1607/68 (1 T-1 span capacity) and a 1610/68 (3 T-1 span
capacity). The second version of this series is a UNIX(RegisteredTradeMark);-
based platform which utilizes many of the same components as the /68 series and
is known as McIAS 16xx/IP. "IP" designates an Intelligent Peripheral,
indicating the ability to serve as a voice peripheral to any manufacturer's
switch and delivering multiple application capability.
The McIAS 16xx/IP is available as a 1607/IP, a 1610/IP, and a 1623/IP.
Features include an open architecture, scaleable processing power and disk
drives, and centralized administration. Application examples include, or will
include, number change with call completion, automated attendant, voice mail,
interactive voice response, prepaid calling cards, audiotext, and time and
temperature announcements. The evolution of this product line is expected to
continue in 1998 with the release of an all-VME based 1623, providing greater
capacity for advanced functionality, including SS7 capabilities, and a DSP-based
line interface card, T1, E1 and ISDN Primary Rate interfaces, which can be
utilized to deliver additional capabilities such as voice activated dialing,
voice recognition and text to speech. The Company believes that this technology
will provide for a successful entry into the Advanced Intelligent Network
market.
Call Processors. The Company's McIAS 950 is also an automated attendant
and audiotext system with the flexibility to offer the caller various choices
(dial an extension, revert to an operator, etc.). The system also offers a wide
variety of menu-selected information to callers. The McIAS 950 is designed for
use in both telephone network environments and the commercial business market.
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European Distributorship Operations. Dacon Electronics Plc., based in
Hertfordshire, England, distributes call management and voice processing
products, including products manufactured by the Company, in Europe.
(ii) Status of publicly announced new products or industry segments
requiring material investment. Inapplicable.
(iii) The Company has adequate sources for obtaining raw materials,
components and supplies to meet production requirements and did not
experience difficulty during 1997 in obtaining such materials 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 1997, revenues included sales of $7.4 million to Northern
Telecom, Inc., sales of $5.4 million to Siemens Telecom Network and sales of
$2.4 million to GTE Corporation. The Company's U.K. operations had sales of
$5.0 million to British Telecommunications Plc in 1997. Over the past several
years, a major portion of the revenues of the domestic operations has come from
two or three large customers, and a significant portion of the revenues of the
UK operations has come from one customer. Accordingly, the loss of any of
these customers could have a material adverse impact on the Company's results of
operations.
(viii) The dollar amount of orders believed by the Company to be
firm as of December 31, 1997 and 1996, amounted to $1.6 million and $2.0
million, respectively. Substantially all of the orders as of December 31,
1997, can reasonably be expected to be filled during 1998.
(ix) Business subject to renegotiation. Inapplicable.
(x) The Company competes, and expects to compete, in fields noted
for rapid technological advances and the frequent introduction of new
products and services. The Company's products are similar to those
manufactured, or capable of being manufactured, by a number of companies, some
of which are well-established corporations with financial, personnel and
technical resources substantially larger than those of the Company. The
Company's ability to compete in the future depends on its ability to maintain
the technological and performance advantages of its current products and to
introduce new products and applications that achieve market acceptance. Future
research and development expenditures will be based, in part, on future
results of operations. There are no assurances that the Company will be able
to successfully develop and market new products and applications.
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(xi) Expenditures for research and development activities of
continuing operations, as determined in accordance with generally accepted
accounting principles, amounted to $1.8 million in 1997, $1.6 million in 1996
and $1.5 million in 1995. In addition, the estimated dollar amount spent on
the improvement of existing products or techniques was $.2 million in 1997
and $.1 million in each of the years 1996 and 1995.
(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, 1997, the Company and its subsidiaries
employed 94 people.
(d) Sales to foreign customers primarily represent sales of Dacon
Electronics Plc. (incorporated in the United Kingdom) of $8.0 million in 1997,
$7.3 million in 1996 and $7.5 million in 1995. Additional information about
foreign operations is included in Note L to Consolidated Financial Statements
included in Item 8 of this Annual Report on Form 10-K and is incorporated
herein by reference.
Further, there were export-type sales (primarily North America) of
approximately $1.1 million in 1997 and $.1 million in 1996 and 1995. 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
Location Description Feet Expiration
Date
Danbury, Connecticut: Office, engineering, production 40,000 10/31/03
3 Corporate Drive and service facility
Hemel Hempstead Office, distribution
Hertfordshire, and service facility 12,000 7/31/01
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
In 1993, purported class action lawsuits were filed against the Company
and certain of its officers as follows:
1. Michael Germano v. Cognitronics Corporation and Matthew J. Flanigan
in the United States District Court, District of Connecticut, dated March 15,
1993;
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2. Barry L. Bragger and Eve Gerber vs. Matthew J. Flanigan and
Cognitronics, Inc. in the United States District Court, District of Connecticut
dated March 16, 1993; and
3. John M. Mitnick, on behalf of himself and all other similarly
situated v. Cognitronics Corp., Matthew J. Flanigan and G. Sullivan in the
United States District Court for the Northern District of Georgia, Atlanta
Division, dated March 15, 1993.
These actions were consolidated in the United States District Court in
Connecticut and a consolidated amended complaint was filed on July 8, 1993.
The consolidated lawsuit alleges securities law violations in connection with
the purchase of the Company's common stock by members of the classes during
the period from October 29, 1992 through March 12, 1993 (the "Class Period").
The plaintiffs seek unspecified damages and related costs. On January 28,
1998, the plaintiffs and the defendants and their insurer reached an agreement
to settle this litigation, which provides for the payment of an aggregate of
$2.3 million by the defendants and their insurer and the complete release of
all claims by the plaintiffs against the defendants and all other persons who
were directors or officers of the Company during the Class Period. As of
December 31, 1997, the Company has recorded a liability for its portion of
this settlement. The agreement is contingent upon approval by the Court of a
Stipulation of Settlement to be executed by the parties. The Company has
denied any fault or wrongdoing in this matter. If the Stipulation of Settlement
is not approved by the Court and if the lawsuit is adversely determined, the
resolution of this matter could have a material negative effect on the Company's
financial condition, results of operations and cash flow.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
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Executive Officers of the Company
The executive officers of the Company, their positions with the Company and
ages as of March 1, 1998 are as follows:
Name Position(s) and Office(s) Age
Brian J. Kelley President and Chief Executive Officer; Director 46
Kenneth G. Brix Vice President 51
Harold F. Mayer Secretary 68
Michael N. Keefe Vice President 42
Roy A. Strutt Vice President; Director 41
Garrett Sullivan Treasurer and Chief Financial Officer 52
Emmanuel A. Zizzo Vice President 57
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 was Executive Vice President of
TIE/Communications, Inc. from 1991 to 1994 with responsibility for business
development, acquisitions and product management, President of CTG Inc., a
subsidiary of TIE/Canada, Inc., from 1990 to 1991 and President of TIE National
Accounts, Inc., a subsidiary of TIE/Communications, Inc., from 1986 to 1990.
Mr. Brix has been a Vice President of the Company since 1994 with
responsibility for U.S. sales and marketing. Prior to that he was Director of
Sales and Marketing of Syntellect Network Systems, Inc. from 1993 to 1994,
Regional Vice President of Voicetek Corp. from 1990 to 1993 and President of
Voicecom Associates, Inc. from 1987 to 1990.
Mr. Mayer has been Secretary of the Company since 1975. He was Treasurer
from 1974 to 1989 and a Vice President of the Company from 1986 to 1996.
Mr. Keefe has been a Vice President of the Company since 1993 with
responsibility for engineering, prior to which he was Manager of Software
Planning and Development from 1992 until 1993 and senior engineer for more
than five years. He has been employed by the Company since 1980.
Mr. Strutt has been a Vice President of the Company since 1994 with
responsibility for European operations. Since 1992, he has been Managing
Director of Dacon Electronics Plc, which was acquired by the Company in 1992,
and Director of Sales and Operations from 1990 to 1992. Prior to that he was
Managing Director of Automatic Answering Ltd. for four years.
Mr. Sullivan has been Treasurer and Chief Financial Officer of the
Company since 1989. Prior to that he was Treasurer and Chief Financial Officer
of Fundsnet, Inc., an electronic funds transfer company, from 1986 until 1989.
He was employed by The Singer Co. from 1977 to 1986, where his most recent
position was Vice President-Finance, Asia Division.
Mr. Zizzo has been a Vice President of the Company since 1995 with
responsibility for operations, primarily manufacturing, purchasing and physical
facilities, prior to which he had been Director of Operations since 1994. He
was an independent consultant from 1993 to 1994. Prior to that he was a Vice
President of TIE/Communications, Inc. from 1991 to 1992, a Vice President of CTG
Inc., a subsidiary of TIE/Canada, Inc., from 1990 to 1991 and Director of
Customer Support Services of TIE/Communications, Inc. for more than five years.
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PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
(a) and (b) Cognitronics' stock is traded on the American Stock Exchange
under the symbol CGN. On March 1, 1998, there were 847 shareholders of record;
the Company estimates that the total number of beneficial owners was
approximately 4,000. Information on quarterly stock prices is set forth in
Item 8 of this Annual Report on this 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. The Company has no
present intention of paying a cash dividend, and payment of any future
dividends will depend upon the Company's earnings, financial condition and
other relevant factors.
Item 6. Selected Financial Data
Year ended December 31,
(in thousands except per share data)
OPERATING RESULTS 1997 1996 1995 1994 1993
Revenues $29,521 $17,343 $17,485 $14,576 $16,417
Income (loss) from continuing
operations 3,622 1,099 1,321 (297) (1,942)
Income (loss) from discontinued
operations (386)
Cumulative effect of accounting
changes (471)
Net income (loss) 3,622 1,099 1,321 (297) (2,799)
Basic net income (loss) per share:
Continuing operations $1.04 $.32 $.40 $(.09) $(.60)
Discontinued operations (.12)
Cumulative effect of
accounting changes (.15)
Net income (loss) 1.04 .32 .40 (.09) (.87)
Diluted net income (loss) per share:
Continuing operations $.93 $.31 $.38 $(.09) $(.60)
Discontinued operations (.12)
Cumulative effect of accounting
changes (.15)
Net income (loss) .93 .31 .38 (.09) (.87)
Weighted average number of basic
shares outstanding 3,489 3,383 3,278 3,144 3,206
Weighted average number of diluted
shares outstanding 3,893 3,585 3,438 3,144 3,206
FINANCIAL POSITION
Working capital $13,112 $ 8,745 $ 7,374 $ 4,956 $ 2,726
Total assets 23,123 17,511 15,040 14,180 15,449
Common stock subject to repurchase 1,250 1,250
Stockholders' equity 15,014 10,612 9,044 7,042 7,193
Stockholders' equity per share $4.09 $3.05 $2.63 $2.25 $2.37
Cash dividends paid None None None None None
Included in 1997 is $956,000 (net of tax $598,000 or $.17 per basic share and
$.15 per diluted share) of settlement costs and legal fees related to the class
action lawsuits.
Net income (loss) per share and weighted average number of shares outstanding
have been restated to comply with Statement of Financial Accounting Standards
No. 128.
9
The above Selected Financial Data should be read in conjunction with the
Consolidated Financial Statements of the Company, including the notes thereto,
and the unaudited quarterly financial data included in Item 8 of this Annual
Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company reported net income of $3.6 million, $1.1 million and $1.3
million for 1997, 1996 and 1995, respectively.
In 1997, sales increased $12.2 million (70%) to $29.5million from $17.3
million in 1996 primarily due to increased sales of $11.5 million (114%) by
the Company's domestic operations. This increase reflects strong demand for
the Company's products, which commenced in the fourth quarter of 1996. Sales
of the domestic operations to original equipment manufacturers increased
approximately $8.4 million in 1997 over 1996, due to increased sales to a switch
manufacturer and large volume sales to a second switch manufacturer. Direct
sales to CLECs increased approximately $2.9 million in 1997 as compared to 1996,
as these telecommunication providers commence to build out their networks.
Sales by the Company's UK distributorship operations increased $.7 million (9%)
from 1996 to $8.0 million due to increased volume. Gross margin percentages for
1997 were comparable to 1996. The Company's backlog at December 31, 1997 was
$1.6 million versus $2.0 million at December 31, 1996. A major portion of the
Company's domestic revenue comes from two customers and a significant portion of
its UK distributorship revenue comes from one customer. The loss of any of
these customers would have a material adverse impact on the Company.
In 1996, sales decreased $.2 million (1%) to $17.3 million from $17.5
million in 1995 primarily due to lower sales of the Company's UK distributorship
operations. Sales of the Company's domestic operations, which for the first
nine months of 1996 were down $.9 million from the comparable period of 1995,
were essentially unchanged from the prior year due to a strong performance in
the fourth quarter of 1996. During 1996, the Company completed the changeover
from its older product lines (McIAS 2100s, 1100s and 1500s) to the McIAS 16xx
family of products. Gross margin percentages for 1996 were comparable to 1995.
In 1997, research and development expense increased $.2 million (13%) to
$1.8 million due to higher personnel costs. In 1996, research and development
increased $.1 million (9%) primarily due to expenses related to certification
testing of McIAS 950 and McIAS 16xx products and higher personnel expenses.
In 1997, selling, general and administrative costs increased $1.6 million
(29%) to $7.0 million. The domestic operations increased $.9 million (29%) to
$4.2 million primarily due to higher sales commissions and bonuses based on
profitability. Selling, general and administrative expenses for the UK
distributorship operations increased $.6 million (30%) to $2.8 million
primarily due to higher personnel and facilities costs. In 1996, selling,
general and administrative costs increased $.4 million (8%) to $5.4 million
from $5.0 million in 1995 primarily due to increased expenses in the Company's
UK distributorship operations related to the relocation to new facilities and
increased personnel. These expenses were incurred in preparation of expanding
the product line; however, these new products have yet to make a significant
contribution to the results of operations.
Litigation expense represents costs accrued to settle the class action
litigation and expenses incurred during the year in defending this matter.
See Note K to the Consolidated Financial Statements.
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Other income was $.2 million in 1997 versus $.1 million in 1996 due to
higher interest income earned on available cash balances. In 1995, the
Company recorded other expense of $.1 million due to higher interest expense
on higher borrowings.
The Company's effective tax rate for 1997 was 39% versus 41% for 1996 and
1995. This reduction is primarily attributable to the decreasing impact of
the non-deductibility of goodwill on the effective tax rate as the pretax
income increases. The provision for income taxes is discussed in Note G to
the Consolidated Financial Statements. Under Financial Accounting Standards
Board ("FASB") Statement No. 109, the Company has recognized future tax
benefits that management believes will be realized. In order to realize these
benefits, the Company, exclusive of the results of Dacon Electronics Plc, will
have to generate pretax income of $5.4 million. The current deferred tax
benefit of $1.0 million is primarily attributable to inventory provisions, the
recognition of such loss, for tax purposes, is, in large measure, within the
control of the Company, and provisions for the class action settlement which
should reverse in 1998. The non-current tax benefit, $.8 million, primarily
relates to deferred compensation and benefit plans and, as such, would be
recognized over a long period of time. The Company's U.S. pretax income (loss)
from continuing operations was $5.3 million, $.8 million and $1.0 million in
1997, 1996 and 1995, respectively. Based on this, management anticipates that
the Company will generate sufficient taxable income in the future to realize
these benefits.
The effect of inflation has not had a major impact on the operating
results of the Company over the past few years. However, technological
advances and productivity improvements are continually being applied to reduce
costs, thus reducing inflationary pressures on the operating results of the
Company.
Liquidity and Sources of Capital
Net cash flow from operations was $4.5 million, $1.2 million and $2.3
million in 1997, 1996 and 1995, respectively.
Working capital increased to $13.1 million at December 31, 1997 from
$8.7 million at December 31, 1996 and $7.4 million at December 31, 1995. The
ratio of current assets to current liabilities was 3.4:1 at December 31, 1997
versus 3.1:1 at December 31, 1996 and 3.3:1 at December 31, 1995. The
increase in 1997 is primarily due to the results of operations in 1997.
The Company anticipates making capital expenditures of approximately $.5
million, paying the amount recorded to settle the class action lawsuits (see
Note K to the Consolidated Financial Statements and Item 3 - Legal
Proceedings) and incurring increased research and development expenditures in
1998. Management believes that the cash and cash equivalents at December 31,
1997 and the cash flow from operations in 1998 will be sufficient to meet its
needs.
Impact of Year 2000
The Year 2000 issue relates to possible failures in computer systems and
computer driven equipment due to the rollover to the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
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Based on a recent assessment, the Company determined that it will be required
to modify or replace significant portions of its business application software
so that its computer systems will function properly with respect to dates in
the year 2000 and thereafter. The Company presently believes that with
modifications to existing software and conversions to new software, the Year
2000 will not pose significant operational problems for its computer systems.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 issue could have a material impact on the
operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company is vulnerable to
suppliers' failure to remediate their own Year 2000 issues.
The Company is nearing the completion of the process of reviewing its products
to determine its exposure, if any, related to the Year 2000 issue.
The Company will utilize both internal and external resources to reprogram, or
replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project no later than March 31, 1999,
which is prior to any anticipated impact on its operating systems and
products. The Company anticipates that expenditures for these programs will
not exceed $.5 million.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification
plans and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from
those anticipated. Furthermore, the Company cannot estimate or predict the
potential adverse consequences, if any, that could result from a third party's
failure to effectively address the issue.
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made
by its employees or information included in its filings with the Securities
and Exchange Commission (including this Form 10-K) may contain statements
which are not historical facts, so-called "forward-looking statements". These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
future results may differ significantly from those stated in any
forward-looking statements. Forward-looking statements involve a number of
risks and uncertainties, including, but not limited to, product demand, pricing,
market acceptance, litigation, risk of dependence on significant customers,
third party suppliers and intellectual property rights, risks in product and
technology development and other risk factors detailed in this Annual Report on
Form 10-K and in the Company's other Securities and Exchange Commission filings.
Further, the Company's sales volume may vary from quarter to quarter as a result
of a variety of factors. Because, in the short term, a significant portion of
the Company's expenses are fixed, sales variances would have a significant
effect on the results of operations.
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Item 8. Financial Statements and Supplementary Data
QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands except per share amounts)
1997 First Second Third Fourth
Sales $5,548 $9,645 $7,245 $7,083
Gross profit 2,895 5,406 3,818 3,704
Net income 504 1,614 941 563
Net income per share:
Basic $.15 $.47 $.27 $.16
Diluted $.14 $.42 $.24 $.14
Common Stock price range:
High $5 3/8 $11 3/4 $19 1/8 $21 3/4
Low 3 11/16 4 9/16 11 7/16 13 11/16
1996 First Second Third Fourth
Sales $3,765 $5,051 $3,720 $4,807
Gross profit 1,790 2,685 1,989 2,652
Net income 108 430 128 433
Net income per share:
Basic $.03 $.13 $.04 $.13
Diluted $.03 $.12 $ .04 $.12
Common Stock price range:
High $6 13/16 $5 1/2 $5 $4 13/16
Low 3 3/4 3 7/8 3 3/8 3 3/16
Included in the fourth quarter of 1997 is $915,000 (net of tax - $572,000,
$.16 per basic share and $.14 per diluted share) for settlement costs and
legal fees related to the class action lawsuits.
The above financial information should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto.
13
Report of Independent Auditors
Stockholders and Board of Directors
Cognitronics Corporation
We have audited the accompanying consolidated balance sheets of Cognitronics
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cognitronics
Corporation and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 6, 1998
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CONSOLIDATED BALANCE SHEETS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(dollars in thousands)
December 31,
1997 1996
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,088 $ 4,169
Accounts receivable, less allowances
of $38 and $103 4,300 3,624
Inventories 4,386 3,877
Deferred income taxes 1,023 625
Other current assets 1,050 587
------- -------
TOTAL CURRENT ASSETS 18,847 12,882
PROPERTY, PLANT AND EQUIPMENT, net 1,223 1,701
GOODWILL, less amortization of $1,729 and $1,396 1,648 1,981
DEFERRED INCOME TAXES 769 822
OTHER ASSETS 636 125
------- -------
$23,123 $17,511
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,378 $ 1,700
Accrued compensation and benefits 1,051 748
Income taxes payable 317 772
Current maturities of debt 114 86
Other accrued expenses 1,875 831
------- -------
5,735 4,137
LONG-TERM DEBT 111 379
OTHER NON-CURRENT LIABILITIES 2,263 2,383
COMMITMENTS AND CONTINGENCIES (Notes I and K)
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a share; authorized
10,000,000 shares; issued 3,667,351 and
3,475,573 shares 733 695
Additional paid-in capital 13,209 12,250
Retained earnings 1,067 (2,354)
Currency translation adjustment 24 177
Unearned compensation (19) (156)
------- -------
TOTAL STOCKHOLDERS' EQUITY 15,014 10,612
------- -------
$23,123 $17,511
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
15
CONSOLIDATED STATEMENTS OF INCOME
COGNITRONICS CORPORATION AND SUBSIDIARIES
(in thousands except per share data)
Year ended December 31,
1997 1996 1995
---- ---- ----
SALES $29,521 $17,343 $17,485
COSTS AND EXPENSES
Cost of products sold 13,698 8,227 8,326
Research and development 1,807 1,600 1,472
Selling, general and administrative 6,972 5,394 4,990
Amortization of goodwill 333 332 333
Class action litigation 956
Other (income) expense, net (165) (80) 129
------- ------- -------
23,601 15,473 15,250
------- ------- -------
Income before income taxes 5,920 1,870 2,235
PROVISION FOR INCOME TAXES 2,298 771 914
------- ------- -------
NET INCOME $ 3,622 $ 1,099 $ 1,321
======= ======= =======
NET INCOME PER SHARE:
Basic $1.04 $.32 $.40
Diluted $.93 $.31 $.38
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1995, 1996 and 1997
(dollars in thousands)
Common Stock Additional Currency Unearned Treasury
Shares Paid-In Retained Transla- Compensa- Shares
Outstanding Amount Capital Earnings tion tion Amount
----------- ------ ---------- -------- --------- --------- ------
Balance at January 1, 1995 3,131,550 $633 $11,423 $(4,774) $(48) $ 0 $(192)
Shares issued to Dacon shareholders 106,383 21 189
Warrants issued to Dacon shareholders 35
Shares issued pursuant to employee stock plans 198,568 33 495 (265) 192
Shares issued to Directors as compensation 1,435 4
Effect of exchange rate (23)
Net income 1,321
--------- ---- ------- ------- ---- ----- -----
Balance at December 31, 1995 3,437,936 687 12,146 (3,453) (71) (265) 0
Shares issued pursuant to employee stock plans 37,637 8 104 109
Effect of exchange rate 248
Net income 1,099
--------- ---- ------- ------- ---- ----- -----
Balance at December 31, 1996 3,475,573 695 12,250 (2,354) 177 (156) 0
Shares issued pursuant to employee stock plans 211,388 42 1,129 137
Shares returned to pay statutory withholding tax (19,610) (4) (170) (201)
Effect of exchange rate (153)
Net income 3,622
--------- ---- ------- ------- ---- ----- ------
Balance at December 31, 1997 3,667,351 $733 $13,209 $ 1,067 $ 24 $ (19) $ 0
========= ==== ======= ======= ==== ===== ======
The accompanying notes to consolidated financial statements are an integral part of these statements.
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(in thousands) Year ended December 31,
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES
Net income $3,622 $1,099 $1,321
Adjustments to reconcile net income to
net cash provided by operating
activities:
Income tax expense 2,298 771 914
Depreciation and amortization 758 690 684
Loss on disposition of assets 3 62 21
Shares issued as compensation 188 109 198
Net (increase) decrease in:
Accounts receivable (750) (667) (546)
Inventories (602) (741) (311)
Other assets (459) 15 150
Net increase (decrease) in:
Accounts payable 732 904 (337)
Accrued compensation and benefits 191 (78) 121
Other accrued expenses 1,218 (19) 195
------ ------ ------
7,199 2,145 2,410
Income taxes paid (2,712) (974) (80)
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,487 1,171 2,330
------ ------ ------
INVESTING ACTIVITIES
Proceeds from disposition of assets 387 24 26
Additions to property, plant and equipment (381) (846) (286)
Purchase of software licenses (528)
------ ------ ------
NET CASH USED BY INVESTING ACTIVITIES (522) (822) (260)
------ ------ ------
FINANCING ACTIVITIES
Shares subject to repurchase pursuant
to the Dacon acquisition (500)
Principal payments on debt (433) (213) (1,715)
Issuance of debt 210 192 725
Shares issued pursuant to employee
stock plans 611 93 165
Shares returned to pay statutory
withholding tax upon vesting of
restricted stock (375)
------ ------- -------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 13 72 (1,325)
------ ------ -------
EFFECT OF EXCHANGE RATE DIFFERENCES (59) 80 (17)
------ ------ -------
INCREASE IN CASH AND CASH EQUIVALENTS 3,919 501 728
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 4,169 3,668 2,940
------ ------ ------
CASH AND CASH EQUIVALENTS - END OF YEAR $8,088 $4,169 $3,668
====== ====== ======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COGNITRONICS CORPORATION AND SUBSIDIARIES
Note A. Summary of Significant Accounting Policies
Organization. The Company designs, manufactures and markets voice processing
products in the United States and, through a subsidiary, distributes call
management and voice processing equipment in Europe.
Risks and Uncertainties. A major portion of the Company's domestic revenues
is generated by sales to two customers, and a significant portion of its
European distributorship revenue comes from one customer. The loss of any of
these customers would have a material adverse impact on the Company. The
Company's receivables are primarily from major, well-established companies in
the telecommunications industry, and at December 31, 1997, three such
companies accounted for 54 % 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.
Use of Estimates. The preparation of the financial statements in conformity
with generally accepted accounting principals 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) 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, 1997, essentially all of the Company's cash and
cash equivalent balances were with three financial institutions.
Inventories. Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property, Plant and Equipment. Property, plant and equipment is carried at
cost less allowances for depreciation, computed in accordance with the
straight-line method based on estimated useful lives.
Foreign Exchange. Results of operations for the Company's foreign subsidiary
were translated into U.S. dollars using average exchange rates during the
period, while assets and liabilities were translated using current rates at
the end of the period.
18
Stock Based Compensation. The Company grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair value at the
date of grant. The Company accounts for stock option grants in accordance
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees", and therefore recognizes no compensation expense
for stock options granted. In 1996, the Company adopted the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" (see Note J).
Income Per Share. In December 1997, the Company adopted SFAS No. 128 and
restated prior periods. Under this statement, primary and fully diluted
earnings per share were replaced with basic and diluted earnings per share,
respectively. In computing basic earnings per share, the dilutive effect of
stock options and warrants are excluded. The shares used in the basic
earnings per share calculations were 3,488,943, 3,382,603, and 3,278,211 and
in the diluted earnings per share were 3,893,210, 3,585,269 and 3,437,761 for
1997, 1996 and 1995, respectively.
Goodwill. The Company has classified as goodwill the cost in excess of fair
value of the net assets of companies acquired in purchase transactions.
Goodwill is amortized using the straight-line method over its estimated useful
life (10 years). Goodwill in excess of associated expected operating cash
flows is considered to be impaired and is written down to fair value.
New Accounting Pronouncements. During 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 is effective for the first quarter of 1998, while
SFAS No. 131 is effective for year end financial reporting in 1998 and on an
interim basis thereafter. Both of these pronouncements require additional
disclosures and the Company expects no material impact upon adoption.
Note B. Valuation and Qualifying Accounts
The allowance for doubtful accounts was (decreased) increased by $(12,000),
$35,000 and $84,000 in 1997, 1996 and 1995, respectively, by (credits) charges
to costs and expenses. In 1995, the Company reclassified an allowance of
$169,000, together with the related receivables to other assets. The Company
wrote off uncollectible accounts, net of recoveries, of $53,000 and $15,000 in
1997 and 1996, respectively.
Note C. Inventories (in thousands):
1997 1996
Finished and in process $3,450 $2,682
Materials and purchased parts 936 1,195
------ ------
$4,386 $3,877
====== ======
19
Note D. Property, Plant and Equipment (in thousands):
1997 1996
Building $ 425
Machinery and equipment $1,383 1,230
Furniture and fixtures 1,755 1,694
------ ------
3,138 3,349
Less allowances for depreciation 1,915 1,648
------ ------
$1,223 $1,701
====== ======
Note E. Other Non-current Liabilities (in thousands):
1997 1996
Accrued officers' supplemental pension plan expense $ 667 $ 702
Accrued deferred compensation 324 332
Accrued pension expense 670 713
Accrued postretirement benefit liability 778 813
------ ------
2,439 2,560
Less current portion 176 177
------ ------
$2,263 $2,383
====== ======
Note F. Debt and Credit Arrangements
The Company has a $2,000,000 line of credit maturing in July, 1998. Borrowings
under this arrangement are subject to various financial covenants, are due on
demand, are based on the amount of eligible accounts receivable, as defined,
bear interest at the prime rate and are secured by substantially all of the
Company's assets. In 1997 and 1996, no amounts were borrowed under lines of
credit.
Dacon Electronics Plc has a bank line of credit of $160,000 expiring in 1998.
During 1997 and 1996, no amounts were borrowed under this facility.
Long term debt (in thousands):
1997 1996
---- ----
Mortgage note, interest at 12% per annum $267
Installment finance agreements, interest at 10% to 12%
per annum expiring through 2001 $225 198
---- ----
225 465
Less current maturities of debt 114 86
---- ----
$111 $379
==== ====
Payments on the installment finance agreements in each of the five years in
the period ending December 31, 2002 are $114,000, $83,000, $18,000, $10,000
and $0, respectively.
Interest of $53,000, $63,000 and $141,000 was paid in 1997, 1996 and 1995,
respectively.
Note G. Income Taxes
At December 31, 1997, the consolidated retained earnings included
approximately $2.1 million of retained earnings applicable to Dacon
Electronics Plc, a foreign subsidiary. If the undistributed earnings were
20
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):
1997 1996 1995
Current: ---- ---- ----
Federal $2,023 $359 $245
Foreign 310 480 515
State 310 71 40
------ ---- ----
Total current $2,643 910 800
Deferred:
Federal (345) (135) 97
Foreign
State (4) 17
----- ---- ----
Total deferred (345) (139) 114
------ ---- ----
$2,298 $771 $914
====== ==== ====
Not reflected in the 1997, 1996 and 1995 tax provisions are $509,000, $19,000
and $97,000, respectively, of income tax benefits related to employee stock
plans; such amounts were credited to additional paid-in capital.
Domestic and foreign pretax income for the years ended December 31 are as
follows (in thousands):
1997 1996 1995
Domestic operations $5,313 $ 815 $1,015
Foreign Operations 607 1,055 1,220
------ ------ ------
$5,920 $1,870 $2,235
====== ====== ======
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, 1997 and
1996 are as follows (in thousands):
1997 1996
---- ----
Deferred tax liabilities $ 42 $ 69
------- -------
Deferred tax assets:
Inventory valuation 705 597
Accrued liabilities and employee benefits 649 417
Accrued deferred compensation 368 385
Other post-retirement benefits 296 309
Separate return federal operating loss carryforwards
expiring in 2008 and 2009 445 445
Other 57 9
------ ------
Total deferred tax assets 2,520 2,162
Valuation allowance (686) (646)
------ ------
1,834 1,516
------ ------
Net deferred tax assets $1,792 $1,447
====== ======
21
Valuation allowance at January 1 $ (646) $(656)
Credited (charged) to tax expense (40) 10
------ -----
Valuation allowance at December 31 $ (686) $(646)
====== =====
A reconciliation of the statutory federal income tax rate to the effective tax
rate on income for the years ended December 31, are as follows:
1997 1996 1995
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 3.5 2.4 1.7
Lower foreign tax rate (0.2) (0.8) (0.5)
Goodwill amortization 1.9 6.0 5.1
Other (0.4) (0.4) .6
---- ---- ----
38.8% 41.2% 40.9%
==== ==== ====
Note H. Other (Income) Expense, Net (in thousands):
Year Ended December 31,
1997 1996 1995
---- ---- ----
Interest expense $ 74 $ 82 $194
Interest income (239) (164) (70)
Foreign exchange gain 2 5
----- ---- ----
$(165) $(80) $129
===== ==== ====
Note I. Commitments
Leases. Total rental expense amounted to $449,000 in 1997, $377,000 in 1996
and $265,000 in 1995. Future annual payments for long-term noncancellable
leases for each of the five years in the period ending December 31, 2002 are
approximately $429,000, $381,000, $356,000, $303,000 and $217,000,
respectively, and approximately $199,000 thereafter.
Pension Plan. The Company and its domestic subsidiaries have a defined
benefit pension plan covering substantially all employees. The benefits are
based on years of service and the employee's compensation. No additional
service cost benefits were earned subsequent to June 30, 1994. The Company's
funding policy is to contribute amounts to the plan sufficient to meet the
minimum funding requirements set forth in the Employee Retirement Income
Security Act of 1974, plus such additional amounts as the Company may
determine to be appropriate from time to time.
The components of net cost of the plan for the years ended December 31 are as
follows (in thousands):
1997 1996 1995
---- ---- ----
Interest cost on projected benefit obligation $103 $103 $111
Actual return on plan assets (170) (117) (199)
Net amortization and deferral 77 24 120
---- ---- ----
Net periodic pension cost $ 10 $ 10 $ 32
==== ==== ====
22
The following table sets forth the plan's funded status and the accrued
pension expense recognized in the Company's Consolidated Balance Sheets at
December 31 (in thousands):
1997 1996
---- ----
Actuarial present value:
Accumulated benefit obligation -
Vested $1,526 $1,390
Non-vested 16 22
------ ------
$1,542 $1,412
Projected benefit obligation for service rendered to
date $1,542 $1,412
Plan assets at fair value 1,200 1,085
------ ------
Plan assets less than projected benefit obligation (342) (327)
Unrecognized net asset, less accumulated amortization
of $148 and $140 (33) (41)
Unrecognized net gain (295) (345)
------ ------
Accrued pension expense (included in other non-current
liabilities) $ (670) $ (713)
====== ======
The discount rate used in determining the projected benefit obligation was
6.75%, in 1997 and 7.25% in 1996. The expected long-term rate of return on
plan assets used in determining the net periodic pension cost was 7% for all
years presented.
The plan assets at December 31, 1997 and 1996 were principally invested in
corporate debt and equity securities.
401(k) Retirement Plan. The Company has a defined contribution plan covering
substantially all domestic employees. The Company's contribution is based upon
the participants' contributions. The expense was $40,000, $32,000 and
$15,000 in 1997, 1996 and 1995, respectively.
Officers' Supplemental Pension Plan. The Company has an unfunded, noncontributo
ry defined benefit pension plan covering certain retired officers. Benefits
under the plan are the greater of a percentage of final salary of qualified
officers or an annual amount that, when combined with other retirement plans
of the Company, is equal to $44,000 per year.
The components of net pension cost of the plan for the years ended December 31
are as follows (in thousands):
1997 1996 1995
---- ---- ----
Interest cost on projected benefit obligation $39 $40 $40
Amortization of prior service cost 13
Amortization of actuarial gains (6) (7) (9)
--- --- ---
Net periodic pension cost $33 $33 $44
=== === ===
23
The following table sets forth the plan's status and the accrued pension
expense recognized in the Company's Consolidated Balance Sheets at December 31
(in thousands):
1997 1996
---- ----
Actuarial present value of vested accumulated benefit
obligation $548 $577
Unrecognized net gain 119 125
---- ----
Accrued pension expense (included in other non-current
liabilities) $667 $702
==== ====
The discount rate used in determining the projected benefit obligation in all
years was 7.25%. All participants are retired and receiving benefits under the
Plan and therefore future increases in compensation are not applicable.
Other Postretirement Benefit Plans. In addition to the Company's pension
plans, the Company has a contributory , unfunded defined benefit plan
providing certain health care benefits for domestic employees who retired
prior to March 31, 1996. The participants' contributions are adjusted
periodically and are based on age and length of service at time of retirement.
The assumed rate of increase in the per capita cost of covered benefits was
8.1% decreasing to 6% after 8 years. Increasing the health care cost trend
rate by one percentage point each year would increase the accumulated
postretirement benefit obligation by $25,000 at December 31, 1997 and the
aggregate service and interest cost component of net periodic postretirement
benefit cost for 1997 by $2,000. The weighted average discount rate used in
determining the net periodic postretirement benefit cost and accumulated
benefit obligation was 7.0% for all periods presented.
The following sets forth the plan's status and accrued post-retirement benefit
liability recognized in the Company's Consolidated Balance Sheets at December
31 (in thousands):
1997 1996
Actuarial present value of accumulated postretirement
benefit obligation:
Retirees $526 $618
Active plan participants 58
---- ----
526 676
Unrecognized net gain 252 137
---- ----
Accrued postretirement benefit liability (included in other
non-current liabilities) $778 $813
==== ====
The components of post-retirement benefit cost for the years ended December
31, are as follows (in thousands):
1997 1996 1995
---- ---- ----
Interest cost $36 $44 $52
Net amortization (18) (6)
--- --- ---
Net periodic cost $18 $38 $52
=== === ===
Deferred Compensation. At December 31, 1997 and 1996, the liability relating
to a deferred compensation arrangement between the Company and a director and
former officer of the Company was $324,000 and $332,000, respectively.
24
Note J. Stock Plans
At December 31, 1997, the Company has reserved 6,166 shares of its common
stock for issuance to key employees under the 1990 Stock Option Plan. The plan
provides for the grant, at fair market value on the date of grant, of
nonqualified stock options and incentive stock options. Options generally
become exercisable in three equal annual installments on a cumulative basis
commencing six months from the date of grant and expire five years (maximum
ten years) after the date granted.
The Company also has the 1967 Employee Stock Purchase Plan under which 53,445
shares were reserved at December 31, 1997. The purchase price is 85% of the
fair market value of the stock on the date offered. Generally, rights to
purchase shares under this plan expire 12 months (maximum 27 months) after the
date of grant.
Share information pertaining to these plans is as follows:
Option Purchase
Plan Plan
Outstanding at January 1, 1995 401,263 46,787
Granted 37,500
Cancelled or expired (45,509) (7,385)
Exercised (40,322) (19,246)
------- ------
Outstanding at December 31, 1995 352,932 20,156
Granted 90,000 37,545
Cancelled or expired (2,168) (1,527)
Exercised (17,481) (20,156)
------- ------
Outstanding at December 31, 1996 423,283 36,018
Granted 89,500
Cancelled or expired (471)
Exercised (164,899) (35,547)
------- ------
Outstanding at December 31, 1997 347,884 0
======= ======
The exercise price for options granted during 1995 ranged from $2.38 to $6.75,
was $3.63 for options granted in 1996 and for options granted in 1997 ranged
from $4.69 to $7.63. The weighted average exercise price for the 347,884
options outstanding under the Option Plan is $3.43 with expiration dates
ranging from 1999 to 2002. Options were exercised under the Option Plan at
weighted average exercise prices of $2.80, $2.70 and $2.91 in 1995, 1996 and
1997, respectively. Shares exercisable under the Option Plan at December 31,
1995, 1996 and 1997 were 132,693, 224,237 and 226,717, respectively.
Rights were granted under the Purchase Plan at an exercise price of $3.72 in
1996. Shares were exercised under the Purchase Plan at a weighted average
price of $2.34 in 1995 and 1996 and $3.72 in 1997.
The Company has elected to follow APB No. 25 and related interpretations in
accounting for its stock option plans, and has adopted the disclosure-only
provisions of SFAS No. 123. If the Company had elected to recognize
compensation expense for the 1990 Stock Option Plan and the 1967 Stock
Purchase Plan based on the fair value at the grant date , consistent with the
method presented by SFAS No. 123, the pro forma net income and net income per
25
share would be as follows (in thousands except per share information):
1997 1996 1995
---- ---- ----
Net income As reported $3,622 $1,099 $1,321
Pro forma $3,461 $1,047 $1,303
Net income per share As reported Basic $1.04 $.32 $.40
Diluted $ .93 $.31 $.38
Pro forma Basic $ .99 $.31 $.40
Diluted $ .89 $.29 $.38
Because SFAS 123 method of accounting has only been applied to options granted
subsequent to December 31, 1994, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value for the Stock Option and Stock Purchase Plans was estimated at
the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1997, 1996 and 1995, respectively:
risk-free interest rates of 5.0%, 5.8% and 5.1%; no dividend yields;
volatility factors of the expected market price of the Company's common stock
of 0.64 in all years; and a weighted-average expected life of the option of
4.2 years for the Option Plan and 9 months for the Purchase Plan.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
In 1995, the Company adopted the Restricted Stock Plan, a time accelerated
restricted stock plan, under which 150,000 shares of its common stock were
reserved. The plan provides for the award of shares to key employees;
generally, the awards vest in five equal annual installments commencing two
years after the date of the award. Vesting may be accelerated based on the
achievement of certain financial performance goals. In 1995, 139,000 shares
were awarded under the plan, of which 41,700 became vested, and $198,000 of
compensation expense was recognized. In 1996, $109,000 of compensation
expense was recognized. In 1997, 1,058 shares were forfeited, 12,000 shares
were awarded, 92,942 shares became vested and $189,000 of compensation expense
was recognized. At December 31, 1997, 58 shares were reserved for issuance
under this plan.
Certain sellers of Dacon Electronics Plc have warrants, expiring on December
14, 1998, to purchase 50,000 shares of common stock at $2.375 per share.
Note K. Contingencies
In 1993, class action lawsuits were filed against the Company and certain of
its officers alleging securities law violations in connection with the
purchase of the Company's common stock by members of the class during the
period from October 29, 1992 through March 11, 1993. The plaintiffs seek
26
unspecified damages and related costs. On January 28, 1998, the plaintiffs
and the defendants and their insurer reached an agreement to settle this
litigation, which provides for the payment of an aggregate of $2.3 million by
the defendants and their insurer and the complete release of all claims by the
plaintiffs against the defendants and all other persons who were directors or
officers of the Company during the class period. The agreement is contingent
upon approval by the Court of a Stipulation of Settlement to be executed by
the parties. In the year ended December 31, 1997, the Company expensed
$956,000 for its share of the settlement and expenses related to this
litigation. The Company has denied any fault or wrongdoing in this matter.
If the Stipulation of Settlement is not approved by the Court and if the
lawsuit is adversely determined, the resolution of this matter could have a
material negative effect on the Company's financial condition, results of
operations and cash flow.
Note L. Operations by Industry Segment and Geographic Areas
The Company operates in one industry segment: voice processing products.
The Company operates in the United States and Europe (United Kingdom).
Information about the Company's operations by geographic area for the years
ended December 31, is as follows (in thousands):
1997 1996 1995
---- ---- ----
Net sales
United States:
Unaffiliated customers $21,550 $10,051 $ 9,970
Inter-company transfers 186 544 636
------- ------- -------
21,736 10,595 10,606
Europe 7,971 7,292 7,515
Eliminations (186) (544) (636)
------- ------- -------
$29,521 $17,343 $17,485
======= ======= =======
Operating profit
United States $7,587 $1,977 $2,429
Europe 594 1,067 1,256
Inter-company eliminations 17 (58)
------ ------ ------
8,198 2,986 3,685
General corporate expenses 2,443 1,196 1,321
Interest (income) expense, net (165) (82) 124
Foreign exchange loss 2 5
------ ------ ------
Income before income taxes $5,920 $1,870 $2,235
====== ====== ======
Identifiable assets
United States $17,086 $10,774 $ 9,427
Europe 6,092 6,790 5,642
Inter-company eliminations (55) (53) (29)
------- ------- -------
$23,123 $17,511 $15,040
======= ======= =======
Net sales include sales of $7.4 million, $4.0 million and $3.5 million in
1997, 1996 and 1995, respectively, to one major customer; sales of $5.4
million and $.5 million in 1997 and 1996, respectively, to another major
27
customer; sales of $2.4 million, $2.4 million and $2.7 million in 1997, 1996
and 1995, respectively, to another customer; and foreign sales of $5.0
million, $5.4 million and $5.5 million in 1997, 1996 and 1995, respectively,
to another customer.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
1. (a) The identification of the directors of the Company as of
March 1, 1998 and persons nominated to become directors set forth under the
caption Information Concerning Nominees in the Proxy Statement for the annual
meeting of stockholders to be held on May 14, 1998 is incorporated herein by
reference.
(b) The identification of the executive officers of the Company
and their positions with the Company and ages as of March 1, 1998 is set forth
under the caption Executive Officers of the Company in Part I of this Annual
Report on Form 10-K.
2. The information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 set forth under the caption Section 16(a)
Beneficial Ownership Reporting Compliance in the Proxy Statement for the
annual meeting of stockholders to be held on May 14, 1998 is incorporated
herein by reference.
Item 11. Executive Compensation
The information on executive compensation set forth under the
caption Executive Compensation in the Proxy Statement for the annual meeting
of stockholders to be held on May 14, 1998 is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) and (b) Security ownership of certain beneficial owners and
management set forth under the caption Security Ownership in the Proxy
Statement for the annual meeting of stockholders to be held on May 14, 1998 is
incorporated herein by reference.
(c) Changes in Control. None.
Item 13. Certain Relationships and Related Transactions
The information on certain relationships and related transactions
set forth under the caption Certain Relationships and Related Transactions in
the Proxy Statement for the annual meeting of stockholders to be held on May
14, 1998 is incorporated herein by reference.
28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) and (2) and (d) The response to this portion of Item 14 is
submitted as a separate section beginning on page 26 of this Annual Report on
Form 10-K.
(a)(3) and (c) The response to this portion of Item 14 is submitted as a
separate section beginning on page 27 of this Annual Report on Form 10-K.
(b) There were no reports filed on Form 8-K during the fourth quarter of
1997.
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
27, 1998.
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 27, 1998.
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/ Edward S. Davis Director
---------------------
Edward S. Davis
/s/ Jack Meehan Director
----------------
Jack Meehan
/s/ William A. Merritt Director
----------------------
William A. Merritt
/s/ Timothy P. Murphy Director
---------------------
Timothy P. Murphy
29
Form 10-K -- Item 14 (a) (1) and (2) and (d)
(a) (1) Financial Statements
The following financial statements of the Company are included in Item 8.
Financial Statements Covered by Report of Independent Auditors: Page
Report of Independent Auditors 11
Consolidated Balance Sheets, December 31, 1997 and December 31, 1996 12
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1997 13
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1997 13
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1997 14
Notes to Consolidated Financial Statements 15
(2) and (d) Financial Statement Schedules
Schedules for which provision is made in the applicable accounting regulation
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
Item 14(a)(3) and (c)
INDEX TO EXHIBITS
Exhibit
3.1 Certificate of Incorporation as filed on January 2, 1962 (Exhibit 3-1-A
to Form S-1 Registration Statement No. 2-27439 and incorporated herein
by reference).
3.2 Amendment, dated June 28, 1965 (Exhibit 3-1-B to Form S-1 Registration
Statement No. 2-27439 and incorporated herein by reference).
3.3 Amendment, dated October 3, 1966 (Exhibit 3-1-C to Form S-1 Registration
Statement No. 2-27439 and incorporated herein by reference).
3.4 Amendment, dated October 30, 1967 (Exhibit 3-1-D to Form S-1 Registration
Statement No. 2-27439 and incorporated herein by reference).
3.5 Amendment, dated July 27, 1981 (Exhibit 3.5 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1983 and incorporated herein by
reference).
3.6 Amendment, dated September 27, 1984 (Exhibit 3.6 to Annual Report on Form
10-K for the fiscal year ended December 31, 1984 and incorporated herein
by reference).
3.7 Amendment dated June 13, 1988 (Exhibit 3.7 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1988 and incorporated herein by
reference).
3.8 Amendment dated November 3, 1994 (Exhibit 3.8 to Annual Report on Form
10-K for the year ended December 31, 1994 and incorporated herein by
reference).
3.9 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 (attached as Exhibit 10.1 to this
Annual report on Form 10-K).
10.2 Lease, dated April 30, 1993, between Seymour R.Powers and The Danbury
Industrial Corporation, landlord, and Cognitronics Corporation, tenant
(Exhibit 10.3 to Annual Report on Form 10-K for the year ended December
31, 1993 and incorporated herein by reference).
10.3 Form of Indemnity Agreement, dated October 27, 1986, between each
Director (with equivalent form for each Officer) and Cognitronics
Corporation (Exhibit 10.7 to Annual Report on Form 10-K for the year
ended December 31, 1986 and incorporated herein by reference).
10.4 Supplemental Pension Plan for Officers, as amended November 2, 1993
(Exhibit 10.6 to Annual Report on Form 10-K for the year ended December
31, 1993 and incorporated herein by reference).
10.5 1997 Executive Bonus Plan (attached as Exhibit 10.5 to this Annual Report
on Form 10-K).
10.6 Form of Warrant Agreement dated February 9, 1995 between Cognitronics
Corporation and each of the former shareholders (other than Inkel) of
Dacon Electronics Plc, granting warrants to purchase up to an aggregate
of 50,000 shares of the Company's Common Stock (Exhibit 10.9 to Annual
Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
10.7 Cognitronics Corporation Restricted Stock Plan (Exhibit 10.1 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated
herein by reference).
10.8 Form of Executive Severance Agreement between certain officers and
Cognitronics Corporation (attached as Exhibit 10.8 to this Annual Report
on Form 10-K).
10.9 Commercial Revolving Loan and Security Agreement between Cognitronics
Corporation and Fleet National Bank dated July 31, 1997 (Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
and incorporated herein by reference).
10.10 Memorandum of Understanding among parties to the Consolidated Class
Action Suits (attached as Exhibit 10.10 to this Annual Report on Form
10-K).
22. List of subsidiaries of the Company as of December 31, 1997 (attached as
Exhibit 22 to this Annual Report on Form 10-K).
23. Consent of Independent Auditors, dated March 30, 1998 (attached as
Exhibit 23 to this Annual Report on Form 10-K).
27. Financial Data Schedule (attached as Exhibit 27 to this Annual Report
on Form 10-k).