<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from to
Commission file number 0-3035
COGNITRONICS CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-1953544
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Corporate Drive, Danbury, Connecticut 06810-4130
(Address of principal executive offices) (Zip Code)
(203) 830-3400
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been subject
to such filing requirements for at least the past 90 days. Yes x No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of September 30, 1998.
Common Stock, par value $0.20 per share -- 3,694,436 shares
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Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,324 $ 4,188
Marketable securities 4,400 3,900
Accounts receivable, net 4,645 4,300
Inventories 4,597 4,386
Deferred income taxes 809 1,023
Other current assets 1,066 1,050
------- -------
TOTAL CURRENT ASSETS 20,841 18,847
PROPERTY, PLANT AND EQUIPMENT, NET 1,336 1,223
GOODWILL, NET 1,398 1,648
DEFERRED INCOME TAXES 758 769
OTHER ASSETS 640 636
------- -------
$24,973 $23,123
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,610 $ 2,378
Accrued compensation and benefits 1,004 1,051
Income taxes payable 498 317
Current maturities of debt 111 114
Other accrued expenses 587 1,875
------- -------
TOTAL CURRENT LIABILITIES 3,810 5,735
LONG-TERM DEBT 185 111
OTHER NON-CURRENT LIABILITIES 2,196 2,263
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 10,000,000
shares; issued 3,694,436
and 3,667,351 shares 739 733
Additional paid-in capital 13,502 13,209
Retained earnings 4,565 1,067
Accumulated comprehensive income 235 24
Unearned compensation (259) (19)
------- -------
TOTAL STOCKHOLDERS' EQUITY 18,782 15,014
------- -------
$24,973 $23,123
======= =======
See Note to Condensed Consolidated Financial Statements.
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COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
NET SALES $7,029 $7,245 $21,638 $22,438
COST AND EXPENSES:
Cost of products sold 3,128 3,427 9,571 10,319
Research and development 466 376 1,395 1,222
Selling, general and
administrative 1,629 1,892 4,966 5,508
Amortization of goodwill 83 83 250 249
Other (income) expense,
net (102) (43) (224) (29)
------ ------ ------- -------
5,204 5,735 15,958 17,269
------ ------ ------- -------
Income before income taxes 1,825 1,510 5,680 5,169
PROVISION FOR INCOME TAXES 711 569 2,181 2,110
------ ------ ------- -------
NET INCOME 1,114 941 3,499 3,059
Currency translation
adjustment 115 211 (153)
------ ------ ------- -------
COMPREHENSIVE INCOME $1,229 $ 941 $ 3,710 $ 2,906
====== ====== ======= =======
Net Income Per Share:
Basic $.30 $.27 $.95 $.89
==== ==== ==== ====
Diluted $.28 $.24 $.87 $.80
==== ==== ==== ====
Weighted average number
of outstanding shares:
Basic 3,699,932 3,492,769 3,689,909 3,447,546
========= ========= ========= =========
Diluted 3,981,683 3,989,330 4,003,108 3,835,054
========= ========= ========= =========
See Note to Condensed Consolidated Financial Statements.
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COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Nine Months Ended
September 30,
1998 1997
---- ----
NET CASH PROVIDED BY OPERATIONS $1,845 $3,238
------ ------
INVESTING ACTIVITIES
Additions to property, plant and
equipment, net (409) (332)
------ ------
NET CASH USED BY INVESTING
ACTIVITIES (409) (332)
====== ======
FINANCING ACTIVITIES
Purchases of marketable securities (3,700) (5,680)
Sales of marketable securities 3,200 2,550
Payment of debt (129) (168)
Issuance of debt 196 212
Shares issued pursuant to employee
stock plans, 4,751 and 100,728 shares 90 275
------ ------
NET CASH USED BY FINANCING ACTIVITIES (343) (2,811)
------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES 43 (58)
------ ------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,136 37
CASH AND CASH EQUIVALENTS- BEGINNING
OF PERIOD 4,188 2,969
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $5,324 $3,006
====== ======
INCOME TAXES PAID $1,460 $2,207
====== ======
INTEREST EXPENSE PAID $ 41 $ 40
====== ======
See Note to Condensed Consolidated Financial Statements.
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NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month and
nine-month periods ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998. The
balance sheet at December 31, 1997 has been derived from the audited financial
statements at that date. For further information, refer to the consolidated
financial statements and footnotes thereto and the quarterly financial data
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Certain amounts have been reclassified in the prior year for comparative
purposes.
Inventories (in thousands):
September 30, December 31,
1998 1997
------------- ------------
Finished and in process $3,512 $3,450
Materials and purchased parts 1,085 936
------ ------
$4,597 $4,386
====== ======
Other Non-Current Liabilities (in thousands):
September 30, December 31,
1998 1997
------------- ------------
Accrued supplemental pension plan $ 644 $ 667
Accrued deferred compensation 317 324
Accrued pension expense 615 670
Accrued other post-retirement
benefit liability 796 778
------ ------
2,372 2,439
Less current portion 176 176
------ ------
$2,196 $2,263
====== ======
Common Stock
During the three months ended September 30, 1998, the Company granted 26,000
shares of common stock under the Restricted Stock Plan and recorded $260,000
of unearned compensation expense. In addition, during this period, in order
to satisfy statutory withholding requirements arising from the vesting of
common stock granted under the Restricted Stock Plan in 1995, 3,666 shares of
common stock were returned to the Company. For the nine months ended
September 30, 1998 and 1997, 4,751 and 100,728 options were exercised.
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Income Per Share
In computing basic earnings per share, the dilutive effect of stock options
and warrants are excluded; whereas, for dilutive earnings per share, they are
included.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting Sta
ndards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
established new rules for the reporting of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to
the requirements of SFAS No. 130.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, Disclosure About Segments of an Enterprise and
Related Information; No. 132, Employers Disclosures About Pensions and Other
Postretirement Benefits; and No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Company has not yet adopted these standards.
Management does not anticipate that the adoption of these standards will have
a significant effect on earnings or the financial position of the Company.
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 sought
unspecified damages and related costs. The Company has denied any fault or
wrongdoing in this matter. On January 28, 1998, the plaintiffs and the
defendants and their insurer signed a Memorandum of Understanding 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. In the year
ended December 31, 1997, the Company expensed its share of the proposed
settlement related to this litigation. In February 1998, the Company
deposited into an escrow account, pending the Court's approval of the
settlement, its share of the proposed settlement, $.8 million. On April 14,
1998, the parties entered into a Stipulation of Settlement providing for the
settlement of this litigation. On September 11, 1998, the Court issued an
Order and Final Judgement approving the settlement.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net income was $1,114,000 and $3,499,000, respectively, for the three and
nine-month periods ended September 30, 1998 versus $941,000 and $3,059,000,
respectively, in the prior year periods.
Consolidated sales for the quarter ended September 30, 1998 decreased $.2
million (3%) from the prior year period to $7.0 million due to a sales
decrease of $.6 million in the Company's UK distributorship operations offset,
in part, by higher sales by domestic operations. For the nine-month period of
1998, sales decreased $.8 million (4%) from the prior year period due to a
$1.2 million decrease in direct sales of the domestic operations offset, in
part, by higher sales of the UK distributorship operations. The domestic
sales decrease for the nine-month period was primarily due to the inclusion in
the 1997 period of a $1 million order to a North American telephone company to
replace existing equipment.
Research and development expenses increased versus the prior year periods by
$90,000 (24%) and $173,000 (14%) in the three and nine-month periods,
respectively, ended September 30, 1998 primarily due to higher personnel
expenses.
Selling, general and administrative expenses decreased by $263,000 (14%) and
$542,000 (10%), respectively, for the three-month and nine-month periods when
compared to the comparable periods of the prior year primarily due to lower
personnel costs (commissions and bonuses) in the domestic operations.
Other (income) expense in the current periods is primarily interest income.
Included in the prior year nine-month period was a charge of $76,000 to write
down the Company's building in the UK, which was for sale, to net realizable
value.
Under Statement of Financial Accounting Standards No. 109, the Company has
recognized future tax benefits that management believes will be realized. In
order to realize this benefit, the Company, exclusive of the results of its UK
distributorship operations, Dacon Electronics Plc, will have to generate
pretax income of $5 million. The current deferred tax benefit of $.8 million
is primarily attributable to inventory provisions and the recognition of such
expense, for tax purposes, is, in large measure, within the control of the
Company and the provision for the class action settlement which reverses this
year. The non-current tax benefit, $.8 million, primarily relates to deferred
compensation and benefit plans and, as such, would be recognized over a long
period of time. The Company's U.S. pretax income was $4.8 million for the
nine months ended September 30, 1998 and $5.3 million, $.8 million and $1.0
million for the years ended December 31, 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.
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Liquidity and Sources of Capital
Working capital and the ratio of current assets to current liabilities
increased to $17.0 million and 5.5:1 at September 30, 1998 compared to $13.1
million and 3.3:1 at December 31, 1997. The improvement in 1998 is mainly due
to the Company's results of operations for the nine months ended September 30,
1998.
The Company modified its line of credit agreement with a bank, increasing its
credit limit to $6 million. Borrowings under this agreement are subject to
various financial covenants, due on demand, based on the amount of eligible
accounts receivable and inventory, as defined, and secured by substantially
all the Company's assets.
During the remainder of 1998, the Company anticipates purchasing $.3 million
of equipment and incurring increased research and development expenditures.
Management believes that its cash and cash equivalents and the cash flow from
operations in 1998 will be sufficient to meet these 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.
Internal Systems
The Year 2000 problem 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. The Company has 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, conversions to new software and
replacement of certain hardware, 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
anticipates the completion of all modifications and/or changes to software and
hardware by March 1999.
Vendors
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
not aware of any vendor with a Year 2000 problem that will not be corrected
prior to January 1, 2000, that would materially impact the Company's results
of operations, liquidity or capital resources.
Products
Currently, the products the Company ships are Year 2000 compliant; however,
the Company has sold in the past products that could be impacted. For the
impacted products, the Company has made, or will make, available, at a cost,
upgrades that, among other things, correct this problem.
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The Company will utilize both internal and external resources to reprogram, or
replace, and test the software for Year 2000 modifications. The Company
anticipates that expenditures for these programs will not exceed $.1 million.
The Company currently has no contingency plans in place in the event it does
not complete all phases of the Year 2000 program. The Company plans to
evaluate the status of completion in March 1999 and determine whether such a
plan is necessary. If such a plan is necessary, it would consist of manual
and computer work-arounds and increased inventory levels.
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-Q) 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
Quarterly Report on Form 10-Q and in the Company's other Securities and
Exchange Commission filings.
PART II
Item 1. 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;
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
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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 sought unspecified damages and related costs. The Company has
denied any fault or wrongdoing in this matter. 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. In the year
ended December 31, 1997, the Company expensed its share of the proposed
settlement related to this litigation. In February 1998, the Company
deposited into an escrow account, pending the Court's approval of the
settlement, its share of the proposed settlement, $.8 million. In April 1998,
the parties submitted to the Court a Stipulation of Settlement. On September
11, 1998, the Court issued an Order and Final Judgement approving the
settlement.
Item 6.Exhibits and reports on Form 8-K
(a) Index to Exhibits
Exhibits
10.1 First Modification to Commercial Revolving Promissory Note and
Commercial Revolving Loan and Security Agreement (attached as exhibit 10.1 to
this Quarterly Report on Form 10Q)
27 Financial Data Schedule for the nine months ended September 30,
1998.
(b) No reports on Form 8-K were filed during the current quarter.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COGNITRONICS CORPORATION
Registrant
Date: November 16, 1998 By /s/ Garrett Sullivan
Garrett Sullivan, Chief Financial
and Accounting Officer
<PAGE> 1
FIRST MODIFICATION TO
COMMERCIAL REVOLVING PROMISSORY NOTE
AND
COMMERCIAL REVOLVING LOAN AND SECURITY AGREEMENT
THIS FIRST MODIFICATION TO COMMERCIAL REVOLVING PROMISSORY NOTE AND
COMMERCIAL REVOLVING LOAN AND SECURITY AGREEMENT the "Modification
Agreement") is made as of October 7, 1998, by and between FLEET NATIONAL
BANK, a national banking association having an address at 1 Landmark
Square, Stamford, Connecticut 06901 (the "Bank"), and COGNITRONICS
CORPORATION, a New York corporation with an office at 3 Corporate Drive,
Danbury, Connecticut 06810-4130 (the "Borrower").
BACKGROUND
On July 31, 1997, the Bank and the Borrower entered into a Commercial
Revolving Loan and Security Agreement (the "Loan Agreement") whereby the
Bank loaned the Borrower the principal amount of $2,000,000.00 by way of
a revolving line of credit (the "Revolving Loan"). The Revolving Loan is
evidenced by a Commercial Revolving Promissory Note dated July 31, 1997
(the "Note").
The Borrower requests that the Bank increase the amount of the Revolving
Loan, expand the borrowing base of the Revolving Loan, and extend the
maturity date of the Revolving Loan. The Bank is agreeable, all upon the
terms to follow.
AGREEMENT
The Bank and the Borrower agree to modify the Loan Agreement and the Note
(collectively, the "Documents") as follows:
1.AMOUNT. The amount of the Revolving Loan is increased from
$2,000,000.00 to $6,000,000.00. SIX MILLION and 00/100 DOLLARS
($6,000,000.00)is hereby substituted for TWO MILLION and 00/100
DOLLARS ($2,000,000.00) as it appears in Paragraph 1 of the Note.
In addition, any reference in the Note or the Loan Agreement to
$2,000,000.00 is hereby amended to read $6,000,000.00.
2.BORROWING BASE. "Borrowing Base" as defined in Section 1.01(d)
of the Loan Agreement is amended to read as follows: 'Borrowing
Base' shall mean an amount which shall not exceed the lesser of
the following: (i) $6,000,000.00; or (ii) 75% of Eligible Accounts
Receivable plus 50% of Eligible Inventory, which advances against
Eligible Inventory shall not exceed $2,000,000.00.
Eligible Inventory shall mean such inventory of Borrower which is not
ineligible as the basis for advances based on the criteria set forth
below. In determining whether inventory constitutes Eligible
Inventory, the Bank does not intend to include inventory which:
(i) is not owned by Borrower free and clear of all liens and rights
of others, except the liens in favor of the Bank;
(ii) is not located on premises owned or operated by the Borrower;
(iii) is inventory in transit or inventory held on or at leased
premises where the landlord thereof has not executed a consent and
waiver in form and substance satisfactory to the Bank;
(iv) is in the possession or control of a bailee, warehouseman,
processor, converter or other person other than the Borrower,
unless the Bank is in possession of such agreements, instruments,
and documents as the Bank may require in order to perfect its
<PAGE> 2
security interest in such inventory;
(v) in the Bank's reasonable judgment, is obsolete, unsalable,
shopworn, damaged, unfit for further processing, or is of
substandard quality;
(vi) consists of display items, packing and shipping materials or
goods which have been returned by the buyer;
(vii) consists of discontinued or, in the Bank's reasonable judgment,
slow-moving items;
(viii) is not a type held for sale in the ordinary course of
Borrower's business;
(ix) is inventory which in any way fails to meet or violates any
warranty, representation, or covenant as may be contained in the
Loan Agreement; or
(x) is not otherwise acceptable in the reasonable judgment of the
Bank, based upon such credit and collateral considerations as the
Bank may deem appropriate from time to time.
3. MATURITY DATE. The Maturity Date (as defined in the Note) of the
Revolving Loan is extended to June 29, 1999. Accordingly, the
Revolving Loan Maturity Date (as defined in the Loan Agreement) is
amended to be June 29, 1999.
4. FINANCIAL COVENANTS. Section 6.04(a) of the Loan Agreement is
hereby deleted in its entirety and replaced with the following:
(a) Minimum Tangible Net Worth. Permit its Tangible Net Worth to
be less than $11,000,000.00 at any time. This covenant shall be
tested quarterly.
Section 6.04(d) of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
(d) 30-Day Annual Cleanup: The Borrower shall maintain a zero
outstanding level under the Note for at least 30 consecutive days
during the renewed term of the facility.
The following financial covenant is hereby made Section 6.04(e) of
the Loan Agreement:
(e) Maximum Leverage. The Borrower shall not permit the ratio of
its Total Liabilities to its Tangible Net Worth to be greater than
1.0 to 1.0 at any time. This covenant shall be tested quarterly.
5. CORPORATE NAME. The Borrower represents to the Bank that
Cognitronics Corporation New York, the entity registered as a
foreign corporation with the Connecticut Secretary of State to
transact business in the State of Connecticut under the name
Cognitronics Corporation New York, is the same corporate entity as
the Borrower. Borrower agrees to amend or correct its registration
as a foreign corporation with the Connecticut Secretary of State to
reflect that the entity registered as a foreign corporation is
Cognitronics Corporation. The Borrower shall cause such
registration to be amended or corrected on or before November 20,
1998, and shall provide the Bank with evidence of such correction
or amendment. Borrower's failure to cause such registration to be
amended or corrected on or before November 20, 1998, shall be an
additional event of default under the Documents.
6. BANK'S COSTS AND EXPENSES. The Borrower agrees to reimburse the
Bank for all its costs, fees, and expenses incurred in connection
with the review, documentation, and preparation for the closing of
this transaction. These costs, fees, and expenses shall include,
but not be limited to, its legal fees and its field examination
expenses, all of which shall be due and payable upon the closing
<PAGE> 3
of this transaction.
7. REAFFIRMATION OF BORROWER. Borrower hereby acknowledges and
reaffirms the Revolving Loan and its liability for payment thereof.
Borrower agrees, represents, and warrants that (a) no setoff,
counterclaim, or defense exists with respect to its liability under
the Revolving Loan and that no other claim against the Bank exists
and waives its right to raise any such setoff, counterclaim,
defense, or claim against the Bank arising out of occurrences on or
prior to the date hereof, (b) except as set forth in amended
Schedules 5(d) and 5(r) to the Loan Agreement attached hereto, all
the representations and warranties contained in the Loan Agreement,
after giving effect to the amendments and modifications
contemplated hereby, are true and correct on and as of the date
hereof as though made on and as of the date hereof, (c) the
Borrower has taken all corporate or other action necessary to make
this Modification Agreement and all agreements and instruments
executed in connection herewith the valid and enforceable
obligations they purport to be, and (d) no default or breach under
any of the Documents after giving effect to the amendments
contemplated hereby, and no event which the passage of time or
giving of notice or both would constitute such a default or breach,
exists on the date hereof.
8. COLLATERAL. The Borrower represents and warrants that it is the
sole owner of the Collateral (as defined in the Loan Agreement)
free and clear of all liens, claims, security interests, and
encumbrances except in favor of the Bank, and is fully authorized
to sell, transfer, pledge and/or grant a security interest in each
and every item of Collateral.
9. OTHER CHANGES. All other terms and conditions of the Documents
shall remain the same and in full force and effect except as
specifically amended herein.
10. JURISDICTION. This Modification Agreement and all other
agreements, documents, and instruments executed in connection
herewith or contemplated hereby shall be governed by and construed
in accordance with the laws of the State of Connecticut.
11. CAPTIONS. The captions are inserted herein only as a matter of
convenience and for reference, and in no way define, limit,
describe, or in any way affect the scope or intent of this
Agreement.
12. JURY TRIAL WAIVER. THE BORROWER WAIVES TRIAL BY JURY IN ANY
COURT IN ANY SUIT, ACTION, PROCEEDING OR ANY MATTER ARISING IN
CONNECTION WITH OR IN ANY WAY RELATED TO THIS MODIFICATION
AGREEMENT OR THE FINANCING TRANSACTION OF WHICH THIS MODIFICATION
AGREEMENT IS A PART OR THE DEFENSE OR ENFORCEMENT OF THE BORROWER'S
RIGHTS AND REMEDIES IN CONNECTION THEREWITH. THE BORROWER
ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY,
WITHOUT DURESS AND ONLY AFTER THE OPPORTUNITY FOR EXTENSIVE
CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH ITS
ATTORNEYS. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE
BANK TO EXTEND THIS FINANCING COMMITMENT AND TO ENTER INTO THIS
MODIFICATION AGREEMENT WITH RESPECT TO THE REVOLVING LOAN.
<PAGE> 4
Executed to be effective as of the date first set forth above.
THE BORROWER:
Signed in the presence of: COGNITRONICS CORPORATION
/s/Seth L. Cooper
By /s/ Brian J. Kelley
/s/Ron R. Miller Brian J. Kelley
Its President, duly authorized
THE BANK:
FLEET NATIONAL BANK
/s/Seth L. Cooper
/s/Ron R. Miller By /s/ Charlene S. O'Connell
Charlene S. O'Connell
Its Vice President
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