<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (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.
<PAGE> 3
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.
<PAGE> 4
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.
<PAGE> 5
(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.
<PAGE> 7
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.
<PAGE> 8
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.
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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.
<PAGE> 10
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.
<PAGE> 11
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.
<PAGE> 12
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.
<PAGE> 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
<PAGE> 14
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.
<PAGE> 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
<TABLE>
<CAPTION>
(dollars in thousands)
Common Stock Additional Currency Unearned Treasury
Shares Paid-In Retained Transla- Compensa- Shares
Outstanding Amount Capital Earnings tion tion Amount
----------- ------ ---------- -------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
<PAGE> 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.
<PAGE> 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.
<PAGE> 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
====== ======
<PAGE> 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
<PAGE> 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
====== ======
<PAGE> 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
==== ==== ====
<PAGE> 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
=== === ===
<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<PAGE> 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).
<PAGE> 1
Exhibit 10.1
COGNITRONICS CORPORATION
1990 STOCK OPTION PLAN, AS AMENDED
1. Purpose
This incentive stock option plan (the "Plan") is intended to
provide incentives to executives and other key employees of
Cognitronics Corporation (the "Company") and its Subsidiaries by
providing them with opportunities for stock ownership under the Plan.
"Subsidiary" means any corporation in which the Company or another Subsidiary
or both owns 50% or more of the combined voting power of all classes of
stock. This plan is a successor plan to the Cognitronics Corporation 1980
Stock Option Plan, as amended.
2. Administration
The Plan shall be administered by a committee of not less than
three directors of the Company (the "Committee")selected by, and
serving at the pleasure of, its Board of Directors (the "Board"). A
director may not serve on the Committee unless he is "disinterested" for
purposes of Rule 16b-3 under the Securities Exchange Act of 1934, (or any
successor rule t hereto).
The Committee shall have authority, subject to the terms of the
Plan, to determine the persons eligible for options and those to whom options
shall be granted, the number of shares to be covered by each option, the time
or times at which options shall be granted, and the terms and provisions of
the instruments by which options shall be evidenced, and to interpret the
Plan and make all determinations necessary or advisable for its
administration. The Committee may consult with legal counsel, who may
be counsel to the Company, and shall not incur any liability for any
action taken in good faith in reliance upon the advice of counsel. The
Board reserves to itself the right to exercise any authority granted to the
Committee hereunder.
3. Eligibility
Full-time employees, including officers, of the Company or any
Subsidiary or both, shall be eligible to participate in the Plan. A member
of the Committee shall not be eligible, while a member, to receive an option
under the Plan, but may exercise any options previously granted to him.
4. Stock
The stock as to which options may be granted shall be the Company's
common stock, par value $.20 per share ("Common Stock"). When options are
exercised the Company may either issue unissued Common Stock or transfer
issued Common Stock held in its treasury. The total number of shares of Common
Stock which may be sold to employees under the Plan pursuant to options
shall not exceed 600,000 shares. If an option expires, or is otherwise
terminated prior to its exercise, the Common Stock covered by such
option immediately prior to such expiration or other termination shall
continue to be available under the Plan.
<PAGE> 2
5. Granting of Options
The "Date of Grant" of an option under the Plan shall be the date on
which the option is awarded by the Committee. The grant of any option to any
employee shall neither entitle such employee to, nor disqualify him from,
participation in any other grant of options.
6. Terms and Conditions of Options
Options shall be evidenced by instruments in form approved by the
Committee. Such instruments shall conform to the following terms and
conditions:
(a) Option price. The option price per share of Common Stock
shall be the Fair Market Value of the optioned shares on the Date of
Grant. "Fair Market Value" shall be the closing price of the Common
Stock recorded on the American Stock Exchange on the Date of Grant or the
last trading day prior thereto.
(b) Term and exercise of options. Each option shall expire no later than
the tenth anniversary of its Date of Grant and shall become exercisable in
three substantially equal annual installments commencing on the date six
months after the Date of Grant, provided, however, that the Committee may
include in any option instrument, initially or by amendment at any time, a
provision making any installment or installments exercisable at such earlier
date, or upon the occurrence of such earlier event, as may be specified by
such provision, if the Committee deems such provision to be in the interests
of the Company or necessary to realize the reasonable expectation of the
optionee, but in no event shall any option be exercisable sooner than six
months from the date on which such option is granted, except when the
retirement or death of the optionee occurs within such six-month
period. After becoming exercisable, each installment shall remain
exercisable until expiration or termination of the option. An option may be
exercised from time to time, in whole or part, up to the total number of
shares with respect to which it is then exercisable. Payment of the purchase
price will be made in such manner as the Committee may provide in the
option, which may include cash (including cash equivalents), payroll
deductions, any other manner permitted by law as determined by the
Committee or any combination of the foregoing.
(c) Termination of employment. If an optionee ceases, other than by reason
of death or retirement, to be employed by the Company or Subsidiary, all
options granted to him and exercisable on the date of his termination of
employment shall terminate on the earlier of such options' expiration or
three months after the day his employment ends or as otherwise determined by
the Committee. Any installment not exercisable on the date of such
termination shall lapse and be thenceforth unexercisable. Whether authorized
leave of absence or absence in military or governmental service may
constitute employment for the purposes of the Plan shall be conclusively
determined by the Committee.
(d) Retirement of optionee. If an optionee retires, all options held by him
on the date of his retirement shall become exercisable on the date of his
retirement and shall terminate on the earlier of such option's expiration or
the first anniversary of the day of his retirement.
<PAGE> 3
(e) Death of optionee. If an optionee dies, his option may be
exercised, to the extent of the number of shares with respect to which he
could have exercised it on the date of his death, by his estate, personal
representative or beneficiary who acquires the option by will or by the laws
of descent and distribution, at any time prior to the earlier of such option's
expiration or the first anniversary of the optionee's death. On the earlier of
such dates, the option shall terminate.
(f) Assignability. No option shall be assignable or transferable by the
optionee except by will or by laws of descent and distribution, and during
the lifetime of the optionee the option shall be exercisable only by him. At
the request of an optionee, shares of Common Stock purchased on exercise of
an option may be issued or transferred in the name of the optionee and another
person jointly with the right of survivorship.
(g) Other provisions. Instruments evidencing options may contain such other
provisions, not inconsistent with the Plan, as the Committee deems advisable,
including a requirement that an optionee represent to the Company in
writing, when an option is granted, or when he receives shares on its
exercise, that he is accepting such option, or receiving such shares (unless
they are then covered by a Securities Act of 1933 registration statement),
for his own account for investment only. All certificates representing
shares issued under the Plan may bear a legend deemed appropriate by the
Committee to confirm an exemption from the registration requirements of the
Securities Act of 1933.
7. Capital Adjustments
The number and price of shares of Common Stock covered by each option,
the total number of shares that may be sold under the Plan, and the maximum
number of shares that may be sold, issued or transferred to an employee,
shall be proportionately adjusted to reflect, as deemed equitable and
appropriate by the committee, any stock dividend, stock split or share
combination of the Common Stock or recapitalization of the Company. To the
extent deemed equitable and appropriate by the Committee, subject any
required action by stockholders, in any merger, consolidation,
reorganization, liquidation or dissolution, any option granted under the
Plan shall pertain to the securities and other property to which a holder
of the number of shares of Common Stock covered by the option would have
been entitled to receive in connection with such event.
8. Incentive Stock Options
The aggregate Fair Market Value (determined as of the time the option
is granted) of the Common Stock with respect to which incentive stock
options, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended, are exercisable for the first time by an individual in any
calendar year (under the Plan or any other plan of the Company or any of
its parent or subsidiary corporations (as such terms are defined in
Section 424(e) and (f), respectively, of the Internal Revenue
Code)pursuant to which such incentive stock options may be granted)shall
not exceed $100,000.
9. Term; Amendment of Plan
The Board may discontinue the Plan at any time and may amend it from time
to time. No amendment or discontinuation of the Plan shall adversely affect
<PAGE> 4
any award previously granted without the employee's written consent.
Amendments may be made without stockholder approval except as required to
satisfy Rule 16b-3 under the Securities Exchange Act of 1934 (or any
successor rule) or other regulatory requirements.
10. Effective Date
The Plan is in accordance with a Resolution of Stockholders duly
approved at an Annual Meeting held on June 21,1990 and became effective on
June 21, 1990. It was amended by a Resolution of Stockholders and by the
Board on July 12, 1994 and further amended by a Resolution of Stockholders
and by the Board on May 9,1996.
11. New York State Law
The Terms of the Plan shall be governed by the laws of the State of New
York.
12. Change of Control
Notwithstanding the provisions of Section 6(b) hereof, in the event of a
Change in Control, as hereinafter defined, all options held by an optionee
shall become exercisable on the date of the Change of Control.
"Change in Control" means an event in which:
(a) the shareholders of the Company approve (i) any consolidation or merger
of the Company or any of its subsidiaries where the shareholders of the
Company, immediately prior to the consolidation or merger, would not,
immediately after the consolidation or merger, beneficially own, directly or
indirectly, shares representing in the aggregate more than 50% of all votes to
which all shareholders of the corporation issuing cash or securities in the
consolidation or merger (or of its ultimate parent corporation, if any) would
be entitled under ordinary circumstances to vote in an election of directors
or where the members of the Board, immediately prior to the consolidation or
merger, would not, immediately after the consolidation or merger, constitute a
majority of the Board of Directors of the corporation issuing cash or
securities in the consolidation or merger (or of its ultimate parent
corporation, if any), (ii) any sale, lease, exchange or other transfer (in one
transaction or a series of transactions contemplated or arranged by any person
as a single plan) of all or substantially all of the assets of the Company or
(iii) any plan or proposal for the liquidation or dissolution of the Company;
(b) persons who, as of the effective date hereof, constitute the entire
Board (as of the date hereof the "Incumbent Directors") cease for any reason
to constitute at least a majority of the Board, provided, however, that any
person becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, is approved by a vote
of at least a majority of the then Incumbent Directors (other than an election
or nomination of a person whose assumption of office is the result of an
actual or threatened election contest relating to the election of directors of
the Company, as such terms are used in Rule 14a-11 under the Securities
Exchange Act of 1934, as amended from time to time (the "Exchange Act")),
shall be considered an Incumbent Director; or
(c) any "person", as such term is used in Sections 13(d) and 14(d) of the
Exchange Act (other than the Company, any of its subsidiaries, any employee
benefit plan of the Company or any of its subsidiaries or any entity
<PAGE> 5
organized, appointed or established by the Company for or pursuant to the
terms of such plan), together with all "affiliates" and "associates" (as such
terms are defined in Rule 12b-2 under the Exchange Act) of such person,
becomes the "beneficial owner" or "beneficial owners" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of securities
of the Company representing in the aggregate 20% or more of either (i) the
then outstanding shares of Common Stock or (ii) the combined voting power of
all then outstanding securities of the Company having the right under ordinary
circumstances to vote in an election of directors to the Board ("Voting
Securities") (in either such case other than as a result of acquisitions of
such securities directly from the Company).
Notwithstanding the foregoing, a "Change in Control" will not have
occurred for purposes of clause (c) solely as the result of an acquisition of
securities by the Company which, by reducing the number of shares of Common
Stock or other Voting Securities outstanding, increases (i) the proportionate
number of shares of Common Stock beneficially owned by any person to 20% or
more of the shares of Stock then outstanding or (ii) the proportionate voting
power represented by the Voting Securities beneficially owned by any person to
20% or more of the combined voting power of all then outstanding Voting
Securities; provided, however, that if any person referred to in clause (i) or
(ii) of this sentence thereafter becomes the beneficial owner of any
additional shares of Common Stock or other Voting Securities (other than
pursuant to a stock split, stock dividend or similar transaction), then a
"Change in Control" will have occurred for purposes of clause (c).
<PAGE> 1
Exhibit 10.5
COGNITRONICS CORPORATION
1997 EXECUTIVE BONUS PLAN
Part A
Participants: President and Treasurer
The bonus for each is to be calculated as follows:
Amount Earned
-------------
Range of Operating
Income(1) President Treasurer
- ------------------ --------- ---------
Under $1.0 million 2% of Operating Income 1% of Operating Income
$1.0 million to $20,000 plus 3% of $10,000 plus 1 1/4% of
$1.9 million Operating Income in Operating Income in
excess $1.0 of million excess of $1.0 millon
$2.0 million to $50,000 plus 4% of $22,500 plus 1 1/2% of
$2.9 million Operating Income in Operating Income in
excess of $2.0 million excess of $2.0 million
$3.0 million and over $90,000 plus 5% of $37,500 plus 2% of
Operating Income in Operating Income in
excess of $3.0 million excess of $3.0 million
(1) Operating Income for Part A is consolidated income before income taxes
exclusive of executive bonus expense and special or non-recurring income or
expense.
Part B
Participants: Vice President - Sales, Vice President - Engineering and Vice
President - Manufacturing
The bonus pool is to be calculated as follows:
Range of Operating Income(2) Bonus Pool
- ---------------------------- ----------
Under $.5 million 3% of Operating Income
$.5 million to $..99 million $15,000 plus 5% of Operating Income
in excess of $.5 million
$1.0 million and over $40,000 plus 6% of Operating Income
in excess of $1.0 million
The Part B bonus pool is to be allocated among the participants by the
Compensation Committee after reviewing the written recommendations of the
President.
(2) Operating Income for Part B is income before income taxes of domestic
operations exclusive of executive bonus expense and extraordinary, special or
non-recurring income or expense.
<PAGE> 1
Exhibit 10.8
EXECUTIVE SEVERANCE AGREEMENT
AGREEMENT, dated as of October 16, 1995, by and between Cognitronics
Corporation, a New York corporation having offices at 3 Corporate Drive,
Danbury, Connecticut 06810 (the "Company"), and
whose residence address
is
(the "Executive").
The Company's Board of Directors (the "Board") considers the continued
services of key executives of the Company to be in the best interests of the
Company and its shareholders.
The Board desires to assure, and has determined that it is appropriate and in
the best interests of the Company and its shareholders to reinforce and
encourage, the continued attention and dedication of key executives of the
Company to their duties of employment without personal distraction or conflict
of interest in circumstances arising from the possibility or occurrence of a
change in control of the Company.
The Board has approved that the Company enter into severance agreements with
key executives of the Company.
In consideration of the premises and the covenants and agreements contained
herein, and other good and valuable consideration, the Company and the
Executive agree as follows:
1. Services During Certain Events. In the event a proposal is made to effect
a Change in Control (as defined in Section 2 hereof), the Executive agrees
that he will not voluntarily leave the employ of the Company, and will render
the services contemplated in the recitals to this Agreement, until such
proposal for a Change in Control is terminated or abandoned or until a Change
in Control has occurred.
2. Termination. Except as provided in Section 4 hereof, the Company will pay
or cause to be paid to the Executive the Benefits described in Section 3
hereof in the event that the Executive's employment by the Company is
terminated within two years following a Change in Control: (a) by the Company
for reasons other than death, "disability" or "cause" (as such terms are
defined in Section 4 hereof); or (b) by the Executive following the occurrence
of any of the following events without the Executive's consent:
(i) the assignment of the Executive to any duties or responsibilities that
are inconsistent with his position, duties, responsibilities or status
immediately preceding such Change in Control, or a change in his reporting
responsibilities or titles in effect at such time resulting in a reduction of
his responsibilities at the Company;
(ii) a reduction of the Executive's annual salary, or a reduction in any year
of the ratio of the incentive compensation or fringe benefits received by the
Executive pursuant to any bonus, incentive or fringe benefit plan (the
"Benefit Plans") to his annual salary in such year, which reduction is greater
than the average reduction in the ratio of such incentive compensation or
fringe benefits to annual salary received by all participants under the
Benefit Plans;
<PAGE> 2
(iii) a material increase in the amount of travel normally required of the
Executive in connection with his employment by the Company, or relocation of
the Executive's place of employment to a place greater than fifty miles from
its current location; or
(iv) any failure by the Company to comply with and satisfy Section 10 of this
Agreement.
For purposes of this Agreement, a "Change in Control" will be deemed to have
occurred if:
(a) the shareholders of the Company approve (i) any consolidation or merger of
the Company or any of its subsidiaries where the shareholders of the Company,
immediately prior to the consolidation or merger, would not, immediately after
the consolidation or merger, beneficially own, directly or indirectly, shares
representing in the aggregate more than 50% of all votes to which all
shareholders of the corporation issuing cash or securities in the
consolidation or merger (or of its ultimate parent corporation, if any) would
be entitled under ordinary circumstance to vote in an election of directors or
where the members of the Board, immediately prior to the consolidation or
merger, would not, immediately after the consolidation or merger, constitute a
majority of the Board of Directors of the corporation issuing cash or
securities in the consolidation or merger (or of its ultimate parent
corporation, if any), (ii) any sale, lease, exchange or other transfer (in one
transaction or a series of transactions contemplated or arranged by any person
as a single plan) of all or substantially all of the assets of the Company or
(iii) any plan or proposal for the liquidation or dissolution of the Company;
(b) persons who, as of the effective date hereof, constitute the entire Board
(as of the date hereof the "Incumbent Directors) cease for any reason to
constitute at least a majority of the Board, provided, however, that any
person becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, is approved by a vote
of at least a majority of the then Incumbent Directors (other than an election
or nomination of a person whose assumption of office is the result of an
actual or threatened election contest relating to the election of directors of
the Company, as such terms are used in Rule 14a-11 under the Securities
Exchange Act of 1934, (the "Exchange Act)), shall be considered an Incumbent
Directors; or
(c) any "person", as such term is used in Sections 13(d) and 14(d) of the
Exchange Act (other than the Company, any of its subsidiaries, any employee
benefit plan of the Company or any of its subsidiaries or any entity
organized, appointed or established by the Company for or pursuant to the
terms of such plan), together with all "affiliates" and "associates" (as such
terms are defined in Rule 12b-2 under the Exchange Act) of such person,
becomes the "beneficial owner" or "beneficial owners" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of securities
of the Company representing in the aggregate 20% or more of either (i) the
then outstanding shares of Stock or (ii) the combined voting power of all then
outstanding common stock of the Company ("Stock") having the right under
ordinary circumstances to vote in an election of directors to the Board
("Voting Securities")(in either such case other than as a result of
acquisitions of such securities directly from the Company).
<PAGE> 3
Notwithstanding the foregoing, a "Change in Control" will not have occurred
for purposes of clause (c) solely as the result of an acquisition of
securities by the Company which, by reducing the number of shares of Stock or
other Voting Securities outstanding, increases (i) the proportionate number of
shares of Stock beneficially owned by any person to 20% or more of the shares
of Stock then outstanding or (ii) the proportionate voting power represented
by the Voting Securities beneficially owned by any person to 20% or more of
the combined voting power of all then outstanding Voting Securities; provided,
however, that if any person referred to in clause (i) or (ii) of this sentence
thereafter becomes the beneficial owner of any additional shares of Stock or
other Voting Securities (other than pursuant to a stock split, stock dividend
or similar transaction), then a "Change in Control" will have occurred for
purposes of clause (c).
For purposes of this Agreement, a "Subsidiary" means any corporation whose
board of directors may be determined by the Company or another Subsidiary.
3. Benefits Payable Upon Termination. In the event of the termination of the
Executive's employment under any of the circumstances set forth in Section 2
hereof ("Termination"), the Company agrees to provide the following to the
Executive (collectively referred to as the "Benefits"):
(a) Severance Payment. The Company will pay the Executive no later than the
fifth business day following his Termination a cash lump sum severance payment
equal to 200% of the sum of (A) the greater of (i) the Executive's annual
salary as in effect immediately prior to the Termination or (ii) the
Executive's annual salary as in effect immediately prior to the Change in
Control (the "Base Salary") plus (B) the greater of (i) the Executive's annual
bonus for the prior annual period, including performance bonus, amounts vested
under the Company's Restricted Stock Plan and amounts under any other bonus
program of the Company ("Bonus Amounts") or (ii) the average Bonus Amounts for
the prior two years, whichever is greater.
(b) Welfare Benefits. During the period from Termination until the second
anniversary thereof (the "Benefits Period"), the Company will maintain in full
force and effect for the continued benefit of the Executive each employee
medical, life and disability insurance benefit plan (collectively, the
"Welfare Benefit Plans") maintained by the Company in which officers of the
Company are generally entitled to participate, unless an essentially
equivalent and no less favorable benefit is provided by a subsequent
employer. If the terms of any Welfare Benefit Plan do not permit continued
participation by the Executive, then the Company will arrange to provide to
the Executive a benefit substantially similar to, and no less favorable than,
the benefit he was entitled to receive under such plan at the end of the
period of coverage.
(c) 280G. Notwithstanding the foregoing, in the event that Section 280G
of the Internal Revenue Code (the "Code") is applicable to payments under this
Agreement and the Company's independent auditors determine that any payment by
the Company to or for the benefit of the Executive (whether payable pursuant
to the terms of this Agreement or otherwise) would not be deductible by the
Company for Federal income tax purposes solely by reason of Section 280G of
the Code, then the amounts payable to the Executive under this Agreement will
be reduced to such lesser amount as will permit all, or the maximum possible
amount, of the payments to be made by the Company to be deductible in
accordance with Section 280G of the Code. The Executive may determine which
of the amounts payable under this Agreement will be eliminated or reduced
consistent with the requirements set forth above; except that if the Executive
does not make such determination within 10 business days of receipt of the
<PAGE> 4
calculations made by the independent auditors referred to above, the Company
may elect which of the amounts payable under this Agreement will be eliminated
or reduced consistent with the requirements set forth above and will notify
the Executive promptly of such election.
4. Conditions to the Obligations of the Company. The Company will have no
obligation to pay or cause to be paid to the Executive the Benefits described
in Section 3 hereof if any of the following events occur:
(a) The Company terminates the Executive's employment for "cause". For
purposes of this Agreement, termination of employment for "cause" means (i)
willfully engaging in illegal conduct or gross misconduct which is materially
and demonstrably injurious to the Company, (ii) engaging in fraud,
misappropriation, embezzlement or any act or acts of dishonesty resulting or
intended to result directly or indirectly in a substantial gain or personal
enrichment to the Executive at the expense of the Company or any of its
Subsidiaries, (iii) willfully and continually failing substantially to perform
his or her duties with the Company (other than a failure resulting from the
Executive incapacity due to physical or mental illness), which failure has
continued for a period of a least 30 days after a written notice of demand for
a substantial performance has been delivered to the Executive specifying in
reasonable detail the manner in which the Executive has failed to substantially
perform, or (iv) the intentional and material violation of the provisions of
paragraph 5 and 6 (relating to confidential information) and paragraph 7
(relating to disparagement).
(b) The Executive has not, promptly after Termination and upon receiving a
written request to do so, resigned as a director and/or officer of each
Subsidiary and affiliate of the Company of which he is then serving as a
director and/or officer.
(c) The Company terminates the Executive's employment for "disability". For
purposes of this Agreement, "disability" means the physical or mental
incapacity or disability of the Executive which renders him unable to perform
his duties for the Company for a period of six months or longer, as confirmed
in writing by an independent physician selected by the Executive or his legal
representative.
5. Confidentiality. Executive shall not disclose to any person any
Confidential Information relating to the Company or any of its subsidiaries or
affiliates, except as expressly requested by the Company or as required by law
or by an order of a court or governmental agency with jurisdiction. Executive
shall give written notice to the Company of any such requirement, or
threatened requirement, by a court or government agency in order to allow the
Company the opportunity to resist such requirement. For purposes of this
Agreement, "Confidential Information" shall mean non-public information
concerning financial data, business plans, operating policies and manuals,
product development, patentable inventions or improvements, arrangements with
employees, customer lists, marketing or sales plans and any other proprietary
information of the Company or any of its Subsidiaries or affiliates, except
for specific items which have become publicly available information other than
through a breach by Executive of this fiduciary duty or of any confidentiality
agreement.
6. Discoveries. Executive will immediately call to the attention of the
Company any invention or improvement which Executive has discovered or may
discover solely or jointly with others relating to any device or process which
<PAGE> 5
is applicable or related to the Company's business, or which may be of use in
connection therewith, regardless of whether such invention or improvement was
conceived, made or developed on the Company's time and at the expense of the
Company, or on Executive's time and at the expense of Executive, provided that
such invention or improvement was conceived or discovered during the term of
his employment with the Company, or within six months following the
termination of such employment. Executive will, on demand, assign, transfer
and set over unto the Company, its successors or assigns, the entire right,
title and interest in and to any such invention or improvement that he has
made or conceived since his initial employment with the Company, or that he
may make or conceive, either solely or jointly with others during his
employment with the Company, or within six months following the termination of
such employment. The Company, at its own expense, may thereupon apply for all
letters patent which the Company deems necessary or advisable, which letters
patent shall be the exclusive property of the Company. Executive shall
execute all documents necessary or desirable to obtain any such letters patent
and assignment thereof to the Company
7. Disparagement.
(a) For a period of three (3) years following the termination of Executive's
employment with the Company, Executive will not disparage, denigrate or
ridicule the Company, nor shall Executive disparage, denigrate or ridicule any
of the Company's subsidiaries or directors, or any individual or entity with
whom the Company or any of its subsidiaries or affiliates has a business
relationship, whether by way of news interviews or the expression of personal
views, opinions or judgments to the news media, or otherwise. Nothing herein
will prevent Executive from promoting his subsequent employer or its products
after his voluntary resignation hereunder.
(b) The Company will not, for a period of three (3) years following the
termination of Executive's employment with the Company, disparage, denigrate
or ridicule Executive
8. Arbitration and Expenses.
(a) Any dispute or controversy arising under or in connection with this
Agreement will be settled by arbitration, conducted before a panel of three
arbitrators in Danbury, Connecticut, in accordance with the rules of the
American Arbitration Association then in effect. The arbitrators are to be
approved by both the Company and the Executive and their decision will be
binding on the parties and conclusive for all purposes. Judgment may be
entered on the arbitrators' award in any court having jurisdiction. All
expenses of such arbitration will be borne by the Company.
(b) The Company will pay or reimburse the Executive for all costs and
expenses (including, without limitation, attorneys' fees) incurred by the
Executive as a result of any claim action or proceeding (including, without
limitation, a claim, action or proceeding by the Executive against the
Company) arising out of, or challenging the validity, advisability or
enforceability of, this Agreement or any provision hereof, except to the
extent the arbitrators determine that the Executive's claim, action or
proceeding is frivolous or without merit.
9. Successors. The Company will promptly require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in
form and substance satisfactory to the Executive, expressly, absolutely and
unconditionally to assume and agree to perform this Agreement in the same
<PAGE> 6
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. As used in this Agreement, "the
Company" includes any successor to all or substantially all of the Company's
business or assets which executes and delivers (or is required to execute and
deliver) an agreement provided for in this Section 9 or which otherwise
becomes bound by all the terms and provision of this Agreement by operation of
law.
10. Notice of Termination. Any termination of the Executive's employment by
the Company will be communicated to the Executive at the address set forth
above (or such other address as the Executive may have notified the Company in
writing for purposes of this Agreement) in a written notice and, except for
termination for "cause", will specify a termination date no sooner than 15
days after the giving of such notice.
11. Term of Agreement. This Agreement will terminate on October 16, 2000,
unless a Change in Control has occurred on or prior to such date, in which
case this Agreement will continue in effect for 24 months following the Change
in Control.
12. Miscellaneous.
(a) No Duty to Mitigate. The Executive's entitlement to Benefits hereunder
will not be governed by any duty to mitigate the amount of any payment by
seeking other employment or taking any other action nor will the amount of
Benefits be reduced by any compensation which he may receive from other
employment or otherwise after Termination, except as provided in paragraph
3(b).
(b) Assignment. No right, benefit or interest hereunder will be subject to
assignment, anticipation, alienation, sale, encumbrance, charge, pledge,
hypothecation or set-off in respect of any claim, debt or obligation, or to
execution, attachment, levy or similar process.
(c) Construction of Agreement. Nothing in this Agreement may be construed to
amend any provision of any plan or policy of the Company. Subject to Section
10 hereof, this Agreement is not, and nothing herein will be deemed to create,
a commitment of continued employment of the Executive by the Company.
(d) Amendment. This Agreement may not be amended, modified or canceled
except by written agreement of the parties.
(e) Waiver. No provision of this Agreement may be waived except by a writing
signed by the party to be bound thereby.
(f) Severability. In the event that any provision or portion of this
Agreement is determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement will remain in full force and effect to
the fullest extent permitted by law.
(g) Taxes. Any payment or delivery required under this Agreement will be
subject to all requirements of the law with regard to withholding of taxes,
filing, making of reports and the like, and the Company will use its best
efforts to satisfy promptly all such requirements.
(h) Governing Law. This Agreement will be governed and construed in
accordance with the laws of the State of New York.
<PAGE> 7
(i) Entire Agreement. This Agreement sets forth the entire agreement and
understanding of the parties hereto with respect to the matters covered
hereby.
Executive:
COGNITRONICS CORPORATION
By: Its:
<PAGE> 1
Exhibit 10.10
Memorandum of Understanding
Plaintiffs in the consolidated actions (collectively, the "Actions") entitled
Michael Germano v. Cognitronics Corporation and Matthew J. Flanigan, Civ. 3:93
CV 539 (CFD), Barry L. Bragger, et al. v. Matthew J. Flanigan and
Cognitronics, Inc., Civ. 3:93 CV 546 (CFD), and John M. Mitnick v.
Cognitronics Corp., Matthew J. Flanigan and G. Sullivan, Civ. 3:93 CV01106
(CFD), pending in the United States District Court for the District of
Connecticut (the "Court"), on behalf of themselves and the class set forth
below, have reached an agreement providing for (i) the settlement of the
Actions against, and the release of, defendants Cognitronics Corporation
("Cognitronics"), Matthew J. Flanigan ("Flanigan"), and Garrett Sullivan
("Sullivan") (Collectively, the "Defendants"), and (ii) the release of all
persons other than the Defendants who were directors and/or officers of
Cognitronics at any time during the period from October 29, 1992 through March
12, 1993 (the "Released Directors and Officers") on the terms and subject to
the conditions set forth below, which shall be incorporated in a Stipulation
of Settlement to be executed by the parties to this Memorandum of
Understanding (the "Settlement").
1. In exchange for a complete release by plaintiffs, as specifically
described in Paragraph 6 below, and other consideration in favor of the
Defendants and the Released Directors and Officers, Cognitronics and National
Union Fire Insurance Company of Pittsburg, Pa. ("National Union"), on behalf
of defendants Flanigan and Sullivan (the "Individual Defendants") and the
Released Directors and Officers, shall pay the aggregate cash sum of
$2,300,000, which shall be deposited into trust accounts (the "Settlement
Fund"), as hereinafter described.
2. A portion of the Settlement Fund in the amount of $1,500,000.00 was
deposited on December 31, 1997 into a trust account of D'Amato & Lynch,
counsel to National Union, at Citibank, N.A., 120 Broadway, New York, New York
and invested in U.S. Treasury securities, or their equivalent. The interest
accruing in such account shall become part of the Settlement Fund. Within
twenty (20) days of the execution of this Memorandum of Understanding, the
remaining $800,000 portion of the Settlement Fund shall be deposited into a
trust account of Hughes Hubbard & Reed LLP, attorneys for Cognitronics, at
Chase Manhattan Bank, which shall be invested in U.S. Treasury securities or
their equivalent. The interest accruing in such account shall become part of
the Settlement Fund.
3. Following final Court approval of the Settlement, the Settlement Fund,
after deduction of notice and settlement administration costs, plaintiffs'
counsel's fees, expenses and individual awards approved by the Court, and any
taxes and related expenses, will be distributed to the Class consisting of all
persons and entities who purchased Cognitronics' common stock on the open
market during the period from October 29, 1992 through March 11, 1993,
inclusive (the "Class Period"). Excluded from the Class are the Defendants in
the Actions, the Released Directors and Officers, members of the immediate
family of each of the Individual Defendants and the Released Directors and
Officers, any entity with which any Defendant or any of the Released Directors
and Officers is affiliated (as that term is defined in Rule 12b-2 promulgated
by the Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934, as amended) and the legal representatives, heirs, successors,
predecessors in interest or assigns of any Individual Defendant or any of the
Released Directors and Officers.
4. The Settlement Fund shall advance and pay all reasonable costs of
notice of the proposed Settlement required by Rule 23(e) of the Federal Rules
of Civil Procedure. These costs shall be limited to the costs relating to
<PAGE> 2
printing and first class mailing of the notice (including broker and other
nominee expenses relating to the notice) and publication of the notice to
shareholders required under said Rule 23(e). Plaintiffs and their counsel
shall not be liable for such notice costs so advanced and paid from the
Settlement Fund, regardless of whether the Settlement is finally approved.
5. In the event the Settlement is not finally approved by the Court, the
Settlement Fund, less the notice costs required to be advanced, paid or
accrued under paragraph 4 hereof, shall be released from the trust accounts
and returned to the funders thereof pro rata in accordance with the funders'
respective contributions to the Settlement Fund. In the event the Settlement
is finally approved, the Settlement Fund, less notice costs advanced, paid or
accrued, shall be transferred to Wolf Popper LLP, as Chairman of Plaintiffs'
Executive Committee. After deduction for settlement administrative costs, and
plaintiffs' attorneys fees and expenses awarded by the Court, the amount
remaining from the Settlement Fund shall be distributed pursuant to a plan of
allocation proposed by Plaintiff's Executive Committee and approved by the
Court. Defendants shall have no reversionary interest in the Settlement Fund
once the Settlement is finally approved by the Court.
6. The Settlement shall be conditioned solely on (i) the execution of an
appropriate Stipulation of Settlement and other customary documentation by the
parties to this Memoranudm of Understanding and (ii) approval by the Court.
The Stipulation of Settlement will provide for a release of all claims, known
and unknown, that plaintiffs and members of the Class have and may have
against any of the Defendants, any of the Released Directors and Officers, any
Related Party (i.e., any agent, attorney, accountant, insurer, advisor,
representative, independent contractor, affiliate, heir, or associate) of the
Defendants and of the Released Directors and Officers by reason of or in any
way related to the purchase, acquisition, ownership or sale of Cognitronics'
common stock or in any way connected with (a) any acts or omissions or failure
to act during the Class Period which are or could have been alleged or
referred to in the Actions, or (b) the adequacy of disclosure or the filing of
or failure to file with the Securities Exchange Commission or any other
governmental agency at any time during the Class Period or the dissemination
of or failure to disseminate at any time during the Class Period any reports,
representations, announcements or other statements, or any other act or
omission or failure to act occurring during the Class Period, concerning, in
each case, any Cognitronics' common stock or Cognitronics' business
operations, transactions, financial condition, prospects or earnings.
7. Contemporaneously with the execution of the Stipulation of Settlement,
National Union, Cognitronics, and the Individual Defendants will execute a
Release and Settlement Agreement, which will provide, inter alia, (a) for
mutual releases of all claims, known and unknown, that Cognitronics and/or the
Individual Defendants have or may have against National Union, or that
National Union has or may have against Cognitronics and/or the Individual
Defendants, under National Union policy no. 440-06-95, by reason of or based
upon (i) any of the Actions, (ii) the Settlement and/or (iii) acts, failures
to act, omissions, misrepresentations or other subject matter that were or
could have been alleged in the Actions, including any claim that Cognitronics
or National Union breached any obligation under policy no. 440-06-95 and (b)
for the allocation between Cognitronics and National Union of the payment of
the settlement funds and defense costs.
8. Plaintiffs' counsel intend to apply for an award of attorneys' fees in
an aggregate amount of up to one-third (33 1/3%) of the Settlement Fund, plus
expenses, payable out of the Settlement Fund. Plaintiffs' counsel also intend
to apply for individual awards in amounts not to exceed $15,000 in total to
the three named plaintiffs, Michael Germano, Barry L. Bragger and John M.
Mitnick, for having acted as class representatives, payable out of the
<PAGE> 3
Settlement Fund. The Defendants shall not oppose plaintiffs' applications for
attorneys' fees, expenses, and individual awards to the named plaintiffs.
9. Nothing contained in this Memorandum of Understanding, the Stipulation
of Settlement, the releases and other agreements executed in connection with
the Settlement shall be construed as an admission by any Defendant of any
alleged liability, fault or wrongdoing, whatsoever, of the Defendants or any
of them.
10. The Settlement shall be presented to the Court for a fairness hearing
as soon as practicable.
11. This Memorandum of Understanding may be executed in four original
counterparts - one for each of the signatories hereto and one for the Court
(if required).Dated: January 28, 1998
WOLF POPPER LLP
By:
Robert M. Kornreich
Chairman of Plaintiffs' Executive
Committee on Behalf of all Plaintiffs
HUGHES HUBBARD & REED LLP
By:
Robert W. Brundige, Jr.
Attorneys for all Defendants
D'AMATO & LYNCH
By:
Charles Bramham
Attorneys for National Union Fire
Insurance Company of Pittsburgh, Pa.
<PAGE> 1
Exhibit 22
COGNITRONICS CORPORATION
SUBSIDIARIES
Dacon Electronics Plc
(incorporated in United Kingdom)
Dacon Electronics Corp.
(Incorporated in New Jersey)
American Computer Corp.
(Incorporated in New York)
(inactive)
Reed Printing, Inc.
(Incorporated in New York)
(inactive)
Stamford Crescent Corp.
(Incorporated in Connecticut)
(inactive)
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-42543 dated August 30, 1991) pertaining to the Cognitronics
Corporation 1967 Employee Stock Purchase Plan, the Registration Statements
(Form S-8 No. 33-42544 dated August 30, 1991 and Form S-8 No. 333-05897 dated
June 13, 1996) pertaining to the Cognitronics Corporation 1990 Stock Option
Plan and the Registration Statement (Form S-8 No. 333-05899 dated June 13,
1996) pertaining to the Cognitronics Corporation Restricted Stock Plan of our
report dated March 6 , 1998, with respect to the consolidated financial
statements of Cognitronics Corporation included in this Annual Report
(Form10-K) for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 30, 1998
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