<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from to
Commission file number 0-3035
COGNITRONICS CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-1953544
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Corporate Drive, Danbury, Connecticut 06810-4130
(Address of principal executive offices) (Zip Code)
(203) 830-3400
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for at least the past 90 days. Yes x No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of March 31, 1998.
Common Stock, par value $0.20 per share -- 3,668,017 shares
<PAGE> 2
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
1998 1997
(Unaudited)
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,460 $ 8,088
Accounts receivable, net 5,410 4,300
Inventories 4,119 4,386
Deferred income taxes 1,013 1,023
Other current assets 1,706 1,050
------- -------
TOTAL CURRENT ASSETS 19,708 18,847
PROPERTY, PLANT AND EQUIPMENT, NET 1,199 1,223
GOODWILL, NET 1,565 1,648
DEFERRED INCOME TAXES 767 769
OTHER ASSETS 634 636
------- -------
$23,873 $23,123
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,452 $ 2,378
Accrued compensation and benefits 862 1,051
Income taxes payable 688 317
Current maturities of debt 141 114
Other accrued expenses 1,977 1,875
------- -------
TOTAL CURRENT LIABILITIES 5,120 5,735
LONG-TERM DEBT 98 111
OTHER NON-CURRENT LIABILITIES 2,267 2,263
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 10,000,000
shares; issued 3,668,017
and 3,667,351 shares 734 733
Additional paid-in capital 13,285 13,209
Retained earnings 2,263 1,067
Currency translation adjustment 120 24
Unearned compensation (14) (19)
------- -------
TOTAL STOCKHOLDERS' EQUITY 16,388 15,014
------- -------
$23,873 $23,123
======= =======
See Note to Condensed Consolidated Financial Statements.
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COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands except per share amounts)
Three Months Ended
March 31,
1998 1997
---- ----
SALES $7,540 $5,548
COST AND EXPENSES:
Cost of products sold 3,329 2,653
Research and development 472 381
Selling, general and
administrative 1,743 1,586
Amortization of goodwill 83 83
Other (income), net (35) (16)
------ ------
5,592 4,687
------ ------
Income before income taxes 1,948 861
PROVISION FOR INCOME TAXES 752 357
------ ------
NET INCOME 1,196 504
Currency translation adjustment 96 (153)
------ ------
COMPREHENSIVE INCOME $1,292 $ 351
====== ======
NET INCOME PER SHARE:
Basic $.32 $.15
==== ====
Diluted $.30 $.14
==== ====
Weighted average number of
shares outstanding:
Basic 3,682,910 3,412,223
========= =========
Diluted 4,019,492 3,656,890
========= =========
See Note to Condensed Consolidated Financial Statements.
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COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Three Months Ended
March 31,
-------------------
1998 1997
---- ----
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES $ (626) $ 764
------ ------
INVESTING ACTIVITIES
Additions to property, plant and
equipment, net (58) (60)
------ ------
NET CASH USED BY INVESTING ACTIVITIES (58) (60)
------ ------
FINANCING ACTIVITIES
Principal payments on debts (31) (45)
Issuance of debt 42 231
Common stock issued pursuant to employee
stock plans (666 and 10,060 shares) 2 29
------ ------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 13 215
------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES 43 (58)
------ ------
INCREASE IN CASH AND CASH EQUIVALENTS (628) 861
CASH AND CASH EQUIVALENTS - BEGINNING
OF PERIOD 8,088 4,169
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $7,460 $5,030
====== ======
INCOME TAXES PAID $ 85 $ 253
====== ======
INTEREST EXPENSE PAID $ 10 $ 10
====== ======
See Note to Condensed Consolidated Financial Statements.
<PAGE> 5
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1998
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. The balance sheet at December
31, 1997 has been derived from the audited financial statements at that date.
For further information, refer to the consolidated financial statements and
footnotes thereto and the quarterly financial data included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
Inventories (in thousands):
March 31, December 31,
1998 1997
--------- ------------
Finished and in process $3,111 $3,450
Materials and purchased parts 1,008 936
------ ------
$4,119 $4,386
====== ======
Other Non-Current Liabilities (in thousands):
March 31, December 31,
1998 1997
--------- ------------
Accrued supplemental pension plan $ 660 $ 667
Accrued deferred compensation 322 324
Accrued pension expense 667 670
Accrued post-retirement benefit liability 784 778
------ ------
2,443 2,439
Less current portion 176 176
------ ------
$2,267 $2,263
====== ======
Income Per Share:
In computing basic earnings per share, the diluted effect of stock options and
warrants are excluded.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
established new rules for the reporting of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires foreign
<PAGE> 6
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to
the requirements of SFAS No. 130.
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
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. In the year ended December
31, 1997, the Company expensed its share of the proposed settlement related to
this litigation. In February 1998, the Company deposited into an escrow
account, pending the Court's approval of the settlement, its share of the
proposed settlement, $.8 million, which is included in other current assets.
In April 1998, the parties submitted to the Court a Stipulation of
Settlement. The agreement is contingent upon approval by the Court of the
Stipulation of Settlement. 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 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net income increased 137% to $1.2 million ($.30 per diluted share) in the
quarter ended March 31, 1998, from $.5 million ($.14 per diluted share) in the
comparable 1997 quarter on a sales increase of 36%.
Consolidated sales for the first quarter of 1997 increased $2.0 million, or
36%, from the prior year period. Sales of domestic operations increased $1.4
million, or 38%, due to higher volume of sales to original equipment
manufacturers, competitive access providers and local exchange carriers and
sales of the United Kingdom distributorship operations increased $.4 million,
or 32%, from the prior year due to higher volume of third party products.
The gross margin percentage increased to 56% in the current quarter from 52%
in the comparable quarter in 1997 primarily due to cost reductions and a
favorable product mix.
Research and development expense increased $.1 million, or 24%, from the same
period in 1997 primarily due to higher personnel costs.
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Selling, general and administrative expense increased $.2 million, or 10%, in
the current quarter from the same 1997 quarter primarily due to higher
personnel costs in the United Kingdom.
The Company's effective tax rate for 1997 was 39% versus 42% for 1996. 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 and a higher proportion of income attributable to the UK
distributorship operations, which has a lower effective tax rate. Under
Statement of Financial Accounting Standards No. 109, the Company has
recognized future tax benefits that management believes will be realized. In
order to realize this benefit, the Company, exclusive of the results of 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 and the recognition of such expense, for tax purposes,
is, in large measure, within the control of the Company and the provision for
the class action settlement which should reverse this year. The non-current
tax benefit, $.8 million, primarily relates to deferred compensation and
benefit plans and, as such, would be recognized over a long period of time.
The Company's U.S. pretax income was $1.5 million for the quarter ended March
31, 1998 and $5.3 million, $.8 million and $1.0 million for the years ended
December 31, 1997, 1996 and 1995, respectively. Based on this, management
anticipates that the Company will generate sufficient taxable income in the
future to realize these benefits.
Liquidity and Sources of Capital
Working capital and the ratio of current assets to current liabilities
increased to $14.6 million and 3.8:1 at March 31, 1998 compared to $13.1
million and 3.4:1 at December 31, 1997. The improvement in 1998 is mainly due
to the Company's results of operations for the three months ended March 31,
1998.
In 1998, the Company anticipates purchasing $.5 million of equipment and
incurring increased research and development expenditures. Management
believes that its cash and cash equivalents and the cash flow from operations
in 1998 will be sufficient to meet these needs.
In 1993, a purported consolidated class action lawsuit was filed against the
Company and certain of its officers (see Note to the Condensed Consolidated
Financial Statements and Part II - Item 1. Legal Proceedings).
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-Q) may contain statements which
are not historical facts, so-called "forward-looking statements". These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
future results may differ significantly from those stated in any
forward-looking statements. Forward-looking statements involve a number of
risks and uncertainties, including, but not limited to , product demand,
pricing, market acceptance, litigation, risk of dependence on significant
customers, third party suppliers and intellectual property rights, risks in
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product and technology development and other risk factors detailed in this
Quarterly Report on Form 10-Q and in the Company's other Securities and
Exchange Commission filings.
Part II
Item 1. Legal Proceedings
In 1993, purported class action lawsuits were filed against the Company and
certain of its officers as follows:
1. Michael Germano v. Cognitronics Corporation and Matthew J.
Flanigan in the United States District Court, District of Connecticut,
dated March 15, 1993;
2. Barry L. Bragger and Eve Gerber vs. Matthew J. Flanigan
and Cognitronics, Inc. in the United States District Court, District
of Connecticut dated March 16, 1993; and
3. John M. Mitnick, on behalf of himself and all other similarly
situated v. Cognitronics Corp., Matthew J. Flanigan and G. Sullivan
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. In the
year ended December 31, 1997, the Company has expensed its share of the
proposed settlement related to this litigation. In February 1998, the Company
deposited into an escrow account, pending the Court's approval of the
settlement, its share of the proposed settlement, $.8 million. In April 1998,
the parties submitted to the Court a Stipulation of Settlement. The agreement
is contingent upon approval by the Court of the Stipulation of Settlement.
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 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits
<PAGE> 9
Exhibit
10.1 Stipulation of Settlement among parties to the Consolidated
Class Action Suits (attached as Exhibit 10.1 to this
Quarterly Report on Form 10-Q)
(b) No reports on Form 8-K were filed during the current quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COGNITRONICS CORPORATION
Registrant
Date: May 7, 1998 By /s/ Garrett Sullivan
---------------------
Garrett Sullivan, Treasurer
and Chief Financial Officer
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IN THE UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
- ------------------------------x
:
IN RE COGNITRONICS : MASTER FILE NO.
SECURITIES LITIGATION : 3:93CV539 (CFD)
:
- ------------------------------x
:
THIS DOCUMENT RELATES TO: : April 14, 1998
:
ALL ACTIONS :
:
- ------------------------------x
STIPULATION OF SETTLEMENT
THIS STIPULATION OF SETTLEMENT (the "Stipulation") is made and entered
into as of April 14, 1998, by and between the parties set forth below:
WHEREAS, by Order of this Court dated June 24, 1993 (the "Consolidation
Order"), the following actions were consolidated (the consolidated actions are
referred to herein as the "Action") in this District for all purposes pursuant
to Rule 42(a) of the Federal Rules of Civil Procedure:
Michael Germano v. Cognitronics Corporation and Matthew J. Flanigan,
Civ. Action No. 3:93-CV-539 (D. Conn.);
Barry L. Bragger and Eve Gerber v. Matthew J. Flanigan and Cognitronics,
Inc., Civ. Action No. 3:93-CV-546 (D. Conn.); and
John H. Mitnick v. Cognitronics Corporation, Matthew J. Flanigan and G.
Sullivan, Civ. Action No. 1-93-CB-554-CAM (N.D. Ga.);
WHEREAS, on or about July 8, 1993, pursuant to the Consolidation Order,
plaintiffs Michael Germano, Barry Bragger, Eve Gerber, and John Mitnick (the
"Original Plaintiffs"), individually and as putative representatives of a
class consisting of all persons and entities who purchased securities of
Cognitronics Corporation ("Cognitronics") in the open market from October 29,
1992 through March 12, 1993, inclusive, filed a consolidated amended class
action complaint (the "Complaint") in the Action;
WHEREAS, the Complaint alleges class action claims against the defendant
Cognitronics and defendants Matthew J. Flanigan and Garrett Sullivan (the
"Individual Defendants" and collectively with Cognitronics, the "Defendants")
under Section 10(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), 15 U.S.C. § 78j(b), Rule 10b-5 promulgated by the
Securities and Exchange Commission thereunder, and Section 20(a) of the
Exchange Act, 15 U.S.C. § 78t;
WHEREAS, the claims set forth in the Complaint allege that press releases
issued by Cognitronics on October 29, 1992, and February 10, 1993, were
materially false and misleading, and were issued in knowing or reckless
disregard of the truth;
WHEREAS, on or about July 27, 1993, Defendants moved to dismiss the
Complaint;
WHEREAS, on or about August 13, 1993, the Original Plaintiffs moved for
class certification;
WHEREAS, on or about June 24, 1996, plaintiff Eve Gerber withdrew from
the Action and dismissed her claims against Defendants, without prejudice and
without costs to any party;
WHEREAS, on or about March 25, 1997, the Court (a) denied Defendants'
motion to dismiss the Complaint; (b) referred the Action to United States
Magistrate Judge Donna F. Martinez for a settlement conference; and (c)
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denied, without prejudice, the motion of Germano, Bragger, and Mitnick (the
"Class Plaintiffs") to certify the Class (defined below) and ordered
resubmission of Class Plaintiffs' class certification motion;
WHEREAS, on or about May 15, 1997, Defendants served and filed their
Answer, wherein they denied all allegations of wrongdoing asserted against
them by Class Plaintiffs and asserted various defenses;
WHEREAS, after resubmission of Class Plaintiffs' class certification
motion, Class Plaintiffs and Defendants entered into a stipulation, dated July
30, 1997, agreeing to certification of a class in the Action;
WHEREAS, on September 16, 1997, the parties appeared at a settlement
conference before United States Magistrate Judge Donna F. Martinez;
WHEREAS, by order dated September 16, 1997, Magistrate Judge Martinez set
December 19, 1997, as the initial deadline for the completion of merits
discovery;
WHEREAS, Class Plaintiffs have conducted substantial discovery,
including: the inspection and analysis of thousands of pages of documents
produced by Defendants and non-parties, including Cognitronics' accountants,
customers, and public relations firm; the taking of nine depositions and
conducting of interviews with various other witnesses; and the evaluation of
Defendants' interrogatory responses;
WHEREAS, as a result of the extensive discovery taken, as referenced
above, and consultations with their damage expert, Class Plaintiffs, through
their counsel, have made a thorough investigation into the facts and
circumstances relevant to the Action;
WHEREAS, after, and as a result of, negotiations between the parties in
an attempt to settle the Action, the parties hereto reached agreement and
executed a Memorandum of Understanding, dated January 28, 1998, setting out
generally the terms and conditions of this settlement;
WHEREAS, Class Plaintiffs have considered the expense and length of time
necessary to prosecute this Action through trial and any subsequent appeals,
the uncertainties and obstacles to prevailing at trial against Defendants and
proving damages in this complex litigation, as well as the substantial benefit
provided to the Class by the settlement;
WHEREAS, Class Plaintiffs and their counsel have agreed to compromise and
settle this Action upon the terms and conditions of this Stipulation by reason
of the conclusion reached by counsel for the Class that settlement of the
litigation upon the terms and conditions provided for in this Stipulation (the
"Settlement") is fair, reasonable and adequate and is in the best interests of
the Class; and
WHEREAS, Defendants deny any fault, wrongdoing or liability whatsoever
and maintain that there is no substance to any of the allegations made against
them in the Complaint and desire, by settlement of all controversies between
Defendants, on the one hand, and Class Plaintiffs and the Class, on the other
hand, to avoid the expense, inconvenience, distraction and delay of further
litigation:
NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED, by and among Class
Plaintiffs and Defendants and the Insurer (defined below), by their duly
authorized counsel, subject to the approval of the Court pursuant to Rule
23(e) of the Federal Rules of Civil Procedure, that effective immediately upon
the Effective Date, as defined herein, Class Plaintiffs and all Class members
who do not validly exercise their right to opt-out of the Class in accordance
with procedures set forth in Exhibit B (hereinafter collectively the
"Releasors"), for good and sufficient consideration, the receipt of which is
hereby acknowledged, do hereby forever discharge and release with prejudice
all claims (hereinafter the "Settled Claims"), known and unknown, that the
Releasors have and may have against the Releasees (defined below) 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) the Action; (b)
<PAGE> 3
the Settlement (except relating to the enforcement thereof); (c) any acts or
omissions or failure to act during the Class Period (defined below) which are
or could have been alleged or referred to in the Action; and/or (d) 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, upon and subject to the following terms and conditions:
1. The following terms shall have the meanings ascribed to them below
(it being understood that other terms are defined elsewhere in this
Stipulation):
a. "Class" shall mean all persons and entities who purchased
Cognitronics' common stock in the open market during the period from October
29, 1992 through March 11, 1993, inclusive (the "Class Period"). Excluded
from the Class are any persons who were directors or officers of Cognitronics
at any time during the Class Period (the "Excluded Officers and Directors"),
the Defendants, members of the immediate family of each of the Individual
Defendants and any of the Excluded Officers and Directors, any entity with
which any Defendant or any of the Excluded Officers and Directors 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 of the Defendants or any of the
Excluded Officers and Directors.
b. "Class Counsel" shall mean the law firm of Wolf Popper LLP as
Chair of Plaintiffs' Executive Committee; and the firms of Gilman & Pastor,
Doffermyre Shields Canfield Knowles & Devine, and Hurwitz & Sagarin PC.
c. "Effective Date" shall mean the date when (a) this
Stipulation, including any modification thereto made with the consent of the
parties, has been approved by the Court; and (b) a Judgment, substantially in
the form as annexed hereto as Exhibit E (the "Judgment"), has been entered and
the time to seek review or appeal of the Judgment has expired without any
review or appeal having been sought or taken or if such review or appeal is
sought or taken, such review or appeal shall have been finally determined
(including any appeals thereof) in such a manner as to permit the
implementation of the Settlement substantially in accordance with the terms
set out in this Stipulation. (The Judgment, after such appeals process has
been completed, being hereinafter referred to as the "Final Judgment").
d. "Fee Effective Date" shall mean the later of the Effective
Date or the date when (a) the application by Class Counsel for an award of
attorneys' fees and reimbursement of their out-of-pocket expenses incurred in
prosecuting the Action (including experts' fees and expenses), described in
paragraph 7 of this Stipulation, has been decided by the Court; and (b) an
order relating to Class Counsel's fee and expense application has been entered
and the time to seek review or appeal of such order has expired without any
review or appeal having been sought or taken or if such review or appeal is
sought or taken, such review or appeal shall have been finally determined
(including any appeals thereof) in such a manner as to permit the
implementation of the Settlement with respect to such application according to
the terms set out in paragraph 7 of this Stipulation.
e. "Insurer" shall mean National Union Fire Insurance Company of
Pittsburgh, Pa.
f. "Notice" shall mean the Notice of Pendency of Class Action
and Hearing on Proposed Settlement provided to the Class annexed hereto as
Exhibit B.
<PAGE> 4
g. "Plan of Allocation" shall mean the plan of allocation
described in the Notice.
h. "Proof of Claim" shall mean the Proof of Claim and Release
annexed to the Notice and annexed hereto as Exhibit C.
i. "Releasees" shall mean the Defendants, 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"), and 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.
j. "Settlement Administrator" shall mean the designee and its
agents, retained by Class Counsel to facilitate the giving of notice to the
Class and to administer the Settlement.
k. "Settlement Fund" shall mean $2.3 million in cash paid in
settlement by, or on behalf of, the Defendants, plus all interest earned
thereon, pursuant to paragraph 2 of this Stipulation.
l. "Summary Notice" shall mean the Summary Notice of Pendency of
Class Action and Hearing on Proposed Settlement annexed hereto as Exhibit D.
2. In consideration for, and contingent upon, the dismissal of the
Action with prejudice and without costs to any party, the approval by the
Court of this Stipulation and/or any modification made hereto with the consent
of the parties, and the entry of the Final Judgment, Defendants and the
Insurer shall pay in full settlement hereof the total sum of Two Million Three
Hundred Thousand Dollars ($2,300,000.00) in cash, plus all interest earned
thereon after the dates of deposit described below (the "Settlement Fund"). A
portion of the Settlement Fund in the amount of $1,500,000 was deposited on
December 31, 1997, into a trust account of D'Amato & Lynch, counsel to the
Insurer, at Citibank, N.A., 120 Broadway, New York, New York and invested in
U.S. Treasury securities, or their equivalent. The interest earned in such
account shall become part of the Settlement Fund. The remaining $800,000
portion of the Settlement Fund was deposited on February 17, 1998, into a
trust account of Hughes Hubbard & Reed LLP, attorneys for Defendants, at Chase
Manhattan Bank, and invested in U.S. Treasury securities or their equivalent.
The interest earned in such account shall become part of the Settlement Fund.
3. After the Effective Date, the Settlement Fund, less the Notice
Costs (defined below) that have been advanced in accordance with paragraph 4,
shall be paid to the Chair of Plaintiffs' Executive Committee, to be held in
escrow in an interest bearing account for the benefit of the Class. Such
payment shall be made by D'Amato & Lynch and by Hughes Hubbard & Reed LLP of
the respective portions of the Settlement Fund held in their trust accounts,
as aforesaid, plus interest earned thereon, within five (5) business days
after receiving written notice from the Chair of the Plaintiffs' Executive
Committee of the Effective Date and information sufficient for such payments
to be made by wire transfer. The Settlement Fund, from the time it is
deposited by the Chair of Plaintiffs' Executive Committee until it is
distributed to Claimants, shall be invested and reinvested, to the extent
reasonably practicable, in obligations of the United States Government or in a
segregated, interest-bearing escrow account designated by Class Counsel. All
interest which is earned in such escrow account shall become part of the
Settlement Fund.
4. Prior to the scheduling of a hearing pursuant to Rule 23(e) of the
Federal Rules of Civil Procedure (the "Class Settlement Hearing"), the
Settlement Fund shall advance and pay all reasonable costs of notice (the
"Notice Costs") of the proposed Settlement required by Rule 23(e) of the
Federal Rules of Civil Procedure. Notice Costs shall be limited to the costs
relating to printing and first class mailing of the notice (including broker
and other nominee expenses relating to the notice) and publication of such
<PAGE> 5
notice to members of the Class, as may be required by the Court pursuant to
said Rule 23(e). Cognitronics and/or the Insurer shall advance from the
Settlement Fund and pay to the Chair of Plaintiffs' Executive Committee the
amount of $30,000 for such purpose. Any amount not so utilized for Notice
Costs shall be held in escrow by the Chair of Plaintiffs' Executive Committee
and shall remain part of the Settlement Fund. Class Plaintiffs and their
counsel shall not be liable for Notice Costs so incurred or paid from the
Settlement Fund, regardless of whether the Settlement is finally approved.
5. Promptly following execution of this Stipulation, Class Counsel
shall apply to the Court for entry of a Preliminary Approval Order in the form
annexed hereto as Exhibit A, which shall, among other things:
a. tentatively certify the Action as a class action on behalf of
the Class pending the Class Settlement Hearing (defined below);
b. determine that the terms and conditions of the Settlement, as
set forth in the Stipulation, fall within the range of possible approval, and
that the Settlement is preliminarily approved;
c. preliminarily approve the Plan of Allocation;
d. set the time and date of a hearing (the "Class Settlement
Hearing") (i) to determine whether the Action should be finally certified as a
class action on behalf of the Class; (ii) to determine whether the Settlement
and Plan of Allocation are fair, reasonable and adequate to the members of the
Class and should be approved by the Court; (iii) to determine whether the
Judgment should be entered approving the Settlement and dismissing the Action
on the merits, with prejudice, and without costs; and (iv) to consider an
application by Class Counsel for an award of attorneys' fees and the
reimbursement of their out-of-pocket expenses (including expert's fees and
expenses) incurred in connection with the prosecution of the Action and
individual awards to the Class representatives described in paragraph 7;
e. approve as to form and content the "Notice," "Proof of
Claim," and "Summary Notice," in the forms annexed hereto as Exhibits B, C and
D;
f. direct the mailing of the Notice and Proof of Claim form to
Class members and the publication of the Summary Notice;
g. provide for a procedure for members of the Class to opt-out
of the Class in accordance with Fed. R. Civ. P. 23(c)(2);
h. provide a procedure for any objection by any person who is
legally entitled to object, and who desires to object to the approval of the
proposed Settlement, certification of the class, the Plan of Allocation, or
the application for attorneys' fees and expenses and entry of the Final
Judgment, and require that such person: (1) must appear at the Class
Settlement Hearing and show cause why the proposed Settlement should not be
approved as fair, reasonable and adequate, and why said Final Judgment should
not be entered approving the Settlement; (2) must file with the Court written
notice of their intention to appear; and (3) must file, and serve Class
Counsel, counsel for Defendants, and counsel for the Insurer with copies of
all papers in support of their objections by a date prior to the Class
Settlement Hearing specified by the Court, or else be deemed to have waived
and be forever foreclosed and barred from asserting such objections;
i. provide for a claims process whereby Class members who do not
properly opt-out must timely submit a qualifying Proof of Claim or else be
forever barred from receiving any payment from the Settlement Fund
notwithstanding that they will be bound by all other aspects of any Final
Judgment approving the Settlement;
j. authorize Class Counsel to select the Settlement
Administrator to facilitate the giving of notice to the Class and to
administer the Settlement; and
k. provide for such other relief as the Court may deem to be
necessary and proper under the circumstances.
<PAGE> 6
6. The Settlement contemplated by this Stipulation is contingent upon
the entry of the Final Judgment:
a. certifying the Action as a class action on behalf of the
Class;
b. approving the Settlement as fair, reasonable and adequate to
the members of the Class and directing its consummation in accordance with the
terms and conditions of this Stipulation;
c. dismissing the Action with prejudice and without costs except
as herein provided;
d. enjoining proceedings against, and confirming the release and
discharge of the Releasees from the Settled Claims as provided herein;
e. awarding Class Counsel fees and reimbursement of their
out-of-pocket expenses (including expert's fees and expenses) and individual
awards to the Class representatives in such amounts as the Court determines
pursuant to their application for such as described in paragraph 7 below or
reserving jurisdiction with respect thereto; and
f. reserving jurisdiction to effectuate and enforce this
Settlement on the terms and conditions set forth in this Stipulation.
7. At or following the Class Settlement Hearing, Class Counsel shall
apply to the Court for an award of attorneys' fees and reimbursement of their
out-of-pocket expenses (including expert's fees and expenses) incurred in
connection with their prosecution of this Action, which award shall be
contingent upon approval of the Settlement by the Court. Class Counsel shall
apply for an award of attorneys' fees in an aggregate amount of not more than
one-third (33 1/3%) of the amount of the Settlement Fund at the time of the
Hearing, plus expenses (including expert's fees and expenses), payable out of
the Settlement Fund. Class Counsel shall 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 Mitnick, for having acted as Class
representatives, payable out of the Settlement Fund. Defendants and the
Insurer will not oppose Class Counsel's applications for attorneys' fees,
expenses, and individual awards to named plaintiffs in the amounts and for the
purposes indicated above. Any order or proceeding relating to such an
application, or any appeal from any order or proceeding relating thereto or
reversal or modification thereof, shall not operate to terminate or cancel
this Stipulation, or be grounds for delaying the approval or the entry of, or
for modifying or otherwise affecting the Settlement, this Stipulation, the
Final Judgment or any other order entered pursuant to this Stipulation. On
the Fee Effective Date, the attorneys' fees and reimbursement of their
out-of-pocket expenses (including expert's fees and expenses), as awarded by
the Court, shall be paid out of the Settlement Fund to Wolf Popper LLP, as
Chair of Plaintiffs' Executive Committee, on behalf of all Class Counsel.
8. In the event that the Settlement, and/or any orders proposed
jointly by the parties relating thereto, are not finally approved by the Court
substantially in the form submitted, or that approval of the Settlement,
and/or such orders, are modified or reversed in any material respect by any
appellate or other court, Class Plaintiffs, Defendants and the Insurer shall
each have the right to terminate the Settlement by providing written notice to
the other parties within ten (10) days from the Court's final order of denial,
modification or reversal of its approval of the Settlement, or from the
modification or reversal of the approval of the Settlement in any material
respect by any appellate or other court. In that event, this Stipulation and
all orders entered in connection with it shall become null and void and of no
further force and effect; the Settlement Fund, less the Notice Costs required
to be paid or incurred under paragraph 4 hereof, shall be released from the
trust accounts and returned to Cognitronics and/or the Insurer as agreed
between them; and Class Plaintiffs and Class Counsel shall not be liable for
such Notice Costs so paid or incurred, but shall be required to return any
<PAGE> 7
funds advanced for Notice Costs that have not been used for such costs.
9. If the Effective Date occurs, the Settlement Fund will be
distributed as soon as practicable under the Court's direction and supervision
in the following manner pursuant to the Plan of Allocation as approved by the
Court:
a. To pay or reimburse any remaining Notice Costs, the costs of
settlement administration, and any income taxes (and related expenses), on
account of income earned by the Settlement Fund;
b. To pay to Class Counsel fees and expenses (including expert's
fees and expenses) in an amount to be approved by the Court;
c. To pay individual awards to Class Plaintiffs Michael Germano,
Barry L. Bragger, and John M. Mitnick in an amount to be approved by the
Court; and
d. To pay, after deduction of the foregoing amounts from the
Settlement Fund, the balance of the Settlement Fund (the "Net Settlement
Fund") to the members of the Class who have not validly and timely opted out
and who have submitted valid and timely Proofs of Claim, in accordance with
the terms of the Plan of Allocation approved by the Court.
10. Neither Defendants, the Insurer, nor any "related persons" as
defined under §§ 267(b) or 707(b)(1) of the Internal Revenue Code
shall have any reversionary interest in the Settlement Fund subsequent to the
Effective Date.
11. a. A member of the Class desiring to participate in the
distribution of the Net Settlement Fund shall file with the Settlement
Administrator or other designee of Class Counsel a completed Proof of Claim,
postmarked within ninety (90) days after the publication of the Summary
Notice, or such other time as may be set by the Court;
b. the Proof of Claim shall be filed in the form annexed to the
Notice, shall be executed under oath or affirmation, and shall be accompanied
by brokers' confirmations, monthly account statements or other documentation
acceptable to the Settlement Administrator or Class Counsel, documenting all
relevant purchases, sales and holdings of Cognitronics' common stock, as
applicable;
c. all Proofs of Claim will be subject to review by Class Counsel
or the Settlement Administrator. Each Proof of Claim shall be deemed to have
been filed when received;
d. if any Proof of Claim is rejected in whole or in part, notice
thereof shall be given to the person filing said Proof of Claim advising said
person of the reason for such rejection and of the right to appeal to the
Court. Any member of the Class who fails to submit a qualifying Proof of
Claim shall be forever barred from receiving any payment pursuant to this
Stipulation, but shall in all other respects be subject to and bound by the
terms of this Stipulation and any orders of approval thereof, including the
releases contained in said documents;
e. distributions from the Settlement Fund shall only be made to
Class members who timely submit a valid Proof of Claim, and shall be made in
accordance with the Plan of Allocation described in the Notice or as otherwise
approved by the Court;
f. Class Counsel may obtain the services of the Settlement
Administrator to review and process the Proofs of Claim and to assist in
giving Notice to the Class and in the administration of this Stipulation and
distribution of the Net Settlement Fund; and
g. the administration of this Settlement and the resolution of all
disputed questions of law and fact relating to the allowance of claims to
participate in the Net Settlement Fund, including the manner of proving
claims, shall be under the authority of the Court.
12. After the Settlement Administrator has made reasonable and
diligent efforts to distribute the Net Settlement Fund to Class members who
<PAGE> 8
are entitled to participate in the distribution of the Net Settlement Fund,
any balance remaining in the Net Settlement Fund one (1) year after the
initial distribution shall be contributed to non-sectarian, not-for-profit,
501(c)(3) organization(s) designated by the Chair of Plaintiffs' Executive
Committee and not affiliated with Class Counsel.
13. The Plan of Allocation described in the Notice shall be
considered by the Court separately from the Court's consideration of the
fairness, reasonableness and adequacy of the Settlement. Notwithstanding the
provisions of any other paragraph of this Stipulation, any order or proceeding
relating to the Plan of Allocation or any appeal from any order relating
thereto or reversal or modification thereof shall not operate to terminate or
cancel this Stipulation, or be grounds for delaying the approval or the entry
of, or for modifying or otherwise affecting the Settlement, this Stipulation,
the Final Judgment or any other order entered pursuant to this Stipulation.
Defendants and the Insurer shall have no role in formulating the Plan of
Allocation, in the review, validation or approval of Proofs of Claim, or in
any other aspect of the administration of the Settlement, nor any obligation
or liability with respect thereto. However, Cognitronics shall have the
right, upon submitting to the Chair of Plaintiffs' Executive Committee a
written request articulating good cause therefor, to review and receive copies
of the Proofs of Claim and related documents and correspondence.
14. The Settlement Fund shall be treated as a Qualified or Designated
Settlement Fund under § 468B of the Internal Revenue Code and the
regulations promulgated thereunder (including, specifically, Treasury
Regulation § 1.468B-1). The Defendants and the Settlement Administrator
shall jointly execute all documents necessary to satisfy the requirements for
the "Relation Back Election" of the Settlement Fund. The Settlement
Administrator or other designee of Class Counsel shall take all necessary
steps in order to comply with § 468B(g) and Reg. § 1.468B-1 through
¶ 1.468B-5. The Settlement Administrator or other designee of Class
Counsel shall file all informational and other tax returns necessary to report
any income earned by the Settlement Fund, as and when legally required, and
shall make all tax payments (including interest and penalties) due on the
income earned by the Settlement Fund. All such taxes (including any interest
and penalties) due with respect to the income earned by the Settlement Fund
shall be paid by the Settlement Fund, and the Defendants and the Insurer shall
have no responsibility or liability therefor.
15. Class Plaintiffs, Defendants, and the Insurer agree to cooperate
with one another and to use their best efforts to obtain all necessary and
prompt approvals by the Court of the Settlement and this Stipulation.
16. This Stipulation shall not be modified or amended except by a
written agreement signed by Class Counsel, counsel for Defendants, and counsel
for the Insurer.
17. This Stipulation shall be governed by and construed in accordance
with the laws of the State of Connecticut.
18. This Stipulation shall be binding upon and inure to the benefit
of the parties hereto and their respective heirs, successors and assigns, and
any corporation, partnership, or other entity into or with which any party
hereto may merge, consolidate, or reorganize.
19. The Court shall retain jurisdiction with respect to this
Stipulation, the Settlement, and the administration thereof, and all disputes
relating thereto.
<PAGE> 9
Dated: New York, New York
April 13, 1998
WOLF POPPER LLP
845 Third Avenue
New York, New York 10022
As Chair of Plaintiffs'
Executive Committee on
Behalf of all Plaintiffs
Dated: New York, New York
April 14, 1998
HUGHES HUBBARD & REED LLP
One Battery Park Plaza
New York, New York 10004
Attorneys for Defendants
Dated: New York, New York
April 14, 1998
D'AMATO & LYNCH
70 Pine Street
New York, New York 10270
Attorneys for National Union
Fire Insurance Company of
Pittsburgh, Pa.
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