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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999,
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
(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, 2000:
Common Stock, par value $0.20 per share -- $112,965,000
The number of shares outstanding of each of the issuer's classes of common
stock as of March 1, 2000:
Common Stock, par value $0.20 per share -- 5,846,428 shares
Documents incorporated by reference: Portions of the Proxy Statement for the
annual meeting of stockholders to be held on May 11, 2000 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. . . . . . . . . . . . . . . . . . . . . . . . . .7
7a.Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . 10
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . 24
PART III
10. Directors and Executive Officers of the Company. . . . . . . . . . . . 24
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . 24
12. Security Ownership of Certain Beneficial Owners and Management . . . . 24
13. Certain Relationships and Related Transactions . . . . . . . . . . . . 24
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . 24
McIAS is a trademark of Cognitronics Corporation.
UNIX is a registered trademark of Santa Cruz Operation, Inc.
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PART I
Item 1. Business
(a) Cognitronics Corporation (the "Company") was incorporated in January
1962 under the laws of the State of New York. The Company designs, manufactures
and markets voice processing systems.
(b) The Company operates in two segments of the voice processing industry.
In the United States, the Company designs, manufactures and sells equipment for
use in telephone central offices. In Europe, the Company distributes equipment
for use on customers' premises.
(c) (i) A description of the fields of voice processing in which the Company
operates and its products are as follows:
Domestic Operation. These products are sold directly to telephone service
providers or through switch manufacturers who distribute the Company's products.
Intelligent Announcers. The Company's McIAS -trademark- 16xx product family
has been primarily used by Incumbent Local Exchange Carriers (ILECs) and
Competitive Local Exchange Carriers (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 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 -registered trademark- 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, scalable processing power and disk
drives, and centralized administration. Application examples include number
change with call completion, automated attendant, voice mail and time and
temperature announcements.
A new product line, the CX Series, was announced and sales began in 1999. This
family of products provides greater capacity and increased functionality to meet
carriers' network needs in Advanced Intelligent Network ("AIN") and packet
switched environments. Included in the CX capabilities are a new MultiResource
Line Card and support for several key AIN protocols such as SS7, SR-3511,
GR-1129-CORE and ISDN-PRI. The CX is also designed and planned to be IP
Telephony and ATM ready by providing key packet switched network support such as
MGCP, MEGACO, RTP/RTCP, H.323, SIP and others.
Passive Announcers. These announcers are used by the ILECs and 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 950, and the McIAS 16xx product family.
Call Processors. The Company's McIAS 950 is also an automated attendant and
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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.
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 1999 in obtaining such materials, supplies and components.
(iv) The Company relies on technological expertise, responsiveness to
users' needs and innovations and believes that these are of greater significance
in its industry than patent protection. There can be no assurance that patents
owned or controlled by others will not be encountered and asserted against the
Company's voice processing products or that licenses or other rights under such
patents would be available, if needed. The Company has registered trademarks
and names which the Company considers important in promoting the business of the
Company and its products.
(v) Seasonality. Inapplicable.
(vi) The discussion of liquidity and sources of capital as set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations is included in Item 7 of this Annual Report on Form 10-K and is
incorporated herein by reference.
(vii) In 1999, revenues included sales of $7.3 million to Siemens
Communication Networks Inc., $2.9 million to Alcatel Indetel Industria de
Telecomunicacion S.A. de C.V. and $2.9 million to GTE Corp. The Company's U.K.
operations had sales of $4.6 million to British Telecommunications Plc in 1999.
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, 1999 and 1998, amounted to $.5 million and $1.2 million,
respectively. Substantially all of the orders as of December 31, 1999, can
reasonably be expected to be filled during 2000.
(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
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expenditures will be based, in part, on future results of operations. There
are no assurances that the Company will be able to successfully develop and
market new products and applications.
(xi) Expenditures for research and development activities, as determined in
accordance with generally accepted accounting principles, amounted to $2.1
million in 1999, $2.0 million in 1998 and $1.8 million in 1997. In addition,
the estimated dollar amount spent on the improvement of existing products or
techniques was $.2 million in each of the years.
(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, 1999, the Company and its subsidiaries employed 91
people.
(d) Sales to foreign customers primarily represent sales of Dacon Electronics
Plc. (incorporated in the United Kingdom) of $7.2 million in 1999, $8.3 million
in 1998 and $8.0 million in 1997. Additional information about foreign
operations is included in Note K 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 $3.5 million in 1999, $2.4 million in 1998 and $1.1 million in
1997. Export sales do not involve any greater business risks than do sales to
domestic customers and, in certain instances, the Company obtains an irrevocable
letter of credit or payment prior to shipment of products to the customer.
Selling prices and gross profit margins on export-type sales are comparable to
sales to domestic customers.
Item 2. Properties
The facilities of the Company and its subsidiaries are located as follows:
SQUARE LEASE EXPIRATION
LOCATION DESCRIPTION FEET DATE
Danbury, Connecticut: Office, engineering, 40,000 10/31/03
3 Corporate Drive production and service
facility
Hemel Hempstead Office, distribution 12,000 7/31/01
Hertfordshire, and service facility
United Kingdom
1 Enterprise Way
The Company considers each of these facilities to be in good condition and
adequate for the Company's business.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company or any
of its subsidiaries is a party or of which any of their property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
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Executive Officers of the Company
The executive officers of the Company, their positions with the Company and
ages as of March 1, 2000 are as follows:
NAME POSITION(S) AND OFFICE(S) AGE
Brian J. Kelley President and Chief Executive Officer; Director 48
Kenneth G. Brix Vice President 53
Harold F. Mayer Secretary 70
Michael N. Keefe Vice President 44
Roy A. Strutt Vice President; Director 43
Garrett Sullivan Treasurer and Chief Financial Officer 54
Emmanuel A. Zizzo Vice President 59
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.
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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.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
(a) and (b) Cognitronics' Common Stock is traded on the American Stock
Exchange under the symbol CGN. On March 1, 2000, there were 738 shareholders of
record; the Company estimates that the total number of beneficial owners was
approximately 4,400. Information on quarterly stock prices is set forth in Item
8 of this Annual Report on Form 10-K and is incorporated herein by reference.
(c) The Company has never paid a cash dividend on its Common Stock and has
used its cash for the development of its business. In 1998, the Company
announced its intention to repurchase up to 300,000 shares of its Common Stock.
Through December 31, 1999, the Company had repurchased 105,900 shares of its
Common Stock. 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 1999 1998 1997 1996 1995
Revenues $31,693 $28,917 $29,521 $17,343 $17,485
Net income (loss) 5,346 4,689 3,622 1,099 1,321
Net income (loss) per share:
Basic $.94 $.85 $.69 $.22 $.27
Diluted .88 .78 .62 .20 .26
Weighted average number of
basic shares outstanding 5,670 5,543 5,233 5,074 4,917
Weighted average number of
diluted shares outstanding 6,048 5,993 5,840 5,378 5,157
FINANCIAL POSITION
Working capital $24,130 $18,281 $13,112 $ 8,745 $ 7,374
Total assets 35,102 27,080 23,123 17,511 15,040
Stockholders' equity 25,729 20,033 15,014 10,612 9,044
Stockholders' equity
per share $4.40 $3.58 $2.73 $2.04 $1.75
Cash dividends paid None None None None None
Included in 1997 is $956,000 (net of tax $598,000 or $.11 per basic share and
$.10 per diluted share) of settlement costs and legal fees related to class
action litigation.
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.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company reported net income of $5.3 million, $4.7 million and $3.6
million for 1999, 1998 and 1997, respectively.
In 1999, sales increased 10% to $31.7 million due to increased sales of $3.9
million (19%) by the Company's domestic operations, offset by decreased sales
of $1.1 million (13%) in its UK distributorship operations. The increased sales
in the U.S. operations were due to increased direct sales of $3.0 million and
$.9 million of indirect sales. The increase in direct sales was primarily
attributable to two customers and the increase in indirect sales was
attributable to increased sales of $5.7 million to three customers, offset by
a decrease of $4.9 million sales to another customer. In 1999, primarily in the
third quarter, the Company sold $2.9 million to Alcatel Indetel Industria de
Telecomunicacion S.A. de C.V., up from $2.0 million in the fourth quarter of
1998. This completed the project which began in the fourth quarter of 1998.
The decreased sales in UK distributorship operations were due to decreased
demand from its primary customer, reflecting increased competition faced by this
customer and obsolescence of certain products distributed by the Company. The
Company's backlog at December 31, 1999 was $.5 million, versus $1.2 million
at December 31, 1998. In 1999, a major portion of the Company's domestic
revenue came from one customer and a significant portion of its UK
distributorship revenue came from one customer. The loss of either of these
customers would have a material adverse impact on the Company.
Consolidated gross margin percentage improved 1% to 56% from 55% in 1998,
primarily due to an increase of 2.7% in the domestic operations' gross margin
attributable to improved product mix and higher volume. This was offset, in
part, by a 3.5% decrease in the UK distributorship's gross margin due to
unfavorable product mix and exchange rates.
In 1998, sales decreased 2% to $28.9 million from $29.5 million in 1997 due
to decreased sales of $.9 million (4%) by the Company's domestic operations,
offset in part by increased sales of $.3 million (4%) by the Company's UK
distributorship operations. This decrease reflects lower direct and indirect
(OEM) sales in the United States of $2 million, offset by an increase of $1.1
million in export sales (primarily to North America). The increase in export
sales was due to a $2.0 million sale to Alcatel Indetel Industria de
Telecomunicacion S.A. de C.V. in the fourth quarter of 1998, offset by lower
sales to another customer. The UK distributorship operations' increased sales
is primarily attributable to exchange rate fluctuation. Gross margin percentage
improved 1% to 55% in 1998 from 1997. The US operations' gross margin
percentage increased .5% in 1998 from 1997 due to improved product mix. The UK
distributorship's gross margin percentage increased 2.5% in 1998 as compared to
1997 due to favorable product mix and favorable exchange rates.
In 1999 and 1998, research and development increased $.1 million (7%) and
$.2 million (11%), respectively, in each year versus the prior year due to
higher personnel costs. The Company anticipates an acceleration in the rate of
increase in spending for research and development.
In 1999, selling, general and administrative costs increased $.9 million
(13%) due to an increase of $.7 million (20%) in the domestic operations and $.1
million (5%) in the UK distributorship operations. The increase in the domestic
operations was due to higher sales commissions and bonuses. In 1998, selling,
general and administrative costs decreased from the prior year $.4 million (6%)
to $6.6 million due to a decrease of $.5 million (10%) in the domestic
operations primarily attributable to lower bonus expense and sales commissions.
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Other income was $.4 million in 1999 and 1998 and $.2 million in 1997. The
increase in 1998 from 1997 is due to higher interest income earned on available
cash balances and marketable securities and to interest income realized on tax
refunds.
The Company's effective tax rate for 1999 and 1998 was 36% versus 39% for
1997. The reduction in the effective rate in 1998 from 1997 is attributable to
higher US tax credits for R&D, higher amounts of tax-free interest income and a
higher proportion of income from foreign operations. The provision for income
taxes is discussed in Note G to 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 $4.2 million.
The current deferred tax benefit of $.9 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. The non-current tax benefit,
$.7 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 $8.4 million, $6.0 million and $5.3 million in 1999, 1998 and
1997, 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. Technological advances and productivity
improvements are continually being applied to reduce costs, thus reducing
inflationary pressures on the operating results of the Company.
Exchange rate changes will impact the reported dollar sales and cost of
sales of the Company's UK distributorship operations. In addition, at December
31, 1999, the Company's UK distributorship operations had net assets of $1.6
million, which would be impacted by changes in foreign exchange rates. However,
the impact of such rate change would be reflected in the translation
adjustment recorded in the equity section of the balance sheet. The Company
does not hedge this foreign currency net asset exposure.
Liquidity and Sources of Capital
Net cash provided by operations was $3.0 million, $3.7 million and $4.5
million in 1999, 1998 and 1997, respectively, primarily due to the results of
operations. In 1999, cash provided by operating activities decreased from 1998
due to increased accounts receivable, inventories and tax payments, offset, in
part, by increases in accounts payable. Cash provided by operating activities
decreased in 1998 from 1997, in spite of increased net income due to an increase
in working capital. Cash used by investing activities was $6.1, $1 and $3.2
million in 1999, 1998 and 1997, respectively. Included in these amounts were
$5.6, $.5 and $2.7 million, respectively, for the net purchase of marketable
securities. Cash provided by financing activities was $.1 million in 1999 and
1998.
Working capital increased to $24.1 million at December 31, 1999 from $18.3
million at December 31, 1998 and $13.1 million at December 31, 1997. The ratio
of current assets to current liabilities was 4.4:1 at December 31, 1999 versus
4.9:1 at December 31, 1998 and 3.3:1 at December 31, 1997. The decrease in 1999
was due to a volume purchase of inventory items at a favorable price occurring
in the last quarter of 1999. The increase in 1998 is primarily due to the
results of operations.
<PAGE> 10
The Company anticipates making capital expenditures of approximately $.5
million and incurring increased research and development expenditures and may
repurchase up to 194,000 shares of its Common Stock in 2000. Management
believes that the cash and cash equivalents at December 31, 1999 and the cash
flow from operations in 2000 will be sufficient to meet its needs.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly. The Company expensed less than $.1
million during 1999 in connection with remediating its systems.
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.
Item 7.a Market Risk
The Company does not use derivative financial instruments. The Company is
exposed to changes in interest rates. The Company's marketable securities
consist of short-term and/or variable rate instruments and therefore a change
in interest rates would not have a material impact on the value of these
securities.
<PAGE> 11
Item 8. Financial Statements and Supplementary Data
QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands except per share amounts)
1999 FIRST SECOND THIRD FOURTH
- ---- ----- ------ ----- ------
Sales $7,804 $8,334 $9,662 $5,893
Gross profit 4,401 4,738 5,560 3,095
Net income 1,283 1,512 1,873 678
Net income per share:
Basic $.23 $.27 $.33 $.12
Diluted $.22 $.25 $.31 $.11
Common Stock price range:
High $6 13/64 $12 11/64 $14 3/8 $18 5/8
Low 4 7/8 5 27/64 9 3/8 9 3/4
1998 FIRST SECOND THIRD FOURTH
- ---- ----- ------ ----- ------
Sales $7,540 $7,069 $7,029 $7,279
Gross profit 4,211 3,955 3,901 3,767
Net income 1,196 1,189 1,114 1,190
Net income per share:
Basic $.21 $.21 $.20 $.21
Diluted $.20 $.20 $.19 $.20
Common Stock price range:
High $14 $12 1/4 $9 1/2 $8
Low 10 1/8 8 3/8 5 1/3 4 2/3
Included in the fourth quarter of 1998 is $100,000 (net of tax - $.01 per
basic share and diluted share) related to interest income on tax refunds. In
addition, the effective tax rates for the fourth quarter of 1999 and 1998 were
25.2% and 28.5%, respectively, versus the estimated effective rates of 37.3%
and 38.4% for the first nine months of 1999 and 1998, respectively.
The above financial information should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto.
<PAGE> 12
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, 1999 and 1998, and the related
consolidated statements of income and comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 3, 2000
<PAGE> 13
CONSOLIDATED BALANCE SHEETS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(dollars in thousands)
December 31,
1999 1998
ASSETS ---- ----
CURRENT ASSETS
Cash and cash equivalents $ 3,992 $ 6,991
Marketable securities 10,000 4,400
Accounts receivable, less allowances of $54 and $44 6,752 4,972
Inventories 9,079 5,012
Deferred income taxes 889 858
Other current assets 591 766
------- -------
TOTAL CURRENT ASSETS 31,303 22,999
PROPERTY, PLANT AND EQUIPMENT, net 1,370 1,334
GOODWILL, less amortization of $2,394 and $2,061 983 1,316
DEFERRED INCOME TAXES 685 809
OTHER ASSETS, less amortization of $11 in 1999 761 622
------- -------
$35,102 $27,080
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,312 $ 1,603
Accrued compensation and benefits 1,176 1,066
Income taxes payable 734 974
Current maturities of debt 49 112
Other accrued expenses 902 963
------- -------
TOTAL CURRENT LIABILITIES 7,173 4,718
LONG-TERM DEBT 90 140
OTHER NON-CURRENT LIABILITIES 2,110 2,189
COMMITMENTS AND CONTINGENCIES (Note I)
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a share; authorized
10,000,000 shares; issued 5,841,153 and 5,597,869
shares 1,168 1,120
Additional paid-in capital 14,050 13,628
Retained earnings 10,688 5,359
Cumulative other comprehensive income 66 166
Unearned compensation (243) (239)
------- -------
25,729 20,034
Less cost of 150 common shares in treasury in 1998 (1)
------- -------
TOTAL STOCKHOLDERS' EQUITY 25,729 20,033
------- -------
$35,102 $27,080
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE>14
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
COGNITRONICS CORPORATION AND SUBSIDIARIES
(in thousands except per share data)
Year ended December 31,
1999 1998 1997
---- ---- ----
SALES $31,693 $28,917 $29,521
COSTS AND EXPENSES
Cost of products sold 13,899 13,083 13,698
Research and development 2,132 1,997 1,807
Selling, general and administrative 7,422 6,564 6,972
Amortization of goodwill 333 332 333
Class action litigation 956
Other (income) expense, net (441) (404) (165)
------- ------- -------
23,345 21,572 23,601
------- ------- -------
Income before income taxes 8,348 7,345 5,920
PROVISION FOR INCOME TAXES 3,002 2,656 2,298
------- ------- -------
NET INCOME 5,346 4,689 3,622
Currency translation adjustment (100) 142 (153)
------- ------- -------
COMPREHENSIVE INCOME $ 5,246 $ 4,831 $ 3,469
======= ======= =======
NET INCOME PER SHARE:
Basic $.94 $.85 $.69
==== ==== ====
Diluted $.88 $.78 $.62
==== ==== ====
<PAGE> 15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1998 and 1999
(dollars in thousands)
<TABLE>
Common Stock Additional Compre- Unearned Treasury
Shares Paid-In Retained hensive Compensa- Shares
Outstanding Amount Capital Earnings Income tion Amount
---------- ------ --------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 5,213,194 $1,043 $12,250 $(2,702) $177 $(156)
Shares issued pursuant to
employee stock plans 317,082 63 1,129 (21) 137
Shares returned to pay statutory
withholding tax (29,415) (6) (170) (199)
Currency translation adjustment (153)
Net income 3,622
--------- ------ ------- ------- ----- -----
Balance at December 31, 1997 5,500,861 1,100 13,209 700 24 (19)
Shares issued pursuant to
employee stock plans 48,501 10 369 (3) (220)
Shares returned to pay statutory
withholding tax (5,800) (1) (29) (23)
Repurchase of common shares $(1)
Exercise of Warrants 54,307 11 79 (4)
Currency translation adjustment 142
Net income 4,689
--------- ------ ------- ------- ---- ----- ----
Balance at December 31, 1998 5,597,869 1,120 13,628 5,359 166 (239) (1)
Shares issued pursuant to
employee stock plans 243,284 48 422 (17) (4) 589
Repurchase of common shares (588)
Currency translation adjustment (100)
Net income 5,346
--------- ------ ------- ------- ---- ----- ----
Balance at December 31, 1999 5,841,153 $1,168 $14,050 $10,688 $ 66 $(243) $ 0
========= ====== ======= ======= ==== ===== ====
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(in thousands) Year ended December 31,
1999 1998 1997
---- ---- ----
OPERATING ACTIVITIES
Net income $5,346 $4,689 $3,622
Adjustments to reconcile net income to net cash
provided by operating activities:
Income tax expense 3,002 2,656 2,298
Depreciation and amortization 802 769 758
(Gain) loss on disposition of assets (15) 6 3
Shares issued as compensation 185 40 188
Net (increase) decrease in:
Accounts receivable (1,820) (605) (750)
Inventories (4,111) (569) (602)
Other assets (296) 284 (459)
Net increase (decrease) in:
Accounts payable 2,738 (802) 732
Accrued compensation and benefits 34 (60) 191
Other accrued expenses (62) (793) 1,218
------ ------ ------
5,803 5,615 7,199
Income taxes paid (2,760) (1,956) (2,712)
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,043 3,659 4,487
------ ------ ------
INVESTING ACTIVITIES
Purchase of marketable securities (11,200) (3,700) (5,750)
Sale of marketable securities 5,600 3,200 3,050
Proceeds from disposition of assets 10 24 387
Additions to property, plant and equipment (483) (539) (381)
Purchase of software licenses (528)
------- ------ ------
NET CASH USED BY INVESTING ACTIVITIES (6,073) (1,015) (3,222)
------- ------ ------
FINANCING ACTIVITIES
Principal payments on debt (111) (174) (433)
Issuance of debt 196 210
Shares issued pursuant to employee stock plans 783 22 611
Shares issued pursuant to warrants 86
Shares repurchased for treasury, 105,750 in 1999
and 150 in 1998 (588) (1)
Shares returned to pay statutory withholding tax
upon vesting of restricted stock (53) (375)
------- ------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 84 76 13
------- ------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES (53) 83 (59)
------- ------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,999) 2,803 1,219
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 6,991 4,188 2,969
------- ------ ------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 3,992 $6,991 $4,188
======= ====== ======
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, 1999, three such
companies accounted for 37% of the Company's accounts receivable. In addition,
50% of the Company's accounts receivable were supported by a guaranteed,
irrevocable letter of credit. The Company's markets are subject to rapid
technological change and frequent introduction of new products. The Company's
products are similar to those manufactured, or capable of being manufactured,
by a number of companies, some of which are well established with financial,
personnel and technical resources substantially larger than those of the
Company. The Company's ability to compete in the future depends on its ability
to maintain the technological and performance advantages of its current products
and to introduce new products and applications that achieve market acceptance.
Principles of Consolidation. The financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly-owned. Intercompany
accounts and transactions have been eliminated in consolidation.
Revenue. Revenue is recognized when products are shipped or when services are
rendered.
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) due to their terms and maturities approximate fair value.
Cash and Cash Equivalents. The Company considers financial instruments with a
maturity of three months or less from the date of purchase to be cash
equivalents. At December 31, 1999, essentially all of the Company's cash and
cash equivalent balances were with two financial institutions.
Marketable Securities. Marketable securities are classified as available for
sale and are reported at cost. Due to their short maturities and/or reset
provisions, their carrying value approximates fair value.
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. The estimated lives for
machinery and equipment are 5 to 12 years and for furniture and fixtures are 4
to 10 years.
<PAGE> 18
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.
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.
Income Per Share. In computing basic earnings per share, the dilutive effect
of stock options and warrants are excluded, whereas for diluted earnings per
share they are included. The shares used in the basic earnings per share
calculations were 5,670,023, 5,542,804 and 5,233,414 and in the diluted earnings
per share were 6,047,636, 5,993,077 and 5,839,815 for 1999, 1998 and 1997,
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.
Stock Split. All shares and per share amounts have been restated to give
retroactive effect to a 3 for 2 split in the form of a dividend declared July
1999. The par value of the additional shares of common stock issued in
connection with the stock split was credited to common stock and charged to
retained earnings.
NOTE B. VALUATION AND QUALIFYING ACCOUNTS
The allowance for doubtful accounts was increased (decreased) by $10,000,
$24,000 and $(12,000) in 1999, 1998 and 1997, respectively, by credits (charges)
to costs and expenses. The Company wrote off uncollectible accounts, net of
recoveries, of $18,000 and $53,000 in 1998 and 1997, respectively.
NOTE C. INVENTORIES (IN THOUSANDS):
1999 1998
---- ----
Finished and in process $3,947 $3,998
Materials and purchased parts 5,132 1,014
------ ------
$9,079 $5,012
====== ======
NOTE D. PROPERTY, PLANT AND EQUIPMENT (IN THOUSANDS):
1999 1998
---- ----
Machinery and equipment $1,768 $1,780
Furniture and fixtures 2,100 1,777
------ ------
3,868 3,557
Less allowances for depreciation 2,498 2,223
------ ------
$1,370 $1,334
====== ======
<PAGE> 19
NOTE E. OTHER NON-CURRENT LIABILITIES (IN THOUSANDS):
1999 1998
---- ----
Accrued officers' supplemental pension $ 593 $ 630
Accrued deferred compensation 305 316
Accrued pension 607 647
Accrued postretirement benefit 800 778
------ ------
2,305 2,371
Less current portion 195 182
------ ------
$2,110 $2,189
====== ======
NOTE F. DEBT AND CREDIT ARRANGEMENTS
Dacon Electronics Plc has a bank line of credit of $160,000 expiring in 2000.
During 1999 and 1998, no amounts were borrowed under this facility.
Long term debt (in thousands):
1999 1998
---- ----
Installment finance agreements, interest at 8% to 12%
per annum expiring through 2003 $139 $252
Less current maturities of debt 49 112
---- ----
$ 90 $140
==== ====
Payments on the installment finance agreements in each of the four years in
the period ending December 31, 2003 are $49,000, $43,000, $35,000 and $12,000,
respectively.
Interest of $30,000, $42,000 and $53,000 was paid in 1999, 1998 and 1997,
respectively.
NOTE G. INCOME TAXES
At December 31, 1999, the consolidated retained earnings included approximately
$1.3 million of retained earnings applicable to Dacon Electronics Plc, a foreign
subsidiary. If the undistributed earnings were remitted, any resulting federal
tax would be substantially reduced by foreign tax credits.
The components of the provision (benefit) for income taxes for the years ended
December 31 are as follows (in thousands):
<PAGE> 20
1999 1998 1997
---- ---- ----
Current:
Federal $2,428 $1,565 $2,023
Foreign 62 377 310
State 419 370 310
------ ------ ------
Total current 2,909 2,312 2,643
------ ------ ------
Deferred:
Federal 84 344 (345)
State 9
------ ------ ------
Total deferred 93 344 (345)
------ ------ ------
$3,002 $2,656 $2,298
====== ====== ======
Not reflected in the 1999, 1998 and 1997 tax provisions are $73,000, $94,000
and $509,000, respectively, of income tax benefits related to employee stock
plans; such amounts were credited to additional paid-in capital.
Domestic and foreign pretax income (loss) for the years ended December 31 are
as follows (in thousands):
1999 1998 1997
Domestic operations $8,484 $6,357 $5,313
Foreign Operations (136) 988 607
------ ------ ------
$8,348 $7,345 $5,920
====== ====== ======
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, 1999 and
1998 are as follows (in thousands):
1999 1998
---- ----
Deferred tax liabilities $ 238 $ 79
------ ------
Deferred tax assets:
Inventory valuation 701 700
Accrued liabilities and employee benefits 380 313
Accrued deferred compensation 333 351
Other postretirement benefits 304 296
Separate return federal operating loss carryforwards
expiring in 2008 and 2009 445 445
Other 94 86
------ ------
Total deferred tax assets 2,257 2,191
Valuation allowance (445) (445)
------ ------
1,812 1,746
------ ------
Net deferred tax assets $1,574 $1,667
====== ======
<PAGE> 21
Valuation allowance at January 1 $ (445) $ (686)
Credited (charged) to tax expense 22
Reclassified to taxes payable 219
------ ------
Valuation allowance at December 31 $ (445) $ (445)
====== ======
A reconciliation of the statutory federal income tax rate to the effective tax
rate on income for the years ended December 31, is as follows:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 3.4 3.6 3.5
Lower foreign tax rate (0.1) (1.0) (0.2)
Research & Development Credit (1.0) (1.6) (0.7)
Nontaxable interest income (1.2) (0.7) (0.4)
Goodwill amortization 1.0 1.5 1.9
Other (0.1) 0.4 0.7
---- ---- ----
36.0% 36.2% 38.8%
==== ==== ====
NOTE H. OTHER (INCOME) EXPENSE, NET (IN THOUSANDS):
Year Ended December 31,
1999 1998 1997
---- ---- ----
Interest expense $ 49 $ 73 $ 74
Interest income (490) (477) (239)
----- ----- -----
$(441) $(404) $(165)
===== ===== =====
NOTE I. COMMITMENTS
Leases. Total rental expense amounted to $532,000 in 1999, $465,000 in 1998
and $449,000 in 1997. Future annual payments for long-term noncancellable
leases for each of the five years in the period ending December 31, 2004 are
approximately $457,000, $399,000, $282,000, $217,000 and $0, respectively, and
no amounts 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):
1999 1998 1997
---- ---- ----
Interest cost on projected benefit obligation $117 $115 $103
Actual return on plan assets (50) (120) (170)
Net amortization and deferral (44) 31 77
---- ---- ----
Net periodic pension cost $ 23 $ 26 $ 10
==== ==== ====
<PAGE> 22
The following table sets forth the plan's funded status and the accrued
pension liability recognized in the Company's Consolidated Balance Sheets at
December 31 (in thousands):
1999 1998
---- ----
Projected benefit obligation for services rendered to date
Beginning of year $1,773 $1,542
(Gain)loss due to change in estimates (152) 227
Interest cost 116 115
Less benefits paid (151) (111)
------ ------
End of year 1,586 1,773
------ ------
Plan assets at fair value
Beginning of year 1,258 1,200
Actual return on plan assets 50 120
Contribution 63 49
Benefits paid (151) (111)
------ ------
End of year 1,220 1,258
------ ------
Plan assets less than projected benefit obligation (366) (515)
Unrecognized net asset, less accumulated amortization
of $164 and $156 (17) (25)
Unrecognized net gain (224) (107)
------ ------
Accrued pension liability (included in other non-current
liabilities) $ (607) $ (647)
====== ======
The discount rates used in determining the projected benefit obligation were
7.75% in 1999 and 6.75% in 1998. 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, 1999 and 1998 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 $53,000, $52,000 and $40,000
in 1999, 1998 and 1997, respectively.
Officers' Supplemental Pension Plan. The Company has an unfunded,
noncontributory defined benefit pension plan covering certain retired officers.
The components of net pension cost of the plan for the years ended
December 31 are as follows (in thousands):
1999 1998 1997
---- ---- ----
Interest cost on projected benefit obligation $34 $35 $39
Amortization of actuarial gains (2) (3) (6)
--- --- ---
Net periodic pension cost $32 $32 $33
=== === ===
The following table sets forth the plan's status and the accrued pension
liability recognized in the Company's Consolidated Balance Sheets at December 31
<PAGE> 23
(in thousands):
1999 1998
---- ----
Projected benefit obligations
Balance at beginning of period $543 $548
Loss on change in estimates 30
Interest expense 34 35
Less benefits paid (69) (70)
---- ----
Balance at end of period 508 543
Unrecognized net gain 85 87
---- ----
Accrued pension liability (included in other non-current
liabilities) $593 $630
==== ====
The discount rates used in determining the projected benefit obligation was
6.75% in 1999 and 1998 and 7.25% in 1997. 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 used in 1998 was 7.8% decreasing to 6%
after 6 years and for 1999 was 9% decreasing to 5% after 8 years. Increasing
the health care cost trend rate by one percentage point each year would increase
the accumulated postretirement benefit obligation by $73,000 at December 31,
1999 and the aggregate service and interest cost component of net periodic
postretirement benefit cost for 1999 by $5,000. The corresponding impact for a
1% decrease are $(64,000) and ($5,000), respectively. The weighted average
discount rates used in determining the net periodic postretirement benefit cost
and accumulated benefit obligation were 7.75% and 7.0% for 1999 and 1998,
respectively.
The following sets forth the plan's status and accrued postretirement benefit
liability recognized in the Company's Consolidated Balance Sheets at
December 31 (in thousands):
1999 1998
---- ----
Actuarial present value of accumulated postretirement
benefit obligation: $733 $635
Unrecognized net gain 67 143
---- ----
Accrued postretirement benefit liability (included in
other non-current liabilities) $800 $778
==== ====
The components of postretirement benefit cost for the years ended December 31,
are as follows (in thousands):
1999 1998 1997
---- ---- ----
Interest cost $53 $42 $36
Net amortization (8) (18)
--- --- ---
Net periodic cost $53 $34 $18
=== === ===
<PAGE> 24
Deferred Compensation. At December 31, 1999 and 1998, the liability relating
to a deferred compensation arrangement between the Company and a director and
former officer of the Company was $305,000 and $316,000, respectively.
NOTE J. STOCK PLANS
At December 31, 1999, the Company has reserved 124,250 shares of its common
stock for grant 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 52,478
shares were reserved for grant at December 31, 1999. 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.
The Company also has a time accelerated restricted stock plan ("Restricted
Stock Plan") under which 87 shares are available for grant. 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.
Share information pertaining to these plans is as follows:
Restricted
Option Purchase Stock
Plan Plan Plan
------ -------- ----------
Outstanding at January 1,1997 634,924 54,027 145,950
Granted 134,250 18,000
Cancelled or expired (707) (1,587)
Vested (139,413)
Exercised (247,348) (53,320)
------- ------ -------
Outstanding at December 31, 1997 521,826 0 22,950
Granted 175,725 28,603 39,000
Cancelled or expired (2,000)
Vested (20,550)
Exercised (9,501)
------- ------ ------
Outstanding at December 31, 1998 686,050 28,603 41,400
Granted 142,875 21,000
Cancelled or expired (4,101) (913)
Vested (12,480)
Exercised (300,497) (27,690)
------- ------ ------
Outstanding at December 31, 1999 524,327 0 49,920
======= ====== ======
The exercise price for options granted in 1997 ranged from $3.13 to $5.09, for
options granted in 1998 was $6.67 and for options granted in 1999 was $9.00.
The weighted average exercise price for the 524,477 options outstanding under
the Option Plan is $5.67 with expiration dates ranging from 2000 to 2004.
Options were exercised under the Option Plan at weighted average exercise prices
<PAGE> 25
of $1.94, $1.98 and $2.08 in 1997, 1998 and 1999, respectively. Shares
exercisable under the Option Plan at December 31, 1997, 1998 and 1999 were
340,075, 419,577 and 316,027, respectively.
Rights were granted under the Purchase Plan at an exercise price of $5.67 in
1998. Shares were exercised under the Purchase Plan at a weighted average price
of $2.48 in 1997 and $5.67 in 1999.
Under the Restricted Stock Plan compensation expense was $184,000, $30,000 and
$189,000 in 1999, 1998 and 1997, respectively.
During 1998, the Company established a stock option plan for non-employee
directors and officers. The plan provided for an initial grant of options to
purchase 3,000 shares to each participant (18,000 in total) at $5.50, the fair
market value on the date of grant, and additional grants of 1,500 shares for
each participant on August 1st of subsequent years at the then fair market
value. Effective August 1, 1999, an additional 1,500 shares were granted to
each participant (9,000 in all) at an exercise price of $11.17. Through
December 31, 1999, no grants under this plan have been exercised. At
December 31, 1999, the Company has reserved 25,500 shares of its Common Stock
for grant.
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 share
would be as follows (in thousands except per share information):
1999 1998 1997
---- ---- ----
Net income As reported $5,346 $4,689 $3,622
====== ====== ======
Pro forma $4,859 $4,442 $3,461
====== ====== ======
Net income per share As reported Basic $.94 $.85 $.69
==== ==== ====
Diluted $.88 $.78 $.62
==== ==== ====
Pro forma Basic $.86 $.80 $.66
==== ==== ====
Diluted $.81 $.75 $.60
==== ==== ====
The estimated weighted average fair value per share of stock options granted
were $5.16, $3.21 and $1.68 for 1999, 1998 and 1997, respectively. 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 1999, 1998 and 1997, respectively: risk-free
interest rates of 5.5%, 4.5% and 5.0%; no dividend yields; volatility factors
of the expected market price of the Company's common stock of .61 in 1999 and
.64 in 1998 and 1997; and a weighted-average expected life of the option of 3.8
years in 1999 and 1998 and 4.2 years for 1997 for the Option Plan; 9 months for
all years for the Purchase Plan, and 5 years for the Directors and Officers
Plan.
<PAGE> 26
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 1998, warrants to purchase 54,307 shares of common stock at $1.58 per share
were exercised and 20,693 expired.
<PAGE> 27
NOTE K. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREAS
The Company operates in two segments of the voice processing industry. In the
United States, the Company designs, manufactures and sells equipment for use in
telephone central offices. In Europe (United Kingdom), the Company distributes
equipment for use in customers' premises. Information about the Company's
operations by segment and geographic area for the years ended December 31,
is as follows (in thousands):
1999 1998 1997
---- ---- ----
Net sales
United States:
Unaffiliated customers (North America) $24,462 $20,603 $21,550
Intercompany transfers 194 98 186
------- ------- -------
24,656 20,701 21,736
Europe 7,231 8,314 7,971
Eliminations (194) (98) (186)
------- ------- -------
$31,693 $28,917 $29,521
======= ======= =======
Operating profit
United States $ 9,433 $ 7,247 $ 7,587
Europe (138) 878 594
Intercompany eliminations (10) 18 17
------ ------ ------
9,285 8,143 8,198
General corporate expenses 1,378 1,202 2,443
Other (income) expense, net (441) (404) (165)
------- ------- -------
Income before income taxes $ 8,348 $ 7,345 $ 5,920
======= ======= =======
Total assets
United States $31,238 $21,461 $17,086
Europe 3,919 5,670 6,092
Intercompany eliminations (55) (51) (55)
------- ------- -------
$35,102 $27,080 $23,123
======= ======= =======
Long-lived assets
United States $ 1,718 $ 1,531 $ 1,395
Europe 1,432 1,757 2,144
Intercompany eliminations (36) (16) (32)
------- ------- -------
$ 3,114 $ 3,272 $ 3,507
======= ======= =======
Expenditures for long-lived assets
United States $ 300 $ 384 $ 775
Europe 246 155 134
Intercompany eliminations (63) 0 0
------- ------- -------
$ 483 $ 539 $ 909
======= ======= =======
Depreciation and amortization
United States $ 279 $ 261 $ 251
Europe 540 525 512
Intercompany eliminations (17) (17) (5)
------- ------- -------
$ 802 $ 769 $ 758
======= ======= =======
<PAGE> 28
Gross profit margin on intercompany transfers are comparable to sales to third
parties. The United States operations had net sales of $1.9 million, $6.8
million and $7.4 million in 1999, 1998 and 1997, respectively, to one major
customer; sales of $7.3 million, $5.2 million and $5.4 million in 1999, 1998 and
1997, respectively, to another major customer; sales of $2.9 million in 1999 and
$2.4 million in 1997 to another customer and export sales of $2.9 million and
$2.0 million in 1999 and 1998, respectively, to another customer. The European
operations had sales of $4.6, $5.2 million and $5.0 million in 1999, 1998 and
1997, respectively, to one 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, 2000
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 11, 2000 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, 2000 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 11, 2000 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 11, 2000 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 11, 2000 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 11, 2000
is incorporated herein by reference.
<PAGE> 29
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
1999.
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 29, 2000.
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 29, 2000.
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
/s/ David H. Shepard Director
David H. Shepard
<PAGE> 30
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, 1999 and December 31, 1998 . 12
Consolidated Statements of Income and Comprehensive Income for each
of the three years in the period ended December 31, 1999 . . . . . . 13
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1999 . . . . . . . . . 13
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1999. . . . . . . . . . . . . . . . 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, are inapplicable, or the information has been included in the
Company's financial statements. and, therefore, have been omitted.
<PAGE> 31
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 1999 Executive Bonus Plan (attached as Exhibit 10.5 to this Annual
Report on Form 10-K).
<PAGE> 32
10.6 Cognitronics Corporation Restricted Stock Plan (attached as Exhibit
10.6 to this Annual Report on Form 10-K).
10.7 Form of Executive Severance Agreement between certain officers and
Cognitronics Corporation ( Exhibit 10.8 to Annual Report on Form 10-K
for the year ended December 31, 1997 and incorporated herein by
reference).
10.8 Addendum to Executive Severance Agreement between certain officers and
Cognitronics Corporation (attached as Exhibit 10.8 to this Annual Report
on Form 10-K).
10.9 The Directors' Stock Option Plan (attached as Exhibit 10.9 to this
Annual Report on Form 10-K).
22. List of subsidiaries of the Company as of December 31, 1999 (attached
as Exhibit 22 to this Annual Report on Form 10-K).
23. Consent of Independent Auditors, dated March 29, 2000 (attached as
Exhibit 23 to this Annual Report on Form 10-K).
Copies of the Exhibits to this Annual Report on Form 10-K are available upon
written request to the Secretary of the Company at 3 Corporate Drive, Danbury,
CT 06810-4130 and payment of $35.00 for a complete set of the Exhibits or $.25
per page for any part thereof (minimum $5.00).
<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.
.
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 thereto).
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 1,327,500
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.
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
<PAGE> 2
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 a share of Common Stock 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 a
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.
(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
<PAGE> 3
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 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 and by Resolutions of Stockholders on May 14, 1998 and
May 13, 1999.
11. New York State Law
The Terms of the Plan shall be governed by the laws of the State of New
<PAGE> 4
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 in Control.
"Change in Control" means an event in which:
(a) the stockholders of the Company approve (i) any consolidation or
merger of the Company or any of its subsidiaries where the stockholders
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 stockholders 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
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
<PAGE> 5
of Common Stock beneficially owned by any person to 20% or more of the shares of
Common 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
1999 EXECUTIVE BONUS PLAN
Participants:President, Vice President - Sales, Vice President - Engineering,
Vice President - Manufacturing and Treasurer
The bonus pool is to be calculated as follows:
Range of Operating Income(1) Bonus Pool
Under $2.5 million 4% of Operating Income
$2.5 million to $5 million $100,000 plus 6% of Operating
Income in excess of $2.5 million
$5 million to $7.5 million $250,000 plus 8% of Operating
Income in excess of $5 million
$7.5 million and over $450,000 plus 10% of Operating
Income in excess of $7.5 million
The bonus pool is to be allocated among the participants by the Compensation
Committee after reviewing the written recommendations of the President.
(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.
<PAGE> 1
EXHIBIT 10.6
COGNITRONICS CORPORATION
RESTRICTED STOCK PLAN
Section 1. Purpose.
The purpose of the Cognitronics Corporation Restricted Stock Plan is:
(a)to increase the proprietary interest in the Company of those Key Employees
whose responsibilities and decisions directly affect the performance of the
Company and its subsidiaries;
(b)to provide rewards for those Key Employees who make contributions to the
success of the Company and its subsidiaries; and
(c)to attract and retain persons of superior ability as Key Employees of the
Company and its subsidiaries.
Section 2. Definitions.
"Award" means an award of Restricted Stock granted to any Key Employee in
accordance with the provisions of the Plan.
"Award Agreement" means the written agreement evidencing each Award between
the Key Employee and the Company.
"Board" means the Board of Directors of the Company.
"Cause" means (i) the Key Employee is convicted of a felony involving moral
turpitude; or (ii) the Key Employee is guilty of willful gross neglect or
willful gross misconduct in carrying out his duties, resulting, in either
case, in material economic harm to the Company, unless the Key Employee
believed in good faith that such act or nonact was in the best interests of
the Company.
"Change in Control" means an event in which:
(a)the stockholders of the Company approve (i) any consolidation or
merger of the Company or any of its subsidiaries where the stockholders 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 stockholders 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 stockholders, is approved by a vote
of at least a majority of the then Incumbent Directors (other than an election
<PAGE> 2
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 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
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 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 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).
"Committee" means the Committee appointed by the Board to administer the Plan
pursuant to Section 4(a) hereof.
"Company" means Cognitronics Corporation and its successors and assigns.
"Constructive Termination Without Cause" means a termination of a Key
Employee's employment at his initiative following the occurrence, without the
Key Employee's prior written consent, of one or more of the following events
(except in consequence of a prior termination):
(i) a reduction in the Key Employee's base salary or the termination
or material reduction of any employee benefit or perquisite enjoyed by him
(other than as part of an across-the-board reduction applicable to all
executive officers of the Company);
(ii) a material diminution in the Key Employee's duties or the assignment
to the Key Employee of duties which are materially inconsistent with his
duties or which materially impair the Key Employee's ability to function in
his position with the Company.
(iii) the failure to continue the Key Employee's participation in any
incentive compensation plan unless a plan providing a substantially similar
opportunity is substituted; or
(iv) the relocation of the Key Employee's office location as assigned to
<PAGE> 3
him by the Company to a location more than 50 miles from his prior office
location.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from time
to time.
"Key Employee" means an officer or other key employee of any Participating Compa
ny who, in the judgment of the Committee, is responsible for or contributes to
the management, growth, technology or profitability of the business of any
Participating Company.
"Participating Company" means the Company or any subsidiary or other affiliate
of the Company.
"Plan" means the Cognitronics Corporation Restricted Stock Plan.
"Restricted Stock" means Stock delivered under the Plan subject to the
requirements of Section 7 hereof and such other restrictions as the Committee
deems appropriate or desirable.
"Stock"means the common stock ($.20 par value) of the Company.
"Total Disability" means the complete and permanent inability of a Key
Employee to perform substantially all of his or her duties under the terms of
his or her employment with any Participating Company, as determined by the
Committee upon the basis of such evidence, including independent medical
reports or data, as the Committee deems appropriate or necessary.
Section 3. Effective Date.
The effective date of the Plan shall be January 1, 1995, subject to
approval of the Plan by a majority of the Company's stockholders.
Notwithstanding anything in the Plan to the contrary, if the Plan shall have
been approved by the Board prior to such stockholder approval, Key Employees
may be selected and Award criteria may be determined and Awards may be made as
provided herein subject to subsequent stockholder approval.
Section 4. Plan Administration.
(a) Committee. The Plan shall be administered by a Committee appointed by
the Board and serving at the Board's pleasure. The Committee shall be
comprised of not less than two (2) members of the Board. Members of the
Committee shall be members of the Board who are "disinterested persons" within
the meaning of Rule 16b-3 under the Exchange Act or a successor rule or
regulation.
(b) Powers. The Committee is authorized, subject to the provisions of the
Plan, to establish such rules and regulations as it deems necessary or
advisable for the proper administration of the Plan and to take such other
action in connection with or in relation to the Plan as it deems necessary or
advisable. Each decision made or action taken pursuant to the Plan, including
interpretation of the Plan and the Awards granted hereunder by the Committee,
shall be final and conclusive for all purposes and upon all persons, including
without limitation, the Participating Companies, the Committee, the Board, Key
Employees and their respective successors in interest.
(c) Indemnification. No member or former member of the Committee or the
Board shall be liable for any action or determination made in good faith with
<PAGE> 4
respect to the Plan or any Award granted under it. Each member or former
member of the Committee or the Board shall be indemnified and held harmless by
the Company against all costs and expenses (including counsel fees) and
liability (including any sum paid in settlement of a claim with the approval
of the Board) arising out of any act or omission to act in connection with the
Plan unless arising out of such member's own fraud or bad faith. Such
indemnification shall be in addition to any rights of indemnification the
members or former members may have as directors or under the by-laws of the
Company.
(d) Independent Advisors. The Committee may employ such independent
professional advisors, including without limitation independent legal counsel
and counsel regularly employed by the Company, consultants and agents as the
Committee may deem appropriate for the administration of the Plan and may rely
upon any opinion received from any such counsel or consultant and any
computations received from any such consultant or agent. All expenses
incurred by the Committee in interpreting and administering the Plan,
including without limitation meeting fees and expenses and professional fees,
shall be paid by the Company.
Section 5. Participation.
Participation in the Plan shall be limited to Key Employees of the
Participating Companies who have received written notification from the
Committee, or from a person designated by the Committee, that they have been
selected to participate in the Plan. No employee shall at any time have any
right to be selected to participate in the Plan. No Key Employee having been
granted an Award shall have any right to be granted an additional Award in the
future. Neither the Plan nor any action taken thereunder shall be construed
as giving any Key Employee any right to be retained in the employ of the
Participating Companies. The right and power of the Participating Companies
to dismiss or discharge any Key Employee, with or without cause, is
specifically reserved.
Section 6. Award Grants and Agreements.
(a) Grants. The Chief Executive Officer ("CEO") of the Company may
recommend Key Employees to participate in the Plan, and may recommend the
timing, amount and restrictions, if any, and other terms and conditions of an
Award, subject to the terms of the Plan. The Committee, in its sole
discretion, has the authority to grant Awards under the Plan, which may be
made in accordance with the recommendations of the CEO or otherwise.
(b) Agreements. Each Award shall be evidenced by a written Award
Agreement, in a form adopted by the Committee. Each Award Agreement shall be
subject to and incorporate the express terms and conditions, if any, required
by the Plan, and contain such restrictions, terms and conditions as the
Committee may determine.
Section 7. Restricted Stock.
(a) Shares Subject to the Plan. An aggregate of 285,000 shares of Stock
may be awarded under the Plan as Restricted Stock. Any share of Restricted
Stock that is subject to an Award but that for any reason does not vest shall
again become available for an Award under the Plan.
(b) Adjustments. In the event of any change in the Stock subject to the
Plan (through merger, consolidation, reorganization, recapitalization, stock
dividend, split-up, spin-off, combination of shares, exchange of shares,
<PAGE> 5
issuance of rights to subscribe or other change in capital structure), the
Committee shall make appropriate adjustments in the amount of Stock available
for Awards under the Plan or subject to outstanding Awards, or the terms,
conditions or restrictions of such Awards as the Committee deems equitable to
prevent the dilution or enlargement of the benefits intended pursuant to the
Plan.
(c) Custody of Shares.
(i) Each certificate representing shares of Restricted Stock issued
pursuant to an Award shall be registered in the name of the Key Employee and
held, together with a stock power endorsed in blank, by the Company. Unless
and until such shares of Restricted Stock fail to vest and are forfeited as
provided herein, the Key Employee shall be entitled to vote all such shares of
Restricted Stock and receive all cash dividends, if any, with respect
thereto. All other distributions with respect to such Restricted Stock,
including, but not limited to, Stock received as a result of a stock dividend,
stock split, combination of shares or otherwise, shall be retained by the
Company in escrow. Each certificate of Restricted Stock issued pursuant to an
Award shall bear the following (or similar) legend:
"The transferability of this certificate and of the shares of Common Stock
represented hereby are subject to the terms and conditions (including vesting)
contained in the Cognitronics Corporation Restricted Stock Plan and an Award
Agreement entered into between the registered owner and Cognitronics
Corporation. A copy of such Plan and Award Agreement is on file in the office
of the Secretary of Cognitronics Corporation."
In lieu of the foregoing, the Company may issue stop transfer
instructions to its transfer agent or take such other steps as are necessary
to preclude the transfer of Restricted Stock.
(ii) Certificates representing shares of Restricted Stock which have
become vested pursuant to Section 7 hereof and which have been held by the
Company pursuant to Section 7(c) hereof shall be delivered by the Company to
the Key Employee (or the Key Employee's legal representative) in the form of a
freely transferable certificate, without legend (provided that the Key
Employee is not an "affiliate" of the Company within the meaning of Rule 405
adopted pursuant to the Securities Act of 1933, as amended) promptly after
becoming vested, provided, however, that the Company need not deliver such
certificates to a Key Employee until the Key Employee has paid or caused to be
paid all taxes required to be withheld pursuant to Section 8 hereof.
(d) Restriction Period.
(i) Vesting Schedule. Except as provided in Section 7(d)(ii),
7(d)(iii) or 7(d)(iv) hereof, to the extent that a Key Employee remains
continuously employed by a Participating Company, Restricted Stock received as
an award shall become vested and shall not be subject to forfeiture in
accordance with the following schedule:
Period of EmploymentPortion of Award Vested
Prior to the second anniversary date of the Award 0%
On or after the second anniversary date, but prior to the third
anniversary date of the Award 20%
On or after the third anniversary date, but prior to the fourth
anniversary date of the Award 40%
On or after the fourth anniversary date, but prior to the fifth
anniversary date of the Award 60%
<PAGE> 6
On or after the fifth anniversary date, but prior to the sixth
anniversary date of the Award 80%
On or after the sixth anniversary date of the Award100%
(ii) Waiver of Vesting Schedule. Notwithstanding the provisions of
Section 7(d)(i) hereof, with respect to any Key Employee or group of Key
Employees, the Committee may elect to waive or accelerate the vesting schedule
set forth in Section 7(d)(i) hereof, in whole or in part, at any time at or
after the time an Award is granted, based on such corporate, personal or other
performance criteria as the Committee may determine and require, in its sole
discretion.
(iii) Death, Disability and Retirement. Notwithstanding the provisions of
Section 7(d)(i) hereof, upon a Key Employee's death, Total Disability or
retirement on or after reaching the age of 62, shares of Restricted Stock
shall vest on a pro rata basis, comparing the number of years from the date of
the Award to the date of death, Total Disability or retirement to six years.
Shares of Restricted Stock which do not so vest shall be forfeited to the
Company.
(iv) Termination of Employment Following a Change in Control.
Notwithstanding the provisions of Section 7(d)(i) hereof, if following a
Change in Control, a Key Employee's employment is terminated without Cause or
there is a Constructive Termination Without Cause, all shares of Restricted
Stock subject to an Award shall become immediately vested.
(e)Restrictions.
Until shares of Restricted Stock have vested in accordance with Section 7(d)
hereof, an Award shall be subject to the following restrictions:
(i) Nontransferability. Except as otherwise required by law,
Restricted Stock which has not vested may not be sold, assigned, exchanged,
transferred, pledged, hypothecated or otherwise disposed of, except to the
Company as provided herein.
(ii) Other Restrictions. The Committee may impose such other restrictions
on any Award as it may deem advisable, including without limitation,
stop-transfer orders and other restrictions set forth in the terms of the
Award Agreement or as the Committee may deem advisable under the rules and
regulations, and other requirements of the Securities and Exchange Commission,
and any applicable federal or state securities or other laws.
Section 8. Miscellaneous.
(a) Awards Not Considered Compensation. No Award made under the Plan
shall be deemed salary or compensation for the purpose of computing benefits
under any employee benefit plan or other arrangement of any Participating
Company for the benefit of its employees unless the Company shall determine
otherwise.
(b) Absences. Absence on leave approved by a duly constituted officer of
the Company shall not be considered interruption or termination of employment
for any purposes of the Plan; provided, however, that no Award may be granted
to an employee while he or she is absent on leave.
(c) Delivery to Persons Other Than Key Employee. If the Committee finds
that shares of Restricted Stock are to be delivered under the Plan to a Key
Employee who is unable to care for his or her affairs because of illness or
accident, then any payment due him or her (unless a prior claim therefor has
<PAGE> 7
been made by a duly appointed legal representative) may, if the Committee so
directs, be paid to his or her spouse, a child, a relative, an institution
maintaining or having custody of such person, or any other person deemed by
the Committee to be a proper recipient on behalf of such person otherwise
entitled to delivery. Any such delivery shall be a complete discharge of the
liability of the Company therefor.
(d) Plan Copies. Copies of the Plan and all amendments, administrative
rules and procedures and interpretations shall be made available to all Key
Employees at all reasonable times at the Company's headquarters.
(e) Withholding Taxes. The Company may withhold any taxes in connection
with the Plan that the Company determines it is required to withhold under the
laws and regulations of any governmental authority, whether federal, state or
local and whether domestic or foreign, including, without limitation, taxes in
connection with the delivery of shares of Restricted Stock or the vesting of
Restricted Stock. A Key Employee may elect to satisfy such withholding
requirements either by (i) delivery to the Company of a certified check prior
to the delivery of shares of Restricted Stock which are vested pursuant to
Section 7 hereof, (ii) instructing the Company to retain a sufficient number
of shares of Stock to cover the withholding requirements, or (iii) instructing
the Company to satisfy the withholding requirements from the Key Employee's
salary.
(f) Governing Law. The Plan and all rights hereunder shall be governed by
and construed in accordance with the law as of the State of New York, without
giving effect to its rules on conflicts of law.
(g) Key Employee Communications. All elections, designations, requests,
notices, instructions and other communications from a Key Employee or other
person to the Committee required or permitted under the Plan shall be in such
form as is prescribed from time to time by the Committee and shall be mailed
by first class or delivered to such location as shall be specified by the
Committee.
(h) Binding on Successors. The terms of the Plan shall be binding upon
the Company and its successors and assigns.
(i) Captions. Captions preceding the sections and clauses hereof are
inserted solely as a matter of convenience and in no way define or limit the
scope or intent of any provisions hereof.
(j) Severability. Whenever possible, each provision of the Plan shall be
interpreted in such manner as to be effective and valid under applicable law.
If any provision of the Plan or the application thereof to any person or
circumstances is prohibited by or invalid under applicable law, such provision
shall be ineffective to the minimal extent of such prohibition or invalidity
without invalidating the reminder of such provision or the remaining
provisions of the Plan or the application of such provision to other persons
or circumstances.
(k) Duration, Amendment, and Termination. The Board may at any time
amend or terminate this Plan as of any date specified in a resolution adopted
by the Board. The Plan may also be amended by the Committee, provided that
all such amendments are reported to the Board. Each amendment shall be
subject to stockholder approval if required by Rule 16b-3 under the Exchange
Act or a successor rule or regulation. No amendment of the Plan may affect an
Award theretofore granted under the Plan without the written consent of the
Key Employee affected. If not earlier terminated, the Plan shall terminate on
December 31, 2000. No Award may be granted after this Plan has terminated.
<PAGE> 8
After the Plan has terminated, the functions of the Committee shall be limited
to supervising the administration of Awards previously granted. Termination
of the Plan shall not affect any Award previously granted.
<PAGE> 1
EXHIBIT 10.8
ADDENDUM
TO
EXECUTIVE SERVICE AGREEMENT
ADDENDUM, dated as of July 16, 1999, to amend the Executive Service Agreement,
dated as of December 4, 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 "Agreement"), as
follows: Section 11 of the Agreement is hereby deleted in its entirety and a
new Section 11 is added, as follows:
"11. Term of Agreement. This Agreement will terminate on October 16,
2005, 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."
Executive:
COGNITRONICS CORPORATION
By:
Its: President
<PAGE> 1
EXHIBIT 10.9
COGNITRONICS CORPORATION
DIRECTORS' STOCK OPTION PLAN
1. Purpose
The Director' Stock Option Plan (the "Plan") is intended to provide incentives
to non-employee directors and officers of Cognitronics Corporation (the
"Company") by more closely aligning their compensation with stockholder value.
2. Administration
The Plan shall be administered by a committee of not less than two of Company's
directors, chief executive officer or chief financial officer (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 thereto).
The Committee shall have authority, subject to the terms of the Plan, 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
All non-employee directors and officers (individually "Participants",
collectively "Participants") shall be eligible to participate in the Plan.
A non-employee director or officer means a director or officer who is neither an
employee of the Company nor any subsidiary of the Company.
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 Participants under the Plan pursuant to options shall not exceed
52,500 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.
5. Awarding of Options
Options shall be awarded to Participants as follows:
(a) Upon the Effective Date, an option to purchase 2,000 shares of Common
Stock.
(b) On each August 1 subsequent to the Effective Date, an option to purchase
1,000 shares of Common Stock.
The "Date of Award" of an option shall be the date on which the option is
awarded under the Plan. The award of any option to any Participant shall neither
entitle such Participant to, nor disqualify him from, participation in any other
plan for Participants which provides for the issuance of Common Stock.
<PAGE> 2
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 a share of Common Stock on the Date of Award. "Fair
Market Value" shall be the closing price of the Common Stock recorded on the
American Stock Exchange on the Date of Award or the last trading day prior
thereto.
(b) Term and exercise of options. Each option shall expire no later than
the fifth anniversary of its Date of Grant and shall become exercisable on
the date one year 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 option 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 option shall remain exercisable until its
expiration or termination. 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) or any other manner permitted by law as determined by the
Committee or any combination of the foregoing.
(c) Termination of Participant. If Participant ceases, other than by reason
of death or retirement,to be a director or officer of the Company, all options
awarded to him and exercisable on the date of he ceases to be director or
officer shall terminate on the earlier of such options' expiration or three
months after the day he ceases to be a director or officer or as otherwise
determined by the Committee. Any option not exercisable on the date of such
termination shall lapse and be thenceforth unexercisable.
(d) Retirement of Participant. If a Participant 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 date of his retirement.
(e) Death of Participant. If a Participant dies, all options held by him on
the date of his death shall become exercisable on the date of his death, may
be exercised by his estate, personal representative or beneficiary who
acquires the options by will or by the laws of descent and distribution and
shall terminate on the earlier of such option's expiration or the first
anniversary of the date of his death.
(f) Assignability. No option shall be assignable or transferable by the
Participant except by will or by laws of descent and distribution, and during
the lifetime of the Participant the option shall be exercisable only by him.
At the request of a Participant, shares of Common Stock purchased on exercise
of an option may be issued or transferred in the name of the Participant 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,
<PAGE> 3
including a requirement that a Participant represent to the Company in
writing, when an option is awarded, 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 a Participant, 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 to 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. 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 a Participant shall
become exercisable on the date of the Change in Control.
"Change in Control" means an event in which:
(a) the stockholders of the Company approve (i) any consolidation or merger
of the Company or any of its subsidiaries where the stockholders 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 stockholders 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
<PAGE> 4
(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 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
Common 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).
9. Term; Amendment of Plan
The Board or the Committee 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 any award previously without the Participant'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 the Board duly adopted and
approved by unanimous written consent on September 17, 1998 (the "Effective
Date") and a Resolution of Stockholders on May 13, 1999.
11. New York State Law
The Terms of the Plan shall be governed by the laws of the State of New York.
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)
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 3, 2000, with respect to the consolidated financial
statements of Cognitronics Corporation included in this Annual Report
(Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 29, 2000
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