UNITED STATES
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, 2005,
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 1-8496
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 Shares Outstanding
Title of each class which registered as of March 1, 2006
Common Stock, par value American Stock Exchange 6,865,691
$0.20 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes No x
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes No x
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 (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for 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 or any amendment to the Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition
of "accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one): Large accelerated filer ___
Accelerated filer ___ Non-Accelerated filer x
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No x
The aggregate market value of the voting stock held by non-affiliates of
the registrant computed by reference to the price the stock was last
sold as of June 30, 2005, the last business day of the most recently
completed second fiscal quarter, was $13,303,389.
Documents incorporated by reference: Portions of the Proxy Statement for
the 2006 annual meeting of stockholders are incorporated by reference
into Part III.
TABLE OF CONTENTS
PART I
Item
Page
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . .4
1B. Unresolved Staff Comments. . . . . . . . . . . . . . . . . . .6
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . .6
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . .6
4. Submission of Matters to a Vote of Security Holders. . . . . .6
Executive Officers of the Company . . . . . . . . . . . . . .7
PART II
5. Market for Company's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities . . . . . .8
6. Selected Financial Data. . . . . . . . . . . . . . . . . . . .8
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation . . . . . . . . . . . . . .9
7A. Quantitative and Qualitative Disclosures About Market Risk . 11
8. Financial Statements and Supplementary Data. . . . . . . . . 12
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . 26
9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . 27
9B. Other Information. . . . . . . . . . . . . . . . . . . . . . 28
PART III
10. Directors and Executive Officers of the Company. . . . . . . 29
11. Executive Compensation . . . . . . . . . . . . . . . . . . . 29
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters . . . . . . . . . 29
13. Certain Relationships and Related Transactions . . . . . . . 29
14. Principal Accountant Fees and Services . . . . . . . . . . . 29
PART IV
15. Exhibits and Financial Statement Schedules . . . . . . . . . 29
PART I
Information set forth on this annual report on Form 10-K that are not
historical facts, may be forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements generally are
characterized by the use of terms such as "believe","expect" and "may".
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, the
Company's actual results could differ materially from these set forth
in the forward-looking statements. Factors that might cause such a
difference are set forth in Item 1A below. Given the uncertainties,
the Company cautions readers not to place undue reliance on such
forward-looking statements.
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.
On November 18, 2005,the Company acquired ThinkEngine Networks, Inc., based
in Marlborough, Massachusetts, for 1,149,705 shares of the Company's common
stock, par value $0.20 per share, $1,250,000 in cash and notes in the
aggregate amount of $300,000. ThinkEngine is a provider of Time Division
Multiplexing ("TDM") and Internet Protocol ("IP") capable conferencing
bridges and media servers to the telecommunications industry.
On December 22, 2005, the Company sold Dacon Electronics Plc, its European
distributorship operations based in Hertfordshire, England, to Silbury
307 Limited ("Silbury") in an arms length transaction for the payment
of $150,000 in cash and a note in the principal amount of $150,000.
Mr. Roy A. Strutt, the Company's former Vice President of European
Operations and the Managing Director of Dacon Electronics Plc, is the
sole shareholder of Silbury.
(b) The Company operates in one segment, voice processing. The
Company designs, manufactures and sells equipment for use in
telecommunication networks.
(c)(i)The Company designs, manufactures and sells media
servers and application servers for use in telephone networks,
cable VOIP networks, large enterprise and government markets.
Areas of application include network announcements, interactive
voice response (IVR), intelligent peripherals, audio
conferencing, intelligent call routing, pre/post-paid calling
cards and automatic speech recognition (ASR). The Company's
primary products are the CX Series of Network Media Servers, and
the VSR1000, a multi-function voice services router.
These products are sold directly to telecommunications
service providers, switch manufacturers, IP-based communications
systems manufacturers, systems integrators, and value added
resellers (VAR) who distribute the Company's products.
(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, consisting primarily of electronic components and
subassemblies, and did not experience difficulty during 2005
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 2005, revenues included sales of $2.1 million to Telcordia
Technologies, Inc., $1.4 million to Verizon Communications
Inc., $1.1 million to Comcast Corporation and $.7 million to Telus
Corporation. Over the past several years, a major portion of the
revenues has come from one or two large customers. 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, 2005 and 2004, amounted to $3.1 million and $.4
million, respectively. Substantially all of the orders as of
December 31, 2005 can reasonably be expected to be filled
during 2006.
(ix) Business subject to renegotiation. Inapplicable.
(ix) The Company competes, and expects to compete, in fields noted
for rapid technological advances and the frequent introduction
of new products and services. The Company's products are similar
to those manufactured, or capable of being manufactured, by a
number of companies, some of which are well established
corporations with financial, personnel and technical resources
substantially larger than those of the Company. The Company's
ability to compete in the future depends on its ability to
maintain the technological and performance advantages of its
current products and to introduce new products and
applications that achieve market acceptance. Future research
and development expenditures will be based, in part, on future
results of operations. There are no assurances that the
Company will be able to successfully develop and market new
products and applications.
(xi) Expenditures for research and development activities, as
determined in accordance with generally accepted accounting
principles, amounted to $3.9 million (including purchase research
and development of $.7 million) in 2005, $2.5 million in 2004 and
$2.6 million in 2003. In addition, the estimated dollar amount
spent on the improvement of existing products or techniques was
$.1 million in 2005, 2004 and 2003.
(xii)Material effects of compliance with Federal, State or local
provisions regulating the discharge of materials into the en-
vironment or otherwise relating to the protection of the en-
vironment. Inapplicable.
(xiii) At December 31, 2005, the Company and its subsidiaries employed
63 people.
(d) Sales to foreign customers primarily represent export-type sales
(primarily North America and Europe) of approximately $.8 million in 2005
primarily to one customer, $.5 million in 2004 and $.1 million in 2003. Export
sales generally do not involve any greater business risks than do sales to
domestic customers. Selling prices and gross profit margins on export-type
sales are comparable to sales to domestic customers.
Item 1A. Risk Factors
The Company's business and future performance are affected by general industry
and market conditions and growth rates, general U.S. and non-U.S. economic and
political conditions (including the global economy), interest rate fluctuations
and other events. The following items are representative of the risks,
uncertainties and other conditions that can impact the Company's business, its
future performance and the forward-looking statements that it makes in this
report or that it may make in the future.
A Small Number of the Company's Customers Account for a Substantial Portion of
Its Revenues, and Most of Its Receivables. The Loss of a Major Customer or
Reduced Spending of These Service Providers Could Significantly Reduce the
Company's Revenues, Profitability and Cash Flow.
A few large telecommunications service providers account for a substantial
portion of the Company's revenues. The telecommunications industry has recently
experienced substantial consolidation, as evidenced by the mergers of Sprint
and Nextel, Cingular and AT&T Wireless, SBC and AT&T, Verizon and MCI and
the announced merger of AT&T and BellSouth. As service providers increase in
size, it is possible that an even greater percentage of the Company's revenues
will be attributable to a smaller number of large service providers going
forward.
Acquisition
In November 2005, the Company acquired ThinkEngine Networks, Inc.
("ThinkEngine"). ThinkEngine has never made a profit and will continue to
generate losses and require funding until sales of the VSR1000 product line can
be increased to sufficient levels, of which there can be no assurance.
The Company Operates in a Highly Competitive Industry with Many Participants.
The Company operates in a highly competitive environment, competing on the
basis of product offerings, technical capabilities, quality, service and
pricing. Competition for new service providers as well as for new
infrastructure deployments is particularly intense.
The Company has a number of existing competitors, some of which are very large,
with significantly greater technological and financial resources, brand
recognition and established relationships with telecommunications service
providers. In addition, new competitors may enter the industry as a result of
shifts in technology. The Company cannot assure you that it will be able to
compete successfully against existing or future competitors.
Technology Drives the Company's Products and Services. If the Company Fails to
Keep Pace with Technological Advances in Its Industry, or If It Pursues
Technologies That Do Not Become Commercially Accepted, Customers May Not Buy
Its Products or Use Its Services.
The telecommunications industry uses numerous and varied technologies and large
service providers often invest in several and, sometimes, incompatible
technologies. The industry also demands frequent and, at times, significant
technology upgrades. The Company does not have the resources to invest in all
of these existing and potential technologies. As a result, the Company
concentrates its resources on those technologies it believes have or will
achieve substantial customer acceptance and in which it has appropriate
technical expertise. However, existing products often have short product life
cycles. In addition, the Company's choices for developing technologies may
prove incorrect if customers do not adopt the products it develops or if those
technologies ultimately prove to be unviable. The Company's operating results
depend to a significant extent on the market acceptance of its products and
its ability to enhance its existing products, to continue to introduce new
products successfully and on a timely basis, and to develop new or enhance
existing tools for its services offerings.
The Company Needs to Attract and Retain Highly Qualified Personnel.
The Company's future success is dependent on its ability to attract and retain
key design engineering, sales and executive personnel. There is intense
competition for qualified personnel, in particular, design engineers, and the
Company may not be able to attract and retain engineers and other qualified
personnel necessary for the development and introduction of new products or to
replace engineers or other qualified personnel that may leave its employ.
The Telecommunications Market Fluctuates and Is Impacted By Many Factors,
Including Decisions By Service Providers Regarding Their Deployment of
Technology and Their Timing of Purchases, as Well as Demand and Spending for
Communications Services By Businesses and Consumers.
After significant deterioration earlier this decade, the global
telecommunications market stabilized in 2004 and experienced modest growth in
2005 as reflected in increased capital expenditures by service providers and
growing demand for telecommunications services. Although the Company believes
the overall market will continue to grow, the rate of growth could vary
geographically and across different technologies, and is subject to substantial
fluctuations. The specific market segment in which the Company participates may
not experience the growth of other segments. In that case, the Company's
results of operations may be adversely affected.
The Company Is Subject to Intellectual Property Litigation and Infringement
Claims, Which Could Cause It to Incur Significant Expenses or Prevent the
Company from Selling Its Products.
Intellectual property litigation can be costly and time-consuming and can
divert the attention of management and key personnel from other business
issues. The complexity of the technology involved and the uncertainty of
intellectual property litigation increase these risks. A successful claim by
a third party of patent or other intellectual property infringement by the
Company could compel it to enter into costly royalty or license agreements
or force it to pay significant damages and could even require it to stop
selling certain products.
The Company Relies on Third Party Suppliers to Produce Subassemblies.
The Company has outsourced the production of subassemblies and certain finished
goods. If a contract manufacturer terminates its relationship with the Company
or is unable to fill its orders on a timely basis, or if the Company does not
accurately forecast its requirements, the Company may be unable to deliver the
affected products to meet its customers' orders.
Item 1B. Unresolved Staff Comments
Not applicable.
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, 27,600 10/31/08
3 Corporate Drive production and service
facility
Marlborough, Massachusetts Office, engineering 11,405 Month to Month
100 Nickerson Road and service facility
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
None.
Executive Officers of the Company
The executive officers of the Company, their positions with the Company and
ages as of March 23, 2006 are as follows:
Name Position(s) and Office(s) Age
Brian J. Kelley President and Chief Executive Officer; Director 54
Kenneth G. Brix Vice President 59
Paul Gagne Vice President and Chief Technology Officer 53
Harold F. Mayer Secretary 76
Garrett Sullivan Treasurer and Chief Financial Officer 60
Emmanuel A. Zizzo Vice President 65
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 held senior management positions with
TIE/Communications, Inc. from 1986 to 1994.
Mr. Brix has been a Vice President of the Company since 1994 with
responsibility for U.S. sales and marketing. Prior to that he held senior sales
management positions from 1987 to 1994.
Mr. Gagne has been a Vice President of the Company since 2006 with
responsibility for engineering. Since 2001, he has been vice president of
engineering for ThinkEngine Networks, Inc. which was acquired by the Company
in 2005. Prior to that he held senior engineering positions.
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. Sullivan has been Treasurer and Chief Financial Officer of the Company
since 1989.
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.
PART II
Item 5. Market for Company's Common Equity Related Stockholder Matters and
Issuer Purchases of Equity Securities
Cognitronics' Common Stock is traded on the American Stock Exchange under the
symbol CGN. On March 1, 2006, there were 517 stockholders of record; the
Company estimates that the total number of beneficial owners was approximately
2,200. 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.
The Company has never paid a cash dividend on its Common Stock and has used its
cash for the development of its business. The Company has no present intention
of paying a cash dividend and payment of any future dividends will depend upon
the Company's earnings, financial condition and other relevant factors.
Item 6. Selected Financial Data
Year ended December 31,
(in thousands except per share data)
OPERATING RESULTS 2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Revenues $7,750 $8,699 $5,096 $5,535 $12,977
Loss from continuing operations (2,591) (341) (3,482) (6,361) (872)
Loss from discontinued operations (1,555) (213) (68) (83) (933)
Net loss (4,146) (554) (3,550) (6,444) (1,805)
Loss per share
Continuing operations (0.44) (0.06) (0.62) (1.17) (0.16)
Discontinued operations (0.26) (0.04) (0.01) (0.02) (0.17)
Net loss (0.70) (0.10) (0.63) (1.18) (0.33)
Weighted average number of
common shares outstanding, 5,879 5,781 5,615 5,438 5,417
FINANCIAL POSITION
Working capital $7,251 $13,132 $12,851 $16,321 $23,092
Total assets 21,205 18,956 18,898 22,812 28,573
Stockholders' equity 14,015 15,015 15,268 18,152 24,204
Stockholders' equity per share $2.03 $2.59 $2.72 $3.34 $4.46
Cash dividends paid None None None None None
Included in Continuing Operations in 2005 is the expensing of purchased in-
process R&D of $678,000 and an increase in deferred tax valuation allowance
of $829,000.
Included in Continuing Operations in 2004 is an inventory provision of $666,000
and an increase in deferred tax valuation allowance of $181,000.
Included in Continuing Operations in 2003 is an inventory provision of $434,000
and an increase in deferred tax valuation allowance of $1,151,000.
Included in Continuing Operations in 2002 is an inventory provision of $951,000
and provisions for impairment of fixed assets of $275,000 and an increase in
the deferred tax valuation allowance of $2,425,000.
Included in Continuing Operations in 2001 is an inventory provision of $510,000
and a tax benefit due to an adjustment to the tax provision of $155,000.
The above Selected Financial Data should be read in conjunction with the
Consolidated Financial Statements of the Company, including the notes thereto,
and the unaudited quarterly financial data included in Item 8 of this Annual
Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Executive Summary
The Company designs, manufactures and sells voice processing equipment for use
primarily in telecommunications service providers' central offices.
The Company's products include intelligent announcers, media servers and
application servers. These products facilitate the deployment of voice
resources in service providers' networks, both traditional circuit-switched
networks, as well as the next generation of packet-based networks.
Beginning in 2001, expenditures for network development decreased significantly
reflecting a decline in the competitive local exchange carrier market and
reduced capital spending by large service providers. This trend intensified in
2002 and continued into 2003. The Company believes that the market for
telecommunication equipment over the past several years has stabilized and is
growing in certain areas, but the timing of such spending continues to be
uncertain and may be adversely impacted by mergers and acquisitions among
telecommunications service providers.
Established service providers are looking for ways to offer additional features
on their legacy networks while they institute a multi-year plan to transition
to IP based multimedia services. To effectively compete, the Company must
expand its penetration in the market, increase the applications available on
its intelligent peripherals, media servers and application servers and
increase the capacity of its media servers.
Capital spending in the markets the Company serves can vary over a short period
of time and change rapidly. In addition, the Company faces intense competition
from larger and better financed competitors and a few customers account for a
significant portion of the Company's revenue. As a result, the Company's
performance is subject to large fluctuations. Because of these uncertainties,
it is difficult for the Company to make accurate short and long-term
projections of results of operations and cash flow.
In 2005 Revenues for Dacon Electronics, Plc (the Company's UK distributorship
operation) decreased $1.7 million (31%) to $3.8 million and its loss from
operations increased $.9 million to $1.1 million from 2004. In December 2005
the Company sold this operations.
As discussed more fully throughout the Management's Discussion and Analysis:
Loss from continuing operations increased in 2005 due to decreased
revenues and higher research and development expenses.
The Company disposed of its European Distributorship Operations.
The Company acquired ThinkEngine Networks, Inc.
Results
The Company reported net losses from continuing operations of $2.6 million,
$.3 million and $3.5 million in 2005, 2004 and 2003, respectively.
In 2005, revenues decreased $.9 million (11%) primarily due to decreased sales
of $1.3 million, offset, in part, by increased service revenue of $.4 million.
The lower sales were primarily due to a decrease in sales of $5.0 million to a
large telecommunications service provider. The Company has shipped
approximately $2.0 million of equipment to this customer in 2005 that will be
recognized as revenue in the first quarter of 2006. This decrease was offset
by increased sales of $2.1 million to a telecommunication equipment integrator
and $1.1 million and $.7 million to telecommunications service providers.
ThinkEngine Networks, Inc. contributed less than $.1 million in revenues in
2005. The Company's consolidated backlog at December 31, 2005 was $3.1 million
versus $.4 million at December 31, 2004. A major portion of the Company's
revenue came from a few customers. The loss of any of these customers would
have a material adverse impact on the Company.
In 2004, revenues increased $3.6 million (71%) from 2003 levels due to an
increase in sales of the CX4000 to a large domestic telecommunications service
provider. Sales to this customer increased $3.7 million in 2004 from 2003,
continuing a trend commenced in 2003. In addition, the increased revenues
also resulted from an increase in service revenue resulting from the
commencement of software and hardware maintenance agreements with a large
customer.
Consolidated gross margin was 57% in 2005, 59% in 2004 and 30% in 2003.
Included in cost of products sold was inventory obsolescence charges of $.7
million in 2004 and $.4 million in 2003. The decrease in gross margin
percentage in 2005 from 2004 was primarily due to decreased sales volume and
the increase in gross margin percentage in 2004 versus 2003 was primarily due
to increased sales volume and improved product mix.
Research and development increased $1.4 million (55%) in 2005 and decreased $.2
million (5%) in 2004 from the prior year. The increase in 2005 primarily
reflects the expensing of $.7 million of purchased R&D, increased headcount
and salaries and the acquisition of ThinkEngine. The decrease in 2004
primarily reflects lower personnel costs. The company anticipates increasing
research and development expense in 2006.
Selling, general and administrative expense increased $.3 million (11%) in 2005
and decreased $.2 million (7%) in 2004 from the prior year period. In 2005,
$.1 million of the increase is due to the inclusion of ThinkEngine operations
from November 18, 2005. The remaining increase is primarily due to increased
personnel costs. In 2004, the decrease of $.2 million is due to lower
professional fees and personnel costs.
In 2003, other income includes a non-cash gain of $.8 million on the
termination of the Company's postretirement health benefits plan. Other
income of $.3 million in 2005, $.2 million in 2004 and the remaining $.2
million in 2003 is primarily interest income. The increase in 2005 primarily
reflects higher interest rates.
The Company's effective tax rate for 2005 was (2%), for 2004 was (19%) and for
2003 was (2%). Deferred tax valuation allowances of $.8 million in 2005,
$.2 million in 2004 and $1.2 million in 2003 were included in tax expense.
Forming a conclusion that such an allowance is not needed is difficult when
there is evidence such as cumulative losses in recent years. The provision for
income taxes is discussed in Note G to the Consolidated Financial Statements.
The effect of inflation has not had a significant impact on the operating
results of the Company over the past few years. Techno- logical advances and
productivity improvements are continually being applied to reduce costs, thus
reducing inflationary pressures on the operating results of the Company.
Total rental expense amounted to $220,000 in 2005, $190,000 in 2004 and
$186,000 in 2003. Future annual payments for long-term noncancellable
leases for each of the five years in the period ending December 31, 2010 are
approximately $219,000, $218,000, $187,000, $13,000 and $0,respectively,
and $0 thereafter.
Off-Balance Sheet Arrangements
None.
Liquidity and Sources of Capital
Operations provided net cash of $2.1 million in 2005 and used $.3 million in
2004 and $2.5 million in 2003. The cash provided by operations in 2005 is
primarily attributable to $2.1 million of prepaid revenue related to equipment
shipped in 2005. The reduction in use of cash by operations in 2004 versus 2003
is due to the improvement in operating results. Cash (used) provided by
investing activities was ($2.5) million in 2005 and $2.2 million in 2003.
The Company used $1.4 million in 2005 for the acquisition of ThinkEngine, had
net purchases of marketable securities of $.5 million in 2005 and net proceed
from sales of $.1 million and $2.4 million in 2004 and 2003 respectively.
There were purchases of property, plant and equipment and software of $.5
million, $.1million and, $.2 million in 2005, 2004 and 2003, respectively.
Working capital was $7.3 million at December 31, 2005, $13.1 million at
December 31, 2004 and $12.9 million at December 31, 2003. The ratio of
current assets to current liabilities was 2.1:1 at December 31, 2005 versus
5.5:1 at December 31, 2004 and 7.4:1 at December 31, 2003. The decreases in
working capital in 2005 and 2004 from the prior year is due to the net loss
and the Company's decision to terminate its defined benefit pension plan.
The Company's contractual obligations are as follows (amounts in thousands):
Payments due by period
Less than More than
Contractual Obligation Total 1 year 1-3 Years 3-5 Years 5 years
Operating leases $637 $219 $405 $13 $0
The Company anticipates making capital expenditures of approximately $.5
million, increasing the current level of expenditures for research and
development and may repurchase up to 253,792 shares of its Common Stock in
2006. Based on current operating results, management believes that the cash
and cash equivalents at December 31, 2005 will be sufficient to fund the
Company's cash requirements for 2006; however, if the Company's operations
deteriorate due to increased competition, loss of a large customer or
otherwise, it may be required to obtain additional sources of funds through
asset sales, capital market transactions or financing from third parties or a
combination thereof. The Company cannot provide assurances that these
additional sources of funds will be available or, if available, what the
terms would be.
Assumptions and Estimates Used in Critical Accounting Policies
In the preparation of the financial statements in conformity with accounting
principles generally accepted in the United States, management must make
critical decisions regarding accounting policies and judgments regarding their
application. Materially different amounts could be reported under different
circumstances and conditions.
Revenue
We generally recognize product revenue, net of sales discounts and
allowances, when persuasive evidence of an arrangement exists, shipment or
delivery (dependent upon the terms of the sale) has occurred, all
significant contractual obligations have been satisfied, the amount is
fixed or determinable and collection is considered probable. Sales of
services and system support are deferred and recognized ratably over the
contract period.
Inventories - Slow-moving and Obsolescence
Due to a prolonged slow-down in spending by telecommunications service
providers, inventory turnover has slowed. The Company recorded charges
of $.7 million and $.4 million in 2004 and 2003, respectively, to
reduce its carrying value of inventory to the lower of cost or market.
If future capital expenditures by telecommunications service providers
do not increase or decrease further, additional charges may be required.
Deferred Tax Assets
As of December 31, 2005, the Company has a valuation allowance of $5.1
million for net deferred tax assets. In making such a determination, the
Company considers its current and past performance, the market environment
in which it operates, estimated future earnings, tax planning strategies
and other factors. In the future, as these factors change, a change in
the valuation reserve may be required. The Company will only recognize
a deferred tax asset when, based upon available evidence, realization
is more likely than not and will provide a valuation allowance as
necessary.
Pensions
The Company accounts for its defined benefit pension plan in accordance
with SFAS No. 87, "Employers' Accounting for Pensions" which requires
that amounts recognized in financial statements be determined on an
actuarial basis.
In 2006, the Company applied to the Pension Benefit Guarantee Corporation
and the Internal Revenue Service for permission to terminate the Company's
defined benefit plan. Reflecting this, the Company adjusted the discount
rate used to calculate the plan liabilities to 4.73%.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company does not use derivative financial instruments. 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.
Item 8. Financial Statements and Supplementary Data
QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands except per share amounts)
2005, First Second Third Fourth
----- ------ ----- ------
Revenues $1,721 $1,054 $ 986 $3,989
Gross profit 1,051 353 388 2,633
Income(loss) from continuing operations (498) (1,241) (1,065) 213
Loss from discontinued operations (257) (454) (585) (259)
Net loss (755) (1,695) (1,650) (46)
Income (loss) per share
Continuing operations (0.09) (0.22) (0.19) .03
Discontinued operations (0.05) (0.08) (0.11) (.04)
Net income (loss) (0.13) (0.30) (0.29) (.01)
Common Stock price range
High $5.00 $4.05 $3.58 $3.10
Low 2.92 2.80 2.25 2.12
2004 First Second Third Fourth
----- ------ ----- ------
Revenues 430 2,569 771 4,929
Gross profit (153) 1,679 152 3,431
Income(loss) from continuing operations (1,537) 283 (1,192) 2,105
Income (loss) from discontinued operations 186 93 (156) (336)
Net income (loss) (1,351) 376 (1,348) 1,769
Income (loss) per share
Continuing operations (0.28) 0.05 (0.21) 0.33
Discontinued operations 0.03 0.01 (0.03) (0.06)
Net income (loss) (0.24) 0.06 (0.23) 0.28
Common Stock price range
High $4.30 $4.50 $4.16 $4.35
Low 3.00 3.40 3.00 3.01
In the fourth quarter of 2005, the Company expensed $678,000 of purchased in
process R&D in connection with the acquisition of ThinkEngine Networks, Inc.
The gross margin percentage increased in the fourth quarter of 2005 to 66% from
48% for the first nine months primarily due to increased volume.
The gross margin percentage for the fourth quarter of 2004 was 65% versus 47%
for the first nine months of 2004 primarily due to increased volume and an
improved product mix.
The above financial information should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Cognitronics Corporation
We have audited the accompanying consolidated balance sheets of
Cognitronics Corporation and subsidiaries (the "Company") as of
December 31, 2005 and 2004, and the related consolidated
statements of operations and comprehensive loss, stockholders'
equity, and cash flows for each of the years in the three-year
period ended December 31, 2005. These consolidated financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial
statements, 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 consolidated financial statements referred
to above present fairly, in all material respects, the
financial position of Cognitronics Corporation and
subsidiaries as of December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2005 in conformity
with accounting principles generally accepted in the United States
of America.
/s/ Carlin, Charron & Rosen, LLP
Glastonbury, Connecticut
March 24, 2006
CONSOLIDATED BALANCE SHEETS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(dollars in thousands)
December 31,
2005 2004
---- ----
ASSETS (See Note A)
CURRENT ASSETS
Cash and cash equivalents $ 1,750 $ 2,222
Marketable securities 6,370 5,847
Accounts receivable, less allowances of $73 and $46 3,565 3,737
Inventories 2,245 1,595
Other current assets 137 148
Assets - discontinued operations 2,486
------- -------
TOTAL CURRENT ASSETS 14,067 16,035
LOANS TO OFFICERS 2,029 1,968
PROPERTY, PLANT AND EQUIPMENT, net 1,208 806
OTHER ASSETS, less amortization of $117 and $533 3,901 147
------- -------
$21,205 $18,956
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 814 $ 86
Notes payable 300
Accrued compensation and benefits 1,817 842
Deferred service revenues 2,976 416
Income taxes payable 405 333
Other accrued expenses 504 338
Liabilities - discontinued operations 888
------- -------
TOTAL CURRENT LIABILITIES 6,816 2,903
OTHER LIABILITIES 374 1,038
COMMITMENTS AND CONTINGENCIES (Note k)
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 per share; authorized
20,000,000 shares; issued 7,016,583 and 5,866,878
shares 1,403 1,173
Additional paid-in capital 15,498 12,586
Retained earnings (accumulated deficit) (1,281) 2,865
Cumulative other comprehensive loss (580) (225)
Unearned compensation (156) (303)
------- -------
14,884 16,096
Less cost of 111,142 and 138,308 common shares in
Treasury (869) (1,081)
------- -------
TOTAL STOCKHOLDERS' EQUITY 14,015 15,015
------- -------
$21,205 $18,956
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(in thousands except per share data)
Year ended December 31,
2005 2004 2003
---- ---- ----
(See Note A)
REVENUES
Sales $6,666 $8,006 $4,879
Service 1,084 693 217
------ ------ ------
7,750 8,699 5,096
COST AND EXPENSES
Cost of revenues 3,323 3,590 3,591
Research and development 3,853 2,438 2,619
Selling, general and administrative 3,432 3,097 3,314
Other (income) expense, (327) (140) (1,009)
------- ------ ------
10,281 8,985 8,515
------- ------ ------
Pretax lox (2,531) (286) (3,419)
PROVISION FOR INCOME TAXES 60 55 63
------- ------ -------
LOSS FROM CONTINUING OPERATIONS (2,591) (341) (3,482)
LOSS FROM DISCONTINUED OPERATIONS NET OF TAX (1,555) (213) (68)
------- ------ -------
NET LOSS (4,146) (554) (3,550)
Currency translation adjustment (170) 121 129
Minimum pension liability (185) (248) 71
------- ------ -------
COMPREHENSIVE LOSS $(4,501) $ (681) $(3,350)
======= ====== =======
LOSS PER SHARE - BASIC AND DILUTED
LOSS FROM CONTINUING OPERATIONS $(0.44) $(0.06) $(0.62)
LOSS FROM DISCONTINUED OPERATIONS $(0.26) $(0.04) $(0.01)
NET LOSS $(0.71) $(0.10) $(0.63)
The accompanying notes to consolidated financial statements are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COGNITRONICS CORPORATION AND SUBSIDIARIES
Years ended December 31, 2003, 2004 and 2005
(dollars in thousands)
Common Stock Additional Retained Compre- Unearned Treasury
Shares Paid-In Earnings hensive Compensa- Shares
Issued Amount Capital (Deficit) (Loss) tion Amount
------ ------ ------- --------- ------- --------- -------
Balance at December 31, 2002 5,863,229 $1,173 $13,192 $6,969 $(298) $(512) $(2,372)
Shares issued pursuant to stock plans (610) 3 842
Shares issued to directors (14) 19
Directors' fees - common stock
to be issued 75
Officers' awards - common stock
to be issued 151
Currency translation adjustment 129
Minimum pension liability 71
Net loss (3,550)
--------- ------ ------- ------ ---- ---- ------
Balance at December 31, 2003 5,863,229 1,173 12,794 3,419 (98) (509) (1,511)
Shares issued pursuant to
stock plans 3,649 (116) 206 137
Shares issued to directors (290) 293
Directors' fees - common stock
to be issued 47
Officers' awards - common stock
to be issued 151
Currency translation adjustment 121
Minimum pension liability (248)
Net loss (554)
--------- ------ ------- ------ ----- ----- ------
Balance at December 31, 2004 5,866,878 1,173 12,586 2,865 (225) (303) (1,081)
Shares issued pursuant to
stock plans (168) 147 212
Shares issued in connection
with acquisition 1,149,705 230 2,897
Directors' fees - common stock
to be issued 20
Officers' awards - common stock
to be issued 163
Currency translation adjustment (170)
Minimum pension liability (185)
Net loss (4,146)
--------- ------ ------- ------ ----- ----- -----
Balance at December 31, 2005 7,016,583 $1,403 $15,498 $(1,281) $(580) $(156) $(869)
========= ====== ======= ======= ===== ===== =====
The accompanying notes to consolidated financial statements are an integral part
of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
COGNITRONICS CORPORATION AND SUBSIDIARIES
(dollars in thousands)
Year ended December 31,
2005 2004 2003
---- ---- ----
(See Note A)
OPERATING ACTIVITIES
Loss from continuing operations $ (2,591) $ (341) $(3,482)
Adjustments to reconcile net loss to net cash
used by operating activities:
Income tax expense 60 55 63
Depreciation and amortization 373 349 502
Expensing of purchased R&D 678
(Gain) loss on disposition of assets 1 (1) 2
Shares issued as compensation 330 404 454
Net (increase) decrease in
Accounts receivable 438 (3,512) 358
Inventories 189 527 885
Other assets 99 2,205 (329)
Net increase (decrease) in
Accounts payable 550 (138) 57
Accrued compensation and benefits (136) (95) (1,047)
Other accrued liabilities 2,128 363 125
------ ------ ------
2,119 (184) (2,412)
Income taxes paid (5) (81) (60)
------ ------ ------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 2,114 (265) (2,472)
------ ------ ------
INVESTING ACTIVITIES
Purchase of marketable securities (10,412) (7,646) (5,713)
Sale of marketable securities 9,889 7,755 8,144
Acquisition of ThinkEngine Networks, Inc. (Note I) (1,442)
Additions to property, plant and equipment (512) (72) (144)
Purchase of software licenses (33) (51) (36)
------ ------ ------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (2,510) (14) 2,251
------ ------ ------
FINANCING ACTIVITIES
Shares issued pursuant to stock plans, 45 24 10
------ ------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 45 24 10
------ ------ ------
DISCONTINUED OPERATIONS (121) 257
------ ------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (472) 2 (211)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 2,222 2,220 2,431
------ ------ ------
CASH AND CASH EQUIVALENTS - END OF YEAR $1,750 $2,222 $2,220
====== ====== ======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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.
Risks and Uncertainties. A major portion of the Company's revenues is
generated by sales to a small number of customers. The Company had net revenue
of $1.4 million, $6.8 million and $2.8 million in 2005, 2004 and 2003,
respectively, to one major customer and in 2005 net revenue of $2.1 million
and $1.1 million to two other customers. 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, 2005, three such companies accounted for 75% of
the Company's accounts receivable. The Company's markets are subject to rapid
technological change and frequent introduction of new products. The Company's
products are similar to those manufactured, or capable of being manufactured,
by a number of companies, some of which are well established with financial,
personnel and technical resources substantially larger than those of the
Company. The Company's ability to compete in the future depends on its
ability to maintain the technological and performance advantages of its
current products and to introduce new products and applications that achieve
market acceptance.
Principles of Consolidation. The financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly-owned. Intercompany
accounts and transactions have been eliminated in consolidation.
Revenue Recognition. We generally recognize product sales, net of sales
discounts and allowances, when persuasive evidence of an arrangement exists,
shipment or delivery (dependent upon the terms of the sale) has occurred, all
significant contractual obligations have been satisfied, the amount is fixed or
determinable and collection is considered probable. Sales of services and
system support are deferred and recognized ratably over the contract period.
Research and Development Costs. Research and development costs include the
costs of engineering, design, feasibility studies, outside services,
personnel and other costs incurred in development of the Company's
products. All such costs are charged to expense as incurred.
Use of Estimates. The preparation of the financial statements in conformity
with accounting principles generally accepted in the United States 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, 2005, 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 fair value which approximates amortized cost. They
are comprised of investments in municipal bond funds and high grade corporate
debt and auction rate preferred equity securities. The maturities are short
term or have reset provisions.
Inventories. Inventories are stated at the lower of cost (first-in, first-out
method) or market. Provisions for slow moving and obsolete inventories are
provided based on historical experience and product demand.
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 3
to 10 years. Repairs and maintenance are expensed when incurred.
Income Taxes. Income taxes are provided on all revenue and expense items
included in the consolidated statement of operations, regardless of the period
in which such items are recognized for income tax purposes, adjusted for items
representing permanent differences between pretax accounting income and taxable
income. Deferred income taxes result from the future tax consequences
associated with temporary differences between the carrying amounts of assets
and liabilities for tax and financial reporting purposes. A valuation
allowance is provided to the extent the Company cannot determine that the
ultimate realization of net deferred tax assets is more likely than not.
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 (85% of
the fair value for the Stock Purchase Plan) 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.
If the Company had elected to recognize compensation expense for the 1990 Stock
Option Plan, the 1967 Stock Purchase Plan and the Directors' Stock Option Plan
based on the fair value at the grant date, consistent with the method presented
by Statement of Financial Accounting Standards ("SFAS") No.123, "Accounting for
Stock Based Compensation", as amended, the pro forma net loss and net loss per
share would be as follows (in thousands except per share information):
2005 2004 2003
---- ---- ----
Net loss, as reported $(4,146) $(554) $(3,550)
Add: Stock-based compensation expense
included therein 330 404 454
Deduct: Total stock-based compensation
under fair valuation method (742) (707) (843)
------- ----- ------
Pro forma net loss $(4,558) $(857) $(3,939)
======= ===== =======
Net loss per share As reported Basic and Diluted $(.70) $(.10) $(.63)
Pro forma Basic and Diluted $(.78) $(.15) $(.70)
The estimated weighted average fair value per share of stock options granted
were $1.58, $2.56 and $1.49 for 2005, 2004 and 2003, respectively. The fair
value for the stock options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions
for 2005, 2004 and 2003, respectively: risk-free interest rates of 4.4%, 4.4%
and 2.2%; no dividend yields; volatility factors of the expected market price
of the Company's common stock of .55 in 2005, .73 in 2004 and .67 in 2003;
and a weighted average expected life of the option of 7.5 years in all years
for the Option Plan and 5 years for the Directors' Option Plan.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's 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 stock options.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-based
Payment" that will require the Company to expense costs related to share-based
payment transaction with employees. With limited exceptions, SFAS No. 123(R)
requires that the fair value of share-based payments to employees be expensed
over the period service is received and eliminates the ability to account for
these instruments under the intrinsic value method prescribed by APB No. 25,
and allowed under the original provisions of SFAS No. 123. SFAS No. 123(R)
becomes mandatorily effective for the Company on January 1, 2006. SFAS No.
123(R) allows for either modified prospective recognition of compensation
expense or retrospective recognition, which may be back to the original
issuance of SFAS No. 123 or only to interim periods in the year of adoption.
SFAS No. 123(R) allows the use of both closed form models (e.g., Black-Scholes
Model) and open form models (e.g., lattice models) to measure the fair value
of the share-based payment as long as that model is capable of incorporating
all of the substantive characteristics unique to share-based awards. In
accordance with the transition provisions of SFAS No. 123 (R), the expense
attributable to an award will be measured in accordance with the Company's
measurement model at that award's date of grant. The Company is currently
evaluating the impact of the adoption of SFAS No. 123(R) on the Company's
financial position and results of operations.
Income (Loss) Per Share. In computing basic earnings (loss) 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 both the basic and
diluted earnings per share calculations were 5,878,785, 5,780,603 and 5,614,825
for 2005, 2004 and 2003, 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 and other long-lived assets were reviewed for impairment whenever
events such as product discontinuances, plant closures, product dispositions or
other changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment charge is recognized if a reporting unit's goodwill
carrying amount exceeds its implied fair value.
In the third quarter of 2005, the Company, based on the continuing losses
Of its UK subsidiary, determined that the related goodwill was impaired and
Expensed $319,000 of goodwill. This amount is included in loss from
discontinued operations.
Reclassification. Certain prior year amounts have been reclassified to conform
to the current year presentation.
Note B. Marketable Securities
The Company's marketable securities consist of corporate and municipal bonds
and auction rate preferred stock. Unrealized gains/losses on marketable
securities were immaterial in all years presented and therefore have not
impacted cumulative other comprehensive loss. Management believes that the
Company's marketable securities are sufficiently diversified to minimize risks
from individual and industry concentrations. However, marketable securities
are subject to fluctuations in market value due to risks of securities
markets as a whole.
Note C. Accounts Receivable
The allowance for doubtful accounts was increased by $65,000, $34,000 and
$40,000 in 2005, 2004 and 2003, respectively, by charges to costs and
expenses. The Company wrote off uncollectible accounts, net of recoveries,
of $38,000, $23,000 and $15,000 in 2005, 2004 and 2003, respectively.
The allowance is based on historical trends, aging of accounts receivable
balances and the credit worthiness of the customer.
Note D. Inventories, net (in thousands):
2005 2004
---- ----
Finished and in process $1,571 $864
Materials and purchased parts 674 731
------ ------
$2,245 $1,595
====== ======
Included in the above amounts is the Company's reserve for slow moving and
obsolete inventories totaling $3,054,000 and $3,163,000 at December 31, 2005 and
2004, respectively. The provision for slow moving and obsolete inventories was
increased by $666,000 and $293,000 in 2004 and 2003, respectively by charges
to cost of products sold and was reduced by $109,000 in 2005 due t the sale of
the reserved items.
Note E. Property, Plant and Equipment, net (in thousands):
2005 2004
---- ----
Machinery and equipment $2,870 $2,245
Furniture and fixtures 1,174 1,147
------ ------
4,044 3,392
Less allowances for depreciation 2,836 2,586
------ ------
$1,208 $ 806
====== ======
The Company has recorded depreciation expense of $269,000, $277,000 and
$290,000 in 2005, 2004 and 2003, respectively.
Note F. Other Liabilities (in thousands):
2005 2004
---- ----
Accrued officers' supplemental pension $ 313 $ 368
Accrued deferred compensation 176 207
Accrued defined benefit pension plan 775 740
------ ------
1,264 1,315
Less current portion (included in accrued
compensation and benefits) 890 277
------ ------
$ 374 $1,038
====== ======
Note G. Income Taxes
The components of the provision (benefit) for income taxes for the years ended
December 31 are as follows (in thousands):
2005 2004 2003
---- ---- ----
Current:
State $60 $55 $63
Deferred 0 0 0
--- --- ---
Total Tax Expense $60 $55 $63
=== === ===
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,
2005 and 2004 are as follows (in thousands):
2005 2004
---- ----
Deferred tax liabilities $ 84 $ 96
Deferred tax assets:
Inventory valuation 1,174 1,252
Accrued liabilities and employee benefits 2,146 1,272
Accrued deferred compensation 167 199
Federal operating loss carryforward
expiring in 2019 1,007 981
Separate return federal operating loss
carryforwards expiring in 2008 and 2009 445 445
Other 222 195
------ ------
Total deferred tax assets 5,161 4,344
Valuation allowance (5,077) (4,248)
------ ------
84 96
------- -------
Net deferred tax assets $ 0 $ 0
======= =======
The Company has increased its valuation allowances by $829,000, $181,000
and $1,151,000 in 2005, 2004 and 2003, respectively, as the Company cannot
determine that the ultimate realization of its net deferred tax asset is
more likely than not.
A reconciliation of the statutory federal income tax rate to the effective
tax rate on pre tax loss for the years ended December 31, is as follows:
2005 2004 2003
---- ---- ----
Statutory federal income tax rate (34.0)% (34.0)% (34.0)%
State income taxes, net of federal tax benefit 1.4 12.7 1.2
Write-off of purchased R&D, 6.9
Nontaxable interest income (.8) (1.0)
Goodwill amortization (1.0) (9.4) (.1)
Valuation allowance 29.8 63.3 33.7
Other .1 (12.4) 1.0
---- ---- ----
2.4% 19.2% 1.8%
==== ==== ====
Note H. Other (Income) Expense, Net (in thousands):
Year Ended December 31,
2005 2004 2003
---- ---- ----
Interest expense $ 25 $ 14 $ 17
Interest income (352) (154) (177)
Settlement gain in plan termination (849)
----- ----- -------
$(327) $(140) $(1,009)
===== ===== =======
Note I. Acquisition
On November 18, 2005, the Company acquired ThinkEngine Networks, Inc.
("ThinkEngine") at a cost of $4,869,000 including $1,250,000 in cash,
1,149,705 shares of Common Stock valued at $3,127,000, $300,000 in one
year interest-free notes and other costs of $192,000. ThinkEngine,
based in Marlborough, Massachusetts, is an innovative provider of
carrier-grade Voice over Internet Protocol (VOIP) solutions.
The acquisition has been accounted for by the purchase method. The purchase
price was allocated to purchased in process research and development
($678,000), net current and long term assets ($308,000) and the value of
intangible assets ($3,883,000) with estimated remaining useful lives of four
to ten years. The following are unaudited pro forma results of operations as
if the acquisition had taken place at the beginning of the respective year
(in thousands except per share amounts):
2005 2004 2003
---- ---- ----
Revenues $ 8,762 $ 9,348 $ 5,172
Loss from continuing operations $(6,048) $(4,708) $(7,281)
Net loss $(7,599) $(5,048) $(7,349)
Loss per share:
Loss from continuing operations $(0.89) $(0.68) $(1.08)
Net Loss $(1.11) $(0.71) $(1.09)
Note J. Discontinued Operations
On December 22, 2005, the Company sold its UK subsidiary, Dacon Electronics,
Plc ("Dacon") in an arms length transaction to a company owned by the former
Vice President of European Operations for $150,000 in cash and a $150,000
note. In addition, Dacon issued a note for $275,000 for amounts previously
advanced to Dacon by the Company. A charge of $425,000 to reserve for these
two notes was included in the loss on sale of discontinued operations.
As a result, the Company has reclassified Dacon's operations as discontinued
operations and, accordingly, has segregated the assets, liabilities, revenues
and expenses of the discontinue operations in its Consolidated Balance Sheets,
Statement of Operations and notes thereto.
Assets and liabilities of the discontinued operations at December 31, 2004
are as follows (in thousands):
Assets
Cash $ 614
Accounts receivable, net 729
Other current assets 708
Fixed assets, net 116
Goodwill, net 319
------
Total assets $2,486
======
Liabilities
Accounts payable $ 262
Other current liabilities 466
Deferred revenue 160
------
Total liabilities $ 888
======
Summary results for discontinued operations for the years ended December 31
are as follows (in thousands).
2005 2004 2003
---- ---- ----
Revenue $ 3,826 $5,526 $5,161
Operating expense 4,976 5,739 5,229
------- ------ ------
Operating loss (1,150) (213) (68)
Loss on impairment of goodwill (319)
Loss on sale (86)
------- ------ ------
Loss from discontinued operations $(1,555) $ (213) $ (68)
======= ====== ======
Note K. Commitments and Contingencies
Leases. Total rental expense amounted to $220,000 in 2005, $190,000 in
2004 and $186,000 in 2003. Future annual payments for long-term
noncancellable leases for each of the four years in the period ending
December 31, 2009 are approximately $219,000, $218,000, $187,000 and
$13,000, respectively, and $0 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.
Because of this curtailment of the Plan in 1994, at this time the
Projected Benefit Obligation and Accumulated Benefit Obligation are
the same. 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):
2005 2004 2003
---- ---- ----
Interest cost on projected benefit obligation, $ 91 $ 92 $106
Actual (return)/loss on plan assets (33) (14) (109)
Net amortization and deferral (3) (33) 63
Settlement loss 58
----- ---- ----
Net periodic pension cost $ 55 $ 45 $118
===== ==== ====
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):
2005 2004
Projected and accumulated benefit obligation for
services rendered to date
Beginning of year $1,681 $1,489
Loss (gain) due to change in estimates 183 214
Interest cost 91 92
Less benefits paid (112) (114)
------ ------
End of year 1,843 1,681
------ ------
Plan assets at fair value
Beginning of year 941 825
Actual return on plan assets 33 14
Contribution 206 216
Less benefits paid (112) (114)
------ ------
End of year 1,068 941
------ ------
Plan assets less than benefit obligation (775) (740)
Unrecognized net loss 709 524
Minimum pension liability adjustment (709) (524)
------ ------
Accrued pension liability (included in other
liabilities) $ (775) $ (740)
====== ======
The discount rates used in determining the projected benefit obligation were
4.7% in 2005 and 5.5% in 2004. The expected long-term rate of return on
plan assets used in determining the net periodic pension cost was 6.5% in
2005 and 2004. In determining the expected return on plan assets, the
Company considers the relative weighting of plan assets, the historical
performance of total plan assets and individual assets categories and
economic and other indicators of future performance. The Company may
also consult with other professionals in developing expected returns.
The plan's weighted-average asset allocations at December 31, 2005 and
2004 by asset category, are as follows:
Asset Category, 2005 2004
Equity Securities 51% 56%
Debt Securities 25% 31%
Cash and cash equivalents 24% 13%
In 2006, the Company applied to the Pension Benefit Guarantee Corporation
and the Internal Revenue Service for permission to terminate this Plan.
Reflecting this, the Company intends to contribute approximately $800,000
in 2006 to this plan and $1,870,000 in benefit payments is expected to be
paid in 2006. When the Company terminates the Plan, it will recognize an
expense of approximately $709,000.
401(k) Retirement Plan. The Company has a defined contribution plan
covering substantially all domestic employees. The Company's contribution,
until June of 2003 was based upon the participants' contributions. In
June of 2003, the Company suspended its contribution. The expense was
$23,000 in 2003.
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):
2005 2004 2003
---- ---- ----
Interest cost on projected benefit obligation $16 $19 $24
Amortization of actuarial gains (1) (2) (3)
--- --- ---
Net periodic pension cost $15 $17 $21
=== === ===
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 (in thousands):
2005 2004
Projected benefit obligations
Balance at beginning of period $322 $347
Loss due to change in estimate 25
Interest expense 16 19
Less benefits paid (70) (69)
---- ----
Balance at end of period 268 322
Unrecognized net gain 45 46
---- ----
Accrued pension liability (included in other
liabilities) $313 $368
==== ====
The discount rate used in determining the projected benefit obligation
was 5.5% in 2005 and 2004. All participants are retired and receiving
benefits under the Plan and therefore future increases in compensation
are not applicable. The following benefit payments and contributions
are expected to be paid: $69,000 in 2006, $65,000 in 2007, $50,000 in
2008, $50,000 in 2009, $50,000 in 2010 and an aggregate of $23,000 for
the five year period ending in 2015.
Other Postretirement Benefit Plans. In addition to the Company's
pension plans, the Company had a contributory, unfunded defined benefit
plan providing certain health care benefits for domestic employees who
retired prior to March 31, 1996, which was terminated effective December
31, 2003. The components of postretirement benefit cost for the year ended
December 31, 2003 are as follows (in thousands):
2003
----
Interest cost $ 45
Net amortization (9)
Settlement gain (849)
-----
Net periodic cost $(813)
=====
The net benefits paid were $32,000 for 2003.
Deferred Compensation. At December 31, 2005 and 2004, the liability
relating to a deferred compensation arrangement between the Company
and a former director and officer of the Company was $176,000 and
$207,000, respectively and is included in other liabilities. The
Company expects to make payments in 2006 totaling $46,000 under this
contract.
Note L. Stock Plans
The 1990 Stock Option 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 ten years after the date granted.
The Company also has the 1967 Employee Stock Purchase Plan which provides
for the grant to purchase shares at 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. For
each of the three years in the period ended December 31, 2005, no grants
were granted, exercised or cancelled. At December 31, 2005, there were
no grants outstanding and there were 52,478 shares available for future
grant.
The Company also has a time accelerated restricted stock plan ("Restricted
Stock Plan") which 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.
The Company may, in certain circumstances, offer nonqualified options as
an inducement to enter into employment with the Company (Inducement
Options). Options generally become available in three equal annual
installments on a cumulative basis generally commencing six months after
the date of grant and expiring in 10 years.
In 2002, the company granted to key employees the right to receive
395,000 common shares which vested on January 2, 2006. Such rights were
subject to immediate vesting in the event of change of control of the
Company and pro-rata vesting in the event of death or involuntary
termination of employment for reasons other than cause. The total value
of the rights at the date of grant was $612,000 and was based on the
market price of $1.55 per share.
The Directors' Stock Option Plan provides for an annual grant of options
to non-employee officers and directors. This plan provides for the
automatic award of options to purchase 3,000 shares of Common Stock at
the fair market value at the date of grant to each person who is a
participant on August 1 of each year and pro-rated awards in certain cases.
The awards expire five years (ten years for awards granted after 2000) after
the date granted. In 2002, the plan was amended to provide for grant on
November 9, 2002 of options to purchase 5,500 shares for each participant,
and in 2003 the plan was amended to increase the amount granted to 6,000
shares for each participant.
Share information pertaining to these plans is as follows:
1990 Restricted Directors'
Inducement Options Stock Option
Options Plan Plan Plan
---------- ------- ---------- ---------
Outstanding at December 31, 2002 0 1,040,325 258,680 101,250
Granted 248,500 103,187 36,000
Cancelled or expired (154,525) (12,000)
Vested (32,830)
Exercised (3,000)
------- --------- ------- -------
Outstanding at December 31, 2003 0 1,131,300 329,037 125,250
Granted 3,000 30,000
Cancelled or expired (144,751) (12,000)
Vested (53,550)
Exercised (12,497) (14,500)
------- --------- ------- -------
Outstanding at December 31, 2004, 0 977,052 275,487 128,750
Granted 705,000 167,000 30,000
Cancelled or expired (26,667) (22,900)
Vested (70,137)
Exercised (27,166)
------- --------- ------- -------
Outstanding at December 31, 2005 705,000 1,090,219 182,450 158,750
======= ========= ======= =======
Available for future grant 8,515 22,900 28,750
========= ======= =======
Under the 1990 Option Plan, the exercise price for options granted in 2003 was
$2.20, in 2004 was $3.50 and in 2005 was $2.70. The weighted average exercise
price for the options outstanding under the Option Plan is $3.95 with
expiration dates ranging from 2010 to 2015. Options were exercised under the
Option Plan at weighted average exercise prices of $1.55, $1.65 and $1.66 in
2003, 2004 and 2005, respectively. Shares exercisable under the Option Plan
and weighted average exercise price at December 31, 2003, 2004 and 2005 were
681,764 and $6.53, 708,058 and $4.88 and 841,729 and $4.37, respectively.
The weighted average remaining lives for options outstanding at December 31,
2003, 2004 and 2005 were 7.3, 8.25 and 6.76 years, respectively.
Under the Restricted Stock Plan compensation expense was $146,000, $208,000
and $228,000 in 2005, 2004 and 2003, respectively.
The exercise price for options granted in 2003, 2004 and 2005 under the
Directors' Stock Option Plan were $2.11, $3.50 and $3.22, respectively. The
weighted average exercise price for the options outstanding under the plan is
$3.59 with expiration dates ranging from 2006 to 2015. No options were
exercised in 2003 and 2005; in 2004, options with a weighted average exercise
price of $1.93 were exercised. Shares exercisable at December 31, 2003, 2004
and 2005 were 101,250, 104,750 and 128,750, respectively. The weighted
average remaining lives for options outstanding at December 31, 2003, 2004
and 2005 were 7.6, 7.6 and 7.5 years, respectively.
The exercise price for 705,000 inducement options granted in 2005, in
connection with the acquisition of ThinkEngine Networks were issued at an
exercise price of $2.55 with expiration in 2015. At December 31, 2005, 70,000
shares were exercisable.
Note M. Cumulative Other Comprehensive Loss
Cumulative other comprehensive loss consists of the following at December 31
(in thousands):
2005 2004 2003
---- ---- ----
Cumulative translation adjustment $ 170 $ 50
Minimum pension liability net of tax of $128 (580) (395) (148)
----- ----- -----
$(580) $(225) $(98)
===== ===== =====
Note N. Related Party Transactions
Prior to August 2002, the Company had advanced amounts to officers primarily
for personal income taxes related to various stock option plans. The amounts
outstanding at December 31, 2005 and 2004 of $1,996, 000 and $1,968,000
include interest accrued on the advances. This indebtedness bears interest
at rates approximating market rates and is payable upon demand.
In 2005, the Company sold its UK distributorship operations to a company owned
by its former Vice President of European Operations. See Note J.
Note O. Quarterly Financial Data (Unaudited)
(in thousands except per share amounts)
2005 First Second Third Fourth
----- ------ ----- ------
Revenues $1,721 $1,054 $ 986 $3,989
Gross profit 1,051 353 388 2,633
Income (loss) from continuing operations (498) (1,241) (1,065) 213
Loss from discontinued operations (257) (454) (585) (259)
Net income (loss) (755) (1,695) (1,650) (46)
Income (loss) per share:
Continuing operations $(.09) $(.22) $(.19) $(.03)
Discontinued operations (.05) (.08) (.11) (.04)
Net loss (.13) (.31) (.29) (.01)
2004 First Second Third Fourth
----- ------ ----- ------
Revenues $2,261 $4,243 $1,889 $5,832
Gross profit 748 2,499 713 3,794
Income (loss) from continuing operations (1,537) 283 (1,192) 2,105
Income (Loss) from discontinued operations 186 93 (156) (336)
Net income (loss) (1,351) 376 (1,348) 1,769
Net income (loss) per share:
Continuing operations $(.28) $.05 $(.21) $ .33
Discontinued operations .03 .01 (.03) (.06)
Net income (loss) (.24) .06 (.23) .28
The Company expensed $678,000 of purchased in process R&D in connection with
The acquisition of ThinkEngine Networks, Inc. in the fourth quarter of 2005.
The gross margin percentage for the fourth quarter of 2005 was 62% versus 48%
for the first nine months of 2005 due to increased volume.
The gross margin percentage for the fourth quarter of 2004 was 65% versus 47%
for the first nine months of 2004 due to increased volume and an improved
product mix. The gross margin percentage for the fourth quarter of 2003 was
24% versus 45% for the first nine months of 2003 primarily due to lower
volume and lower absorption of overhead.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Quarterly Evaluation. The Company's management carried out an evaluation as of
December 31, 2005 of the effectiveness of the design and operation of the
Company's "disclosure controls and procedures," which the Company refers to as
the Company's disclosure controls. This evaluation was done under the
supervision and with the participation of Company management, including the
Chief Executive Officer and Chief Financial Officer. Rules adopted by the
Commission require that the Company present the conclusions of the Chief
Executive Officer and Chief Financial Officer about the effectiveness of the
Company's disclosure controls as of the end of the period covered by this
annual report.
CEO and CFO Certifications. Included as Exhibits 31.1 and 31.2 to this Annual
Report on Form 10-K are forms of "Certification" of the Company's Chief
Executive Officer and Chief Financial Officer. The forms of Certification are
required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
This section of the Annual Report on Form 10-K is the information concerning
the evaluation referred to in the Section 302 certifications. This information
should be read in conjunction with the Section 302 certifications for a more
complete understanding of the topics presented.
Disclosure Controls and Procedures and Internal Control over Financial
Reporting. Disclosure controls and procedures are designed with the objective
of ensuring that information required to be disclosed in the Company's reports
filed or submitted under the Exchange Act, such as this Annual Report on Form
10-K, is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms. Disclosure controls and
procedures are also designed with the objective of ensuring that such
information is accumulated and communicated to Company management, including
the Company's Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Internal control over financial reporting is a process designed by, or under
the supervision of, the Company's Chief Executive Officer and Chief Financial
Officer, and effected by the Company's Board of Directors, management and
other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles
and includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the Company's
assets;
provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that the Company's receipts
and expenditures are being made only in accordance with authorizations of
management or the Company's Board of Directors; and
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material adverse effect on the Company's financial
statements.
Limitations on the Effectiveness of Controls. Management, including the
Company's Chief Executive Officer and Chief Financial Officer, do not expect
that the Company's disclosure controls and procedures or internal control over
financial reporting will prevent all errors and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management's override of the control. The design of any system of controls
also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Scope of the Evaluation of the Company's Disclosure Controls and Procedures.
As of December 31, 2005, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation of the Company's disclosure controls and
procedures included a review of the Company's internal audit procedures, as
well as discussions with members of management and others in the Company, as
appropriate. In the course of the evaluation, the Company sought to identify
data errors, control problems or acts of fraud and to confirm that appropriate
corrective action, including process improvements were being undertaken. The
overall goals of these various evaluation activities are to monitor the
company's disclosure controls and procedures and to make modifications as
necessary. The Company's intent in this regard is that the disclosure controls
and procedures will be maintained as systems that change (including with
improvements and corrections) as conditions warrant. Among other matters,
the Company sought in this evaluation to determine whether there were any
"significant deficiencies" or "material weaknesses" in the company's internal
control over financial reporting, or whether the Company had identified any
acts of fraud involving personnel who have a significant role in the Company's
internal control over financial reporting. The Company also sought to deal
with other control matters in the evaluation, and in any case in which a
problem was identified, management considered what revision, improvement
and/or correction was necessary to be made in accordance with the Company's
on-going procedures.
Periodic Evaluation and Conclusion of Disclosure Controls and Procedures. As
of December 31, 2005, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
its Chief Executive Officer and its Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that such controls and procedures were
effective as of December 31, 2005.
Changes in Internal Control Over Financial Reporting. During the three months
ended December 31, 2005, there were no changes in the Company's internal
control over financial reporting that has materially affected, or are
reasonably likely to materially affect, the Company's internal control for
financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Company
The information appearing under the captions Information Concerning Nominees,
Qualification of Audit Committee Members, Code of Ethics, and Section 16(a)
Beneficial Ownership Reporting Compliance in the Proxy Statement for the 2006
annual meeting of stockholders is incorporated herein by reference.
The identification of the executive officers of the Company and their
positions with the Company and ages as of March 1, 2005 is set forth under
the caption Executive Officers of the Company in Part I of this Annual Report
on Form 10-K.
Item 11. Executive Compensation
The information on executive compensation set forth under the caption
Executive Compensation in the Proxy Statement for the 2006 annual meeting of
stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholders Matters
Security ownership of certain beneficial owners and management and securities
authorized for issuance under equity compensation plans to be set forth under
the captions Security Ownership and Equity Compensation Plan Information,
respectively, in the Proxy Statement for the 2006 annual meeting of
stockholders is incorporated herein by reference.
The equity compensation plan information set forth under the caption Equity
Compensation Plan Information in the Proxy Statement for the 2006 annual
meeting of stockholders is incorporated herein by reference.
Changes in Control. None.
Item 13. Certain Relationships and Related Transactions
The information on certain relationships and related transactions to be set
forth under the caption Certain Relationships and Related Transactions in the
Proxy Statement for the 2006 annual meeting of stockholders is incorporated
herein by reference.
Item 14. Principal Accountant Fees and Services
The information on fees charged by the principal accountant to be set forth
under the caption Independent Auditors' Fees in the Proxy Statement for the
2006 annual meeting of stockholders is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) and (2) and (c) The response to this portion of Item 15 is submitted
as a separate section beginning on page 32 of this Annual Report on Form 10-K.
(a)(3) and (b) The response to this portion of Item 15 is submitted as a
separate section beginning on page 33 of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on April 3,
2006.
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 April 3, 2006.
Signature Title
/s/ Brian J. Kelley President and Chief
------------------- Executive Officer and a Director
Brian J. Kelley
/s/ Garrett Sullivan Treasurer
-------------------- (Principal financial and
Garrett Sullivan accounting officer)
/s/ John T. Connors Director
-------------------
John T. Connors
/s/ Robert C. Fleming Director
---------------------
Robert C. Fleming
/s/ Jack Meehan Director
---------------
Jack Meehan
/s/ William A. Merritt Director
----------------------
William A. Merritt
/s/ William J. Stuart Director
---------------------
William J. Stuart
Item 15 (a) (1) and (2) and (c)
(a) (1) Financial Statements
The following financial statements of the Company are included in Item 8.
Financial Statements Covered by Reports of Independent Registered Public
Accounting Firms:
Page
Report of Independent Registered Public Accounting Firm. . . . . . . .13
Consolidated Balance Sheets, December 31, 2005 and 2004. . . . . . . .14
Consolidated Statements of Operations and Comprehensive Loss
for each of the three years in the period ended December 31, 2005 . .15
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 2005. . . . . . . . . . 16
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2005. . . . . . . . . . . . . . . . .17
Notes to Consolidated Financial Statements . . . . . . . . . . . . . .18
(2) and (c) 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.
Item 15(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 September 29, 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 14, 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 August 15, 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 May 26, 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 Amendment, dated September 1, 1999 (Exhibit 3.9 to Annual Report on Form
10-K for the fiscal year ended December 31, 2004 and incorporated herein
by reference).
3.10 Amendment, dated July 25, 2000 (Exhibit 3.1 to Quarterly Report on Form
10-Q for the period ended June 30, 2000 and incorporated herein by
reference).
3.11 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 (Exhibit 10.1 to Quarterly Report on
Form 10-Q for the period ended June 30, 2003 and incorporated herein by
reference).
10.2 Lease, dated April 30, 1993, between 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 Lease amendment, dated as of January 27, 2003, between the Danbury
Industrial Corporation and Cognitronics Corporation (Exhibit 10.3 to
Annual Report on Form 10-K for the year ended December 31, 2002 and
incorporated herein by reference).
10.4 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).
10.5 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).
10.6 Cognitronics Corporation Restricted Stock Plan (Exhibit 10.2 to Quarterly
Report on Form 10-Q for the period ended June 30, 2003 and incorporated
herein by reference).
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 (Exhibit 10.8 to Annual Report on Form 10-K for
the year ended December 31, 1999 and incorporated herein by reference).
10.9 The Directors' Stock Option Plan, as amended (Exhibit 10.3 to Quarterly
Report on form 10-Q for the period ended June 30, 2003 and incorporated
herein by reference).
21. List of subsidiaries of the Company as of December 31, 2005 (attached
as Exhibit 21 to this Annual Report on Form 10-K).
23. Consent of Independent Registered Public Accounting Firm, dated March
31, 2006 (attached as Exhibit 23 to this Annual Report on Form 10-K).
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14 as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(attached as Exhibit 31.1 to this Annual Report on Form 10-K).
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14 as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(attached as Exhibit 31.2 to this Annual Report on Form 10-K).
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (attached as Exhibit 32.1 to this Annual Report on Form 10-K).
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (attached as Exhibit 32.2 to this Annual Report on Form 10-K).