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, 2004, 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 Shares Outstanding Title of each class on which registered as of March 1, 2005 -------------------- --------------------- ------------------- Common Stock, par value $0.20 per share American Stock Exchange 5,733,903 Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for at least the past 90 days. Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the 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, 2004, the last business day of the most recently completed second fiscal quarter, was $18,655,000. Documents incorporated by reference: Portions of the Proxy Statement for the annual meeting of stockholders to be held on May 12, 2005 are incorporated by reference into Part III. TABLE OF CONTENTS PART I Item Page 1. Business 3 2. Properties 4 3. Legal Proceedings 4 4. Submission of Matters to a Vote of Security Holders 4 Executive Officers of the Company 5 PART II 5. Market for Company's Common Equity and Related Stockholder Matters 6 6. Selected Financial Data 6 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 7a. Market Risk 11 8. Financial Statements and Supplementary Data 11 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27 9a. Controls and Procedures 27 PART III 10. Directors and Executive Officers of the Company 30 11. Executive Compensation 30 12. Security Ownership of Certain Beneficial Owners and Management 30 13. Certain Relationships and Related Transactions 30 14. Principal Accountant Fees and Services 30 PART IV 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 30 PART I Item 1. Business (a) Cognitronics Corporation (the "Company") was incorporated in January 1962 under the laws of the State of New York. The Company designs, manufactures and markets voice processing systems. (b) The Company operates in two segments of the voice processing industry. In the United States, the Company designs, manufactures and sells equipment for use in telephone networks. In Europe, the Company distributes equipment for use on customers' premises. See Note N of the Company's Consolidated Financial Statements appearing in Item 8 of this report for certain financial information about these two business segments. (c) (i) A description of the fields of voice processing in which the Company operates and its products are as follows: Domestic Operations. These products are sold directly to telecommunication service providers, switch manufacturers, IP-based communications systems manufacturers, systems integrators, and value added resellers (VAR) who distribute the Company's products. Network Media Servers and Intelligent Announcers. Network Media Servers, the Cognitronics Exchange (CX) Series, include a total of four (4) models: CX500, CX1000, CX3000 and CX4000. This family of products facilitates the deployment of voice resources in service provider networks, both the traditional circuit-switched networks as well as the next generation of packet-based networks. The CX platforms provide greater capacity and increased functionality with significantly better price performance. Included in the CX Series capabilities are a new set of Media Server Boards, delivering the power of a media server within a single board. The CX supports AIN protocols such as SR-3511, GR-1129CORE and ISDN-PRI. The CX is also designed to interface with softswitches, media gateways and application servers, supporting industry standard protocols such as MGCP, RTP/RTCP, SIP and Voice Mail. Other protocols will be supported as market demand dictates. This family of products accounted for 15% or more of the Company's consolidated revenues in each of the last three years. Messaging Systems. CX Messaging Systems provide voice mail, unified messaging, and automated attendant functions to target markets. Capabilities include PSTN and IP interfaces, Voice XML scripting language, scalable from a few hundred to more than a million mailboxes, and may be configured for high availability and/or redundant performance. European Distributorship Operations. Dacon Electronics Plc., based in Hertfordshire, England, distributes call management and voice processing products in Europe. (ii) Status of publicly announced new products or industry segments requiring material investment. Inapplicable. (iii) The Company has adequate sources for obtaining raw materials, components and supplies to meet production requirements and did not experience difficulty during 2004 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 2004, revenues included sales of $6.8 million to Verizon Communications Inc. The Company's European operations had sales of $2.9 million to British Telecommunications Plc in 2004. Over the past several years, a major portion of the revenues of the domestic operations has come from one or two large customers, and a significant portion of the revenues of the European operations has come from one customer. Accordingly, the loss of any of these customers could have a material adverse impact on the Company's results of operations. (viii) The dollar amount of orders believed by the Company to be firm as of December 31, 2004 and 2003, amounted to $.7 million and $.2 million, respectively. Substantially all of the orders as of December 31, 2004, can reasonably be expected to be filled during 2005.OPERATING ACTIVITIES Net loss $ (554) $(3,550) $(6,444) Adjustments to reconcile net loss to net cash used by operating activities: Income tax expense 55 63 385 Depreciation and amortization 398 612 743 (Gain) loss on disposition of assets (1) 9 36 Shares issued as compensation 404 454 431 Net (increase) decrease in: Accounts receivable (3,225) 961 88 Inventories 760 778 2,063 Other assets 2,205 (329) 723 Net increase (decrease) in: Accounts payable (468) (255) 10 Accrued compensation and benefits (95) (1,047) (198) Other accrued liabilities 569 253 167 ------ ------- ------ 48 (2,051) (1,996) Income taxes paid (81) (60) (40) ------ -------- ------ NET CASH USED BY OPERATING ACTIVITIES (33) (2,111) (2,036) ====== ======== ====== INVESTING ACTIVITIES Purchase of marketable securities (7,646) (5,713) (16,071) Sale of marketable securities 7,755 8,144 14,104 Loans to officers, net (341) Additions to property, plant and equipment (153) (170) (617) Purchase of software licenses (51) (36) (6) ------ ------- ------ NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (95) 2,225 (2,931) ------ ------- ------ FINANCING ACTIVITIES Principal payments on debt (26) (46) Shares issued pursuant to stock plans 24 10 5 Shares repurchased for treasury, 1,500 in 2002 (5) ------ ------- ------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 24 (16) (46) ------ ------- ------ EFFECT OF EXCHANGE RATE DIFFERENCES 63 47 14 ------ ------- ------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (41) 145 (4,999) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 2,877 2,732 7,731 ------ ------- ------ CASH AND CASH EQUIVALENTS - END OF YEAR $2,836 $ 2,877 $ 2,732 ====== ======= ======= 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 in the United States and, through a subsidiary, distributes call management and voice processing equipment in Europe. Risks and Uncertainties. A major portion of the Company's domestic revenues is generated by sales to one customer, and a significant portion of its European distributorship revenue comes from one customer (See Note N). The loss of either 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, 2004, one such company 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. 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, 2004, 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. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4." The standard requires that abnormal amounts of idle capacity and spoilage costs should be excluded from the cost of inventory and expensed when incurred. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations. Property, Plant and Equipment. Property, plant and equipment is carried at cost less allowances for depreciation, computed in accordance with the straight-line method based on estimated useful lives. The estimated lives for machinery and equipment are 5 to 12 years and for furniture and fixtures are 4 to 10 years. Repairs and maintenance are expensed when incurred. Foreign Exchange. The functional currency of the Company's foreign subsidiary, the European distributorship operations, is the Pound Sterling. Results of operations for the Company's foreign subsidiary were translated from Pounds Sterling into U.S. dollars using average exchange rates during the period, while assets and liabilities were translated using current rates at the end of the period. The difference from historical exchange rates are recorded as comprehensive income (loss) and are included as a component of cumulative other comprehensive loss. 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 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): 2004 2003 2002 Net loss, as reported $(554) $(3,550) $(6,444) Add: Stock-based compensation expense included therein 359 380 370 Deduct: Total stock-based compensation method (662) (769) (701) ----- ------- ------- Pro forma net loss $(857) $(3,939) $(6,775) ===== ======= ======= Net loss per share As reported Basic $(.10) $(.63) $(1.18) Diluted $(.10) $(.63) $(1.18) Pro forma Basic $(.15) $(.70) $(1.25) Diluted $(.15) $(.70) $(1.25) The estimated weighted average fair value per share of stock options granted were $2.56, $1.49 and $1.01 for 2004, 2003 and 2002, 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 2004, 2003 and 2002, respectively: risk-free interest rates of 4.4%, 2.2% and 2.28%; no dividend yields; volatility factors of the expected market price of the Company's common stock of .73 in 2004, .67 in 2003 and .61 in 2002; 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 July 1, 2005. SFAS No. 123(R) allows for either 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. The Company is currently evaluating these transition methods. 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. 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 5,780,603, 5,614,825 and 5,438,126 for 2004, 2003 and 2002, 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. Through December 31, 2001 goodwill was amortized using the straight-line method over its estimated useful life (10 years). 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. Reclassification. Certain prior year amounts have been reclassified to conform to the current year presentation, including reclassification of approximately $606,000, $818,000 and $1,044,000 of accrued officers and directors fees at January 1, 2002, December 31, 2002 and December 31, 2003, respectively, as additional paid-in capital - common stock to be issued, rather than accrued compensation and benefits and accrued deferred directors' fees as previously reported. These reclassifications properly reflect these amounts as equity based compensation in the consolidated balance sheets and had no significant impact on the Company's financial position or results of operations. 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 Receivables The allowance for doubtful accounts was increased by $45,000, $10,000 and $87,000 in 2004, 2003 and 2002, respectively, by charges to costs and expenses. The Company wrote off uncollectible accounts, net of recoveries, of $35,000, $15,000 and $213,000 in 2004, 2003 and 2002, respectively. Note D. Inventories (in thousands): 2004 2003 ---- ---- Finished and in process $1,572 $2,172 Materials and purchased parts 731 815 ------ ------ $2,303 $2,987 ====== ====== Included in the above amounts is the Company's reserve for slow moving and obsolete inventories totaling $3,528,000 and $2,765,000 at December 31, 2004 and 2003, respectively. The provision for slow moving and obsolete inventory was increased by $738,000, $482,000 and $951,000 in 2004, 2003 and 2002, respectively by charges to cost of goods sold. Note E. Property, Plant and Equipment, net (in thousands): 2004 2003 ---- ---- Machinery and equipment $2,391 $2,476 Furniture and fixtures 2,066 2,131 ------ ------ 4,457 4,607 Less allowances for depreciation 3,535 3,520 ------ ------ $ 922 $1,087 ====== ====== Note F. Other Non-current Liabilities (in thousands): 2004 2003 ---- ---- Accrued officers' supplemental pension $ 368 $ 419 Accrued deferred compensation 207 232 Accrued pension 740 664 Accrued postretirement benefit 11 ------ ------ 1,315 1,326 Less current portion 277 257 ------ ------ $1,038 $1,069 ====== ====== Note G. Debt and Credit Arrangements Dacon Electronics Plc's, a foreign subsidiary, bank line of credit expired in 2003. During 2003, no amounts were borrowed under this facility. Interest of $19,000 was paid in 2002. Note H. Income Taxes At December 31, 2004, consolidated retained earnings included approximately $.2 million of retained earnings applicable to Dacon Electronics Plc. If the undistributed earnings were remitted, any resulting federal tax would be substantially reduced by foreign tax credits. The components of the provision (benefit) for income taxes for the years ended December 31 are as follows (in thousands): 2004 2003 2002 ---- ---- ---- Current: Federal $ $ $(1,714) Foreign State 55 63 88 ---- ---- ------- Total current 55 63 (1,626) ---- ---- ------- Deferred: Federal 1,817 State 194 ---- ---- ------- Total deferred 0 0 2,011 ---- ---- ------- $ 55 $ 63 $ 385 ==== ==== ======= Domestic and foreign pretax income (loss) for the years ended December 31 are as follows (in thousands): 2004 2003 2002 ---- ---- ---- Domestic operations $(286) $(3,419) $(5,978) Foreign operations (213) (68) (81) ----- ------- ------- $(499) $(3,487) $(6,059) ===== ======= ======= 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, 2004 and 2003 are as follows (in thousands): 2004 2003 ---- ---- Deferred tax liabilities $ 96 $ 85 ------ ------ Deferred tax assets: Inventory valuation 1,252 1,026 Accrued liabilities and employee benefits 1,272 934 Accrued deferred compensation 199 233 Other postretirement benefits 4 Federal operating loss carryforward expiring in 2019 981 1,257 Separate return federal operating loss carryforwards expiring in 2008 and 2009 445 445 Other 195 207 ------ ------ Total deferred tax assets 4,344 4,106 Valuation allowance (4,248) (4,021) ------ ------ 96 85 ------ ------ Net deferred tax assets $ 0 $ 0 ====== ====== The Company has increased its valuation allowances by $227,000, $1,151,000 and $2,425,000 in 2004, 2003 and 2002, 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 income (loss) for the years ended December 31, is as follows: 2004 2003 2002 ---- ---- ---- Statutory federal income tax rate (34.0)% (34.0)% (34.0)% State income taxes, net of federal tax benefit 7.3 1.8 0.6 Lower foreign tax rate 14.6 0.7 0.5 Nontaxable interest income (0.3) Goodwill amortization (5.0) (0.8) (0.4) Valuation allowance 25.9 33.2 40.0 Other 2.2 0.9 ---- ---- ---- 11.0% 1.8% 6.4% ==== ==== ==== Note I. Other (Income) Expense, Net (in thousands): Year Ended December 31, 2004 2003 2002 ---- ---- ---- Interest expense $ 24 $ 26 $ 36 Interest income (175) (184) (242) Settlement gain in plan termination (849) ----- ------- ----- $(151) $(1,007) $(206) ===== ======= ===== Note J. Commitments and Contingencies Leases. Total rental expense amounted to $396,000 in 2004, $364,000 in 2003 and $423,000 in 2002. Future annual payments for long-term noncancellable leases for each of the five years in the period ending December 31, 2009 are approximately $482,000, $399,000, $277,000, $159,000 and $6,000, 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): 2004 2003 2002 ---- ---- ---- Interest cost on projected benefit obligation $ 92 $106 $120 Actual (return)/loss on plan assets (14) (109) 99 Net amortization and deferral (33) 63 (167) Settlement loss 58 ---- ---- ---- Net periodic pension cost $ 45 $118 $ 52 ==== ==== ==== 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): 2004 2003 ---- ---- Projected and accumulated benefit obligation for services rendered to date Beginning of year $1,489 $1,737 Loss (gain) due to change in estimates 214 50 Interest cost 92 106 Less benefits paid (114) (404) ------ ------ End of year 1,681 1,489 ------ ------ Plan assets at fair value Beginning of year 825 960 Actual return on plan assets 14 109 Contribution 216 160 Less benefits paid (114) (404) ------ ------ End of year 941 825 ------ ------ Plan assets less than benefit obligation (740) (664) Unrecognized net loss (gain) 524 277 Minimum pension liability adjustment (524) (277) ------ ------ Accrued pension liability (included in other non-current liabilities) $ (740) $ (664) ====== ====== The discount rates used in determining the projected benefit obligation were 5.5% in 2004 and 6.25% in 2003. The expected long-term rate of return on plan assets used in determining the net periodic pension cost was 6.5% in 2004 and 2003. 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 allocation at December 31, 2004 and 2003 and target allocation for 2005 by asset category, are as follows: 2005 Target Asset Category Allocation 2004 2003 -------------- ----------- ---- ---- Equity Securities 45-60% 56% 60% Debt Securities 30-45% 31% 33% Cash and cash equivalents 5-15% 13% 7% The Company intends to contribute approximately $170,000 in 2005 to this plan. The following benefit payments are expected to be paid: $99,000 in 2005, $132,000 in 2006, $95,000 in 2007, $93,000 in 2008, $150,000 in 2009 and an aggregate of $645,000 for the five year period ending in 2014. 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 and $52,000 in 2003 and 2002, respectively. Officers' Supplemental Pension Plan. The Company has an unfunded, non- contributory 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): 2004 2003 2002 ---- ---- ---- Interest cost on projected benefit obligation $19 $24 $27 Amortization of actuarial gains (2) (3) (3) --- --- --- Net periodic pension cost $17 $21 $24 === === === 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): 2004 2003 ---- ---- Projected benefit obligations Balance at beginning of period $347 $391 Loss due to change in estimate 25 Interest expense 19 24 Less benefits paid (69) (68) ---- ---- Balance at end of period 322 347 Unrecognized net gain 46 72 ---- ---- Accrued pension liability (included in other non-current liabilities) $368 $419 ==== ==== The discount rate used in determining the projected benefit obligation was 5.5% in 2004 and 6.75% in 2003. 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 2005, $69,000 in 2006, $69,000 in 2007, $65,000 in 2008, $51,000 in 2009 and an aggregate of $124,000 for the five year period ending in 2014. 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 and 2002 are as follows (in thousands): 2003 2002 ---- ---- Interest cost $ 45 $47 Net amortization (9) (11) Settlement gain (849) ----- --- Net periodic cost $(813) $36 ===== === The net benefits paid were $32,000 for 2003. Deferred Compensation. At December 31, 2004 and 2003, the liability relating to a deferred compensation arrangement between the Company and a former director and officer of the Company was $207,000 and $232,000, respectively. The Company expects to make payments in 2005 totaling $42,000 under this contract. Note K. 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, 2004, no grants were granted, exercised or cancelled. At December 31, 2004, 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. In 2002, the company granted to key employees the right to receive 395,000 common shares which vest on January 2, 2006. Such rights are 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' Option Stock Option Plan Plan Plan ------ ---------- ---------- Outstanding at December 31, 2001 856,050 131,210 65,250 Granted 315,500 145,000 51,000 Cancelled or expired (131,225) (15,000) Vested (17,530) Exercised --------- ------- ------- Outstanding at December 31, 2002 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 1,131,300 329,037 125,250 Granted 30,000 Cancelled or expired (144,751) (12,000) Vested (53,550) Exercised (12,497) (14,500) --------- ------- ------- Outstanding at December 31, 2004 974,052 275,487 128,750 ========= ======= ======= Available for future grant 151,848 0 58,250 ========= ======= ======= Under the 1990 Option Plan, the exercise price for options granted in 2002 and 2003 was $1.55 and $2.20, respectively. The weighted average exercise price for the options outstanding under the Option Plan is $4.08 with expiration dates ranging from 2010 to 2013. Options were exercised under the Option Plan at weighted average exercise prices of $1.55 and $1.65 in 2003 and 2004, respectively. Shares exercisable under the Option Plan and weighted average exercise price at December 31, 2002, 2003 and 2004 were 580,892 and $7.32, 681,764 and $6.53 and 708,058 and 4.88, respectively. The weighted average remaining lives for options outstanding at December 31, 2002, 2003 and 2004 were 6.6, 7.3 and 8.25 years, respectively. Under the Restricted Stock Plan compensation expense was $208,000, $228,000 and $220,000 in 2004, 2003 and 2002, respectively. The exercise price for options granted under the Directors' Stock Option Plan in 2002 ranged from $1.45 to $2.00, for options granted in 2003 was $2.11 and for options granted in 2004 was $3.50. The weighted average exercise price for the options outstanding under the plan is $3.68 with expiration dates ranging from 2005 to 2014. No options were exercised in 2002 and 2003; in 2004, options with a weighted average exercise price of $1.93 were exercised. Shares exercisable at December 31, 2002, 2003 and 2004 were 62,250, 101,250 and 104,750, respectively. The weighted average remaining lives for options outstanding at December 31, 2002, 2003 and 2004 were 7.0, 7.6 and 7.63 years, respectively. Note L. Cumulative Other Comprehensive Loss Cumulative other comprehensive loss consists of the following at December 31 (in thousands): 2004 2003 2002 ---- ---- ---- Cumulative translation adjustment $ 171 $ 50 $ (79) Minimum pension liability net of tax of $128 (396) (148) (219) ----- ----- ----- $(225) $ (98) $(298) ===== ===== ===== Note M. 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, 2004 and 2003 of $1,968,000 and $1,931,000 include interest accrued on the advances. This indebtedness bears interest at rates approximating market rates and is payable upon demand. No advances have been made since July 2002. Note N. Operations by Industry Segment and Geographic Areas The Company operates in two segments. In the United States, the Company designs, manufactures and sells equipment for use in telephone central offices. In Europe (United Kingdom), the Company distributes equipment for use in customers' premises, primarily contact centers. Information about the Company's operations by segment and geographic area for the years ended December 31, is as follows (in thousands): 2004 2003 2002 ---- ---- ---- Net sales United States $ 8,699 $ 5,096 $ 5,536 Europe 5,526 5,161 5,763 ------- ------- ------- $14,225 $10,257 $11,299 ======= ======= ======= Operating profit (loss) United States $ 739 $(3,047) $(5,115) Europe (224) (68) (75) Intercompany eliminations 11 19 ------- ------- ------- 515 (3,104) (5,171) General corporate expenses 1,165 1,390 1,094 Other (income) expense, net (151) (1,007) (206) ------- ------- ------- Income (loss) before income taxes $ (499) $(3,487) $(6,059) ======= ======= ======= Total assets United States $16,773 $16,042 $20,164 Europe 2,183 2,856 2,655 Intercompany eliminations (7) ------- ------- ------- $18,956 $18,898 $22,812 ======= ======= ======= Long-lived assets United States $ 953 $ 1,160 $ 1,485 Europe 435 395 473 ------- ------- ------- $ 1,388 $ 1,555 $ 1,958 ======= ======= ======= Expenditures for long-lived assets United States $ 123 $ 180 $ 570 Europe 81 26 53 ------- ------- ------- $ 204 $ 206 $ 623 ======= ======= ======= Depreciation and amortization United States $ 351 $ 502 $ 588 Europe 47 110 165 Intercompany eliminations (10) ------- ------- ------- $ 398 $ 612 $ 743 ======= ======= ======= The United States operations had net sales of $6.8 million, $2.8 million and $1.6 million in 2004, 2003 and 2002, respectively, to one major customer and sales of $.4 million, $1.1 million and $1.4 million in 2004, 2003 and 2002 to another major customer. The European operations had sales of $2.9 million, $3.0 million and $2.2 million in 2004, 2003 and 2002, respectively, to one customer. Note O. QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands except per share amounts) 2004 First Second Third Fourth ---- ----- ------ ----- ------ Sales $2,261 $4,243 $1,889 $5,832 Gross profit 748 2,499 713 3,794 Net income (loss) (1,351) 376 (1,348) 1,769 Net income (loss) per share: Basic $(.24) $.07 $(.23) $ .30 Diluted (.24) .06 (.23) .28 2003 First Second Third Fourth ---- ----- ------ ----- ------ Sales $2,496 $2,448 $3,498 $1,815 Gross profit 918 990 1,860 428 Net loss (1,325) (326) (466) (1,433) Net loss per share: Basic $(.24) $(.06) $(.08) $(.25) Diluted (.24) (.06) (.08) (.25) 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. Included in the second quarter of 2003 was a non-cash gain of $.8 million due to the termination of the Company's postretirement health benefits plan. Included in the third quarter of 2003 was an expense of $.2 million for the estimated settlement of a rent dispute in the UK distributorship operations. Due to the satisfactory resolution of the company's claim against a third party, this amount was reversed in the fourth quarter of 2003. 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, 2004 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, 2004, 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, 2004, 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, 2004. Scope of the Evaluation of the Company's Internal Control Over Financial Reporting. As with the Company's evaluation of its disclosure controls and procedures, the evaluation by the Company's Chief Executive Officer and Chief Financial Office of the Company's internal control over financial reporting included a review, in conjunction with the Company's internal auditors and others in the Company's organization, of the Company's procedures relating to the reliability of the Company's financial reporting and preparation of the Company's financial statements in accordance with generally accepted accounting principles ("GAAP"). Among other matters, the Company sought in its evaluation to determine whether there were any "significant deficiencies" or "material weaknesses" in its 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. This information is important both for the evaluation generally and because the Section 302 certifications require that the Company's Chief Executive Officer and Chief Financial Officer disclose that information to the Audit Committee of the Board of Directors and the Company's independent auditors and also require the Company to report on related matters in this section of the report on Form10-K. In the professional auditing literature, "significant deficiencies" are referred to as "reportable conditions"; these are control issues that could have a significant adverse effect on the company's ability to record, process, summarize and report financial data reliably, in accordance with GAAP, in the Company's external financial statements. A "material weakness" is defined in the auditing literature as a significant deficiency where the internal control does not reduce to a relatively low risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and would not be detected within a timely period by employees in the normal course of performing their assigned functions. In addition to evaluating the Company's internal control over financial reporting, the Company is documenting and testing the Company's internal control over financial reporting so that management will be able to report on, and the Company's independent auditors will be able to attest to, the Company's internal control over financial reporting as of December 31, 2005, as required by applicable laws and regulations, and the Company will continue to remediate its internal controls to the extent that the Company's testing reveals inadequacies in its controls. Management believes that the Company had adequate internal control over financial reporting but cannot be certain that, since there is no precedent available by which the Company can measure the adequacy of its control system in advance, the Company or the Company's independent auditors will be able to complete all the required testing of controls to attest to the Company's assessment of these controls on a timely basis. Changes in Internal Control Over Financial Reporting. During the three months ended December 31, 2004, 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 Registrant 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 annual meeting of stockholders to be held on May 12, 2005 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, 2004 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 annual meeting of stockholders to be held on May 12, 2005 is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Security ownership of certain beneficial owners and management and securities authorized for issuance under equity compensation plans set forth under the captions Security Ownership and Equity Compensation Plan Information, respectively, in the Proxy Statement for the annual meeting of stockholders to be held on May 12, 2005 is incorporated herein by reference. Changes in Control. None. Item 13. Certain Relationships and Related Transactions The information on certain relationships and related transactions set forth under the caption Certain Relationships and Related Transactions in the Proxy Statement for the annual meeting of stockholders to be held on May 12, 2005 is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information on fees charged by the principal accountant set forth under the caption Independent Auditors' Fees in the Proxy Statement for the annual meeting of stockholders to be held on May 12, 2005 is incorporated herein by reference. PART IV Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K (a)(1) and (2) and (d) The response to this portion of Item 15 is submitted as a separate section beginning on page 31 of this Annual Report on Form 10-K. (a)(3) and (c) The response to this portion of Item 15 is submitted as a separate section beginning on page 31 of this Annual Report on Form 10-K. (b) There was one report filed on Form 8-K during the fourth quarter of 2004. On November 12, 2004, the Company filed a current report on Form 8-K pursuant to Item 9 (Regulation F Disclosures) to furnish a press release reporting results of the third quarter of 2004. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 30, 2005. COGNITRONICS CORPORATION Registrant by /s/ Garrett Sullivan Garrett Sullivan Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 30, 2005. Signature Title Chief Executive Officer: /s/ Brian J. Kelley President and Chief Brian J. Kelley Executive Officer Chief Financial and Accounting Officer: /s/ Garrett Sullivan Treasurer Garrett Sullivan A Majority of the Board of Directors: /s/ John T. Connors Director John T. Connors /s/ Jack Meehan Director Jack Meehan /s/ William A. Merritt Director William A. Merritt /s/ William J. Stuart Director William J. Stuart Form 10-K -- Item 15 (a) (1) and (2) and (d) (a) (1) Financial Statements The following financial statements of the Company are included in Item 8. Financial Statements Covered by Reports of Independent Registered Public Accounting Firms: Page Reports of Independent Registered Public Accounting Firms 12 Consolidated Balance Sheets, December 31, 2004 and 2003 14 Consolidated Statements of Operations and Comprehensive Loss for each of the three years in the period ended December 31, 2004 15 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2004 16 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2004 17 Notes to Consolidated Financial Statements 18 (2) and (d) Financial Statement Schedules Schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the information has been included in the Company's financial statements and, therefore, have been omitted. 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 (attached as Exhibit 3 to this Annual Report on Form 10-K). 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, 2004 (attached as Exhibit 21 to this Annual Report on Form 10-K). 23.1 Consent of Independent Registered Public Accounting Firm, dated March 30, 2005 (attached as Exhibit 23 to this Annual Report on Form 10-K). 23.2 Consent of former Independent Registered Public Accounting Firm, dated March 30, 2005 (attached as Exhibit 23.2 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). Copies of the Exhibits to this Annual Report on Form 10-K are available upon written request to the Secretary of the Company at 3 Corporate Drive, Danbury, CT 06810-4130 and payment of $35.00 for a complete set of the Exhibits or $.25 per page for any part thereof (minimum $5.00).