SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended July 31, 1999 (No Fee Required)
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from to (No Fee Required)
Commission File Number: 0-8174
CONOLOG CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-0853566
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5 Columbia Road, Somerville, NJ 08876
(Address of principal executive office) (Zip code)
Issuer's telephone number, including area code: (908) 722-8081
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange in which registered
Common Stock, $0.01 par value NASDAQ SmallCap Market
Redeemable Class A Warrants NASDAQ SmallCap Market
Check whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure
will 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. X
The aggregate market value of the voting stock held by non-affiliates
of the Registrant based on the closing sale price of $1.00 on
October 26, 1999 was $6,209,409
The number of shares outstanding of the Registrant's common stock outstanding
as of October 26, 1999 was 6,209,409
DOCUMENTS INCORPORATED BY REFERENCE
FORM 10-K
JULY 31, 1999
TABLE OF CONTENTS
PART I
Item 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . 22
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . 23
Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . 24
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION. . . . . . . . . . . . . . . . . . . . 25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . 28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . 28
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS. . . . . . . . . . . . . . . . . 29
Item 11. EXECUTIVE COMPENSATION, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT. . . . . . 31
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . 34
PART IV
Item 14. EXHIBITS AND REPORTS. . . . . . . . . . . . . . . . . . . . . 34
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
PART I
BUSINESS
General
Conolog Corporation, a Delaware Corporation (the "Company"
or "Conolog") is engaged in the design, manufacture (directly or
through subcontractors) and distribution of small electronic and
electromagnetic components and subassemblies for use in
telephone, radio and microwave transmission and reception and
other communication areas that are used in both military and
commercial applications. The Company's products are used for
transceiving various quantities, data and protective relaying
functions in industrial, utility and other markets.
Conolog acquired Atlas Design, a human resource company, in
September 1998. Atlas Design provides short and long term qualified
Engineering and technical staff to major companies as well as human
Resource consulting. The Company plans to utilize the qualified
engineering and technical staff in support of Conolog's longer
term contracts including the PTR1500 series.
History
The Company was organized in 1968 and was engaged primarily
in the design and manufacture of electronic components and
systems for military applications.
The Company, in July 1971, merged with DSI Systems, Inc.,
then engaged in the development and manufacture of terminal
viewers for digital retrieval of microfilm. Later that year, the
name was changed from DSI Systems, Inc. to Conolog Corporation.
By 1980 it became apparent that the military segment of the
business was growing while the terminal viewer segment was a
drain on cash and other resources. By the year end the terminal
viewer business was discontinued and the inventory relating
thereto was written off, allowing the Company to concentrate on
its military business.
In 1981 the Company acquired one of its customers, INIVEN
Corporation ("INIVEN"). At that time, the Company was
manufacturing, on behalf of INIVEN, a line of transmitters and
receivers used for controlling and transceiving the measurement
of the flow of gases and liquids, by gas and water utilities,
for controlling the flow of waste water and sewage and measuring
and controlling traffic.
Since the 1980's, Conolog has been an active participant in
providing electromagnetic wave filters for major military
programs, such as the Patriot Missile, Hawk Missile and Sea
Sparrow Missile. In addition to these projects, Conolog
components are currently used by the military in tanks, the
Apache helicopters and the MK-50 torpedoes.
During 1987, the Company made the strategic decision to
redirect the Company's focus from military to commercial markets.
Since that time, the Company has refocused on manufacturing and
marketing its products for the commercial marketplace rather than
depend on the military and defense-related markets. The effort
has included the introduction of new products, the redesign of
existing products and increased advertising and marketing
efforts, as permitted by its limited financial resources. The
percentage of revenues attributed to products manufactured for
use in commercial applications increased from approximately 4% of
sales in 1981 ($171,000) to approximately 82% of sales in 1998
($616,752). The decision to embark on this program entailed a
major design effort, including the coordination of outside
engineering consultants to develop a complete line of products
aimed at the Company s target markets. The primary emphasis was
on products for electric utilities, co-generation of power, gas
and water companies, traffic control for departments of transport
(DOT) and airports utilizing DSP (Digital Signal Processing)
technology. Commercial product sales in 1999 were approximately
24% ($580,000)
Testing of the Company's first commercial product group, the
Teleprotection Series PTR-1000, was under way in the latter part
of 1992 by Bonneville Power Administration. This detailed test
permitted the Company to "fine tune" the product for power
transmission applications. In March 1994, the PTR-1000 was
approved for use by such utility and thereafter by other
utilities and municipalities. To date, the Company has sold and
delivered approximately 1000 PTR-1000 sets to 14 utilities and
3 municipalities, most of which are installed and in service.
Following the PTR-1000, in 1993, the Company introduced its
"98 Series" Tone Products for water, gas, telephone and oil
companies, waste water, traffic control and airports. In 1994
the Company unveiled the Power Supply Series (allowing the
various utilities to power-up the equipment from any power
source), the "40 Series" for transmission of analog variable data
(water levels, gas pressures and temperature) and the Multiplexer
Series, which permits the transmission of up to 900 separate data
points, again using a telephone line, microwave link, or
satellite. In 1994 the Company also introduced the "68 Series"
tone products. This series is the "98 Series" repackaged
mechanically specifically for customers with older systems
wanting to upgrade to DSP technology without the expense of a
complete mechanical installation. The "68 Series" offers the
entire line offered by the "98 Series". In 1995, the Company
introduced a stand alone "98 Series" transmitter and receiver for
field installations and a wide range fiber optic interface for
the Iniven products. The fiber optic interface is also available
as a stand alone coupling device. The Company launched its
industrial grade 1200 Baud Modem for data transmission/
communication, and completed the PTR-1000 Systems options.
Throughout 1997 and 1998, the Company designed and is in the process
of completing and building the PTR-1500 Quad System, Protection
Equipment, exclusively for the General Electric Company ("GE"),
to be labeled GE-NS50 Series, for worldwide sales as detailed in
the agreement between GE and Conolog dated April 1, 1997.
In February 1999 Conolog completed field testing of its PTR1500
and introduction of unit to US and Canadian utilities. In March 1999
GE advised Conolog that it has sold its Power Line Business to the
Trench Group in Canada; which has been in negotiations with Conolog
to enter into a potential purchase and sales agreement. Conolog
has received an initial $200,000 order for PTR1500 units from
Boston Edison Energy Company.
Due to the end of the cold war and the downsizing of the
American military, the Company experienced unexpected sharp
reductions of military contracts in fiscal 1993 (the Company's
fiscal year ends on July 31) resulting in a 50% decline in the
Company's sales for that year, down to $1,486,298 from $2,997,308
in fiscal 1992. The sales of new products could not replace the
decrease in military sales. The Company, however, continued to
pursue sales as aggressively as its available resources would
permit. Sales for the Fiscal year ended July 31, 1996 were
$1,924,466 as compared to $2,090,933 for the year ended July 31,
1995. Sales in fiscal 1997 totaled $1,123,390, a 42% decrease
from $1,924,466 for the same period in 1996, and sales for the
year ended July 31, 1998 were $746,420, a 33.5% decrease for the
same period of 1997. Military sales for fiscal year ended July 31,
1999 were $118,042, an 85% decrease.
In September 1998, the Company acquired the assets of Atlas
Design, Inc., a human resource outsourcing company, to further
its strategy of mergers and acquisitions, and to assist in
providing qualified engineering and technical staff in support
of Conolog's longer term contracts.
Also in September 1998, the Company completed a sale/leaseback
of its manufacturing facility. This enabled the Company to
significantly reduce operating costs and increases the working
capital.
Revenues from the Company's military product sales represented
approximately 14%, 5.6% and 1% of sales of the Company in
fiscal 1997, 1998 and 1999 respectively, reflecting the
Company's emphasis on commercial sales and markets and other business
strategies.
General Description
Products
The Company is engaged in the design and manufacture of (i)
transducers, which are electro-magnetic devices which convert
electrical energy into mechanical and other forms of physical
energy, or conversely convert mechanical and other forms of
physical energy into electrical energy; (ii) digital signal
processing (DSP) systems and electromagnetic wave filters for
differentiation among discreet audio and radio frequencies; (iii)
audio transmitters and modulators, for the transmission over
telephone lines, microwave circuits, or satellite, of electrical
signals obtained from transducers, data generated in electronic
code form or by computers or other similar equipment (not
manufactured by the Company); (iv) audio receivers and
demodulators which are small systems which receive and decode the
signals from the audio transmitters and convert them into digital
codes for input into computers, teletypes or other similar
equipment (not manufactured by the Company) or convert such
signals into mechanical or other form of energy, such as opening
or closing valves, or starting or stopping a motor; (v) magnetic
"networks" which are devices that permit the matching or coupling
of different types of communication equipment together or many
identical or similar equipment together or onto telephone or
other transmission lines so as not to cause interference; and
(vi) analog transmitters and receivers, which permit the
coding/transmission and receiving/decoding of a constantly
variable data, such as the water level in a tank, pressure in a
pipe or temperature, by actually displaying the exact information
at the receiving end in digital form for storing in a computer or
other devices, or by physically displaying the information in a
visual fashion such as a numerical readout or meter, and (VII)
multiplexer supervisory controls, which enable callers with high
volumes of supervisory data to transmit on fewer phone lines.
Such products are used in radio and other transmissions,
telephones and telephone exchanges, air and traffic control,
automatic transmission of data for utilities, tele-printing of
transmitted data such as news and stock market information and
for use by electric utilities in monitoring power transmission
lines for faults and/or failures. The Company's products may be
used independently or in combination with other products to form
a system type configuration, whereby the Company's equipment is
pre-assembled in a large cabinet with other equipment in a
configuration that would provide the end user with protection as
well as operational status displays.
Present Status/Business Product Description
The Company is presently engaged in four basic market segments:
(A) Commercial Sales (Under the trade-name " INIVEN" (a
Division of Conolog))
- Direct sales to end users
- Sales to system assemblers
- Sales to contractors/installers
(B) Military Sales - Direct contract sales to the
military
- As subcontractor to systems producers
- Foreign governments
(C) Commercial Sales - As Manufacturing Subcontractor
to Systems Producers.
(D) Other Ventures -Short and long term qualified engineering
and technical services as well as human resource consulting
(Under the trade name "Atlas Design")
(A) Military Sales
Since 1992 the Company's engineering staff is dedicated to
"INIVEN" commercial designs and does not engage in any new
designs for military applications. The Company actively
participates in bids only for parts the Company has designed
since inception in 1968. Presently there are approximately 400
designs that are applicable to these military sales.
Military sales are primarily for the Company's electromagnetic
wave filters used in military radios, vehicles (cars, trucks or
tanks), portable (backpack), special signaling equipment and
exchanges (as in field command posts), weapon/missile guidance
and control (Patriot missile, Tomahawk, Pave-Paws), torpedo active
signal recognition and differentiation mounted in the nose cone
of the torpedo (MK-30, Captor, MK-50 torpedoes), ship to ship
teletype signaling filters used in deployment of ships (UCC-1
and UCC-4 systems) as well as many other signaling applications
where accurate electromagnetic frequency control is required.
The Company markets the above military sales directly and
through independent manufacturing sales representatives on a
commission basis.
B) Commercial "INIVEN" Sales and Products
"INIVEN" equipment is designed around four (4) core product
groups:
(1) PTR Teleprotection Series
(Protective Tone Relaying Communications Terminal,
which includes the PTR-1000 and the PTR-1500.
(2) Audio Tone & Telemetry Equipment
(Audio Tone Control, Telemetering and Data
Transmission Systems), which includes Series "98",
"68", "40" and "GEN-1".
(3) Multiplex Supervisory Control System
(4) Communication Link Multihead Fiber Optic Couplers
and Industrial Grade 1200 Baud Modems.
(1) PTR-1000 Teleprotection Series
This product is designed for use exclusively by electric
power generators (electric utilities and cogenerators) in order
to protect their transmission and distribution lines. The PTR-
1000, by monitoring the output signal of the transmission
equipment in less than one hundred of a second protects the
transmission and distribution lines.
The PTR-1000 are installed in pairs, one unit at each end of
the line. Each unit is connected and in constant communication
with the other, as they continuously monitor the line for faults.
In the event of a fault occurring (such as a downed line or a
short circuit) at either end and when confirmed by the receiving
PTR-1000 unit, the line is immediately isolated for shut down,
averting costly damage and downtime.
The PTR-1000 system is composed of a transmitter, dual
receivers, a logic card (brain center and controller of the
system), relay module, line interface module and power supply
module. The transmitters at each end are independent and
transmit (continuously) the status (information being monitored)
at their end of the line.
In the event of a fault, the information is transmitted to
the PTR-1000 at the other end of the line and once confirmed by
both its receivers (this duality is designed such that both
receivers must agree before any action is taken), it will, when
programmed to do so, isolate that end of the line. Generation and
distribution of electric power entails expensive equipment at
both ends of the line. Faults causing interruption of
transmission can cause costly replacement of failed equipment and
loss of revenue caused by downtime for repairs.
The PTR-1500, is a quad system and performs as 2 duals
or 4 singles with many unique features such as multiple line
operation, event recording with date stamp with optional analog
or digital transmission modes including optic fiber interface.
The PTR Teleprotection Series is designed for global use
by electric utilities and any entity generating power for its own
consumption with resale of surplus power to an electric utility,
such as cities, municipalities, cooperatives and large
corporations that find it more economical to generate their own
electricity.
The PTR-1000 target market is worldwide, as follows:
New installations; i.e., new transmission lines, new
distribution segments, for utilities and cogenerators.
Existing installations not properly protected, improving
efficiency and down time.
Existing installations for upgrading to PTR-1000 technology,
again improving efficiency and down time.
Sales efforts for the PTR-1000 are presently being conducted
by the Company's marketing executives, through independent
manufacturers' representatives and through distributors. Sales
are targeted primarily to the largest utilities and co-
generators.
According to McGraw-Hill, Inc. Electrical World (Electric
Utilities of the United States), in the United States alone,
there are over 500 large entities generating electricity. They
are:
Investor-owned
Municipal Systems
Cooperative Systems
Federal, State and District systems.
To date , the Company has sold and delivered approximately 1200
PTR-1000 sets to 15 utilities and 5 municipalities, most of
which are installed and in service.
(2) Audio Tone and Telemetry Equipment
For many years there has been a need for a modularly
independent system that would permit a user, from a distance, to
control functions such as opening a valve, starting a motor,
shutting down a compressor, changing a traffic signal, control
landing lights at an airport, activate a hazard warning on a
highway, and in return allow the user to receive information,
such as the liquid level in a tank, the pressure in a pipe, the
rate of flow out of a compressor, the flow of traffic, the status
of a traffic light, airport lights, or confirmation that a
command was performed. Such information is transmitted and
received and the control functions are performed from a distance
utilizing telephone lines, microwave link or direct wire.
These applications, by their nature, can be accomplished
with slow speed signaling systems composed of a transmitter on
one end and a receiver on the other to carry out the necessary
instructions provided by the transmitter. Each set
(transmitter/receiver combination) is called a channel. Because
of the slow speed, up to 30 channels could be made to transmit
and receive signals, in either direction on a single telephone
line, microwave link or direct wired line at the same time. This
parallel transmission permits each transmitter/receiver pair to
be independent of all the others.
This product segment includes the first generation
equipment, known as GEN-1, followed by later generations which
include technological improvements and programmable capabilities
to include:
GEN-1 Series - First generation with electromagnetic modules
and first generation programmable modules without electro-
magnetic modules.
"98" and "68" Series - The latest generation applies DSP and
microprocessor technology with full programmability, in the
field or at the factory.
"40" Series - Designed to function with the "98" or "68"
series; transmits and receives variable analog data.
GEN-1 and GEN-1 Programmable Series
The diversity of applications for this equipment makes it
available for a wide range of users who are not restricted to a
single industry. Typical industrial uses include: the
measurement of water and gas, waste water, gasoline, oil,
traffic, and electricity. Typical users include: utilities, co-
generators, airports, navy yards, telephone companies, paper and
pulp processors and wherever remote control and data acquisition
is required.
Because of the ease of use and installation, there is much
GEN-1 type equipment installed and used in the United States by a
wide spectrum of diverse users. Since the Company's line has a
distinct mechanical configuration, the Company designed its GEN-1
Programmable units and other improvements as replacements for
existing units. These account for approximately 18% of the
Company's commercial sales. The Company's line of GEN-1 equipment
is extensive and provides the user with the ability to perform
multiple control functions, status monitoring as well as
continuous variable data monitoring, such as a level in a tank or
pressure gauge.
Sales for this line are primarily for the replacement of
existing installations and for expansion of these installations
where it would not be economical to install the latest
technology, which would not be mechanically compatible.
Sales to this market are made in the same manner as the PTR-
1000 market except that manufacturers' representatives
specialize in selling to this diverse market.
"98," "68" and "40" Series
These series represent the Company's latest designs in the
audio tone equipment utilizing the more advanced DSP technology,
which provides high accuracy and long term stability. These
features have allowed the Company to greatly improve the scope,
density and number of functions that can be performed on a single
phone line, microwave link or direct line.
Given this technology and the high-reliability and quality
standards of the Company's products, the Company began in
the first quarter of 1994 to offer a 12 year warranty for all of
its commercial products. This warranty has been favorably
received by customers. Based upon its past experience, the
Company does not believe that its extended warranty will result
in any material repair or replacement expenses.
Sales of these products are made by the same agents who
sell the Company s GEN-1 products, but are also directed to
encompass more sophisticated users with larger amounts of data
and control points. The mechanical configuration of the "98"
series is more compact, permitting more equipment in a given
space, while performing many more functions when it is connected
to the "40" Series. The "68" Series is the "98" Series
repackaged mechanically specifically for customers with older
systems permitting them to upgrade their systems to DSP
technology. The "40" Series, when connected to the "98" or "68"
in the same chassis, permits the continuous monitoring of
variable data. Typical applications for these products include
transmission of the variable data (such as volume, temperature,
pressure and moisture) for water, gas, industrial gases, oil ,
gasoline, transportation equipment and telephone exchanges, and
for use at airports, tunnels and bridges and for security and
electricity systems.
(3) Multiplex Supervisory (IM) Control System
This product is a response to the cost and scarcity of
dedicated phone lines (connections whereby the phone link is
dedicated to one subscriber), and enables customers with high
volumes of supervisory data (where many functions are monitored
from a single site) to transmit data on fewer phone lines (i.e.,
with more data per channel, up to a maximum of 30 channels per
line).
Using the "98" DSP Series as its communications link, the
Company designed the Multiplexer Supervisory Control System to
handle 8 times the normal capacity per channel. The
microprocessor based system allows a single telephone line to
handle up to 900 data inputs.
This product line, because of its data density capability,
may be utilized for a very broad range of applications. This
product has only recently been introduced and the Company sales
efforts for it are being conducted through its existing
independent manufacturers sales representatives.
(4) Fiber Optic Link and Data Modem
The expansion of fiber lines by the Company's customers and
their need to switch equipment from phone lines to fiber prompted
the Company to design and introduce a fiber-optic-coupler line to
interface with the many different fiber heads. In addition to
complete data interface couplers the Company launched a series of
1200 Baud Modems (Industrial Grade) for operation under the same
environmental specifications in line with the Company's products.
(C) Commercial Subcontract Manufacturing to Systems Producers
Since the downsizing of the American Military, the Company
has actively sought manufacturing subcontract orders to fill the
production void created by the severe drop in military
production. In June 1996 the Company negotiated and entered
into a renewable annual agreement with the General Electric
Company, GE Electrical Distribution and Control and its
participating affiliated companies for the manufacture of sub-
systems, board assemblies and magnetic filters and other products
consistent with the Company's expertise. The success of this
agreement has prompted the Company to pursue other system
producers to more fully utilize the Company's manufacturing
capacity.
Recent Developments
In February 1999 Conolog completed field testing of its PTR1500 and
introduction of units to US and Canadian utilities. In March 1999,
GE advised Conolog that it has sold its Power Line Business to Trench
Group in Canada; which has been in negotiations with Conolog to enter
into a potential pruchase and sales agreement. Conolog has received
an initial $200,000 order for PTR1500 units from the Boston Edison
Energy Company.
The Company's new INIVEN Multiplexer was tested for 2 way radio
operation to provide 8 analog and 16 status functions bi-
directionally at a single site. The Company introduced this radio
link product line in the second half of 1998.
In September 1998, the Company completed the sale of its building
resulting in $717,000 net proceeds to the Company. The transaction
also provided for a three year rent-free lease to the Company of
approximately 38% of the total space.
Also in September 1998, the Company completed the acquisition of the
assets of Atlas Design, Inc. for $145,000 in cash. Atlas Design provides
short and long term qualified engineering and technical staff to the
country's leading companies as well as human resource consulting.
Atlas Design's integration with the Company will provide a pool of
project engineering leaders and software designers in support of
the Company's longer term contracts including the GE PTR-1500 series.
Both the sale of the building and the acquisition of Atlas Design, Inc.
is in line with the Company's expansion plan through acquisitions, mergers
and GE software support.
The Company and CLOG LLC have entered into an Option Agreement, dated
as of December 22, 1998, which was amended and restated as of May 5, 1999
(the "Option Agreement"). Pursuant to the Option Agreement, the Company
has granted an option to CLOG to purchase convertible debentures of the
Company having an aggregate principal amount of up to $2,000,000. CLOG's
option may be exercised at any time prior to December 31, 1999.
Each convertible debenture is convertible into common stock of the
Company at a conversion rate of $1.00 per share, the fair market value of
the common stock on the date of the Option Agreement. If CLOG were to
exercise its option for all $2,000,000 of convertible debentures, it would
have the right to convert those notes into 2,000,000 shares of common stock.
The Option Agreement provides that the voting power of any Conversion
Shares owned by CLOG will be voted in the same manner as shares voted by
all other shareholders of the Company.
Each convertible debenture bears interest at the rate of 8% per
annum and will be due 12 months from the date such debenture is issued,
subject to acceleration under certain circumstances. At maturity, except
with respect to the initial $200,000 loaned, the Company will have the
option to pay each debenture, together with all accrued interest thereon,
by issuing shares of a new Series C preferred stock having a value of
$5.00 per share for purposes of such repayment.
The Series C preferred will be non-voting and carry a cumulative
dividend of 8% per annum, which may be payable by the issuance of shares
of common stock valued at $5.00 per share. The Series C preferred will
be convertible into common stock at the rate of one share of common stock
for each share of Series C preferred and have a liquidating preference of
$5.00 per share. The Series C preferred may be redeemed by the Company at
any time by paying $5.00 in cash therefor.
Pursuant to the Option Agreement, the Company filed a Registration
Statement with the Securities and Exchange Commission (the "Commission")
covering the resale of the 2,000,000 shares of common stock into which
the convertible debentures are convertible. Such Registration Statement
was declared effective by the Commission on April 12, 1999. The Company
will take appropriate measures to update the Registration Statement and
the Prospectus to reflect the results of the shareholder vote on this
proposal after its Annual Meeting of Shareholders to be held June 17, 1999.
The Company and The Nybor Group Inc. have entered into a Consulting
Agreement, dated as of December 22, 1998, which was amended and restated
as of May 5, 1999 (the "Consulting Agreement"). Pursuant to the Consulting
Agreement, Nybor has agreed to provide the services of its President, Warren
Schreiber, to the Company for management consulting and financial consulting
Purposes through December 31, 2004. Mr. Schreiber also serves as the managing
member of CLOG LLC. As compensation, Nybor received 1,057,143 shares
of common stock.
The Consulting Agreement provides that the voting power of the
Consulting Shares owned by Nybor will be voted in the same manner as shares
voted by the other shareholders (as discussed above).
The Registration Statement discussed above also covered the resale
of the shares issuable pursuant to the Consulting Agreement.
Shares of Stock issued to Employees and Consultants
In September 1998, the Company issued 25,000 shares of common stock to
a consultant at a value of $15,500.
In November 1998, the Company issued 468,000 shares as a bonus to its
officers and key employees, of which $110,272 is included in cost of sales
and $313,853 in selling, general and administrative expenses.
In December 1998, the Company issued 60,000 shares to various consultants
for the performance of various services in the amount of $58,084, which
was expensed to selling, general and administrative.
The Company has registered such shares with the SEC.
In March 1999, 105,000 shares were issued upon exercise of Options
granted to certain key employees under the Conolog Corporation 1995/1996
Stock Option Plan (the "Option Plan"). The Option Plan is designed to
permit the Company to grant either incentive stock options under Section
422A of the Internal Revenue code (the "Code") or nonqualified stock options.
Under the Option Plan, a Stock Option Committee (the "Option Committee")
of the Board of Directors is authorized to grant options to purchase up
to 200,000 shares of stock to key employees, officers, directors and
consultants of the Company. The Option Committee administers the
Option Plan and designates the optionee's, the type of options to be
granted (i.e., nonqualified or incentive stock options), the number of
shares subject to the options, and the terms and conditions of each
option. The terms and conditions include the exercise price, date of
grant, and date of exercise of each option. An employee may, at the
discretion of the Option Committee, be permitted to exercise an option
and make payment by giving a personal note.
Incentive stock options may only be granted to employees of the
Company and not to directors or consultants who are not so employed.
The exercise price for incentive stock options must be at least
one hundred percent (100%) of the fair market value of the Common
Stock as determined by the Option Committee on the date of the grant.
All incentive stock options under the Option Plan must be granted
within ten (10) years from the date of adoption of the Option Plan
and each option must be exercised, if at all, within ten (10) years
of the date of grant. In no event may any employee be given incentive
stock options whereby more than $100,000 of options become excercisable
for the first time in a single calendar year. All incentive stock
options must be exercised by an option within three (3) months after
termination of the optionee's employment, unless such termination is as
a result of death, disability or retirement. In the event an optionee's
employment is terminated as a result of death or disability, such optionee
or his designated beneficiary shall be entitled to exercise any and all
options for a period of twelve (12) months after such termination. If
an optionee's employment is terminated as a result of retirement, the
optionee shall be entitled to exercise his options for a period of
twenty four (24) months following such termination.
Nonqualified stock options under the Option Plan are generally
subject to the same rules as discussed above. Nonqualified stock
options may, however, also be granted to directors and consultants,
whether or not such individuals are employees of the Company. The
exercise price for nonqualified stock options may not be granted at
less that eighty-five percent (85%) of the fair market value of the
shares on the date of the grant.
Public Offering January 21, 1998
On January 21, 1998 the Company offered to the public 700,000 units
(the Units) at a price of $5.00 per unit. Each Unit consisted of one
(1) share of Common Stock, par value $1.00 per share (Common Stock),
and four (4) Redeemable Class A Warrants for Common Stock (Class A
Warrants). The Common Stock and Class A Warrants are detachable and
trade separately.
Each Class A Warrant entitles the holder to purchase one (1) share of
the Company's Common Stock, at a exercise price of $6.00, subject to
adjustment, from January 22, 1998 through August 30, 2002. The Class
A Warrants are subject to redemption by the Company commencing the
earlier of (i) 24 months from the date of the offering or (ii) 12
months from the date of the offering, with the consent of the underwriter,
on not less than thirty (30) days notice at $.05 per Class AWarrant,
provided the average closing price of the Common Stock exceeds $7.20
per share for twenty (20) consecutive trading days ending within fifteen
(15) days prior to the notice.
On March 6, 1998, the Company raised an additional $110,055, net of
expenses, from the sale of an over-allotment of 25,300 shares of the
Company's common stock.
The offering raised $2,788,642 cash, net of offering costs.
STRATEGY
The Company's strategy is to exploit new commercial markets
by continuing to develop new products and enhance existing
products to improve both its market share and competitive
position. Growth in commercial sales is expected to come through
internal growth of existing products, new product introductions
and the expansion of regional markets to meet the growing needs
of its customers for more sophisticated and comprehensive
products and services. The Company introduced a fiber optic
digitizer during fiscal 1996. The Company believes the largest
growth opportunity remains with the electric utility market,
although it intends to reach other industrial and utility markets
such as railroad and waste water, respectively. The Company began
an advertisement program during 1996 and devoted substantial
resources as available for promotion. The Company intends to
participate in various trade shows, such as the Utilities
Communications Council and IEEE/PES during the forthcoming year.
The Company will continue to seek out and broaden its base of
manufacturer reps, other marketing strategies and acquisitions
to strengthen its market presence in both areas.
MARKETING AND SALES
In general, the Company's products are marketed by means of
telemarketing and customer contacts by the Company's direct sales
force and through independent manufacturing sales representatives
and distributors.
MILITARY - The Company markets its military sales directly
and through independent manufacturing sales representatives.
COMMERCIAL - The Company markets the PTR-1000, PTR-1500
and all of its INIVEN products by means of Company Sales personnel,
through independent manufacturers representatives, and through
distributors, focusing mainly on the largest utilities and co-
generators. In the United States alone there are over 500
large entities generating electricity which are identified
as investor-owned, municipal systems, cooperative systems and
federal, state and district systems. The Company intends
to expand its sales efforts and expand sales tointernational
markets. The Company markets its Gen-1 and Gen-1 Programmable
Series, as well as its "98" Series, "68" Series and "40"
Series, in the same way as the PTR-1000 except that the
manufacturers representatives used by the Company specialize in
selling to the diverse markets that utilize such products.
Competition
The market for the Company's products is very competitive.
There are several companies engaged in the manufacture of
products of the type produced by the Company, most of which are
substantially larger and have substantially greater name
recognition or greater financial resources and personnel. The
major competitive factors include product quality and reliability
price, service and delivery. Competition is expected to continue
and intensify. The market is also characterized by rapid
technological changes and advances. The Company would be
adversely affected if its competitors introduced technology
superior products or offered these products at significantly
lower prices than the Company's products.
Largest Customers
Sales to the Company's major customers during fiscal 1999
(Schering Plough Corporation, Newark Beth Israel Hospital and
Lockheed Martin) totaled $1,029,935 (41% of all
sales). Sales to the Company's major customer in 1998
(Bonneville Power Company) totaled $205,868 (27.5% of all sales).
Sales to the Company's two major customers during fiscal 1997
(General Electric and Bonneville Power Authority) totaled $255,500
and $200,000 respectively (22.7% and 17.8%, respectively of all sales).
None of such customers has or had any material relationship other
than business with the Company.
Raw Materials
Inventory
The Company believes that it has adequate sources of raw
materials available for use in its business. The Company s
products are assembled from a variety of standard electronic
components, such as integrated circuits, transformers, transistors,
passive components ( i.e., resistors, capacitors and inductors),
diodes and assorted hardware such as printed circuit boards,
connectors and faceplates. The Company is not dependent upon any
single supplier. The Company also purchases a number of other
electronic components and sub-assemblies from various suppliers.
There has been no material increase in the cost of most raw
materials and the Company has no reason to anticipate any
significant shortage of raw materials in the future. The Company
generally is required to maintain adequate amounts of raw material
and parts inventories to meet delivery requirements of customers
and to assure itself of a continuous availability of these items.
In the past the Company manufactured and held in its
inventory finished products pursuant to the military
specifications and based upon the military forecast for future
quantities and delivery schedules. Widespread military
procurements were discontinued as a result of the end of the cold
war and the downsizing of the military establishment.
Consequently, management made a decision to write off a
substantial amount of the military inventory. As a result of
the Company no longer manufacturers military product in advance.
Rather, it only schedules production as purchase orders are
received.
During fiscal 1999, the Company wrote off $36,313 of its inventory
as obsolete.
Manufacturing
Of the 15,700 square feet that the Company occupies at
5 Columbia Road in Somerville, NJ, approximately 10,000 square
feet are dedicated to manufacturing. The Company assembles, under
normal workload conditions, all the product it sells. To
accommodate the peak demands that occur from time to time the
Company has developed a number of subcontractors to assemble
boards to the Company's specifications. All assemblies, however,
are inspected and fully tested by the Company's quality,
engineering and testing departments. The Company maintains test
equipment and every product is burned-in (i.e., each product is
run at full power for 48 hours) and tested prior to shipment. This
control, together with design reliability, has permitted the
Company to offer a 12-year warranty on all its commercial
products.
In September 1998 the Company sold its facility and is
leasing back approximately 38% of the total space of the building
in a three year prepaid lease.
Warranty and Service
The Company provides a twelve year warranty on its products
which covers parts and labor. The Company, at its option,
repairs or replaces products that are found defective during
the warranty period providing proper preventive
maintenance procedures have been followed by customers. Repairs
that are necessitated by misuse of such products are not
covered by the Company's warranty.
In cases of defective products, the customer typically
returns them to the Company's facility in Somerville, New Jersey.
The Company's service personnel then replace or repair the
defective items and ship them back to the customer. Generally all
servicing is completed at the Company's plant and customers are
charged a fee for those service items that are not covered by the
warranty. The Company does not offer its customers any formal
written service contracts.
Research and Development
New Products
Prior to fiscal 1997, amounts expended by the Company in
recent years for research and development activities have not
been material. During fiscal 1997-98, the Company invested
approximately $1 million for the design and development of the
PTR 1500. During fiscal 1998-99 the Company invested approximately
$30,000 to complete the accessory modules of the PTR-1500 and extend
the range of its Multiplexer products. The Company completed
the PTR-1000 series option modules and the standard modules of the
PTR1500 QUAD series introducing the first prototype in May 1998
and completed field testing in February 1999. In March 1999 GE
advised Conolog that it has sold its Power Line Business to the
Trench Group in Canada; which has been in negotiations with
Conolog to enter into a potential purchase and sales agreement.
In September 1999 Conolog received an initial order for PTR1500
equipment from Boston Edison Energy Company valued at $200,000.
During 1996, the Company invested financial resources to
design a fiber optic digitizer and a 1200 baud modem to be
sold separately or jointly with INIVEN products. This product
enables the Company's INIVEN products to transmit directly onto
fiber optic cables, and opens a new market for the Company's products.
The Company intends to add designs that will extend its product
capability to handle new data inputs not presently available.
There can be no assurance that the Company will be able to successfully
develop and add designs to its products.
Patents and Trademarks
The Company does not have any patents covering any of its
present products. The Company uses the trademark INIVEN for its
commercial products. The Company believes that such trademark is
recognized in the Company's industry. The Company believes that
its prospects are dependent primarily upon its ability to offer
its customers high quality, reliable products at competitive
prices rather than on its ability to obtain and defend patents
and trademarks. The Company does not believe that its INIVEN
trademark is of material importance to the Company's business.
Backlog
As of July 31, 1999, the Company had a backlog of
approximately $1.6 million. It is anticipated that this backlog
will be filled during the balance of calendar year 1999 and the
2000 fiscal year ending July 31, 2000. As of July 31, 1999 and
1998, the Company had a backlog of approximately $1.4 million and
$2.9 million respectively.
The backlog of orders for the Company's PTR 1000 series of product
consists of multiple blanket contracts at fixed prices for the
duration of the contract. There is no obligation or penalty if the
contracts expire prior to additional orders being placed for the
total value of the contract.
Governmental Regulation
The Company's manufacturing facilities, in common with those
of industry generally, are subject to numerous existing and
proposed Federal and state regulations designed to protect the
environment, establish occupational safety and health standards
and cover other matters. The Company believes that its
operations are in compliance with existing regulations and does
not believe that such compliance has had or will have any
material effect upon its capital expenditures, earnings or
competitive position. With respect to military sales, the
Company is not subject to any special regulations. The products
manufactured are done so in accordance with accepted commercial
practices.
Renegotiation
No material portion of the Company's business has been
subject to renegotiation of profits at the election of the
Government since 1987.
Seasonality
The business of the Company is not seasonal, but is sensitive
to general economic factors, such as interest rates, availability
of credit for capital purchases, overall business climate and
general business outlooks that historically impact capital
purchase decisions.
Foreign Sales
During fiscal 1999, the Company has foreign sales of approximately
$160,000. During fiscal 1998 and 1997, the Company did not have any
foreign sales. The company had approximately $380,000 in foreign sales to
British Columbia Hydro Power Authority, Inc. during fiscal 1996.
Employees
As of July 31, 1999, the Company employed 20 persons on a
full-time basis, including 2 in management, 1 in sales, 1 in
clerical, 1 in accounting, 1 in purchasing, 3 in engineering and
11 in production. The Company has enjoyed good labor relations.
None of the Company's employees are represented by a labor union
or bound by a collective bargaining agreement. The Company has
never suffered a work stoppage. The Company believes its future
success will depend, in part, on its continued ability to recruit
and retain highly skilled management, marketing and technical
personnel.
Item 2. PROPERTIES
In September 1998, the Company sold its facility located at
5 Columbia Road, Somerville, New Jersey in a sale/leaseback
transaction in which the Company is leasing approximately 38%
of the total space in a three year prepaid lease.
Credit Facility and Agreement with CNL Holdings, Inc.
The principal amount owing to the Bank under the Company's
Credit Facility at June 30, 1996 and amended as of January 1,1997
was $1,012,500 and the unpaid accrued interest was $48,850. The
Bank and the Company entered into the Conolog Corporation
Allonge (dated as of September 11, 1996) pursuant to which the
Amended and Restated Term Note dated as of August 2, 1995
between the Company and the Bank (the "Note") was further amended
to permit the conversion by the Bank of the unpaid principal
and interest due under the Note into 1,400,000 shares of the
Company's Common Stock and provided for conversion to be exercised
by the Bank or its assignee. The Bank deferred all payments of
principal and interest under the Note until April 16, 1997.
Subsequently, on September 12, 1996 the bank and CNL
Holdings, Inc., a private investor group, entered into an Option
and Purchase, Sale and Assignment Agreement dated as of September
12, 1996 (the "Option Agreement"). Under the Option Agreement
the Bank granted an option to CNL to purchase all of the
Bank's interest in (i)the Amended and Restated Term Loan Agreement
dated as of August 2, 1995 between the Company and the Bank,
(ii) the Note and (iii) the 375,000 shares of the Company's Common
Stock owned by the Bank. CNL paid $150,000 to the Bank for the
option, which had an exercise price of $1,500,000 (a balance of
$1,350,000) and an expiration date of April 15, 1997.
As part of the aforementioned transaction, CNL agreed
to loan up to $2,500,000 to the Company under certain
circumstances (as described below) and the Company agreed to
file a registration statement (the "Registration Statement") with
the Securities and Exchange Commission to register the 375,000
shares of Common Stock owned by the Bank and the 1,400,000
shares of Common Stock into which the Note is convertible
(collectively, the "Acquired Shares"). As of January 21, 1998
CNL Holdings, Inc. had loaned the Company $916,235 which was repaid
at the closing of the Company's public offering.
Each CNL loan carried interest at the rate of 4% per annum and became
due 12 months from the date of such Loan. At maturity, the Company had
the option to pay each Loan, together with all accrued interest thereon,
or by issuing shares of a new Series C Preferred Stock (the "Series C
Preferred") having a value of $5.00 per share for purposes of such
repayment.
Had the Series C Preferred been issued, it would have been non-voting and
carried a cumulative dividend of 8% per annum which would payable by the
issuance of shares of Common Stock valued at $5.00 per share up to a maximum
of 40,000 shares per annum. The Series C Preferred would have been convert-
ible into common stock at the rate of one share of common stock for each
share of Series C Preferred and had a liquidating preference of $5.00 per
share.
The Agreement also provided that for the two year period commencing on the
issuance of any shares of Series C Preferred (the "Registration Period") CNL
may have elected to include its Series C Preferred in any post-effective
amendment to the Registration Statement or any new registration statement
under the Securities Act of 1933, as amended. In addition, the Agreement
also provided that during the Registration Period, CNL may have given notice
to the Company to the effect that it desired to register its shares under
the Act for public distribution in which case the Company would file a post-
effective amendment to a then current registration statement or a new
registration statement.
Management believes that these transactions benefited the Company and its
stockholders. The exercise by CNL of its option under the Option Agreement
converted the Remaining Debt Claim. The Company had the opportunity to, in
effect, exchange its debt for equity and eliminated the Company's default
under the Credit Facility.
Bridge Loan
In December 1996 and January 1997, the Company obtained Bridge financing
from seven (7) lenders in the amount of $200,000. These lenders were the
individuals identified as "Selling Security holders." In exchange for making
the loans to the Company, each Selling Security holder received two (2)
promissory notes (the "Bridge Notes"). Certain Bridge Notes were in the
aggregate principal amount of $150,000 (the "Principal Bridge Notes") and the
other Bridge Notes were in the aggregate principal amount of $50,000 (the
"Convertible Bridge Notes"). Each of the Bridge Notes bore interest at the
rate of eight percent (8%) per annum.
The Bridge Notes were due and payable upon the earlier of (i) January 31,
1999 or (ii) the date on which the next public offering closed. The
Convertible Bridge Notes were convertible into a total of 1,200,000 Class A
Warrants. The proceeds of the bridge financing were used by the Company to pay
certain expenses in connection with this offering and to increase working
capital. Each Class A Warrant contained in the Convertible Bridge Notes was
identical to the Class A Warrants offered therein.
The Company's agreement with the Selling Security holders provided that
the Company would include in its registration statement a prospectus covering
the Class A Warrants owned by the Selling Security holders.
On September 12, 1997 the Company filed a Registration Statement on Form S-1
with the Securities and Exchange Commission. This statement covered the
primary offering of securities of the Company and the offering of other
securities by certain selling Security Holders. The Company registered, under
a primary Prospectus 805,000 Units, each Unit consisting of one (1) share of
common stock and four (4) Class A warrants. The selling Security Holders
registered, under an alternate prospectus, 1,200,000 Class A warrants.
The costs were subsequently deducted from the proceeds of the sale of
stock.
The Bridge loans were repaid on January 28, 1998 at the closing of the
Company's Public Offering.
Item 3. LEGAL PROCEEDINGS
Litigation
In December 1998, the Company was named in two related litigations
pending, one in the United States District Court for the Southern
District of New York and the other in Superior Court of New Jersey.
The first of the pending litigations was commenced in 1993. The
litigations relate to a dispute concerning real property acquired
in 1984. While the property is near real property formerly owned
by Conolog, Conolog was not a party to that transaction. The claim
made against Conolog alleges that Conolog contributed to environmental
contamination of the property acquired in 1984. The New York litigation
has been dismissed, although the dismissal is on appeal. The New
Jersey litigation is in its early stages, insofar as Conolog is
concerned. However, the Company believes that it has no liability
and intends to vigorously defend itself.
In the third quarter of fiscal 1999, the Company reached an agreement
in principle to purchase substantially all the stock or assets of Hallmark
Temps, Inc., for use in conjunction with the Company's Atlas Design
business. After discussions were terminated withhout an agreement having
been reached, Conolog began doing business with an entity owned by
a former employee of Hallmark. In October 1999, Hallmark filed a
lawsuit in the Superior Court of New Jersey seeking a preliminary
injunction and damages against the Company. Hallmark alleges that
the Company breached a confidentiality agreement executed by the
Company and Hallmark. While the litigation is in a very early
stage, the Company believes that it has no liability and intends
to vigorously defend itself.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal quarter ended January 31, 1997, shareholders
of the Company approved an amendment to the Certificate of
Incorporation to increase the total number of authorized shares
of all classes of stock from 6,500,000 (of which 500,000 shares
were classified as Preferred Stock and 6,000,000 shares are
classified as Common Stock) to 22,000,000 shares of which
2,000,000 shares are classified as Preferred Stock and
20,000,000 shares are classified as Common Stock.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET PRICE FOR COMMON STOCK AND CLASS A WARRANTS
The Company's Common Stock and Warrants are thinly traded
on the Nasdaq SmallCap Market, under the symbols CNLG and CNLGW,
respectively. Prior to the August 1995 Offering, the Common Stock
was traded on the OTC Bulletin Board.
The following table sets forth, for the periods indicated,
the high and low prices of the Company's Units (which no longer
trade), Common Stock and Warrants traded on the Nasdaq SmallCap
Market for 1997, 1998 and the first, second and third quarters of
1999. As of October 26, 1999, the Company's Common Stock was held
by approximately 815 shareholders of record.
Units Common Stock Warrants
High Low High Low High Low
1997
First ___ ____ 5.875 3.00 .9375 .625
Quarter
Second ___ ____ 6.125 2.375 1.000 .375
Quarter
Third ___ ____ 5.675 2.250 .875 .250
Quarter
Fouth
Quarter ___ ____ 4.250 2.500 1.000 .250
Units Common Stock Warrants
High Low High Low High Low
1998
First
Quarter ___ ____ 6.00 2.000 2.1875 .4375
Second
Quarter ___ ____ 3.875 1.375 1.000 .375
Third
Quarter ___ ____ 2.00 0.4375 0.4375 .0625
Fourth
Quarter ___ ____ 1.625 0.4375 0.25 .0625
Units Common Stock Warrants
High Low High Low High Low
First
Quarter ____ _____ 2.75 .8750 .4375 .0625
Second
Quarter ____ _____ 2.375 1.25 .375 .0625
Third
Quarter ____ _____ 1.75 .875 .3125 .125
DIVIDENDS
Holders of Common Stock are entitled to receive such dividends as
may be declared by the Board of Directors of the Company. To date,
the Company has neither declared nor paid any dividends on its
Common Stock or on its Preferred A or Preferred B share. The
Company anticipate that no such dividends will be paid in the
foreseeable future. Rather, the Company intends to apply any
earnings to the expansion and development of its business. Any
payment of cash dividends on any of its securities in the future
will be dependent upon the future earnings of the Company,
including its financial condition, capital requirement and other
factors which the Board of Directors deems relevant
Item 6. SELECTED FINANCIAL DATA
Year Ended
July 31,
(in thousands, except 1999 1998 1997
per share amounts)
Operations Summary:
Net sales and other $2,555 $746 $1,123
income
Net income (loss) (1,043) (1,765) (3,810)
Income (loss)
per primary (.24) (.54) (2.41)
share
Balance Sheet
Summary:
Total assets $6,620 $4,819 $4,340
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Results of Operations
In order to summarize the Company's operating results for
the past three years, the following tables indicate the percentage
relationships of income and expense items in the statements of
income and the percentage changes in those items for such years.
Income & Expense Items as Income & Percentage
a Percentage Of Revenues Expense Items Increase/Decrease
From Operations
For The Years Ended July 31
1998 1997 1996 1998 to 1997 to 1996 to
1999 1998 1997
100.0% 100.0% 100.0% Sales & 254.3% (33.6%) (41.6%)
other
income
82.4%* 126.0%* 84.2%* Cost of 290.7 (0.5) (27.9)
products
sold
76.5 207.4 182.9 Selling, 26.2 (24.6) (117.0)
general &
administrat
ive
0 3.0 7.4 Interest (95.8) (72.9) (38.0)
161.9 336.5 274.4 Total costs 91.9 (18.5) 29.9
& expenses
(41.5) (236.5) (174.4) Income 40.9 (9.9) (338.5)
(loss)
before
taxes
0 0 .9 Income 0 (98.0) 494.2
taxes
(credits)
(41.5)%(236.5)%(175.3)% Loss before 40.9% (10.4)% (339.0)%
extraordinary
item
* Includes write-offs for obsolete or excess inventory which were
$36,313, $410,759, and $28,101 in 1999, 1998, and 1997 respectively.
Results of Operations
1999 Compared to 1998
Total revenue increased $1,809,237 or 242.39% from $746,420 to
$2,555,657 in 1999. This increase was attributable primarily to
the acquisition of Atlas Design in September 1998.
Gross Margins for the years ended July 31, 1999 and 1998 totaled
$437,791 and $177,847 representing 17.46% and 25.13% of revenues. Costs
of Sales were higher in 1998 than compared to 1998 due mostly to stock
compensation given to consultants and employees.
Selling, General and Administrative expenses increased from
$1,548,446 in 1998 to $1,954,742 in 1999 representing an increase of
26.24% or $406,296. This increase is attributable to shares of
common stock issued to consultants and employees as compensation.
Interest expense totaled $945 for the year ended July 31,
1999 compared to $22,447 for the year ended July 31, 1998. This
decrease was a result of the debt repayment from proceeds of the
Company's Public Offering.
As a result of the foregoing, the Company reported a net loss
of $1,042,919 or $0.24 per share. This compares to a net loss of
$1,765,390 or $.54 per share for the same period last year.
1998 Compared to 1997
Total revenue decreased $376,970 or 33% from $1,123,391 to
$746,420 in 1998. This decrease was attributable, in part, to
delays in the release of tone protection orders from the Bonneville
Power Authority and other utilities customers which the Company
attributes to budget constraints and the delay in the release of
its new advanced PTR1500 tone protection system. The Company
shipped its PTR1500 prototype to the General Electric Company (GE)
in May 1998 for extensive electrical and environmental tests. As
a result of these tests, the Company has agreed to and is presently
redesigning some modules to accommodate modifications requested by
GE to expand the product's range. The Company plans to ship the
expanded prototypes in late 1998 and production models by the end
of the third quarter ending April 30, 1999.
Gross Margins, exclusive of inventory adjustments for the
years ended July 31, 1998 and 1997 totaled $177,847 and $198,743
representing 29% and 18% of revenues. Gross margins for 1998 were
higher than 1997 due to efficiencies in lower operating costs.
Selling, General and Administrative expenses decreased from
$2,054,630 in 1997 to $1,548,446 in 1998 representing a decrease of
24.6% or $506,184. This decrease is attributable to less shares of
common stock being issued as compensation.
Interest expense totaled $22,447 for the year ended July 31,
1998 compared to $82,932 for the year ended July 31, 1997. This
decrease was a result of the debt repayment from proceeds of the
Company's Public Offering.
As a result of the foregoing, the Company reported a net loss
of $1,765,390 or $0.54 per share. This compares to a net loss of
$3,810,736 or $1.24 per share for the same period last year.
1997 Compared to 1996
Total revenue decreased $801,076 or 42% from $1,924,466 to
$1,123,391 in 1997. This decrease was attributable to delays in
the release of tone protection orders from the Bonneville Power
Administration and other customers. The Company attributes these
delays to the budget constraints for various utilities and to the
pending release of the new advanced tone protection device,
the PTR-1500. The Company essentially completed the prototypes
during the first fiscal quarter ended October 31, 1997. The
Company plans to ship prototypes to GE during November 1997.
Gross Margins, exclusive of inventory adjustments for the
years ended July 31, 1997 and 1996 totaled $198,743 & $632,185
representing 15.8% and 32.9% of revenues. Gross margins for 1997
were lower than 1996 due to the lower utilization of the factory
in fiscal 1997 over 1996.
Selling, General and Administrative expenses increased from
$946,954 in 1996 to $2,054,630 in 1997 representing an increase of
117%. This increase is the result of the Company issuing 359,500
shares of Common Stock to eight employees, incurring an additional
$1,313,750 in salary expense.
Interest expense totaled $82,932 for the year ended July 31,
1997 compared to $133,652 for the year ended July 31, 1996. This
decrease was a result of lower outstanding loan balances
resulting from the paydown of the credit facility during the year.
As a result of the foregoing, the Company reported a net loss
before extraordinary item of $1,969,736 or $1.24 per share. This
compares to a net loss before extraordinary item of $448,622 or $.43
per share for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 31, 1999 was $4,766,016 compared to
$4,192,541 at year ended July 31, 1998. The improvement in the
working capital is primarily attributable to higher cash reserves
and the sale of the building in September 1998.
Accounts receivable have increased from $44,477 at year-end
July 31, 1998 to $351,881 at July 31, 1998. This increase of
$307,404 is the result of the increased sales and related
receivables generated by Atlas Design which is primarily engaged
in providing engineers and other personnel to major companies.
The Company plans to meet its cash requirements for the next
twelve months through existing cash balances and cash generated from
operations . In addition, the Company believes that it can obtain
financing from institutional investors secured by its assets, if
necessary.
Inflation
Management believes that the results of operations have not
been affected by inflation and management does not expect
inflation to have a significant effect on its operations in the
future.
Y2K Issues
The company contracted a Y2K solution provider to review
its mainframe computer system for Y2K issues and to upgrade the
computer system to be Y2K compliant. The upgrade was successfully
completed by fiscal year end July 31, 1999. The Company is in the
process of contacting all of its major suppliers to request
representations that their systems are or will be Y2K compliant.
The Company is in the process of determining the impact, if any,
that third parties who are not Y2K compliant may have on its
operations. The Company has a contingency plan in the event that
any of its third parties are not Y2K compliant.
The Company's entire product line is not date sensitive and the
Company presently believes that there are no potential product-related
implications that may result from Y2K issues.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of Conolog Corporation, together
with notes and the Independent Auditors Report, are set forth
immediately following Item 14 of this Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding
the officers and directors of the Company as of July 31, 1999.
NAME AGE POSITION
Robert S. Benou 65 President and Director
Arpad J. Havasy 63 Executive Vice President,
Secretary, Treasurer and
Director
Louis S. Massad 62 Director
Marc R. Benou 32 Vice President, Assistant
Secretary and Director
Edward J. Rielly 32 Director
Thomas Fogg 64 Vice President-Engineering
Robert S. Benou has served as President and a Director of
the Company since 1968. Mr. Benou is responsible for military
products, new product development and supervision of sales and
marketing. Mr. Benou is a graduate of Victoria College and holds
a BS degree from Kingston College, England and a BSEE from Newark
College of Engineering, in addition to industrial management
courses at Newark College of Engineering. Robert S. Benou is
the father of Marc R. Benou.
Arpad J. Havasy has served as the Company's Executive Vice
President and Director since 1968. Mr. Havasy is a graduate of
Electromos E's Gepeszeti Technikum (Hungary) and the University
of Budapest. In addition, Mr. Havasy has attended courses at
both Rutgers University and the American Management Association.
Mr. Havasy is on total disability.
Louis S. Massad has been a Director of the Company since
April 1995. Mr. Massad has been Vice President, Chief Financial
Officer and Director of Computer Power Inc. since 1986. Mr.
Massad holds a BS and MS degree from Cairo University (Egypt) and
an MBA from Long Island University, New York.
Marc R. Benou joined the Company in 1991 and is responsible
for material, purchasing and inventory control. In March 1995,
he was elected Vice President, Assistant Secretary and a Director.
Mr. Benou attended Lehigh and High Point University and holds
a BS degree in Psychology and a BS in Business Administration and
Management. Marc R. Benou is the son of Robert S. Benou, the
Company's President.
Thomas R. Fogg joined the Company in 1976 as Chief Engineer
responsible for analog and guidance projects. Since 1986, when
he became Vice President-Engineering, he led the design team in
the development of the Company's commercial products. Mr. Fogg
holds a BSEE degree from Lafayette College and a MSEE degree from
Rutgers University. Mr. Fogg is a fellow of the Institute of
Electrical and Electronic Engineers and has published articles on
delay equalization and the use of crystal resonators.
Edward J. Rielly has been a Director of the Corporation since
January 1998. Mr. Rielly is an Application Developer with Chubb & Son.
From 1993 to 1998, Mr. Rielly was an Application Developer with the
United States Golf Association. Mr. Rielly is a graduate of Lehigh
University and holds a BS in Computer Science.
Directors hold office until the annual meeting of the
Company's stockholders and the election and qualification of
their successors. Officers hold office, subject to removal at
any time by the Board, until the meeting of directors immediately
following the annual meeting of stockholders and until their
successors are appointed and qualified.
Section 16 (a) Beneficial Ownership Reporting Requirements
There were no delinquent or untimely filers during the fiscal
year.
Item 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth the cash compensation
(consisting entirely of salary) paid (or accrued for) by the
Company to its President, the only executive officer whose
aggregate remuneration exceeded $100,000 in each of the
three Company's fiscal years ended July 31, 1999, 1998 and 1997:
Summary Compensation Table
Annual Compensation Long Term Compensation
Name and Other Annual
Principal Fiscal Compensation
Position Year-End Salary Bonus (1) Awards Payouts
1999 $190,000 0 0 0
Robert
Benou,
President 1998 $170,000 0 0 0
1997 $150,000 0 0 0
_________________
Incentive Stock Option Plan
On May 15, 1995, the Board of Directors of the Company
adopted and on August 14, 1995, the shareholders approved the
Conolog Corporation 1995/1996 Stock Option Plan ( the "Option
Plan"). The Option Plan is designed to permit the Company to
grant either incentive stock options under Section 422A of the
Internal Revenue Code (the "Code") or nonqualified stock options.
Under the Option Plan, a Stock Option Committee (the "Option
Committee") of the Board is authorized to grant options to
purchase up to 200,000 shares of stock to key employees, officers,
directors and consultants of the Company. The Option Committee
administers the Option Plan and designates the optionee's, the type
of options to be granted (i.e., nonqualified or incentive stock
options), the number of shares subject to the options, and the
terms and conditions of each option. The terms and conditions
include the exercise price, date of grant, and date of exercise
of each option. An employee may, at the discretion of the Option
Committee, be permitted to exercise an option and make payment by
giving a personal note.
Incentive stock options may only be granted to employees of
the Company and not to directors or consultants who are not so
employed. The exercise price for incentive stock options must be
at least one hundred percent (100%) of the fair market value of
the Common Stock as determined by the Option Committee on the
date of grant. All incentive stock options under the Option Plan
must be granted within ten (10) years from the date of adoption
of the Option Plan and each option must be exercised, if at all,
within ten (10) years of the date of grant. In no event may any
employee be given incentive stock options whereby more than
$100,000 of options become exercisable for the first time in a
single calendar year. All incentive stock options must be
exercised by an option within three (3) months after termination
of the optionee's employment, unless such termination is as a
result of death, disability or retirement. In the event an
optionee's employment is terminated as a result of death or
disability, such optionee or his designated beneficiary shall be
entitled to exercise any and all options for a period of twelve
(12) months after such termination. If an optionee's employment
is terminated as a result of retirement, the optionee shall be
entitled to exercise his options for a period of twenty four (24)
months following such termination.
Nonqualified stock options under the Option Plan are
generally subject to the same rules as discussed above.
Nonqualified stock options may, however, also be granted to
directors and consultants, whether or not such individuals are
employees of the Company. The exercise price for nonqualified
stock options may not be granted at less than eighty-five percent
(85%) of the fair market value of the shares on the date of
grant.
EMPLOYMENT AGREEMENTS
The Company has entered into a 5-year employment agreement
commencing June 1, 1997 and ending May 31, 2002, with Robert Benou.
Under his employment agreement, Mr. Benou will receive an annual
base salary of $150,000 for the first year of employment with an
increase of $20,000 beginning November 1997. In addition,
Mr. Benou is entitled to an annual bonus equal to 6% of the
Company's annual "income before income tax provision" as stated in
its annual Form 10-K. The employment agreement also entitles Mr. Benou
to the use of an automobile and to employee benefit plans, such
as life, health, pension, profit sharing and other plans.
Under the employment agreement, employment terminates upon death
or disability of the employee and employee may be terminated by
the Company for cause. The company presently has a $1
million life insurance policy on the life of Robert Benou.
The Company has entered into a 5-year employment agreement
commencing June 1, 1997 and ending May 31, 2002, with Marc Benou.
Under his employment agreement, Mr. Benou will receive an annual
base salary of $55,000 for the first year of employment with an
increase of $6,000 beginning June 1998 and every year thereafter.
Mr. Benou is entitled to an annual bonus equal to 3% of the
Company's annual "income before income tax provision" as stated
in its annual Form 10-K. The employment agreement also entitles
him to the use of an automobile and to employee benefit plans,
such as life, health, pension, profit sharing and other plans.
Under the employment agreement, employment terminated upon death
or disability of the employee and employee may be terminated by
the Company for cause.
On March 12, 1998, the Company entered into a five year employment
with Dina Stellwagen to serve as Corporate Development Manager.
Base salary is $50,000 per annum with annual increases of $4,000.
The agreement calls for the Corporate Development Manager to receive
a quarterly bonus of 5,000 shares of Common Stock that have not been
registered and eligible for sale under Rule 144 code. The employment
agreement also entitles her to the use of an automobile and to reimburse
her for all ordinary and necessary business expenses. Eligibility for
all employee benefit plans, such as life, health, pension, profit
sharing and other plans is provided under the agreement, however, the
Company is not obligated to establish or maintain any of the afore-
mentioned executive plans. Upon termination without cause, the agree-
ment provides for severance compensation equal to 2.99 times the
average annual compensation.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the beneficial ownership of
outstanding shares of Common Stock of the Company as of the date
hereof by any person who, to the knowledge of the Company, owns
beneficially more than 5% of the outstanding Common Stock, by all
directors of the Company, and by the directors and officers of
the Company as a group.
Name and Amount and
Address of Nature of
Beneficial Owner(1) Beneficial Ownership % of Ownership
Robert S. Benou 253,100 4.00%
Arpad J. Havasy 55,000 .89%
Marc R. Benou 21,500 .00%
Louis Massad 5,000 .00%
Edward J. Rielly 4,500 .00%
All Directors and Officers
as a Group (5 persons) 339,100 5.40%
(1) The address for these individuals is c/o Conolog
Corporation, 5 Columbia Road, Somerville, New Jersey 08876.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
FORWARD LOOKING STATEMENTS
The foregoing contains certain forward looking statements.
Due to the uncertainties associated with doing business with
governmental entities and the release of backlog orders and
competition in a business characterized by rapid technologic
changes and advances, actual results may differ materially from
any such forward looking statements.
PART IV
Item 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)Financial Statements
Balance Sheets as of July 31, 1999 and 1998 F-2-3
Statements of Operations for the years ended
July 31, 1999 and 1998 F-4
Statements of Stockholders' Equity for the years
ended July 31, 1999 , 1998 and 1997 F-5-6
Statements of Cash Flows for the years ended July 31, 1999 and
1998 F-7-8
Notes to Financial Statements F-9 to-19
Index of Exhibits
Exhibit No. Description of Exhibit
1(a)* Form of Underwriting Agreement
1(b)* Form of Selected Dealer Agreement
1(c)* Form of Agreement Among
Underwriters
3(a) Certificate of Incorporation -
incorporated by reference to the Registrant's
Exhibit 3.01 to Registration Statement on Form S-1
(File No. 2-31302).
(b) Certificate of Amendment of
Certificate of Incorporation - incorporated by
reference to Exhibit 3.02 to the Registrant's
Registration Statement on Form S-1 (File No. 2-
31302).
(c) Certificate of Amendment of
Certificate of Incorporation incorporated by
reference to Exhibit 4 to the Registrant's Current
Report on Form 8-K for July 1971.
(d) Certificate of Ownership and
Merger with respect to the merger of Data Sciences
(Maryland) into the Registrant and the change of
Registrant's name from "Data Sciences Incorporated"
to "DSI Systems, Inc." - incorporated by reference
to Exhibit 3.03(a) to the Registrant's Registration
Statement on Form S-1 (File No. 2-31302).
(e) Certificate of the
Designation, Preferences and Relative,
Participating, Option or Other Special Rights and
Qualifications, Limitations or Restrictions thereof
of the Series A Preferred Stock (par value $.50) of
DSI Systems, Inc. - incorporated by reference to
Exhibit 3.04 to the Registrant's Registration
Statement on Form S-1 (File No. 2-31302).
(f) Certificate of the
Designation, Preferences and Relative,
Participating, Option or Other Special Rights and
Qualifications, Limitations or Restrictions thereof
of the Series B Preferred Stock (par value $.50) of
DSI Systems, Inc. - incorporated by reference to
Exhibit 1 to the Registrant's Current Report on Form
8-K for November 1972.
(g) Certificate of Ownership and
Merger respecting merger of Conolog Corporation into
the Registrant and the changing of the Registrant's
name from "DSI Systems, Inc." to "Conolog
Corporation" - incorporated by reference to Exhibit
3 to the Registrant's Current Report on Form 8-K for
June 1975.
(h) Amended By-Laws - incorporated
by reference to Exhibit 3(h) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
July 31, 1981.
4(a)* Specimen Certificate for shares of Common Stock
(b)* Specimen Certificate for Class A Warrant
(c)* Form of Warrant Agreement
(d)* Form of Representative's Unit Purchase Option
(e)* Form of Financial Consulting Agreement
10.1 Credit Facility documents between Manufacturers Hanover
Trust Company and the Registrant pursuant to which Registrant
obtained a Credit Facility for $4,000,000 - incorporated
by reference to Exhibit 6A-D to the Registrant's
Current Report on Form 8-K dated April 5, 1989.
10.2 * Conolog Corporation 1995/1996 Stock Option Plan.
10.3 *** Option and Purchase, Sale and Assignment Agreement,
dated as of September 12, 1996 by and between The
Chase Manhattan Bank and CNL Holdings, Inc.
10.4 *** Irrevocably Proxy dated as of September 12, 1996 by
and between CNL Holdings, Inc. and Conolog
Corporation.
10.5 *** Agreement dated September 12, 1996 by and between
CNL Holdings, Inc. and Conolog Corporation.
10.5 (A)** Amendment No. 1 dated January 31, 1997 to Conolog Corporation
Allonge.
10.6 Agreement with General Electric Company dated April 1, 1997
incorporated by reference to the Company s Form 10-Q for the
quarter ended April 30, 1997.
10.7**** Employment Agreement dated June 1, 1997 between Robert
Benou and Conolog Corporation
10.8**** Employment Agreement dated June 1, 1997 between Marc Benou
and Conolog Corporation
10.9***** Employment Agreement dated March 1, 1998 between Dina Stellwagen
and Conolog Corporation
___________________
* Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (33-92424).
** Filed by Amendment to the Registrant's Registration Statement
file on Form S-1 (File No. 0-8184) as filed on October 16, 1996.
*** Incorporated by reference to the Registrant's Registration
Statement file on Form S-1 (File No 0-8174) as filed on October
16, 1996
**** Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (File No. 0-8174) as filed on September 12,
1997
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Conolog Corporation
By:
October 28, 1999 /s/ Robert S. Benou
President, Chief Executive
Officer and Chairman of the Board
In accordance with the Exchange Act, this report has been signed
below by the following persons, on behalf of the registrant and
in the capacities and on the dates indicated.
October 28, 1999
/s/Robert S. Benou
President, Chief Executive Officer
and Chairman of the Board
October 28, 1999 /s/Arpad J. Havasy
Executive Vice President, Secretary,
Treasurer and Director
October 28, 1999 /s/Marc R. Benou
Vice President, Assistant Secretary and Director
October 28, 1999 /s/Louis S. Massad
Director
Conolog Corporation and Subsidiary
Consolidated Financial Statements
July 31, 1999
Annual Report on Form 10-K
Item 8, Item 14 (a)(1) and (2)
Consolidated Financial Statements
Year Ended July 31, 1999
Conolog Corporation and Subsidiary
Somerville, New Jersey
Form 10-K - Item 14 (a) (1) and (2)
Index to the Consolidated Financial Statements
Conolog Corporation and Subsidiary
July 31, 1999
Page
The following consolidated financial statements of the registrant
are included in Item 14:
Independent Auditors' Report F-1
Consolidated Balance Sheets - July 31, 1999 and 1998 F-2 - F-3
Consolidated Statements of Operations - Years Ended July 31,
1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity (Deficiency) -
Years Ended July 31, 1999, 1998 and 1997 F-5 - F-6
Consolidated Statements of Cash Flows - Years Ended July 31,
1999, 1998 and 1997 F-7 - F-8
Notes to the Consolidated Financial Statements F-9 - F-19
Independent Auditor's Report
To the Board of Directors of
Conolog Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of Conolog
Corporation and Subsidiary as of July 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for each of the three years in the period ended July 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Conolog
Corporation and Subsidiary as of July 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended July 31, 1999 in conformity with generally accepted accounting
principles.
ROSENBERG RICH BAKER BERMAN AND COMPANY
Bridgewater, New Jersey
October 15, 1999
F-1
Conolog Corporation and Subsidiary
Consolidated Balance Sheets
July 31,
1999 1998
Assets
Current Assets
Cash and equivalents $ 1,142,572 $ 1,108,581
Accounts receivable - less allowances
of $6,000 in 1999 and 1998 351,881 44,477
Inventories
Finished goods 714,001 905,939
Work-in-process 1,285,168 1,205,450
Materials and supplies 1,194,546 1,098,879
------------ ----------
3,193,715 3,210,268
Other current assets
Prepaid consulting fees 103,264 -
Other current assets 285,021 30,531
------------ ----------
Total Current Assets 5,076,453 4,393,857
Property, Plant and Equipment
Land and improvements - 34,524
Building and improvements - 700,461
Leasehold improvements 12,478 -
Machinery and equipment 1,331,800 1,328,218
Furniture and fixtures 378,767 341,607
Computer software 17,986 8,601
------------ ----------
1,741,031 2,413,411
Less allowance for depreciation and amortization 1,604,796 1,997,607
------------ ----------
136,235 415,804
Goodwill,net of accumulated amortization of $3,129 140,108 -
Prepaid consulting fees 1,187,970 -
Other assets 79,658 9,803
------------- ----------
Total Assets $ 6,620,424 $ 4,819,464
============= ============
See notes to the consolidated financial statements.
F-2
July 31,
1999 1998
Liabilities
Current Liabilities
Accounts payable $ 49,604 $ 60,845
Accrued payroll 34,330 30,950
Accrued expenses 175,078 115,337
Deferred gain on sale of assets 51,425 -
---------- ---------
Total Current Liabilities 310,437 207,132
Deferred gain on sale of assets 79,658 -
---------- ---------
Total Liabilities 390,095 207,132
Stockholders' Equity
Preferred Stock, par value $.50; Series A;
4% cumulative; 162,000 shares authorized;
155,000 shares issued and outstanding 77,500 77,500
Preferred Stock, par value $.50; Series B;
$.90 cumulative; 50,000 shares authorized;
1,197 shares issued and outstanding 597 597
Common Stock, par value $0.01 (1999), $1.00
(1998); 20,000,000 shares authorized;
issued 5,912,987 shares in 1999 and 3,724,773
shares in 1998, including 8,813 shares held
in Treasury 59,130 3,724,773
Contributed Capital 15,973,954 9,643,215
Retained Earnings (Deficit) (9,749,118) (8,702,019)
Treasury Shares at Cost (131,734) (131,734)
------------ ------------
Total Stockholders' Equity 6,230,329 4,612,332
------------ ------------
Total Liabilities and Stockholders' Equity $ 6,620,424 $ 4,819,464
============ ============
See notes to the consolidated financial statements.
F-3
Conolog Corporation and Subsidiary
Consolidated Statements of Operations
Year Ended July 31,
1999 1998 1997
Revenue $ 2,508,373 $ 707,805 $ 1,116,122
Costs of revenue 2,070,582 529,958 917,379
------------ ------------ ------------
Gross Profit 437,791 177,847 198,743
------------ ------------ ------------
Selling, general and administrative 1,954,742 1,548,446 2,054,630
------------ ------------ ------------
Loss From Operations (1,516,951) (1,370,599) (1,855,887)
------------ ------------ ------------
Other Income (Expense)
Interest income 47,284 38,615 7,268
Interest expense (945) (22,447) (82,932)
Gain on sale of assets 464,206 - -
Write-off of obsolete or
excess inventories (36,313) (410,759) (28,101)
------------ ------------ ------------
Total Other Income (Expense) 474,232 (394,591) (103,765)
Loss Before Income Taxes and
Extraordinary Items (1,042,719) (1,765,190) (1,959,652)
Provision for Income Taxes 200 200 10,084
------------ ------------ ------------
Net Loss Before Extraordinary Items (1,042,919) (1,765,390) (1,969,736)
Extraordinary Item - - (1,841,000)
------------ ------------ ------------
Net Loss $(1,042,919) $(1,765,390) $(3,810,736)
============ ============ ============
Loss from Continuing Operations
Per Share $ (.24) $ (.54) $ (1.24)
Loss Per Share
- - Basic loss per share $ (.24) $ (.54) $ (2.41)
- - Diluted loss per share $ (.24) $ (.54) $ (2.41)
See notes to the consolidated financial statements.
F-4
Conolog Corporation and Subsidiary
Consolidated Statement of Stockholders' Equity (Deficiency)
Series A Series B
Preferred Preferred Common Contributed
Stock Stock Stock Capital
----------- ----------- ------------ -------------
Balance at
July 31, 1996 $ 77,500 $ 597 $ 1,035,186 $ 4,512,204
Debt to equity conversion - - 1,408,787 1,563,377
Additional shares issued
to employees - - 359,500 954,250
Net loss for the year - - - -
Dividends - - - 4,177
---------- ---------- ------------ ------------
Balance at
July 31, 1997 77,500 597 2,803,473 7,034,008
Public stock offering - - 725,300 2,045,777
Additional shares issued
to employees - - 55,000 80,100
Additional shares issued
to consultant - - 141,000 429,150
Debt to Equity Conversion - - - 50,000
Net Loss for the Year - - - -
Dividends - - - 4,180
---------- ---------- ----------- ------------
Balance at
July 31, 1998 77,500 597 3,724,773 9,643,215
Debt to equity conversion - - 300,000 -
Additional shares issued
to employees - - 746,000 34,719
Additional shares issued
to consultants - - 1,142,143 438,054
Net Loss for the Year - - - -
Dividends - - - 4,180
Change in par value from
$1.00 to $0.01 - - (5,853,786) 5,853,786
---------- ---------- ----------- -----------
Balance at
July 31, 1999 $ 77,500 $ 597 $ 59,130 $15,973,954
========== ========== =========== ============
F-5
Conolog Corporation and Subsidiary
Consolidated Statement of Stockholders' Equity (Deficiency)
(Continued)
Total
Retained Stockholders'
Earnings Treasury Equity
(Deficit) Stock (Deficiency)
------------- -------- -------------
Balance at July 31, 1996 $ (3,117,536) $ (131,734) $ 2,376,217
Debt to equity conversion - - 2,972,164
Additional shares issued
to employees - - 1,313,750
Net loss for the year (3,810,736) - (3,810,736)
Dividends (4,177) - -
------------- ----------- ------------
Balance at July 31, 1997 (6,932,449) (131,734) 2,851,395
Public stock offering - - 2,771,077
Additional shares issued
to employees - - 135,100
Additional shares issued
to consultant - - 570,150
Debt to Equity Conversion - - 50,000
Net Loss for the Year (1,765,390) - (1,765,390)
Dividends (4,180) - -
------------- ----------- ------------
Balance at July 31, 1998 (8,702,019) (131,734) 4,612,332
Debt to equity conversion - - 300,000
Additional shares issued
to employees - - 780,719
Additional shares issued
to consultants - - 1,580,197
Net Loss for the Year (1,042,919) - (1,042,919)
Dividends (4,180) - -
Change in par value from
$1.00 to $0.01 - - -
------------ ------------ ------------
Balance at July 31, 1999 $(9,749,118) $ (131,734) $ 6,230,329
See notes to the consolidated financial statements.
F-6
Conolog Corporation and Subsidiary
Consolidated Statements of Cash Flows
Year Ended July 31,
1999 1998 1997
Cash Flows From Operating Activities
Net Loss $(1,042,919) $(1,765,390)$(3,810,736)
Adjustments to Reconcile Net Loss to Net
Cash Used by Operating Activities
Debt retirement cost - - 1,841,000
Common stock base compensation 715,406 135,100 1,313,750
Common stock for consulting fees 107,206 570,150 -
Depreciation and amortization 39,407 59,419 57,781
Gain on disposition of assets (413,789) - -
Provision for losses on accounts receivable - - (8,000)
(Increase) Decrease in Operating Assets
Accounts receivable (307,404) 65,094 202,449
Inventories 16,553 (36,476) (236,012)
Other current assets (72,733) 13,554 (568)
Other assets (69,855) - -
Increase (Decrease) in Operating Liabilities
Accounts payable (11,241) (127,665) (92,119)
Accrued expenses and other liabilities 63,121 (33,523) 78,241
Deferred gain on sale of assets 131,083 - -
--------- ----------- --------
Net Cash Used by Operating Activities (845,165) (1,119,737) (654,214)
--------- ----------- ---------
Cash Flows From Investing Activities
Purchase of equipment and
leasehold improvements (62,604) (87,418) (11,680)
Proceeds from sale of assets 719,684 - -
Purchase of intangible assets (143,237) - -
--------- ----------- --------
Net Cash Provided (Used) by
Investing Activities 513,843 (87,418) (11,680)
Cash Flows From Financing Activities
Deferred offering costs - 113,813 (113,813)
Increase from public stock offering - 2,771,077 -
(Repayment) proceeds from borrowings - (916,235) 916,235
Increase (Decrease) in bridge loan - (150,000) 200,000
Repayments of long-term borrowings - (3,802) (34,453)
(Increase) reductions in other assets - (2,334) 22,929
Proceeds from issuance of stock options 65,313 - -
Proceeds from sale of convertible
Debentures 300,000 - -
--------- ------------ --------
Net Cash Provided by Financing Activities 365,313 1,812,519 990,898
--------- ------------ --------
Net Increase in Cash and Equivalents 33,991 605,364 325,004
Cash and Equivalents at Beginning of Period 1,108,581 503,217 178,213
------------ ------------ ---------
Cash and Equivalents at End of Period $ 1,142,572 $ 1,108,581 $ 503,217
============ ============ ==========
See notes to the consolidated financial statements.
F-7
Conolog Corporation and Subsidiary
Consolidated Statements of Cash Flows
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the year for:
Interest $ 945 $ 39,821 $ 77,349
Taxes $ 200 $ (9,520) $ 10,084
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
On January 21, 1998, the Company satisfied a $50,000 Bridge Loan with the
conversion of the loan to 1.2 million Class A warrants.
During fiscal year ended July 31, 1999, the Company satisfied the $300,000
convertible debentures with conversion of the bonds to 300,000 common stock
shares.
During fiscal year ended July 31, 1999, the Company issued 1,092,143 shares
of common stock for consulting services.
See notes to the consolidated financial statements.
F-8
Conolog Corporation and Subsidiary
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
The principal business activity of Conolog Corporation (the "Company") is
The design, manufacturing and distribution of small electronic and
electromagnetic components and subassemblies for use in telephone, radio and
microwave transmissions and reception and other communication areas. The
Company's products are used for transceiving various quantities, data and
protective relaying functions in industrial, utility and other markets. The
Company's customers include primarily industrial customers, which include
power companies and various branches of the military.
During the year, the Company formed a wholly owned subsidiary, Nologoc
Corporation. In September 1998, Nologoc Corporation purchased the assets of
Atlas Design, Inc. and is currently trading as Atlas Design. Atlas Design
provides short term and long term qualified engineering and technical staff,
as well as human resource consulting to various industries.
Principles of Consolidation
The consolidated financial statements include the accounts of Conolog
Corporation and its wholly owned subsidiary. All significant intercompany
balances and transactions have been eliminated.
Cash and Equivalents
For the purpose of the statements of cash flows, cash equivalents include
time deposits, certificates of deposit and all highly liquid debt
instruments with original maturities of three months or less.
Inventories
Inventories are valued at the lower of cost (determined on a first-in, first
out basis) or market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less allowances for
depreciation and amortization. Depreciation and amortization are computed
by the straight-line method over the estimated useful lives of the assets.
Depreciation and amortization was $39,407, $59,419 and $57,781 for the years
ended July 31, 1999, 1998 and 1997, respectively.
Revenue Recognition
Sales are recognized when the products are shipped and services are
performed. Sales under certain fixed-price-type contracts, where progress
payments are received, are recognized when work is performed, under the
percentage-of-completion method, in accordance with Statement of Position
81-1, Accounting for Performance of Construction Type and Certain
Production-Type contracts.
F-9
Conolog Corporation
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Costs of Revenue
Costs of revenue includes direct costs to produce product and direct costs
to provide services.
Goodwill
Goodwill represents the excess of the purchase price of assets acquired over
the fair market value at the date of acquisition and is being amortized on
the straight line method over 40 years. Amortization expense charged to
operations for 1999 was $3,129.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising
expense was $20,589, $7,354 and $27,915 for the years ended July 31, 1999,
1998 and 1997, respectively.
Securities Issued for Services
The Company accounts for common stock issued for services by reference to
the fair market value of the Company's stock on the date of stock issuance.
Compensation and consulting expense is recorded for the fair market value of
the stock issued.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the bases of assets and
liabilities for financial and income tax reporting. The deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes also are recognized
for operating losses that are available to offset future federal and state
income taxes.
Loss Per Share of Common Stock
Loss per share of common stock is computed by dividing net loss (after
dividends on preferred shares) by the weighted average number of shares of
Common Stock outstanding during the year. The number of shares used in
the computations were 4,336,009, 3,251,150 and 1,581,218 for 1999, 1998
and 1997 respectively. The effect of assuming the exchange of the warrants,
Series A Preferred Stock and Series B Preferred Stock in 1999 and 1998 would
be anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-10
Conolog Corporation
Notes to the Consolidated Financial Statements
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
At times throughout the year, the Company may maintain certain bank accounts
in excess of FDIC insured limits.
The company provides credit in the normal course of business. The Company
performs ongoing credit evaluations of its customers and maintains
allowances for doubtful accounts based on factors surrounding the credit
risk of specific customers, historical trends, and other information.
NOTES PAYABLE - OTHER
CNL Holdings, Inc. loaned the Company $916,235. The notes were due
During the fiscal year July 31, 1998 and bore interest at the rate
of 4% per annum. The loans were payable in cash or Series C
Preferred Stock, at the Company's option at $5.00 per share.
Interest was payable in Common Stock up to a maximum of 40,000
shares per annum. On January 21, 1998, the Company paid CNL
Holdings, Inc. $916,235 plus accrued interest of $25,421 in cash.
This effectively eliminated all debts and liens with CNL Holdings,
Inc.
BRIDGE LOAN
The Company received $200,000 in net proceeds from several investors in a
private placement. Each investor received two (2) Promissory Notes.
Promissory Notes (the "First Note") totaling $150,000 were due and payable
on the earlier of January 31, 1999 or the closing of the Company's next
public offering (the "First Note"). The Second Convertible Note (the
"Second Note"), totaling $50,000 plus accrued interest was payable on the
earlier of January 31, 1999 or the closing of the Company's next public
offering, or convertible at the time the next Registration Statement is
declared effective by the Securities and Exchange Commission and at the
option of the selling security holders into a total of 1.2 million Class A
Warrants. Each Class A Warrant contained in the Second Note is identical to
the Company' currently outstanding Class A Warrants. On January 21, 1998,
at the closing of the Company's public offering, $150,000 plus accrued
interest of $13,306 was paid in cash in full settlement of the First Note.
The Second Note was satisfied with the 1.2 million Class A Warrants issued
on January 21, 1998.
LEASES
The Company leases their facility and various equipment under operating
leases. Equipment leases expire during fiscal year ended July 31, 2000. As
part of the sale leaseback of the facility, the company entered into a three
year prepaid lease.
Total rental expense for all operating leases of the Company amounted to
approximately $58,000, $7,659 and $10,353 during the years ended July 31,
1999, 1998 and 1997, respectively.
F-11
Conolog Corporation
Notes to the Consolidated Financial Statements
INCOME TAXES
The income tax provision is comprised of the following:
July 31,
1999 1998 1997
Current Income Taxes
Federal $ - $ - $ 9,884
State 200 200 200
-------- --------- --------
$ 200 $ 200 $ 10,084
A reconciliation between taxes computed at the federal statutory rate and
the effective tax rate follows:
July 31,
1999 1998 1997
Federal statutory tax rate (34.0)% (34.0)% (34.0)%
Valuation Allowance on Net Operating Loss
Carryover 34.0 34.0 34.0
Permanent and other differences - - 0.5
------- ------- -------
- % - % 0.5 %
Deferred taxes are recognized for temporary differences between the bases of
assets and liabilities for financial statement and income tax purposes.
The temporary differences causing deferred tax benefits are primarily due to
net operating loss carryforwards.
At July 31, 1999, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $3,925,100 and
$4,834,607, respectively, which are available to offset future Federal and
State taxable income, if any. The federal and state net operating loss
carryforwards expire as follows:
Federal State
2001 $ - $ 706,241
2002 - 897,997
2004 - 542,540
2005 - 1,649,146
2006 - 1,038,683
2014 679,324 -
2017 550,752 -
2018 1,656,388 -
2019 1,038,636 -
------------ ------------
$ 3,925,100 $ 4,834,607
============ ============
F-12
Conolog Corporation
Notes to the Consolidated Financial Statements
INCOME TAXES, Continued
At July 31, 1999 the Company has available unused general business credits
that may provide future tax benefits and expire as follows:
Amount
2000 $ 12,100
2001 26,300
2002 64,900
---------
$103,300
=========
The Company's deferred tax asset is comprised of the following temporary
differences:
Federal State
Net operating losses and tax
credit carryforwards $ 1,438,508 $ 435,115
Less: valuation allowance (1,438,508) (435,115)
------------ -----------
Net Deferred Tax Assets $ - $ -
============ ===========
The net change in the valuation allowance decreased by approximately
$63,000.
PROFIT SHARING PLAN
The Company sponsors a qualified profit sharing plan that covers
substantially all full time employees. Contributions to the plan are
discretionary and determined annually by management.
The Plan also provides an employee savings provision (401(k) plan) whereby
eligible participating employees may elect to contribute up to 15% of their
compensation to an investment trust. The Company contributes $2 for every
$1 of the participant's elective contribution, up to 6% of the participant's
compensation.
The total expense for the above plan amounted to $68,763, $52,721 and
$28,531 for the years ended July 31, 1999, 1998 and 1997, respectively.
F-13
Conolog Corporation
Notes to the Consolidated Financial Statements
CAPITAL STOCK
The Series A Preferred Stock provides 4% ($.02 per share) cumulative
dividends, which were $93,000 in arrears at July 31, 1999. In addition,
each share of Series A Preferred Stock may be exchanged for one share of
Common Stock upon surrender of the Preferred Stock and payment of $1,200 per
share. The Company may redeem the Series A Preferred Stock at $.50 per
share plus accrued and unpaid dividends.
The Series B Preferred Stock provides cumulative dividends of $.90 per share
which were $30,097 in arrears at July 31, 1999. In addition, each five
shares of Series B Preferred Stock is convertible into 1 share of Common
Stock. The Company may redeem the Series B Preferred Stock at $15 per share
plus accrued and unpaid dividends.
The Company has reserved 155,392 shares of Common Stock for Series A and B
Preferred Stock.
WARRANTS
The Company issued common stock purchase warrants separately and as a part
of the previous offerings as follows:
Exercise Original Extended
Number of Price Per Expiration Expiration
Date of Grant Shares Share Date Date
8/16/95 1,135,750 $6.00 8/16/98 8/16/02
1/21/98 2,901,200 $6.00 8/30/02 -
1/21/98 1,200,000 $5.25 1/21/01 -
MAJOR CUSTOMERS
The following summarizes sales to major customers (each 10% or more of net
sales) by the Company:
Sales to Major Number of Percentage of
Year Ended Customers Customers Total
1999 1,029,935 3 41
1998 205,868 1 28
1997 625,134 3 57
F-14
Conolog Corporation
Notes to the Consolidated Financial Statement
COMMITMENTS AND CONTINGENCIES
Employment Agreements
On February 18, 1999 the Company amended the employment agreement, dated
June 1, 1997, with Robert Benou, to serve as the Company's President through
May 31, 2002. Base salary under the agreement is $190,000 per annum with
Annual increases of $20,000. The agreement also calls for an annual bonus
equal to 6% of the Company's income before income taxes as stated in its
annual Form 10-K. Employee benefit plans, such as life, health, pension and
other plans are provided under the agreement. The Company will also provide
reimbursement of ordinary and necessary business expenses and a monthly car
allowance. A noncompetition/nonsolicitation restriction applies for one
year after termination of employment. Upon termination without cause, the
agreement provides for severance compensation equal to 2.99 times the
average annual compensation.
The Vice President of the Company entered into an employment agreement on
June 1, 1997. The agreement is for a period of five years expiring May 31,
2002. Pursuant to the terms of agreement, the officer is to receive a base
salary of $55,000 for the period June 1, 1997 through May 31, 1998 and an
increase of $6,000 per annum for each twelve month period thereafter. The
agreement also calls for an annual bonus equal to 3% of the Company's income
before income taxes as stated in its annual Form 10-K. The Vice President
is entitled to participate in all general pension, profit-sharing, life,
medical, disability and other insurance and executive benefit plans at any
time in effect for executives of the Company, however, the Company is not
obligated to establish or maintain any of the aforementioned executive
benefit plans. The Company will also provide an automobile for the use of
the Vice President and reimburse him for all ordinary and necessary business
expenses. A noncompetition/nonsolicitation restriction applies for six
months after termination of employment. Upon termination without cause the
agreement provides for severance compensation equal to 2.99 times the
average annual compensation paid by the Company.
On March 1, 1998, the Company entered into an employment agreement with a
Company executive to serve as a Corporate Development Manager for a period
of five years. Base salary under the agreement is $50,000 per annum with
annual increases of $4,000. The agreement calls for the Corporate
Development Manager to receive a quarterly bonus of 5,000 shares of Conolog
Corporation stock that have not been registered and eligible for sale under
Rule 144 code. Eligibility for all general pension, profit-sharing, life,
medical disability and other insurance and executive benefit plans is
provided under the agreement, however, the Company is not obligated to
establish or maintain any of the aforementioned executive plans. The
Company will also provide an automobile for the use of the Corporate
Development Manager and reimburse her for all ordinary and necessary
business expenses. Upon termination without cause, the agreement provides
for severance compensation equal to 2.99 times the average annual
compensation.
F-15
Conolog Corporation
Notes to the Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES, Continued
Option Agreement
The Company and CLOG LLC have entered into an Option Agreement, dated as of
December 22, 1998, which was amended and restated as of May 5, 1999 (the
"Option Agreement"). Pursuant to the Option Agreement, the Company has
granted an option to CLOG to purchase convertible debentures of the Company
having an aggregate principal amount of up to $2,000,000. CLOG's option may
be exercised at any time prior to December 31, 1999.
Each convertible debenture is convertible into common stock of the Company
at a conversion rate of $1.00 per share, the fair market value of the common
stock on the date of the Option Agreement. If CLOG were to exercise its
option for all $2,000,000 for convertible debentures, it would have the
right to convert those notes into 2,000,000 shares of common stock. The
Option Agreement provides that the voting power of any Conversion Shares
owned by CLOG will be voted in the same manner as shares voted by all other
shareholders of the Company.
Each convertible debenture will bear interest at the rate of 8% per annum
and will be due 12 months from the date such debenture is issued. With
respect to the initial $200,000 loaned, the Company will have the option to
pay each debenture, together with all accrued interest thereon, by issuing
shares of a new Series C preferred stock having a value of $5.00 per share
for purposes of such payment.
The Series C preferred will be non-voting and carry a cumulative dividend of
8% per annum, which may be payable by the issuance of shares of common stock
valued at $5.00 per share. The Series C preferred will be convertible into
common stock at the rate of one share of common stock for each share of
Series C preferred and have a liquidating preference of $5.00 per share.
The Series C preferred may be redeemed by the Company at any time by paying
$5.00 in cash therefor.
During the year CLOG purchased $300,000 worth of convertible debentures and
subsequently converted them to common stock.
Legal Matters
In December 1998, the Company was named in two related litigations
pending, one in the United States District Court for the Southern
District of New York and the other in Superior Court of New Jersey.
The first of the pending litigations was commenced in 1993. The
litigations relate to a dispute concerning real property acquired
in 1984. While the property is near real property formerly owned
by Conolog, Conolog was not a party to that transaction. The claim
made against Conolog alleges that Conolog contributed to environmental
contamination of the property acquired in 1984. The New York litigation
has been dismissed, although the dismissal is on appeal. The New
Jersey litigation is in its early stages, insofar as Conolog is
concerned. However, the Company believes that it has no liability
and intends to vigorously defend itself.
F-16
Conolog Corporation
Notes to the Consolidated Financial Statements
Legal Matters, Continued
In the third quarter of fiscal 1999, the Company reached an agreement
in principle to purchase substantially all the stock or assets of Hallmark
Temps, Inc., for use in conjunction with the Company's Atlas Design
business. After discussions were terminated withhout an agreement having
been reached, Conolog began doing business with an entity owned by
a former employee of Hallmark. In October 1999, Hallmark filed a
lawsuit in the Superior Court of New Jersey seeking a preliminary
injunction and damages against the Company. Hallmark alleges that
the Company breached a confidentiality agreement executed by the
Company and Hallmark. While the litigation is in a very early
stage, the Company believes that it has no liability and intends
to vigorously defend itself.
Stock Option Plan
On May 15, 1995, the Board of Directors of the Company adopted and on August
14, 1995, the shareholders approved the Conolog corporation 1995/1996 Stock
Option Plan (the "Option Plan"). The Option Plan is designed to permit the
Company to grant either incentive stock options under Section 422A of the
Internal Revenue Code (the "Code") or nonqualified stock options. Under the
Option Plan, the Board is authorized to grant options to purchase up to
200,000 shares of stock to key employees, officers, directors and
consultants of the Company.
Incentive stock options may only be granted to employees of the Company and
not to directors or consultants who are not so employed. The exercise price
for incentive stock options must be at least one hundred percent (100%) of
the fair market value of the common stock as determined on the date of
grant. All incentive stock options under the Option Plan must be granted
within ten (10) years from the date of adoption of the Option Plan and each
option must be exercised, if at all, within ten (10) years of the date of
grant. In no event may any employee be given incentive stock options
whereby more than $100,000 of options become exercisable for the first time
in a single calendar year. All incentive stock options must be exercised by
an optionee within three (3) months after termination of the optionee's
employment, unless such termination is as a result of death, disability or
retirement. In the event an optionee's employment is terminated as a result
of death or disability, such optionee or his designated beneficiary shall be
entitled to exercise any and all options for a period of twelve (12) months
after such termination. If an optionee's employment is terminated as a
result of retirement, the optionee shall be entitled to exercise his options
for a period of twenty four (24) months following such termination.
Nonqualified stock options under the Option Plan are generally subject to
the same rules as discussed above. Nonqualified stock options may, however,
also be granted to directors and consultants, whether or not such
individuals are employees of the Company. The exercise price for
nonqualified stock options may not be granted at less than eighty-five
percent (85%) of the fair market value of the shares on the date of grant.
The Company granted 105,000 options to purchase the Company's common stock
at $.6875 per share. All options granted under this plan were exercised.
F-17
Conolog Corporation
Notes to the Consolidated Financial Statements
Stock Option Plan - (Continued)
No incentive stock options or nonqualified options were granted during
fiscal years ended July 31, 1998 and 1997.
No stock options were outstanding as of July 31, 1999.
COMMON STOCK ISSUED FOR SERVICES
Consulting Agreements
In June of 1999 the Company entered into a consulting agreement with the
NYBOR Group Inc. In consideration for such services the Company granted
1,057,143 shares of common stock to the NYBOR Group Inc. This agreement
expires on December 31, 2004.
In November 1998 the Company entered into a consulting agreement with Paul
B. Radler and Associates and Maple Business Consultants. In consideration
for such services the Company granted 35,000 shares of common stock. These
agreements expire on October 31, 1999.
In February of 1998 the Company entered into a management and financial
consulting agreement with Warren Schreiber ("Schreiber"), whereby Schreiber
would act as a consultant to the Company. In consideration of such
services, Schreiber was granted 75,000 shares of common stock of the
Company upon commencement of the contract. Additionally, for the duration
of the agreement, Schreiber was to receive 25,000 shares of the Company's
common stock on the last day of March, June, September and December of each
year. Under the agreement, termination could occur by either party with or
without cause at any time upon 60 days prior written notice. The agreement
was terminated in February 1999.
Consulting expense is recorded at the fair market value at the date of grant
and is amortized over the life of the contracts. Consulting expense for the
years ended July 31, 1999 and 1998 amounted to approximately $107,000 and
$488,000, respectively.
Employees
During the year the Company issued 633,000 shares of the Company's common
stock, as additional remuneration to certain employees. Compensation
expense was recorded at the average fair value of the stock at the time of
issuance, $648,844 ($1.025 per share).
In February 1998 the Company issued 45,000 shares of the Company's common
stock as additional remuneration to certain employees. Compensation expense
was recorded at the average fair value of the stock at the time of issuance,
$121,500 ($2.70 per share).
In accordance with the employment agreement between the Company and one of
their executives the Company issued 20,000 and 10,000 shares of common stock
during fiscal years ended July 31, 1999 and 1998, respectively.
Compensation expense was recorded at the average fair value of the stock at
the time of issuance, 26,875 (1.34 per share) and $13,600 ($1.36 per share)
in 1999 and 1998, respectively.
F-18
Conolog Corporation
Notes to the Consolidated Financial Statements
COMMON STOCK ISSUED FOR SERVICES, Continued
In July 1997 the Company issued 359,500 shares of common stock to several
employees. Compensation expense was recorded at the average fair value of
the stock at the time of issuance, $1,313,750 ($3.66 per share).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, other current assets,
accounts payable and accrued expenses approximates fair value because of the
short maturity of these instruments.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
SALE - LEASEBACK TRANSACTION
The Company entered into a sale-leaseback arrangement. Under the
arrangement, the Company sold the building, land and improvements for a
realized gain of $595,289 and leased a portion of the building back for a
period of three years. The leaseback has been accounted for as an operating
lease. Of the total gain realized, $181,500 has been deferred and will be
amortized to income in proportion to rental expense over the term of the
lease.
EXTRAORDINARY ITEM
During the year ended July 31, 1997, the Bank converted 1,400,000 shares of
Common Stock it was holding using a value negotiated between Conolog and the
Bank. The difference between the fair value and the negotiated value was
$1.315 and was considered to be contributed capital and an extraordinary
expense called Debt Retirement Cost. The total value placed upon this
transaction was $1,841,000 (1,400,000 x $1.315).
The cost of debt retirement of $1,841,000, which occurred in 1997, is
considered an extraordinary item with no tax effect due to the non-
deductibility of this expense.
RECLASSIFICATIONS
Certain items in the prior years report have been reclassified to conform to
current year classifications. Such reclassifications had no effect on
previously reported net income.
F-19
2
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