SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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, 2000 (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-KSB or any amendment to the Form 10-KSB.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant based on the closing sale price of $0.97 on
October 27, 2000 was $8,792,040
The number of shares outstanding of the Registrant's common stock
outstanding as of October 27, 2000 was 9,063,959
DOCUMENTS INCORPORATED BY REFERENCE FORM 10-KSB
JULY 31, 2000
TABLE OF CONTENTS
PART I
Item 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . .15
Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . 16
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . 16
Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION. . . . . . . . . . . . . . . . . . . 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . ..20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . .20
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS. . . . . . . . . . . . . . . .20
Item 11. EXECUTIVE COMPENSATION, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT. . . . . 22
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . 25
PART IV
Item 14. EXHIBITS AND REPORTS. . . . . . . . . . . . . . . . . . . . 25
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
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.
In September 1998, Conolog entered into the temporary staffing
industry with its acquisition of Atlas Design, a human resource
company. 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.
In August 2000, Conolog acquired Independent Computer Maintenance
Corporation, a provider of installation, maintenance and
troubleshooting services for commercial and corporate computer systems
and networks to businesses in the greater New York metropolitan area.
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
engagedin 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 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.
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
Bonneville and thereafter by other utilities and municipalities.
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 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.
In August 2000, the Company acquired Independent Computer
Maintenance Corporation, a provider of installation, maintenance and
troubleshooting services for commercial and corporate computer systems
and networks to businesses in the greater New York metropolitan area.
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 anddemodulators 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")
- Computer system and network consulting services (Under
the trade name Independent Computer Maintenance
Corporation")
(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
hundredth 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 reducing 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.
(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 August 2000, Conolog acquired substantially all of the
operating assets of Independent Computer Maintenance Corporation,
a provider of installation, maintenance and troubleshooting services
for commercial and corporate computer systems and networks to
businesses in the greater New York metropolitan area. As consideration
for the assets, Conolog issued 100,000 shares of its Common Stock,
with additional shares issuable if the price per share of the Common
Stock is less than $2.00 on the first anniversary of the closing.
Conolog also paid $100,000 in cash, and placed approximately $300,000
into escrow to be released to the seller at a rate of two dollars
for every dollar of earnings before income tax generated by the
acquired assets during the first year following the closing.
The Company is currently undergoing ISO 9000:2000 certification,
funded by a grant by the State of New Jersey. They anticipate
completion by the end of December 2000.
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 to international
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 2000
(Schering-Plough, Superior Bank, and Degussa Corporation) totaled
$1,353,521 (24% of all sales). 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).
None of these 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 2000, the Company wrote off $375,099 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
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. During fiscal
1999-2000 the Company invested approximately $1,015,322 for
product development and amortization of product costs. During
fiscal 1999-2000 the Company started development of the PDR-2000
8 channel digital transfer trip communications product. The
Company also developed a new platform for it's GEN1 products
allowing for its use by the Canadian utilities.
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.
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.
Employees
As of July 31, 2000, the Company employed 19 persons on a
full-time basis, including 2 in management, 1 in sales, 1 in
clerical, 1 in accounting, 1 in purchasing, 2 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. The Company employs approximately 125 contract employees.
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.
The Company currently leases an office at 2810 Morris Avenue
Union, NJ to house its Atlas Design personnel. The annual rent is
$9,600 per annum.
The Company is currently leasing an office at 193 Route 17
Paramus, NJ in connection with its Professional Graphics Staffing
division of Atlas Design. The rent on the office space is $16,800
for the first year and $18,000 for the two following years.
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
without a definitive 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
None.
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 1998, 1999 and the first, second and third quarters of
2000. As of October 27, 2000, the Company's Common Stock was held
by approximately 840 shareholders of record.
Units Common Stock Warrants
1998 High Low High Low High Low
First ___ ____ 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
1999 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
Fourth
Quarter ___ ____ 1.5625 .6562 .1562 .125
Units Common Stock Warrants
2000 High Low High Low High Low
First
Quarter ____ _____ 7.0625 .625 1.7188 .0938
Second
Quarter ____ _____ 3.9688 1.75 .8438 .375
Third
Quarter ____ _____ 1.9375 .75 .4062 .1875
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 2000 1999
per share amounts)
Operations Summary:
Net sales and other $5,758 $2,555
income
Net income (loss) (1,884) (1,043)
Income (loss)
per primary (.28) (.24)
share
Balance Sheet
Summary:
Total assets $6,657 $6,620
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 two 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 Year Ended July 31
1999 1999 to 1998 to
2000 1999
100.0% Sales & 223.7% 254.3%
other
income
70.39 Cost of 190.75 290.7
products
sold
26.59 Selling, 141.74 26.2
general &
administrat
ive
0.0 Interest 0.0 (95.8)
138.26 Total costs 218.46 91.9
& expenses
(38.26) Income (205.86) 40.9
(loss)
before
Income 0.0 0.0
4.69 taxes
(credits)
(33.57%) Loss before (180.62%) 40.9%
extraordinary
item
* Includes write-offs for obsolete or excess inventory which were
375,099 and $36,313 in 2000 and 1999 respectively.
Results of Operations
2000 Compared to 1999
Total revenue increased 224% or $3,102,759 from $2,508,373 to
$5,611,132 in 2000. The increase was attributable primarily to the
expansion of Atlas Design.
Gross Margins for the years ended July 31, 2000 and 1999 totaled
$1,661,624 and $437,791 representing 29.6% and 17.5% of revenues.
Costs of Sales were lower in 2000 than compared to 1999 due to
efficiencies.
Selling, General and Administrative expenses decreased from
42% of sales or $1,052,271 in 1999 to 26% of sales or $1,491,595
in 2000 as a result of increased automation.
The Company did not have any interest expense for fiscal year 2000
compared to $945 of interest expense in fiscal year 1999.
As a result of the foregoing, the Company reported a net loss
of $1,883,663 or $0.28 per share, compared to a net loss of $1,042,919
or $0.24 per share for fiscal 1999.
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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 31, 2000 was $5,383,454 compared to
$4,766,016 at year ended July 31, 1999. The improvement in the
working capital is primarily attributable to higher cash reserves
from the conversion of debentures during the year.
Accounts receivable have increased from $351,881 at year-end
July 31, 1999 to $862,453 at July 31, 2000. This increase of
$510,572 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.
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-KSB.
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, 2000.
NAME AGE POSITION
Robert S. Benou 66 President and Director
Arpad J. Havasy 64 Executive Vice President,
Secretary, Treasurer and
Director
Louis S. Massad 63 Director
Marc R. Benou 33 Vice President, Assistant
Secretary and Director
Edward J. Rielly 33 Director
Thomas Fogg 65 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 was Vice President, Chief Financial
Officer and Director of Computer Power Inc. from 1986 to 1998.
Mr. Massad has been the Chief Financial Officer of Integ.Com Corp
since 1998. 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.
Edward J. Rielly has been a Director of the Company since January
1998. Mr. Rielly is a Senior Consultant with Esavio Corporation. From
February 1998 to February 2000, Mr. Rielly was an Application Developer
with Chubb Corporation. 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.
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.
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
Company's two fiscal years ended July 31, 2000 and 1999:
Summary Compensation Table
Annual Compensation Long Term Compensation
Name and Other Annual
Principal Fiscal Compensation
Position Year-End Salary Bonus Awards Payouts
Robert 2000 $210,000 0 0 0
Benou,
President 1999 $190,000 0 0 0
1998 $170,000 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 agreement 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 714,400 7.9%
Arpad J. Havasy 68,625 0.8%
Marc R. Benou 142,000 1.6%
Louis Massad 22,500 0.2%
Thomas Fogg 60,000 0.7%
Edward J. Rielly 21,500 0.2%
All Executive Officers
and Directors as a Group
(6 Persons) 1,029,025 11.4%
(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, 2000 and 1999 F-2-3
Statements of Operations for the years ended
July 31, 2000 and 1999 F-4
Statements of Stockholders' Equity for the years
ended July 31, 2000 and 1999 F-5
Statements of Cash Flows for the years ended July 31, 2000 and
1999 F-6-7
Notes to Financial Statements 10 to-17
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).
3(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).
3(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.
3(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).
3(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).
3(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.
3(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.
3(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 Registrant's Annual Report on Form
10-K for the year ended July 31, 1999, as filed on October 28, 1999.
* 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:/s/ Robert S. Benou
October 30, 2000 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 30, 2000
/s/Robert S. Benou
President, Chief Executive Officer
and Chairman of the Board
October 30, 2000 /s/Arpad J. Havasy
Executive Vice President, Secretary,
Treasurer and Director
October 30, 2000 /s/Marc R. Benou
Vice President, Assistant Secretary and
Director
October 30, 2000 /s/Louis S. Massad
Director
October 30, 2000 /s/Edward J. Rielly
Director
Independent Auditors' Report
To the Board of Directors of
Conolog Corporation and Subsidiary
We have audited the accompanying consolidated balance sheet of Conolog
Corporation and Subsidiary as of July 31, 2000 and the related
consolidated statements of operations, stockholders' equity and cash
flows for the years ended July 31, 2000 and 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 significantestimates 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, 2000, and the results
of its operations and its cash flows for the years ended July 31, 2000
and 1999, in conformity with generally accepted accounting principles.
Bridgewater, New Jersey
October 20, 2000
Conolog Corporation and Subsidiary
Consolidated Financial Statements
July 31, 2000
Annual Report on Form 10-KSB
Item 8, Item 14 (a)(1) and (2)
Consolidated Financial Statements
Year Ended July 31, 2000
Conolog Corporation and Subsidiary
Somerville, New Jersey
Form 10-KSB - Item 14 (a) (1) and (2)
Index to the Consolidated Financial Statements
Conolog Corporation and Subsidiary
July 31, 2000
Page
The following consolidated financial statements of the registrant
are included in Item 14:
Independent Auditors' Report F-1
Consolidated Balance Sheet - July 31, 2000 F-2 - F-3
Consolidated Statements of Operations -
Years Ended July 31, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity (Deficiency) -
Years Ended July 31, 2000 and 1999 F-5
Consolidated Statements of Cash Flows -
Years Ended July 31, 2000 and 1999
F-6 - F-7
Notes to the Consolidated Financial Statements F-8 - F-17
Conolog Corporation and Subsidiary
Consolidated Balance Sheet
July 31, 2000
Assets
Current Assets
Cash and equivalents $ 1,297,031
Accounts reveivable - less allowances of $6,000 862,453
Inventories
Finished Goods 927,358
Work-in-process 1,077,608
Matereials and Supplies 2,916,583
Other current assets
Deposit on asset purchase 494,360
Prepaid consulting fees 205,241
Other current assets 121,259
Total Current Assets 5,896,927
Property, Plant and Equipment
Leasehold improvements 30,265
Machinery and equipment 1,332,457
Furniture and fixtures 420,691
Computer software 28,508
1,811,921
Less allowance for depreciation and amortization 1,652,028
159,893
Goodwill, net of accumulated amortization of $5,824 137,412
Prepaid consulting fees 189,310
Other assets 10,083
Deferred tax asset 263,000
Total Assets $ 6,656,625
----------------
See notes to the consolidated financial statements
Liabilities
Current Liabilities
Accounts payable $ 69,048
Accrued payroll 68,712
Accrued expenses 315,213
Deferred gain on sale of assets 60,500
Total Current Liabilities 513,473
Deferred gain on sale of assets 10,083
Total Liabilities 523,556
Stockholders' Equity
Preferred Stock, par value $.50; Series A; 4% 77,500
cumulative; 162,000 shares authorized;
155,000 shares issued and outstanding
Preferred Stock, par value $.50; Series B; $.90 597
cumulative; 50,000 shares authorized; 1,197
shares issued and outstanding
Common Stock, par value $.01; 20,000,000 shares 84,188
authorized; issued 8,418,844 shares, including
8,813 shares held in Treasury
Contributed Capital 17,739,479
Retained Earnings (Deficit) (11,636,961)
Treasury Shares at Cost (131,734)
Total Stockholders' Equity 6,133,069
Total Liabilities and Stockholders' Equity $ 6,656,625
--------------
See notes to the consolidated financial statements.
Conolog Corporation and Subsidiary
Consolidated Statements of Operations
Year Ended July 31,
2000 1999
Service revenue $ 4,373,121 $ 1,436,117
Product revenue 1,238,011 1,072,256
Total Revenue 5,611,132 2,508,373
Costs of service revenue 3,515,711 1,100,250
Costs of product revenue 433,797 970,332
Total Cost of Revenue 3,949,508 2,070,582
Gross Profit 1,661,624 437,791
Selling, general and administrative 1,491,595 1,052,271
Income (Loss) From Operations 170,029 (614,480)
Other Income (Expense)
Interest income 86,784 47,284
Interest expense - (945)
Gain on sale of assets 60,500 464,206
Write-off of obsolete or excess (375,099) (36,313)
inventories
Capital raising activities (360,400) (187,065)
Employee bonus (371,280) (715,406)
Amortization of product costs (220,328) -
Marketing and product development (794,994) -
Legal fees (341,677) -
Total Other Income (Expense) (2,316,494) (428,239)
Loss Before Income Taxes (2,146,465) (1,042,719)
(Benefit from) Provision for Income (262,802) 200
Tax
Net Loss $ (1,883,663) $ (1,042,919)
Loss from Continuing Operations $ (.28) $ (.24)
per share
Loss Per Share - Basic $ (.28) $ (.24)
- Assuming Dilution $ (.28) $ (.24)
See notes to the consolidated financial statements
Conolog Corporation and Subsidiary
Consolidated Statement of Stockholders' Equity
Series A Series B
Preferred Preferred Common Contributed
Stock Stock Stock Capital
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
Debt to equity conversion - - 17,000 1,683,000
Additional shares issued to
employees - - 6,160 411,359
Additional shares issued to
consultants - - 7,500 502,500
Additional shares issued for
commissions - - 700 46,900
Purchase of treasury stock
(at cost) - - - -
Remitted shares due to
ammended consulting - - (7,572) (1,060,000)
agreement
Sale of treasury stock - - - 84,496
Additional shares issued for
prepaid acquisition - - 1,270 93,090
Net loss for the year - - - -
Dividends - - - -
Balance at July 31, 2000 77,500 597 84,188 17,739,479
====== === ====== ==========
Conolog Corporation and Subsidiary
Consolidated Statement of Stockholders' Equity
(Continued)
Retained Total
Earnings Treasury Stockholders'
(Deficit) Stock Equity
Balance at July 31, 1998 (8,702,019) (131,734) 4,612,332
Debt to equity conversion - - 300,000
Additional shares issued to - - 780,719
employees
Additional shares issued to - - 1,580,197
consultants
Net loss for the year (1,042,919) - (1,042,919)
Dividends - - -
Balance at July 31, 1999 (9,749,118) (131,734) 6,230,329
Debt to equity conversion - - 1,700,000
Additional shares issued to - - 417,519
employees
Additional shares issued to - - 510,000
consultants
Additional shares issued for - - 47,600
commissions
Purchase of treasury stock (at cost) - (11,638) (11,638)
Remitted shares due to amended - - (1,067,572)
consulting agreement
Sale of treasury stock - 11,638 96,134
Additional shares issued for - - 94,360
prepaid acquisition
Net loss for the year (1,883,663) - (1,883,663)
Dividends (4,180) - -
Balance at July 31, 2000 (11,636,961) (131,734) 6,133,069
============ ========= =========
See notes to the consolidated financial statements.
Conolog Corporation and Subsidiary
Consolidated Statements of Cash Flows
Year Ended July 31,
2000 1999
Cash Flows From Operating Activities
Net Loss $ (1,883,663) $(1,042,919)
Adjustments to Reconcile Net Loss to Net Cash used
In Operating Activities
Common stock for commissions 47,600 -
Common stock base compensation 371,280 715,406
Common stock for consulting fees 510,000 107,206
Depreciation and amortization 49,928 39,407
Gain on disposition of assets - (413,789)
Deferred income taxes (263,000) -
(Increase)Decrease in Operating Assets
Accounts receivable (510,572) (307,404)
Inventories 277,132 16,553
Other current assets (4,639) (72,733)
Other assets 69,575 (69,855)
Increase(Decrease) in Operating Liabilities
Accounts Payable 19,445 (11,241)
Accrued expenses and other liabilities 174,517 63,121
Deferred gain on sale of assets (60,500) 131,083
Net Cash Used in Operating Activities (1,202,897) (845,165)
Cash Flows From Investing Activities
Purchase of equipment and leasehold (70,890) (62,604)
improvements
Proceeds from sale of assets - 719,684
Deposit on asset purchase (400,000) (143,237)
Net Cash (Used In) Provided by Investing (470,890) 513,843
Activities
Cash Flows From Financing Activities
Proceeds from sale of treasury stock 96,100 -
Purchase of treasury stock (11,604) -
Proceeds from issuance of stock options 43,750 65,313
Proceeds from sale of convertible 1,700,000 300,000
debentures
Net Cash Provided by Financing Activities 1,828,246 365,313
Net Increase in Cash and Equivalents 154,459 33,991
Cash and Equivalents at Beginning of Period 1,142,572 1,108,581
Cash and Equivalents at End of Period $ 1,297,031 $ 1,142,572
----------- ------------
See notes to the consolidated financial statements.
Conolog Corporation and Subsidiary
Consolidated Statements of Cash Flows
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Year Ended July 31,
2000 1999
Interest $ - $ 945
Taxes $ 200 $ 200
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended July 31, 2000, the Company satisfied $1,700,000
of convertible debentures with conversion of the bonds to 1,700,000
common stock shares.
During the year ended July 31, 2000, the Company issued 1,270 shares
of its common stock for prepaid consulting fees.
During fiscal years ended July 31, 2000 and 1999, the Company issued
750,000 and 1,142,143 shares of common stock, respectively, for
consulting services. Of the 1,142,143 shares of common stock issued
during fiscal year ended July 31, 1999, 757,143 were remitted in the
current fiscal year due to an amendment of the consulting agreement.
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.
See notes to the consolidated financial statements
Conolog Corporation and Subsidiary
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Conolog Corporation (the "Company") is in the business of 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 ended July 31, 1999, the Company formed a wholly
owned subsidiary, Nologoc Corporation. In September 1998, Nologoc
Corporation purchased the assets of Atlas Design, Inc. and is
currently operating under the trade name, 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 $57,037 and $39,407 for the years ended July 31,
2000 and 1999, 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.
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 was $2,695 and
$3,129 for the years ended July 31, 2000 and 1999, respectively.
Advertising Costs
Advertising costs are charged to operations when incurred.
Advertising expense was $23,679 and $20,589 for the years ended
July 31, 2000 and 1999, 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, consulting and commission
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 6,825,779 and
4,336,009 for 2000 and 1999, respectively. The effect of
assuming the exchange of the warrants, Series A Preferred Stock
and Series B Preferred Stock in 2000 and 1999 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 difer from those estimates
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.
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 $92,922 and $58,000 during the years ended
July 31, 2000 and 1999, respectively.
The following is a schedule of future minimum rental payments
(exclusive of common area charges) required under operating leases
that have initial or remaining non-cancelable lease terms in excess
of one year as of July 31, 2000
Year Ending July 31,
2001 $ 17,300
2002 18,000
2003 17,500
---------
Total minimum payments required $ 52,800
=========
INCOME TAXES
The income tax (benefit) provision is comprised of the following:
July 31,
2000 1999
Current Income Taxes
Federal $ - $ -
State - 200
Deferred Income Taxes
Federal - -
State (262,802) -
---------- -----------
$(262,802) $ 200
========== ===========
In 1998, the State of New Jersey enacted legislation allowing
emerging technology and/or biotechnology companies to sell their
unused New Jersey Net Operating Loss ("NOL") Carryover and Research
and Development Tax Credits ("R&D" Credits) to corporate taxpayers
in New Jersey. During fiscal year ended July 31, 2000, the Company
entered into an agreement under which it sold a portion of its NOL
carryover. The total proceeds of this transaction was recorded as a
benefit in the accompanying financial statements.
Conolog Corporation
Notes to the Consolidated Financial Statements
A reconciliation between taxes computed at the federal statutory
rate and the effective tax rate follows:
July 31,
2000 1999
Federal statutory tax rate (34.0)% (34.0)%
Valuation Allowance on Net Operating (21.8) 34.0
Loss Carryover
Permanent and other differences (12.2)% -%
_______ ______
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,
2000, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $7,592,115
and $3,586,754, 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
2005 $ - $ 644,713
2006 - 859,586
2007 - 2,082,455
2013 253,276 -
2014 1,232,010 -
2015 957,538 -
2017 550,752 -
2018 1,656,388 -
2019 859,696 -
2020 2,082,455 -
---------- ----------
$7,592,115 $3,586,754
At July 31, 2000 the Company has available unused general business
credits that may provide future tax benefits and expire as follows:
Amount
2001 $ 12,100
2002 26,300
2003 64,900
--------
$103,300
Conolog Corporation
Notes to the Consolidated Financial Statements
The Company's deferred tax asset is comprised of the following
temporary differences:
Federal State
Net operating losses and tax credit $ 2,581,319 $322,808
carryforwards
Less: valuation allowance 2,581,319 59,808
----------- ---------
Net Deferred Tax Assets $ - $263,000
The net change in the valuation allowance was $767,504 in 2000 and
$63,000 in 1999.
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 $66,830 and $68,763
for the years ended July 31, 2000 and 1999, respectively.
CAPITAL STOCK
The Series A Preferred Stock provides 4% cumulative dividends, which
were $95,983 ($0.62 per share) in arrears at July 31, 2000. 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 $31,294 ($26.14 per share) in arrears at July
31, 2000. 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 155,241 shares of Common Stock for Series A
and B Preferred Stock.
Conolog Corporation
Notes to the Consolidated Financial Statements
WARRANTS
The Company issued common stock purchase warrants separately and as
a part of the previous offerings as follows:
Date of Grant Number of Exercise Original Extended
Shares Price Per Expiration Expiration
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 -
CONVERTIBLE DEBENTURES
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 a 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. 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. As of December 31,
1999 CLOG exercised their option for 2,000,000 convertible
debentures and converted them to common stock.
MAJOR CUSTOMERS
The following summarizes sales to major customers (each 10% or more
of net sales) by the Company:
Year Ended Sales to Major Number of Percentage of
Customers Customers Total
2000 553,194 1 10
1999 1,029,935 3 41
Conolog Corporation
Notes to the Consolidated Financial Statements
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 the
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 times 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. 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.
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. Thelitigations 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 without 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.
On February 8, 2000, the Company granted 70,000 options to
purchase the Company's common stock at $.625 per share. All
options granted on this date were exercised.
During fiscal year ended July 31, 1999, the Company granted
105,000 options to purchase the Company's common stock at $.6875
per share. All options granted were exercised.
No incentive stock options or nonqualified options were granted
during fiscal years ended July 31, 2000 and 1999.
No stock options were outstanding as of July 31, 2000.
COMMON STOCK ISSUED FOR SERVICES
Consulting Agreements
In June of 1999 the Company entered into a consulting agreement
with the NYBOR Group Inc. ("NYBOR") In consideration for such
services the Company granted 1,057,143 shares of common stock to
the NYBOR. This agreement expires on December 31, 2004. In
January of 2000, the Company and NYBOR amended the original
consulting agreement resulting in the remittance of 757,143
shares by NYBOR.
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 expired
on October 31, 1999.
On February 1, 2000, the Company entered into a six month
agreement with National Financial Communications Corporation
("NFC"), whereby NFC would provide public relations,
communications, advisory and consulting services to the Company.
In consideration of such services, NFC received $10,000 upon
the signing of the agreement and 100,000 shares of the Company's
common stock, during the term of the agreement. On June 14,
2000, the Company and NFC extended their agreement though
December 31, 2000. In remuneration of the contract extension,
the Company granted NFC 50,000 shares of common stock .
On February 1, 2000, the Company entered into a six month
agreement with Robert Marks Co., Inc. ("Robert Marks"), whereby
Robert Marks would act as a consultant to the Company. In
consideration of such services, Robert Marks was granted
100,000 shares of common stock of the Company. On June
14, 2000, the Company and Robert Marks extended their agreement
through December 31, 2000. In remuneration of the contract
extension, the Company granted Robert Marks 50,000 shares of
common stock of the Company. In May of 2000, the Company
entered into a consulting agreement with a former employee,
whereby, the former employee would act as consultant to the
Company. In consideration of such services, the former employee
was granted 10,000 shares of the common stock of the Company.
The agreement terminates October 31, 2000.
In March of 2000, the Company entered into a one year consulting
agreement with Southern Origins, Inc. ("Southern Origins"). In
consideration of the consulting services to be provided, the
Company, at the signing of the agreement, granted Southern
Origins 45,000 shares of the Company's common stock. In
addition, the Company will grant Southern Origins 30,000 shares
of the Company's common stock every ninety days, from the signing
of the agreement plus a bonus of 15,000 shares, per ninety day
period, may be granted at the discretion of the Company. The
agreement terminates February 16, 2001.
In March of 2000, the Company entered into a one year consulting
agreement with Eagle Consulting Services, LLC ("Eagle
Consulting"). In consideration of the consulting services to be
provided, the Company, at the signing of the agreement,
granted Eagle Consulting 45,000 shares of the Company's common
stock. In addition, the Company will grant Eagle Consulting
30,000 shares of the Company's common stock every ninety days,
from the signing of the agreement plus a bonus of 15,000
shares per ninety day period, may be granted at the discretion of
the Company. The agreement terminates February 16, 2001.
During the year, the Company received consulting services from
European Investor Relations Limited. In consideration for such
services the Company granted 100,000 shares of the common stock
of the Company to European Investor Relations Limited.
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, 2000 and 1999
amounted to approximately $540,868 and $107,000, respectively.
Commission Agreement
On February 1, 2000, the Company entered into a six month
commission agreement with Scott Martone, Inc. and Scott Temps
(Scott Martone), whereby, in addition to monetary remuneration,
Scott Martone also received 50,000 shares of the Company's
common stock at the signing of the agreement and 25,000 shares at
the end of every ninety days, from the date of the signing.
Pursuant to the contract, the agreement automatically renewed
July 31, 2000 for a term of one year.
Employees
During the year the Company issued 546,000 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, $371,220 ($1.025 per
share).
In accordance with the employment agreement between the Company
and one of their executives the Company issued 20,000 shares of
common stock during fiscal years ended July 31, 2000 and 1999.
Compensation expense was recorded at the average fair value of
the stock at the time of issuance, 13,600 (.68 per share) and
26,875 (1.34 per share) in 2000 and 1999, respectively.
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.
Conolog Corporation
Notes to the Consolidated Financial Statements
SALE - LEASEBACK TRANSACTION
During the year ended July 31, 1998, 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.
RECLASSIFICATION
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.
REPORTABLE SEGMENTS
The Company's operations are classified into two principal
reportable segments that provide different products or services.
Conolog Nologoc
Corporation Corporation
____________ _____________
Year Ended July 31, 2000
Sales $ 1,238,011 $ 4,373,121
Net Loss (1,836,241) (47,422)
Assets 5,705,361 951,264
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Year Ended July 31, 1999
Sales $ 1,072,256 $ 1,436,117
Net Loss (859,786) (183,133)
Assets 6,112,806 507,618
------------- ------------
SUBSEQUENT EVENT
Effective August 1, 2000, the Company acquired substantially all the
assets of Independent Computer Maintenance Corporation (ICM) for
$600,000. ICM provides installation, maintenance, and
troubleshooting of commercial and corporate computer systems and
networks. Under the agreement, Conolog will pay $400,000 cash and
issue 100,000 shares of common stock with additional shares of
common stock issuable if the price per share of the Company stock is
less than $2.00 on the first anniversary after the closing.
