SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended July 31, 1996 ( 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
Units consisting of two shares of Common Stock and
one Redeemable Class A Warrant NASDAQ SmallCap Market
Common Stock, $1.00 par value NASDAQ SmallCap Market
Redeemable Class A Warrants NASDAQ SmallCap Market
Check whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to the Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates
of the Registrant based on the closing sale price of $3.125 on
October 23, 1996 was $ 1,544,612
The number of shares outstanding of the Registrant's common stock
outstanding
as of October 16, 1996 was 1,032,639
DOCUMENTS INCORPORATED BY REFERENCE
CONOLOG CORPORATION
FORM 10-K
JULY 31, 1996
TABLE OF CONTENTS
PART I
Item 1. BUSINESS
Item 2. PROPERTIES
Item 3. LEGAL PROCEEDINGS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Item 6. SELECTED FINANCIAL DATA
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
Item 14. EXHIBITS AND REPORTS
SIGNATURES
PART I
1. 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.
History
The Company was organized in 1968 and was engaged primarily
in the design and manufacture of electronic components and
systems for military applications.
The Company, in July 1971, merged with DSI Systems, Inc.,
then engaged in the development and manufacture of terminal
viewers for digital retrieval of microfilm. Later that year, the
name was changed from DSI Systems, Inc. to Conolog Corporation.
By 1980 it became apparent that the military segment of the
business was growing while the terminal viewer segment was a
drain on cash and other resources. By the year end the terminal
viewer business was discontinued and the inventory relating
thereto was written off, allowing the Company to concentrate on
its military business.
In 1981 the Company acquired one of its customers, INIVEN
Corporation ("INIVEN"). At that time, the Company was
manufacturing, on behalf of INIVEN, a line of transmitters and
receivers used for controlling and transceiving the measurement
of the flow of gases and liquids, by gas and water utilities,
for controlling the flow of waste water and sewage and measuring
and controlling traffic.
Since the 1980's, Conolog has been an active participant in
providing electromagnetic wave filters for major military
programs, such as the Patriot Missile, Hawk Missile and Sea
Sparrow Missile. In addition to these projects, Conolog
components are currently used by the military in tanks, the
Apache helicopters and the MK-50 torpedoes.
During 1987, the Company made the strategic decision to
redirect the Company's focus from military to commercial markets.
Since that time, the Company has refocused on manufacturing and
marketing its products for the commercial marketplace rather than
depend on the military and defense-related markets. The effort
has included the introduction of new products, the redesign of
existing products and increased advertising and marketing
efforts, as permitted by its limited financial resources. The
percentage of revenues attributed to products manufactured for
use in commercial applications increased from approximately 4% of
sales in 1981 ($171,000) to approximately 75% of sales in 1996
($1,443,000). 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, cogeneration 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 such utility and thereafter by other
utilities and municipalities. To date, the Company has sold and
delivered over 450 PTR-1000 sets to 14 utilities and 3
municipalities, most of which are installed and in service.
Following the PTR-1000, in 1993, the Company introduced its
"98 Series" Tone Products for water, gas, telephone and oil
companies, waste water, traffic control and airports. In 1994
the Company unveiled the Power Supply Series (allowing the
various utilities to power-up the equipment from any power
source), the "40 Series" for transmission of analog variable data
(water levels, gas pressures and temperature) and the Multiplexer
Series, which permits the transmission of up to 900 separate data
points, again using a telephone line, microwave link, or
satellite. In 1994 the Company also introduced the "68 Series"
tone products. This series is the "98 Series" repackaged
mechanically specifically for customers with older systems
wanting to upgrade to DSP technology without the expense of a
complete mechanical installation. The "68 Series" offers the
entire line offered by the "98 Series". In 1995, the Company
introduced a stand alone "98 Series" transmitter and receiver for
field installations and a wide range fiber optic interface for
the Iniven products. The fiber optic interface is also available
as a stand alone coupling device. In 1996, the Company launched
its industrial grade 1200 Baud Modem for data
transmission/communication.
Due to the end of the cold war and the downsizing of the
American military, the Company experienced unexpected sharp
reductions of military contracts in fiscal 1993 (the Company's
fiscal year ends on July 31) resulting in a 50% decline in the
Company's sales for that year, down to $1,486,298 from $2,997,308
in fiscal 1992. The sales of new products could not replace the
decrease in military sales. The Company, however, continued to
pursue sales as aggressively as its available resources would
permit. Sales in fiscal 1994 increased to $2,044,860, a 37%
increase over fiscal 1993. Sales in fiscal 1995 were $2,090,933
a 2% increase over fiscal 1994. Sales for the Fiscal year ended
July 31, 1996 were $1,924,466 as compared to $2,090,933 for the
year ended July 31, 1995. Revenues from the Company's military
product sales represented approximately 60%, 30% and 25% of sales
of the Company in fiscal 1994, 1995 and 1996, respectively,
reflecting the Company's emphasis on commercial sales and markets.
General Description
Products
The Company is engaged in the design and manufacture of (i)
transducers, which are electro-magnetic devices which convert
electrical energy into mechanical and other forms of physical
energy, or conversely convert mechanical and other forms of
physical energy into electrical energy; (ii) digital signal
processing (DSP) systems and electromagnetic wave filters for
differentiation among discreet audio and radio frequencies; (iii)
audio transmitters and modulators, for the transmission over
telephone lines, microwave circuits, or satellite, of electrical
signals obtained from transducers, data generated in electronic
code form or by computers or other similar equipment (not
manufactured by the Company); (iv) audio receivers and
demodulators which are small systems which receive and decode the
signals from the audio transmitters and convert them into digital
codes for input into computers, teletypes or other similar
equipment (not manufactured by the Company) or convert such
signals into mechanical or other form of energy, such as opening
or closing valves, or starting or stopping a motor; (v) magnetic
"networks" which are devices that permit the matching or coupling
of different types of communication equipment together or many
identical or similar equipment together or onto telephone or
other transmission lines so as not to cause interference; and
(vi) analog transmitters and receivers, which permit the
coding/transmission and receiving/decoding of a constantly
variable data, such as the water level in a tank, pressure in a
pipe or temperature, by actually displaying the exact information
at the receiving end in digital form for storing in a computer or
other devices, or by physically displaying the information in a
visual fashion such as a numerical readout or meter, and (VII)
multiplexer supervisory controls, which enable callers with high
volumes of supervisory data to transmit on fewer phone line.
Such products are used in radio and other transmissions,
telephones and telephone exchanges, air and traffic control,
automatic transmission of data for utilities, teleprinting 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 and focused in two basic
market areas:
(A) Military Sales - Direct contract sales to the
military
- As subcontractor to systems producers
- Foreign governments
(B) Commercial Sales (Under the tradename " INIVEN" (a
Division of Conolog))
- Direct sales to end users
- Sales to system assemblers
- Sales to contractors/installers
(C) Commercial Sales - As Manufacturing Subcontractor
to Systems Producers.
(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 repeat residual sales.
These residual 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-1000 Teleprotection Series
(Protective Tone Relaying Communications Terminal)
(2) Audio Tone & Telemetry Equipment
(Audio Tone Control, Telemetering and Data
Transmission Systems), which includes Series "98",
"68", "40" and "GEN-1".
(3) Multiplex Supervisory Control System
(4) Communication Link Multihead Fiber Optic Couplers
and Industrial Grade 1200 Baud Modems.
(1) PTR-1000 Teleprotection Series
This product is designed for use exclusively by electric
power generators (electric utilities and cogenerators) in order
to protect their transmission and distribution lines. The PTR-
1000, by monitoring the output signal of the transmission
equipment in less than one hundred of a second protects the
transmission and distribution lines.
The PTR-1000 are installed in pairs, one unit at each end of
the line. Each unit is connected and in constant communication
with the other, as they continuously monitor the line for faults.
In the event of a fault occurring (such as a downed line or a
short circuit) at either end and when confirmed by the receiving
PTR-1000 unit, the line is immediately isolated for shut down,
averting costly damage and downtime.
The PTR-1000 system is composed of a transmitter, dual
receivers, a logic card (brain center and controller of the
system), relay module, line interface module and power supply
module. The transmitters at each end are independent and
transmit (continuously) the status (information being monitored)
at their end of the line.
In the event of a fault, the information is transmitted to
the PTR-1000 at the other end of the line and once confirmed by
both its receivers (this duality is designed such that both
receivers must agree before any action is taken), it will, when
programmed to do so, isolate that end of the line. Generation and
distribution of electric power entails expensive equipment at
both ends of the line. Faults causing interruption of
transmission can cause costly replacement of failed equipment and
loss of revenue caused by downtime for repairs.
The PTR-1000 is designed for global use by electric
utilities and any entity generating power for its own consumption
with resale of surplus power to an electric utility, such as
cities, municipalities, cooperatives and large corporations that
find it more economical to generate their own electricity.
The PTR-1000 target market is worldwide, as follows:
New installations; i.e., new transmission lines, new
distribution segments, for utilities and cogenerators.
Existing installations not properly protected, improving
efficiency and down time.
Existing installations for upgrading to PTR-1000 technology,
again improving efficiency and down time.
Sales efforts for the PTR-1000 are presently being conducted
by the Company's marketing executives, through independent
manufacturers' representatives and through distributors. Sales
are targeted primarily to the largest utilities and co-
generators.
According to McGraw-Hill, Inc. Electrical World (Electric
Utilities of the United States), in the United States alone,
there are over 500 large entities generating electricity. They
are:
Investor-owned
Municipal Systems
Cooperative Systems
Federal, State and District systems.
To date , the Company has sold and delivered over 450 PTR-
1000 sets to 14 utilities and 3 municipalities, most of which
are installed and in service.
(2) Audio Tone and Telemetry Equipment
For many years there has been a need for a modularly
independent system that would permit a user, from a distance, to
control functions such as opening a valve, starting a motor,
shutting down a compressor, changing a traffic signal, control
landing lights at an airport, activate a hazard warning on a
highway, and in return allow the user to receive information,
such as the liquid level in a tank, the pressure in a pipe, the
rate of flow out of a compressor, the flow of traffic, the status
of a traffic light, airport lights, or confirmation that a
command was performed. Such information is transmitted and
received and the control functions are performed from a distance
utilizing telephone lines, microwave link or direct wire.
These applications, by their nature, can be accomplished
with slow speed signaling systems composed of a transmitter on
one end and a receiver on the other to carry out the necessary
instructions provided by the transmitter. Each set
(transmitter/receiver combination) is called a channel. Because
of the slow speed, up to 30 channels could be made to transmit
and receive signals, in either direction on a single telephone
line, microwave link or direct wired line at the same time. This
parallel transmission permits each transmitter/receiver pair to
be independent of all the others.
This product segment includes the first generation
equipment, known as GEN-1, followed by later generations which
include technological improvements and programmable capabilities
to include:
GEN-1 Series - First generation with electromagnetic modules and
first generation programmable modules without electromagnetic
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 20% 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 has recently
(first quarter 1994) started 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 persons 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
Public Offering
On August 16, 1995, the Company offered 235,750 Units (the
"Units") at a price of $10.00 per Unit. Each Unit consisted of
two (2) shares of Common Stock, par value $1.00 per share
("Common Stock"), and one (1) Redeemable Class A Warrant for
Common Stock ("Class A Warrant"). The Common Stock and Class A
Warrants were immediately detachable and separately tradeable.
Each Class A Warrant entitled the holder to purchase one share of
the Company's Common Stock, at an exercise price of $6.00,
subject to adjustment, from August 17, 1996 through August 16,
1998. The Class A Warrants are subject to redemption by the
Company at anytime after August 17, 1996 on not less than 30 days
notice at $.05 per warrant, provided the average closing price
of the Common Stock for 20 consecutive trading days ending within
15 days prior to the notice exceeds $7.20 per share.
The costs of the offering were deducted from the proceeds
from the sale of stock.
On August 16, 1995, the Company effected a 1- for - 100
reverse stock split of its Common Stock on all shares of Common
Stock outstanding.
On August 16, 1995, holders of 19,360 shares of the
Company's Series B Preferred Stock (including Robert Benou and
Arpad J. Havasy, officers and directors of the Company) converted
their shares of Series B Preferred Stock into 387,200 (3,872 post-
split) shares of Common Stock.
On August 16, 1995, $381,533 of the $420,179 of accrued
dividends on the Series B Preferred Stock at December 31, 1994
were converted into 76,307 shares of Common Stock (represents a
$5.00 per share assigned value of Common Stock) and the remaining
dividends due to such holders (including Messrs. Benou and
Havasy) were waived.
On August 16, 1995, accrued salaries through April 28, 1995
of $309,109 owed by the Company to Mr. Benou were converted into
61,822 shares of Common Stock (represents a $5.00 per share
assigned value of Common Stock).
On August 16, 1995, in connection with the August 1995
Offering, the Bank exchanged their existing loan agreement for
the following:
(a) $250,000 cash
(b) $1,025,000 five-year term loan
(c) 375,000 common shares of the Company
The debt forgiveness of $1,232,728 on restructuring of the
obligation less the tax benefit thereon is accounted for as an
extraordinary gain to the Company.
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 in participation in various trade
shows, such as the Utilities Communications Council and IEEE/PES.
The Company will continue to seek out and broaden its base of
manufacturer reps and other marketing strategies to strengthen its
market presence.
MARKETING AND SALES
Prior to 1987, the Company had focused its sales and marketing
efforts on the military, primarily as a subcontractor to systems
producers and foreign governments. As previously stated, this market
began to deteriorate during the 1970's and more rapidly during the
1980's, resulting in diminished sales and reduced prospects for the
Company. The Company made the strategic decision, in 1987, to
redirect the Company's focus and available resources from military
to commercial markets.
Since that time, the Company successfully refocused on manufacturing
and marketing its products for the commercial marketplace. The effort
has included the introduction of new commercial products, the redesign
of existing products and increased advertising and marketing efforts,
as permitted by its limited financial resources. This program also
entailed a major design effort, including the coordination of outside
engineering consultants to develop a line of products aimed at the
Company'starget markets. Initial emphasis remains on products for
electric utilities, which today represents the largest market.
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.
Commercial - The Company markets the PTR-1000 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
utilized a portion of the proceeds of the August 1995 Offering to
expand its sales efforts (including application engineering) and
expand sales to international markets. The Company markets it
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.
OTHER MARKETS: In addition to the INIVEN line, the Company continues
to sell a limited amount of military products, largely replacement
parts for radio and military guidance systems. The Company
participates in bids for replacement parts.
Military - The Company markets its military sales directly
and through independent manufacturers sales representatives.
Competition
The market for the Company's products is very competitive,
although the number of competitors is generally limited. 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 market for the Company's products are
subject to rapid change, and there can be no assurance that the
Company will be able to keep up with this rate of change, given the
greater resources of some of its competition. The Company believes
that the major competitive factors in the markets in which it
competes are technological change, price, functionality,
price/performance characteristics, quality, reliability and ongoing
service. Competition is expected to continue and the Company's
ability to compete successfully in its markets depends, in part, upon
its ability to react to change. The Company would be adversely
affected if its competitors introduced technologically superior
products or offered these products at significantly lower prices than
the Companys products.
Largest Customers
British Columbia Hydro and Power Authorty, Inc was the largest
customer for fiscal 1996, with $380,000 in sales, or 19.7% of total
revenue. Sales to the Company's major customer in fiscal 1995
(United States Government) totaled $424,849 (20% of net sales).
During fiscal 1994, sales to the Company's only major customer
(Westinghouse Electric Corp.-Naval Systems Division) totaled
$597,000 (29% of net sales). During fiscal 1993, sales to the
Company's single major customer (United States Government -
various agencies) totaled $688,146 (46% of net sales). During
fiscal 1992 sales to the Company's two major customers aggregated
$2,420,117 (81% of net sales), of which $768,139 (26% of net
sales) was to Westinghouse Electric Corp.-Naval Systems
Division, and $1,651,978 (55% of net sales) was to the United
States Government (various agencies). None of such customers has
or had any material relationship other than business with the
Company.
Raw Materials
Inventory
The Company believes that it has adequate sources of raw
materials available for use in its business. The Company s products
are assembled from a variety of standard electronic components, such
as integrated circuits, transformers, transistors, passive components
(i.e., resistors, capacitors and inductors), diodes and assorted
hardware such as printed circuit boards, connectors and faceplates.
The Company is not dependent upon any single supplier. The Company
also purchases a number of other electronic components and sub-
assemblies from various suppliers. There has been no material
increase in the cost of most raw materials and the Company has no
reason to anticipate any significant shortage of raw materials in the
future. The Company generally is required to maintain adequate
amounts of raw material and parts inventories to meet delivery
requirements of customers and to assure itself of a continuous
availability of these items.
Manufacturing
Of the Company s 15,700 square feet that it occupies at 5
Columbia Road in Somerville, NJ, approximately 10,000 square feet are
dedicated to manufacturing. The Company manufactures and assembles
the products it sells. All assemblies are inspected and 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. To accommodate peak demands the Company has
developed a number of subcontractors that assemble boards to the
Company s specifications.
The Company's manufacturing and test equipment is limited and
has been utilized for several years. If sales were to increase
substantially, the Company will be required either to invest in
additional manufacturing equipment or find alternative ways to
increase production.
Warranty and Service
The Company provides a twelve year warranty on its products
which covers both parts and labor. The Company, at its option,
repairs or replaces products that are 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
Amounts expended by the Company in the last three fiscal
years for research and development activities have not been
substancial although the Company is constantly engaged in product
design and development. The Company utilized a portion of the
net proceeds of the August 1995 Offering to design a fiber optic
digitizer and a 1200 baud modem which can be sold as a separate
product or jointly with the Company's products which will enable
all the Company's INIVEN products to transmit directly onto
fiber optic cables, and thus open a new market for the Company's
products. The Company is also using a portion of the August
1995 Offering proceeds to add designs to the PTR-1000 and other
products that will extend its product capability to handle
new data inputs not presently available. There can be no assurance
that the Company will be able to successfully develop and add
designs to its products.
Patents and Trademarks
The Company does not have any patents covering any of its
present products. The Company uses the trademark INIVEN for its
commercial products. The Company believes that such trademark is
recognized in the Company's industry. The Company believes that
its prospects are dependent primarily upon its ability to offer
its customers high quality, reliable products at competitive
prices rather than on its ability to obtain and defend patents
and trademarks. The Company does not believe that its INIVEN
trademark is of material importance to the Company's business.
Backlog
As of July 31, 1996, the Company had a backlog of $3,400,000.
It is anticipated that this backlog will be filled during the
balance of fiscal 1997 and the 1998 fiscal year ending
July 31, 1998. Approximately 75% of the Company's backlog relates
to government contracts and may be subject to cancellation under the
terms of such contracts. As of July 31, 1995 and 1994, the Company
had a backlog of approximately $1,300,000 and $1,500,000,
respectively.
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. During
1987, as a result of late deliveries, the Government canceled orders
aggregating $650,000.
Seasonality
The business of the Company is not seasonal, but is sensitive to
general economic factors, such as interest rates, availability of
credit for capital purchases, overall business climate and general
business outlooks that historically impact capital purchase
decisions.
Foreign Sales
During fiscal 1996 the company had approximatley $380,000 in
foreign sales to British Columbia Hydro Power Authority, Inc. In fiscal
1995 the Company had foreign sales of $140,000 to the Government of Israel.
In fiscal 1994, the Company did not have any foreign sales.
Employees
As of July 31, 1996, the Company employed 42 persons on a full-
time basis, including 2 in management, 3 in sales, 2 in clerical, 1
in accounting, 1 in purchasing, 3 in engineering and 30 in
production. The Company has enjoyed good labor relations. None of
the Company's employees are represented by a labor union or bound by
a collective bargaining agreement. The Company has never suffered a
work stoppage. The Company believes its future success will depend,
in part, on its continued ability to recruit and retain highly
skilled management, marketing and technical personnel.
Item 2. PROPERTIES
The Company owned facility, which management considers adequate
for the Company s present requirements, is located at 5 Columbia
Road, Somerville, NJ. This facility is used for manufacturing, sales
and its executive offices and comprises 15,700 square feet.
The facility is encumbered by a lien, along with the Company's
other assets, securing indebtedness incurred in connection with the
Credit Facility. The Bank has deferred all payments of principal and
interest under the Chase Manhattan Note until April 16, 1997. If the
Chase Manhattan Note is converted into 1,400,000 shares of Common
Stock, the lien on the Company facility will be released. See
"Credit Facility" below.
Credit Facility
Background
In October 25, 1994, the Company and Chase Manhattan Bank
(as successor by mergers with Manufacturers Hanover Trust Company
and Chemical Bank) (the "Bank") restructured the Company's credit
facility ("Credit Facility") between the Company and the Bank
that had been in effect since April 5, 1989.
Under the restructured terms the Credit Facility had been
extended as follows:
(i) Interest on the Credit Facility will accrue
but not be payable until July 31, 1995. Beginning
on that date, interest payments are to be made in
arrears on the last day of each month, with all
unpaid interest previously accrued becoming due and
payable on November 30, 1995.
(ii) All principal on the Credit Facility and
other amounts owing to the Bank will become due and
payable November 30, 1995.
The principal amount owing to the Bank at January 31, 1995
was $3,789,000 and the unpaid accrued interest was $584,728. The
interest rate on the Credit Facility is 3/4% above the Bank's
publicly announced reference rate, which was 9.75% at January 31,
1995.
To secure payment under the Credit Facility, the Company
granted the Bank a first priority lien on all accounts
receivable, inventory, equipment and general intangibles of the
Company and a lien on the Company's real property located at 5
Columbia Road, Somerville, New Jersey 08876.
Payment of liabilities of the Company to the Bank under the
Credit Facility was guaranteed by Robert S. Benou, President of
Company, to the extent of $965,000 and Arpad J. Havasy, Executive
Vice President of the Company, to the extent of $492,500, and
each had pledged all of his Common Stock and Series B Preferred
Stock to the Bank to secure their respective guarantees.
The Credit Facility contains various negative covenants,
including (a) limitations on indebtedness, (b) limitations on
liens, (c) limitations on contingent obligations, (d) limitations
on capital expenditures, (e) prohibition against mergers,
consolidations, liquidation or dissolution, sale or lease of all
or a substantial part of its property, business or assets, (f)
limitations on dividends and stock acquisitions, (g) limitations
on investments, loans and advances, (h) prohibition of certain
prepayments, (i) limitations on leases, (j) prohibition of sale
and leaseback arrangements and (k) prohibition against
subordinated debts.
Terms in Connection with August 1995 Offering
In connection with the August 1995 Offering, the Bank and
the Company agreed to restructure the Credit Facility as follows:
In connection with the August 1995 Offering, the Bank
received from the proceeds of such offering a cash payment of
$250,000 (the "Cash Amount"). The remaining debt, after giving
effect to the payment to the Cash Amount was restructured as
follows: (1) $1,025,000 was structured as a five-year term loan
(the "Term Loan") bearing interest at the Bank's Reference Rate
plus 125 basis points, to be amortized over 10 years; $50,000 per
year for the first two years, $100,000 per year in the third and
fourth years and $112,500 in the fifth year. After the fifth
year, the balance of the payments will be renegotiated at the
Bank's option; and secured by the existing collateral; and (2)
All debt owing to the Bank in excess of the Cash Amount and the
Term Loan was converted into 375,000 shares of Common Stock of
the Company (the "Bank Shares").
The Bank Shares have full voting rights and carry certain
antidilution protection with respect to any reduction in the
exercise price of the Class A Warrants. The Bank Shares carry
piggyback registration rights which provide that upon any
subsequent offering of new registered shares (a "Subsequent
Offering"), the Company must include in such registration a
portion of Bank Shares equaling the lesser of 100% and the New
Share Percentage. The New Share Percentage shall be a fraction,
the numerator of which is the total number of new registered
shares to be offered (excluding any of the Bank Shares to be
registered thereunder) and the denominator of which is the total
number of common shares of the Company issued and outstanding
(including the Bank Shares) immediately prior to the Subsequent
Offering. The Bank may at any time sell all or a portion of the
Bank Shares in one or more private transactions, and may in
addition, demand up to two registrations of any or all of the
Bank Shares at any time after July 31, 1997.
In addition, the Bank agreed to release the existing
guarantees of Messrs. Benou and Havasy on the effective date of
the August 1995 Public Offering. Finally, pursuant to the
restructured Credit Facility the Bank was granted the right to
appoint a member to the Company's Board of Directors. See
" Chase Manhattan Bank's Right To Appoint Director".
New Terms of Credit Facility and Agreement with the Selling
Securityholder
The principal amount owing to the Bank under the Company's
Credit Facility at June 30, 1996 was $1,012,500 and the unpaid
accrued interest was $48,850. The Bank and the Company have
entered into the Conolog Corporation Allonge, dated as of
September 11, 1996, pursuant to which the Amended and Restated
Term Note dated as of August 2, 1995 between the Company and the
Bank (the "Note") was amended to permit the conversion by the
Bank of the unpaid principal and interest due under the Note into
1,400,000 shares of the Company's Common Stock. The conversion
right may be exercised by the Bank or its assignee. The Bank has
deferred all payments of principal and interest under the Note
until April 16, 1997.
The Bank and CNL Holdings, Inc. ("CNL or the "Selling
Securityholder") have entered into an Option and Purchase, Sale
and Assignment Agreement dated as of September 12, 1996 (the
"Option Agreement"). Under the Option Agreement the Bank has
granted an option to CNL to purchase all of the Bank's interest
in (i) the Amended and Restated Term Loan Agreement dated as of
August 2, 1995 between the Company and the Bank, (ii) the Note
and (iii) the 375,000 shares of the Company's Common Stock owned
by the Bank. CNL paid $150,000 to the Bank for the option, which
has an exercise price of $1,500,000 (a balance of $1,350,000) and
an expiration date of April 15, 1997.
The Company and CNL have entered into an agreement dated as
of September 12, 1996 (the "Agreement"), whereby CNL has agreed
to loan up to $2,500,000 to the Company under certain
circumstances (as described below) and the Company has agreed to
file a registration statement (the "Registration Statement") with
the Securities and Exchange Commission to register the 375,000
shares of Common Stock owned by the Bank and the 1, 400,000
shares of Common Stock into which the Note is convertible
(collectively, the "Acquired Shares").
The proceeds of the sale of the Acquired Shares will be
applied as follows: the first $1,500,000 will be paid to CNL
for the payments made to the Bank pursuant to the Option
Agreement; 50% of the balance, up to $2,500,000, will be loaned
to the Company (the "Loans") within five days of CNL's receipt of
the proceeds.
Each loan will be evidenced by a Note bearing interest at
the rate of 4% per annum and will be due 12 months from the date
of such Loan. At maturity, the Company will have the option to
pay each Loan, together with all accrued interest thereon, by
issuing shares of a new Series C Preferred Stock (the "Series C
Preferred") having a value of $5.00 per share for purposes of
such repayment.
The Series C Preferred will be non-voting and carry a
cumulative dividend of 8% per annum which may be payable by the
issuance of shares of Common Stock valued at $5.00 per share up
to a maximum of 40,000 shares per annum. The Series C Preferred
will be convertible into common stock at the rate of one share of
common stock for each share of Series C Preferred and have a
liquidating preference of $5.00 per share.
The Agreement also provides that for the two year period
commencing on the issuance of any shares of Series C Preferred
(the "Registration Period") CNL may elect to include its Series C
Preferred in any post-effective amendment to the Registration
Statement or any new registration statement under the Securities
Act of 1933, as amended. In addition, the Agreement also
provides that during the Registration Period, CNL may give notice
to the Company to the effect that it desires to register its
shares under the Act for public distribution in which case the
Company will file a post-effective amendment to a then current
registration statement or a new registration statement.
Management believes that the foregoing transactions benefit
the Company and its stockholders. In the event CNL exercises its
option under the Option Agreement, exercises the conversion right
under the Agreement and the offering of the Acquired Shares is
successful, the Company has the opportunity to, in effect,
exchange its debt for Preferred Stock and eliminate the
Company's default under the Credit Facility.
Item 3. LEGAL PROCEEDINGS
The Company is not subject to any material pending legal
proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
See Prospectus filed in connection with a stock offering
completed on August 1995.
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 bid and asked quotations of the
Common Stock, based upon information supplied by the
National Quotation Bureau for the years 1993, 1994, 1995 and
the first two quarters of 1996. Such quotations represent
inter-dealer prices, without retail markups, markdowns or
commissions and may not necessarily represent actual
transactions. The Company effected a 1-for-100 reverse
stock split on August 16, 1995. As of October 9, 1996, the
Company's Common Stock was held by approximately 843
shareholders of record.
Bid Asked
High Low High Low
1993
First Quarter .08 .05 .25 .14
Second Quarter .08 .05 .50 .14
Third Quarter .08 .04 .50 .14
Fourth Quarter .08 .04 .15 .14
1994
First Quarter .05 .04 .15 .14
Second Quarter .05 .03 .15 .125
Third Quarter .05 .001 .15 .06
Fourth Quarter .015 .001 .10 .05
1995
First Quarter .02 .01 .10 .05
Second Quarter .04 .01 .15 .05
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 the third and fourth of 1995
and the first three quarters of 1996:
Units Common Stock Warrants
1995 High Low High Low High Low
Third
Quarter 18.5 14 8.50 5.75 4 2
Fourth 19.25 14.75 9.25 6.25 3.25 1.25
Quarter
1996
First 15 11 8.125 3.875 2 .9375
Quarter
Second 11.25 11.25 6.5625 4.25 1. 1.0156
Quarter
Third __ ___ 6.25 2.25 1.5 .50
Quarter
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 nor does the Company anticipate that 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 the
Common Stock in the future will be dependent upon the Company's
earnings, financial condition, capital requirements and other
factors which the Board of Directors deems relevant. Until such
time as the Credit Facility is paid in full, the Company is
restricted from issuing any dividends on its capital stock.
Item 6. SELECTED FINANCIAL DATA
Year Ended
July 31,
(in thousands, except 1996 1995 1994 1993 1992
per share amounts)
Operations Summary:
Net sales and other $1,924 $2,091 $2,045 $1,486 $2,997
income
Net income (loss)
from 294 (522) (1,183) (322) 72
continuing operations
Income (loss) from
continuing operations
per 0.28 (0.12) (0.27) (0.07) (0.16)
share
Income (loss) from
continuing operations
after
giving retroactive
effect to a 1 for (12.01) (27.22) (7.41) 1.60
100 reverse stock
split on August
16, 1995
Balance Sheet
Summary:
Total assets $3,928 $3,882 $3,739 $4,601 $4,586
Long-term debt and
capitalized lease $5 $34 $3,830 $3,733 $2,655
obligations
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Results of Operations
In order to summarize the Company's operating results for
the past three years, the following tables indicate the
percentage relationships of income and expense items in the
statements of income and the percentage changes in those items
for such years.
Income & Expense Items as Income & Percentage
a Percentage Of Revenues Expense Items Increase/Decrease
From Operations
For The Four Years Ended July 31
1996 1995 1994 1996 to 1994 to 1993 to
1995 1995 1994
100.0% 100.0% 100.0% Sales & (8.0%) 2.3% 37.5%
other
income
67.2%* 92.2* 98.4* Cost of (32.9) (4.2) 203.6
products
sold
49.2 44.2 41.7 Selling, 2.4 8.4 6.0
general &
administrat
ive
6.8 12.1 17.7 Interest (48.0) (30.0) 7.8
123.2 148.5 157.8 Total costs (23.6) (3.8) 78.8
& expenses
(23.2) (48.5) (57.8) Income (56.0) (14.3) (269.8)
(loss)
before
taxes
- (23.5) - Income 100.0 (100.0) (96.4)
taxes
(credits)
(23.2)% (25.0)% (57.8)% Loss before (14.4)% (55.9)% (267.4)%
extraordinary
item
* Includes write-offs for obsolete or excess inventories which were
$944,970, $656,248 and $50,281 for 1994, 1995 and 1996, respectively.
Results of Operations
1996 Compared To 1995
Revenues for the year ended July 31, 1996 decreased to
$1,924,466 from $2,090,933 for the twelve months of the prior
year, representing a decrease of 8.0%. Revenues declined as a
result of a decline in sales in the military sector. The Company
completed a large sale of switches to the military in Fiscal 1996
and did not have a comparable sale for Fiscal 1995.
Gross margins for the year totaled $632,184 and $163,194,
respectively, representing 32.9 % and 7.8%, respectively, of
revenues. Gross margins were higher in 1996 due to the obsolete
inventory write-off in 1995. Without the inventory write-off the
1996 and 1995 gross margin would have been 35,5% and 39.3%,
respectively. The gross margin for 1996 was lower than 1995
without the inventory write-off due to the fact that higher
than normal discounts were offered and taken on two major sales.
Selling, general and administrative expenses increased from
$924,524 in 1995 to $946,954 in 1996, representing an increase
of 2.4%. These expenses increased as a result of an expansion
of the employment base and an increase in advertising and
promotion costs.
Interest expense totaled $134,854 for the year ended July
31, 1996 as compared to $253,686 in interest expense for the year
ended July 31, 1995. The Company reached a debt restructuring
agreement with the Bank during 1995 that resulted in having no
interest expense for the quarter ended April 30, 1996.
As a result of the foregoing, the Company reported a net
loss of $293,552, or $.28 per share. The 1996 net profit was inclusive
of a debt compromise of $740,376, net of a tax benefit of
$492,352. This compares to a net loss of $522,044 or $.12 per
share for the same period last year (after retroactive effect to
a 1 for 100 reverse split on August 16, 1995 and after
extraordinary item in 1996).
As of July 31, 1996 the Registrant's backlog of orders was
approximately $3.4 million, representing a mix of military and
commercial telecommunication products. The Company anticipates
its commercial shipments to grow as a percentage of total sales
for the foreseeable future.
1995 Compared To 1994
Total revenue increased $46,000, or 2.3%, from $2,045,000 in
1994 to $2,091,000 in 1995. The increase was attributable to an
expansion in the commercial sector of the Company's business,
which contributed $1,422,000 or 68% to total revenues in 1995,
compared to $1,300,000 or 64% of total revenues in 1994.
Costs of sales totaled $1,271,000 for the year ended July
31, 1995 as compared to $1,068,000 for the comparable period
ended July 31, 1994, representing 60.8% and 52.2% of net
revenues, respectively. Cost of sales increased as a result of
product mix during the comparable years.
A charge of $656,000 for inventory write-off was recorded
during the year. This amount was exclusively due to certain
inventories purchased for military programs in prior periods that
were phased out. There was a comparable charge of $945,000 in
fiscal 1994.
The Company determined during the first quarter of 1995 that
there was not sufficient information from the Government's
Defense-Electronic Supply Center ("DESC") facility to permit the
Company to make a quantitative determination of future sales.
Inventory which totaled $656,000 was written off after management
made an analysis of parts maintained for military and government
orders compared to available inventories. This amount consisted
of $318,000 for raw materials, $249,000 for work in progress and
$89,000 for finished goods. There were comparable charges of
$945,000 in the twelve month period ended April 30, 1994. This
analysis consisted of a study of the forecasted requisitions of
upcoming orders of the DESC, Conolog's principal defense
customer. On examination of prospective sales, it was determined
that the government had no requirements for Conolog's military
products for at least the next twelve to eighteen months.
As a result of the foregoing, gross profit margins totaled
$163,914 or 7.8% of sales for the fiscal year ended July 31, 1995
as compared to $32,330 or 1.6% of sales for the same twelve month
period in 1994. Exclusive of inventory adjustments, gross profit
margins would have been 39% for the year ended July 31, 1995 and
48% for the year ended July 31, 1994.
Selling, General and Administrative Expense totaled $925,000
or 44.2% of revenues, as compared to $ 853,000 or 41.7% of
revenues for the comparable period last year.
As a result of the foregoing, an operating loss of $761,000
was realized for the year ended July 31, 1995 as compared to an
operating loss of $821,000 for the same period last year.
Interest expense for the twelve months totaled $254,000
compared to $362,000 for the fiscal year ended July 31, 1994. The
Bank had agreed to fix the total interest owed as of January 31,
1995 and to keep the amount unchanged through August 16, 1995.
Accordingly, no interest expense was accrued from February 1,
1995 through July 31, 1995.
As a result of the foregoing, the Company incurred a net
loss of $522,000 for the twelve months ended July 31, 1995,
compared to a net loss of $1,183,000 for the same period last
year. The loss in 1995 was reduced by the income tax benefit
derived from previously incurred operating losses not deducted.
The losses, as a result of the Registration, will be deductible
against forgiveness of indebtedness income.
As of July 31, 1995 the Company's backlog totaled $1.3
million, consisting of a mix of military and commercial
telecommunication products, compared to $1.5 million at July 31,
1994. The Company anticipates its commercial shipments to
continue to grow as a percentage of total sales in the
foreseeable future.
1994 Compared to 1993
Sales and other income increased $558,500, or 37.5% from
1993. The increase was due to the concentration of marketing to
non-government customers, which began several years ago.
Government sales in fiscal 1994, as well as in fiscal 1993 were
approximately $700,000 per year. In fiscal 1992 and earlier,
government sales exceeded $2,000,000 per year.
During the quarters ended October 31, 1993, January 31, 1994
and April 30, 1994 not all government requisitions for
procurements had been posted at the government's Defense
Electronics Supply Center ( DESC ) facility in Dayton, Ohio.
Until all requisitions for future procurements were listed, the
Company could not determine which items would be phased out or
not procured at all.
Based upon the open requisitions by DESC, during the last
quarter of the fiscal year, it was demonstrated that a much
reduced future for potential business existed. Based on the
reduced potential quantities, the Company wrote off a
commensurate percentage of its related military inventory, which
amounted to $944,970. In addition, the Company wrote off any
parts that had not been required for products for 4 years and for
which no orders had been received in the past 2 years and no
orders anticipated in the coming year. On this basis, the
Company determined that the utility of these parts was zero.
It has been the experience of the Company that when no
orders are received for a product for a period of 2 years, none
were received in the third or subsequent years. The same is true
for any parts that had not been called for production for 4
years. General parts are interchangeable and unless they are
earmarked for a specific job, a 4 year life is considered normal.
Costs of products sold is a distorted figure, 98.4%, since
approximately $945,000 of old inventory was written off. Had
this write-off not occurred, the cost of sales would have been
52.2%. Although this percentage was greater than normal, the
lack of available cash hampered management's ability to buy
product at more favorable prices. Inventory was written off in
the last quarter of the fiscal year after an analysis was made of
parts in the stockroom that were at least four years old and for
which no orders had been received in the past two years.
Selling, general and administrative costs increased $48,000
from 1993, or 6%, due primarily to increased salaries.
Interest expense increased by $26,000, or 7.6%, due to an
increase in rates. Approximately $483,000 of interest to the
Bank has been accrued but unpaid. Under the new restructured
loan agreement, that interest was to be paid off beginning July
1995.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 1996 was $1,914,981 compared to
a deficit of $2,229,171 at year ended July 31, 1995. The
improvement in the working capital is the result of the August
1995 Offering, as described in more detail under Results of
Operations.
The Company is technically in default of its bank loan to
the Bank due to non-payment of principal and interest since
January 1996. However, the Bank has agreed to defer any payments
at this time since they have signed an Allonge Agreement with the
Company in September 1996 (see below). The total debt is on the
balance sheet as current as of July 31, 1996. Interest has been
accrued through July 31, 1996.
Accounts receivable have increased from $171,541 at year-end
July 31, 1995 to $304,020 at July 31, 1996. This increase has
been caused by slower payment procedures by certain Government
agencies, a smaller discount policy currently offered to
customers of normal sales and sales having been made to several
customers for export with acceptance at destination, which
historically extends the collection period.
Management feels that it has leased or acquired
sufficient equipment to meet its capital expenditure needs
for the next year. Obligations under capital leases which
are presently in effect are approximately $34,000 for the
year and somewhat less thereafter. Historically, the
Company has always leased equipment. Its annual lease
obligations have ranged from $59,000 in 1993 to its present
figure of $34,000. The Company's liquidity and working
capital have been effected by these obligations and will
continue to be so since the operation is dependent upon the
use of this equipment.
For the past year, the Company's marketing emphasis has
been directed to the electric utility industry since its
Iniven line produces a variety of products used by them.
Most of the products offered must be tested for quality,
endurance, etc. for a period of time by the potential
customer. Management is of the opinion that much of the
testing will be completed in the coming year and sales will
be forthcoming from the results of these tests.
Accordingly, it is anticipated that sales and profits will
be higher in the next twelve months as compared to the past
twelve months.
New Terms of Credit Facility and Agreement with the
Selling Securityholder
The principal amount owing to the Bank under the
Company's Credit Facility at July 30, 1996 was $1,012,500
and the unpaid accrued interest was $52,988. The Bank and
the Company have entered into the Conolog Corporation
Allonge, dated as of September 11, 1996, pursuant to which
the Amended and Restated Term Note dated as of August 2,
1995 between the Company and the Bank (the "Note") was
amended to permit the conversion by the Bank of the unpaid
principal and interest due under the Note into 1,400,000
shares of the Company's Common Stock on or before April 16,
1997. The conversion right may be exercised by the Bank or
its assignee. The Bank has deferred all payments of
principal and interest under the Note until April 16, 1997.
The Bank and CNL Holdings, Inc. ("CNL or the "Selling
Securityholder") have entered into an Option and Purchase,
Sale and Assignment Agreement dated as of September 12, 1996
(the "Option Agreement"). Under the Option Agreement the
Bank has granted an option to CNL to purchase all of the
Bank's interest in (i) the Amended and Restated Term Loan
Agreement dated as of August 2, 1995 between the Company and
the Bank, (ii) the Note and (iii) the 375,000 shares of the
Company's Common Stock owned by the Bank. CNL paid $150,000
to the Bank for the option, which has an exercise price of
$1,500,000 (a balance of $1,350,000) and an expiration date
of April 15, 1997.
The Company and CNL have entered into an agreement
dated as of September 12, 1996 (the "Agreement"), whereby
CNL has agreed to loan up to $2,500,000 to the Company under
certain circumstances (as described below) and the Company
has agreed to file a registration statement (the
"Registration Statement") with the Securities and Exchange
Commission to register the 375,000 shares of Common Stock
owned by the Bank and the 1,400,000 shares of Common Stock
into which the Note is convertible (collectively, the
"Acquired Shares").
The proceeds of the sale of the Acquired Shares will be
applied as follows: the first $1,500,000 will be paid to
CNL for the payments made to the Bank pursuant to the Option
Agreement; 50% of the balance, up to $2,500,000, will be
loaned to the Company (the "Loans") within five days of
CNL's receipt of the proceeds.
Each loan will be evidenced by a Note bearing interest
at the rate of 4% per annum and will be due 12 months from
the date of such Loan. At maturity, the Company will have
the option to pay each Loan, together with all accrued
interest thereon, by issuing shares of a new Series C
Preferred Stock (the "Series C Preferred") having a value of
$5.00 per share for purposes of such repayment.
The Series C Preferred will be non-voting and carry a
cumulative dividend of 8% per annum which may be payable by
the issuance of shares of Common Stock valued at $5.00 per
share up to a maximum of 40,000 shares per annum. The
Series C Preferred will be convertible into common stock at
the rate of one share of common stock for each share of
Series C Preferred and have a liquidating preference of
$5.00 per share.
The Agreement also provides that for the two year
period commencing on the issuance of any shares of Series C
Preferred (the "Registration Period") CNL may elect to
include its Series C Preferred in any post-effective
amendment to the Registration Statement or any new
registration statement under the Securities Act of 1933, as
amended. In addition, the Agreement also provides that
during the Registration Period, CNL may give notice to the
Company to the effect that it desires to register its shares
under the Act for public distribution in which case the
Company will file a post-effective amendment to a then
current registration statement or a new registration
statement.
Management believes that the foregoing transactions
benefit the Company and its stockholders. In the event CNL
exercises its option under the Option Agreement, exercises
the conversion right under the Agreement and the offering of
the Acquired Shares is successful, the Company has the
opportunity to, in effect, exchange its debt for Preferred
Stock and eliminate the Company's default under the Credit
Facility.
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-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding
the officers and directors of the Company as of July 31, 1996.
NAME AGE POSITION
Robert S. Benou 62 President and Director
Arpad J. Havasy 60 Executive Vice President,
Secretary, Treasurer and
Director
Louis S. Massad 59 Director
Marc R. Benou 29 Vice President, Assistant
Secretary and Director
Thomas Fogg 61 Vice President-Engineering
Al Vnencak 49 Vice President-Sales and
Marketing
Robert S. Benou has served as President and a Director of
the Company since 1968. Mr. Benou is responsible for military
products, new product development and supervision of sales and
marketing. Mr. Benou is a graduate of Victoria College and holds
a BS degree from Kingston College, England and a BSEE from Newark
College of Engineering, in addition to industrial management
courses at Newark College of Engineering. Robert S. Benou is
the father of Marc R. Benou.
Arpad J. Havasy has served as the Company's Executive Vice
President and Director since 1968. Mr. Havasy is a graduate of
Electromos E's Gepeszeti Technikum (Hungary) and the University
of Budapest. In addition, Mr. Havasy has attended courses at
both Rutgers University and the American Management Association.
Mr. Havasy is on total disability.
Louis S. Massad has been a Director of the Company since
April 1995. Mr. Massad has been Vice President, Chief Financial
Officer and Director of Computer Power Inc. since 1986. Mr.
Massad holds a BS and MS degree from Cairo University (Egypt) and
an MBA from Long Island University, New York.
Marc R. Benou joined the Company in 1991 and is responsible
for material, purchasing and inventory control. In March 1995,
he was elected Vice President, Assistant Secretary and a Director
. Mr. Benou attended Lehigh and High Point University and holds
a BS degree in Psychology and a BS in Business Administration and
Management. Marc R. Benou is the son of Robert S. Benou, the
Company's President.
Thomas R. Fogg joined the Company in 1976 as Chief Engineer
responsible for analog and guidance projects. Since 1986, when
he became Vice President-Engineering, he led the design team in
the development of the Company's commercial products. Mr. Fogg
holds a BSEE degree from Lafayette College and a MSEE degree from
Rutgers University. Mr. Fogg is a fellow of the Institute of
Electrical and Electronic Engineers and has published articles on
delay equalization and the use of crystal resonators.
Al Vnencak joined the Company in 1991 and is responsible for
Iniven product sales and marketing. In October 1995 he was
elected Vice President of Sales and Marketing. Mr. Vnencak
received his electronics training while in the US Navy with the
7th Fleet and was awarded a meritorious service medal for his
activities. Prior to joining the Company Mr. Vnencak was system
engineering manager and director of international sales for 21
years with RFL Industries, Inc.
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 deliquent or untimely filers during the fiscal
year.
Item 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth the cash compensation
(consisting entirely of salary) paid (or accrued for) by the
Company to its President, the only executive officer whose
aggregate remuneration exceeded $100,000 in each of the
three Company's fiscal years ended July 31, 1996, 1995 and 1994:
Summary Compensation Table
Annual Compensation Long Term Compensation
Name and Other Annual
Principal Fiscal Compensation
Posititon Year-End Salary Bonus Awards Payouts
1996 $150,000
Robert
Benou,
President 1995 $150,000
1994 $170,000
_________________
The Company did not grant any stock options or stock
appreciation rights during the fiscal year ended July 31, 1996 to
any of its officers, directors or employees. As of July 31, 1996
none of them had any outstanding stock options or stock
appreciation rights. Furthermore, none of them received awards
under long-term incentive plans that are stock based during the
three fiscal years referred to above. However, these and other
benefits may be adopted in the future if they are authorized by
the Board of Directors.
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
optionees, 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 exerciseable 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.
No incentive stock options or non-qualified options have
been granted.
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 Percentage of Outstanding Shares (1)
Beneficial Owner Beneficial Ownership Before Offering After Offering (6)
Robert S. Benou (2) 1,904,614 (2) 78.3% (3) 5.3% (3)
Arpad J. Havasy (2) 33,397 3.2% 1.4
Chase Manhattan Bank(4) 1,775,000 72.9 -
270 Park Avenue
New York, NY 10017
CNL Holdings, Inc.(5) 1,775,000 72.9 -
750 Lexington Ave.
New York, NY 10022
Marc R. Benou (2) -
Louis Massad (2) -
Thomas Fogg (2) 200 * *
All Directors and Officers
as a Group (5 persons) 1,938,211 (3) 81.5%(3) 6.7%
(1) Does not include treasury stock. See "Financial
Statements". Does not include possible issuance of (i)
1,135,750 shares of Common stock issuable upon exercise of
1,135,750 Class A Warrants, (ii) 41,000 shares of Common
Stock issuable upon exercise of a Unit Purchase Option
issued to the Public Offering Underwriter and (iii) 20,500
shares of Common Stock issuable upon exercise of Class A
Warrants contained in such Unit Purchase Option.
(2) The address for these individuals is c/o Conolog
Corporation, 5 Columbia Road, Somerville, New Jersey 08876.
(3) This amount includes 1,775,000 shares which CNL Holdings,
Inc. (the "Selling Securityholder") has the option to purchase
from the Chase Manhattan Bank (the "Bank") of which 375,000
shares are presently owned by the Bank and 1,400,000 shares
may be acquired by conversion of the Chase Manhattan Note. Mr.
Benou has the sole power to vote in the event the Selling
Securityholder exercises its option to purchase the shares of
Common Stock and execises the conversion rights of the Chase
Manhattan Note. See "Business - Credit Facility - New Terms of
Credit Facility and Agreement with the Selling Securityholder."
(4) See "Business - Credit Facility." This amount includes
conversion of the Chase Manhattan Note into 1,400,000 shares of
Common Stock.
(5) Includes 375,000 shares presently owned by Chase Manhattan
Bank and 1,400,000 shares of Common Stock issuable upon
conversion of the Chase Manhattan Note, all of which are subject
to an option to purchase by CNL Holdings, Inc., the Selling
Securityholder. See "Business - Credit Facility" and "Selling
Securityholder and Plan of Distribution."
(6) Assumes the sale of 1,775,000 shares of Common Stock by the
Selling Securityholder.
* Less than 1%
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Chase Manhattan Bank's Right to Appoint Director
Under the terms of the Credit Facility, the Bank has the
right, for a period of three years through August 16, 1998, to
nominate one person to serve on the Company's Board of Directors,
and upon such nomination the Board shall take the action
necessary to cause the Bank's nominee to be elected to the Board.
If the Bank does not exercise this right, it may appoint an
advisor, who will be entitled to attend all meeting of the Board
of Directors. To date, the Bank has not exercised either right.
See "Business - Credit Facility".
CERTAIN TRANSACTIONS
On August 16, 1995, the Company effected a 1-for-100 reverse
stock split of its Common Stock on all shares of Common Stock
outstanding as of that date.
On August 16, 1995, holders of 19,360 shares of the
Company's Series B Preferred Stock (Robert Benou and Arpad J.
Havasy, officers and directors of the Company) converted their
shares of Series B Preferred Stock into 387,200 shares of Common
Stock (3,872 post-split shares).
On August 16, 1995, $381,533 of the $420,179 of accrued
dividends on the Series B Preferred Stock at December 31, 1994
were converted into 76,306 shares of Common Stock and the
remaining dividends due to such holders (Messrs. Benou and
Havasy) were waived.
As of April 30, 1995, Messrs. Benou and Havasy have advanced
$139,196 to the Company for working capital purposes. No formal
repayment plan or interest charges have been established at this
time. In addition, the officers have not been paid their
salaries since August 1, 1992.
On August 16, 1995, accrued salaries of $309,109 owed by the
Company to Mr. Benou were converted into 61,822 shares of Common
Stock
Payment of the Company's liabilities to the Bank under the
Credit Facility were guaranteed by Mr. Benou to the extent of
$965,000 and Mr. Havasy to the extent of $492,000. Their
respective guarantees were secured by a pledge to the Bank of all
Common Stock and Series B Preferred Stock owned by each of them.
As a result of the August 1995 Offering, the Bank released the
guarantees.
Article Eighth of the Company's Certificate of Incorporation
provides that the Company shall, to the full extent permitted by
Section 145 of the Delaware General Corporation Law, as amended
from time to time, indemnify all persons whom it may indemnify
pursuant thereto.
Section 145 of the General Corporation Law of the State of
Delaware authorizes a corporation to provide indemnification to a
director, officer, employee or agent of the corporation,
including attorneys' fees, judgments, fines and amounts paid in
settlement, actually and reasonably incurred by him in connection
with such action, suit or proceeding, if such party acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful as determined in
accordance with the statute, and except that with respect to any
action which results in a judgment against the person and in
favor of the corporation the corporation may not indemnify unless
a court determines that the person is fairly and reasonably
entitled to the indemnification.
Section 145 further provides that indemnification shall be
provided if the party in question is successful on the merits.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. If a
claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a
director, officer or controlling person in connection with the
securities being registered) the Company will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Company has adopted a policy that transactions with
affiliated entities or persons will be on terms no less favorable
than could be obtained from unrelated parties and that all
transactions between the Company and its officers, directors,
principal shareholders and affiliates will be approved by a
majority of the Company's Board of Directors.
;
PART IV
Item 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)Financial Statements
Balance Sheets as of July 31, 1996 and 1995 F-2
Statements of Income for the years ended July 31, 1996 and 1995
F-3
Statements of Stockholders' Equity ( Deficiency )for the years
ended July 31,1996 ,1995 and 1994 F-4
Statements of Cash Flows for the years ended July 31, 1995 and
1994 F-5
Notes to Financial Statements F-6
Index of Exhibits
Item 16. Exhibits.
Exhibit No.Description of Exhibit
1(a)* Form of Underwriting Agreement
1(b)* Form of Selected Dealer Agreement
1(c)* Form of Agreement Among
Underwriters
3(a) Certificate of Incorporation -
incorporated by reference to the Registrant's
Exhibit 3.01 to Registration Statement on Form S-1
(File No. 2-31302).
(b) Certificate of Amendment of
Certificate of Incorporation - incorporated by
reference to Exhibit 3.02 to the Registrant's
Registration Statement on Form S-1 (File No. 2-
31302).
(c) Certificate of Amendment of
Certificate of Incorporation incorporated by
reference to Exhibit 4 to the Registrant's Current
Report on Form 8-K for July 1971.
(d) Certificate of Ownership and
Merger with respect to the merger of Data Sciences
(Maryland) into the Registrant and the change of
Registrant's name from "Data Sciences Incorporated"
to "DSI Systems, Inc." - incorporated by reference
to Exhibit 3.03(a) to the Registrant's Registration
Statement on Form S-1 (File No. 2-31302).
(e) Certificate of the
Designation, Preferences and Relative,
Participating, Option or Other Special Rights and
Qualifications, Limitations or Restrictions thereof
of the Series A Preferred Stock (par value $.50) of
DSI Systems, Inc. - incorporated by reference to
Exhibit 3.04 to the Registrant's Registration
Statement on Form S-1 (File No. 2-31302).
(f) Certificate of the
Designation, Preferences and Relative,
Participating, Option or Other Special Rights and
Qualifications, Limitations or Restrictions thereof
of the Series B Preferred Stock (par value $.50) of
DSI Systems, Inc. - incorporated by reference to
Exhibit 1 to the Registrant's Current Report on Form
8-K for November 1972.
(g) Certificate of Ownership and
Merger respecting merger of Conolog Corporation into
the Registrant and the changing of the Registrant's
name from "DSI Systems, Inc." to "Conolog
Corporation" - incorporated by reference to Exhibit
3 to the Registrant's Current Report on Form 8-K for
June 1975.
(h) Amended By-Laws - incorporated
by reference to Exhibit 3(h) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
July 31, 1981.
4(a)* Specimen Certificate for shares of Common Stock
(b)* Specimen Certificate for Class A Warrant
(c)* Form of Warrant Agreement
(d)* Form of Representative's Unit Purchase Option
(e)* Form of Financial Consulting Agreement
5.** Opinion of Bernstein & Wasserma on legality of securities
being registered.
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.
* Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (33-92424).
** To be filed by Amendment.
*** Incorporated by reference to the Registrant's Registration
Statement file on Form S-1 (File No 0-8174) as filed on October
16, 1996
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Conolog Corporation
By:
October 24, 1996 /s/ Robert S. Benou
President, Chief Executive
Officer and
Chairman of the Board
In accordance with the Exchange Act, this report has been signed
below by the following persons, on behalf of the registrant and
in the capacities and on the dates indicated.
October 24, 1996
/s/Robert S. Benou
President, Chief Executive
Officer
and Chairman of the Board
October 24, 1996 /s/Arpad J. Havasy
Executive Vice President,
Secretary,
Treasurer and Director
October 24, 1996 /s/Marc R. Benou
Vice President,Assistant
Secretary and Director
October 24, 1996 /s/Louis S. Massad
Director
_______________________________
Conolog Corporation
Financial Statements
July 31, 1996
Annual Report on Form 10-K
Item 8, Item 14 (a)(1) and (2)
Financial Statements
Year Ended July 31, 1996
Conolog Corporation
Somerville, New Jersey
Form 10-K - Item 14 (a) (1) and (2)
Index to the Financial Statements
Conolog Corporation
July 31, 1996
The following financial statements of the registrant are included
in Item 14:
Balance Sheets - July 31, 1996 and 1995 F-2
Statements of Income -Years Ended July 31, 1996,
1995 and 1994 F-3
Statements of Stockholders' Equity (Deficiency) -Years
Ended July 31, 1996, 1995 and 1994 F-4
Statements of Cash Flows -Years Ended
July 31, 1996, 1995 and 1994 F-5
Notes to Financial Statements F-6-10
Independent Auditors' Report
Board of Directors
Conolog Corporation
We have audited the accompanying balance sheets of
Conolog Corporation at July 31, 1996 and 1995, and the
related statements of income, stockholders' equity
(deficiency) and cash flows for each of the three years
in the period ended July 31, 1996. These financial
statements are the responsibility of the Company's
management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of Conolog Corporation at July 31,
1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period
ended July 31, 1996 in conformity with generally accepted
accounting principles.
Bridgewater, New Jersey
October 8, 1996
Conolog Corporation
Balance Sheets
July 31,
1996 1995
Assets
Current Assets
Cash $ 178,213 $ 27,577
Accounts receivable - less allowances of 304,020 171,541
$14,000 and $10,000 in 1996 and 1995,
respectively
Inventories:
Finished goods 1,494,289 529,812
Work-in-process 129,675 831,410
Materials and supplies 1,313,816 1,236,905
2,937,780 2,598,127
43,517 25,683
Other current assets
Deferred tax asset - 492,352
Deferred offering costs - 86,154
3,463,530 3,401,434
Property, plant and equipment
Land and improvements 34,524 34,524
Building and improvements 659,477 651,977
Machinery and equipment 1,289,578 1,298,844
Furniture and fixtures 330,735 304,472
2,314,314 2,289,817
Less allowance for depreciation and 1,880,408 1,820,922
amortization
433,906 468,895
Other assets 30,398 11,906
Total Assets $ 3,927,834 $ 3,882,235
July 31,
1996 1995
Liabilities
Current liabilities
Note payable - bank $ 1,012,500 $ 3,798,000
Accounts payable 280,629 287,630
Accrued payroll 41,716 499,761
Accrued interest 64,699 654,618
Bridge loan - 200,000
Other accrued expenses 115,723 135,936
Current maturities of capitalized lease 33,282 54,660
obligations
Total current liabilities 1,548,549 5,630,605
Other liabilities
Capitalized lease obligations, less 4,973 34,103
current maturities
Due to officers - 161,705
4,973 195,808
Stockholders' equity (deficiency)
Preferred stock, par value $.50; series A; 77,500 77,500
4% cumulative; 162,000 shares authorized;
155,000 shares issued and outstanding
Preferred stock, par value $.50; series B; 597 10,661
$.90 cumulative; 50,000 shares authorized;
issued and outstanding 1,167 shares in 1996
and 21,321 in 1995
Common stock, par value $1.00; 6,000,000 1,035,186 52,239
shares authorized; issued 1,035,186 shares
in 1996 and 52,239 in 1995, including 8,776
shares held in treasury
Additional paid-In capital 4,401,636 952,994
Retained earnings (deficit) (3,008,873) (2,905,838)
Treasury shares at cost (131,734) (131,734)
Total stockholders' equity (deficiency) 2,374,312 (1,944,178)
Total liabilities and stockholders'equity $ 3,927,834 $ 3,882,235
Conolog Corporation
Statements of Income
Year Ended July 31,
1996 1995 1994
Sales and other income $ 1,924,466 $ 2,090,933 $ 2,044,860
Costs and expenses:
Cost of products sold 1,242,001 1,270,771 1,067,560
Selling, general and 946,954 924,524 852,951
administrative
Interest 131,854 253,686 362,317
Write-off of obsolete or 50,281 656,248 944,970
excess inventories
2,371,090 3,105,229 3,227,798
Loss before income taxes and (446,624) (1,014,296) (1,182,938)
xtraordinary items
Income taxes (benefit) 200 (492,252) 50
Net loss before extraordinary (446,824) (522,044) (1,182,988)
items
Extraordinary item 740,376 - -
Net income (loss) $ 293,552 $ (522,044) $(1,182,988)
Earnings (loss) per share of $ .28 $ (.12) $ (.27)
common stock
<TABLE>
<CAPTION>
Conolog Corporation
Statement of Stockholders' Equity (Deficiency)
<S> <C> <C> <C> <C> <C> <C> <C>
Series A Series B Common Additional Retained Treasury Total
Preferred Preferred Stock Paid-in Earnings Stock Stockholders'
Stock Stock Capital (Deficit) Equity
(Deficiency)
Balance at $77,500 $10,661 $52,239 $952,994 $(1,200,806) $(131,734) $(239,146)
July 31, 1993
Net loss for - - - - (1,182,988) - (1,182,988)
the year
Balance at 77,500 10,661 52,239 952,994 (2,383,794) (131,734) (1,422,134)
July 31, 1994
Net loss for - - - - (522,044) - (522,044)
the year
Balance at 77,500 10,661 52,239 952,994 (2,905,838) (131,734) (1,944,178)
July 31, 1995
Public stock - (10,064) 982,947 3,448,642 (396,587) - 4,024,938
offering
Net income for - - - - 293,552 - 293,552
the year
Balance at $77,500 $ 597 $1,035,186 $4,401,636 $(3,008,873) $(131,734) $2,374,312
July 31, 1996
</TABLE>
Conolog Corporation
Statements of Cash Flows
Year Ended July 31,
1996 1995 1994
Cash Flows From Operating Activities
Net Income (Loss) $ 293,552 $(522,044) $(1,182,988)
Adjustments to Reconcile Net
Income to Net Cash Provided
(Used) by Operating Activities
Deferred income taxes 492,352 (492,352) -
Depreciation and amortization 64,994 60,396 57,529
Gain on disposition of equipment (3,420) - -
Provision for losses on accounts 9,000 - (28,561)
receivables
(Increase) decrease in operating
assets
Accounts receivable (141,479) 74,529 (58,051)
Inventories (339,653) 392,058 874,989
Other current assets (17,834) (3,394) 22,555
Increase (decrease) in operating
liabilities
Accounts payable (7,001) 12,330 38,459
Accrued expenses and other (1,068,177) 417,484 398,239
liabilities
Net cash provided (used) by (717,666) (60,993) 122,171
operating activities
Cash Flows From Investing Activities
Purchase of property, plant and (43,163) (19,625) (44,675)
equipment
Proceeds from sale of equipment 18,666 - -
Net cash used in investing (24,497) (19,625) (44,675)
Activities
Cash flows from financing activities
Deferred offering costs 86,154 (86,154) -
Increase from public stock offering 4,421,525 - -
Proceeds from long-term borrowings - - 75,000
Increase (decrease) in bridge loan (200,000) 200,000 -
Repayments of long-term borrowings (2,836,008) (38,681) (53,098)
(Increase) reductions in other (20,580) 325 20,672
assets
Dividends paid (396,587) - -
Increase (decrease) in due to (161,705) 17,302 (137,333)
officers
Net cash provided (used) by 892,799 92,792 (94,759)
financing activities
Net increase (decrease) in cash 150,636 12,174 (17,263)
Cash at beginning of period 27,577 15,403 32,666
Cash at end of period $ 178,213 $ 27,577 $ 15,403
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest paid $ 772,773 $102,816 $ 90,917
Taxes paid $ 125 $ 50 $ 50
SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Capitalized lease obligations $ - $ 56,550 $ -
incurred for use of equipment
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The principal business activity of Conolog Corporation (the
"Company") is the design, manufacturing and distribution of small
electronic and electromagnetic components and subassemblies for
use in telephone, radio and microwave transmission 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.
Revenue Recognition
Sales are generally recognized when the products are shipped.
Sales under certain fixed-price-type contracts, where progress
payments are received, are recognized when work is performed.
Inventories
Inventories are stated principally at average cost which is not
in excess of 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.
Income (Loss) Per Share of Common Stock
Income (loss) per share of common stock is computed by dividing
net earnings (loss) (after dividends on preferred shares) by the
weighted average number of shares of Common Stock outstanding
during the year. The effect of assuming the exchange of the
Series A Preferred Stock and Series B Preferred Stock in 1996
would be anti-dilutive.
Income Taxes
Deferred income taxes have been provided for in accordance with
Statement No. 109 of the Financial Accounting Standards Board.
Deferred income taxes arise from timing differences resulting
from income and expense items reported for financial accounting
and tax purposes in difference periods. Deferred taxes are
classified as current or noncurrent, depending on the
classification of the assets and liabilities to which they
related. Deferred taxes arising from timing differences that are
not related to an asset or liability are classified as current or
noncurrent depending on the periods in which the timing
differences are expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTES PAYABLE - BANK
On August 16, 1995, the Bank exchanged debt obligations for (a)
250,000 cash; (b) $1,205,000 Five-year term loan and (c) 375,000
shares of Common Stock.
The five-year term loan of $1,025,000 bears interest at the Bank's
refinance rate, plus 1 1/4% to be amortized as follows:
- eight (8) quarterly payments of $12,500, beginning October
1995 through July 1997,
- eight (8) quarterly payments of $25,000, beginning October
1997 through July 1999,
- three (3) quarterly payments of $28,125, beginning October
1999 and ending April 2000,
- a balloon payment of $640,625, due July 2000.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As a result of the above transaction, the Company realized a
$1,232,728 gain on debt compromise. In addition, the Bank released
the existing guarantees of Messrs. Benou and Havasy on the Closing
Date.
At July 31, 1996, the Company was in default with the bank. The
company is negotiating the total bank debt to equity. (See
Subsequent Events Note.)
DUE TO OFFICERS
Effective July 31, 1995 interest has been accrued from inception on
these advances at the cumulative rate of 12% of the outstanding
balances. Total accrued interest on these advances, included in
accrued interest in the accompanying financial statements, is
$7,563 and $65,889 for the years ended at July 31, 1996 and 1995.
CAPITAL STOCK
The Series A Preferred Stock provides 4% ($.02 per share)
cumulative dividends, which were $83,700 ($.54 per share) in
arrears at July 31, 1996. 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 $12.00 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 $426,860 ($366 per share) in arrears at July
31, 1996. In addition, each share of Series B Preferred Stock is
convertible into 392 shares of Common Stock. The Company may
redeem the Series B Preferred Stock at $15 per share plus accrued
and unpaid dividends.
The Company has reserved 155,392 shares of Common Stock for Series
A and B Preferred Stock.
WRITE-OFF OF OBSOLETE OR EXCESS INVENTORIES
During 1996, the Company recorded a write-off of obsolete or excess
inventories of $50,281. During 1995 and 1994, the Company recorded
a write-off of obsolete or excess inventories of $656,248 and
$944,970, respectively.
The inventory written off was military related. In management's
opinion these items will not be reordered in the foreseeable
future.
INCOME TAXES
Income taxes are comprised of the following:
July 31,
1996 1995 1994
Deferred Income Taxes (Benefit) $ - $(492,352) $ -
Current Income Taxes
Federal - - -
State 200 100 50
$ 200 $(492,252) $ 50
Taxable income differs from financial statement income due to the
effect of non-deductible permanent tax differences. These
permanent tax differences include officer's life insurance premiums
and non-deductible entertainment expenses.
At July 31, 1996 the Company has a net operating loss carryforward
of approximately $2,968,000 for financial reporting purposes and
approximately $3,025,000 for tax purposes which is available to
offset future Federal taxable income. For Federal purposes,
$490,000 of the carryforward expires in 2003, $346,000 expires in
2008, $1,232,000 expires in 2009 and $957,000 expires in 2010.
For state purposes the carryforward is approximately $2,187,000;
$57,000 expires in 2000, $1,232,000 expires in 2001 and $898,000
expires in 2002. Also, at July 31, 1995 the Company has unused
tax credits available of approximately $103,300 of which $12,100
expires in 2000, $26,300 in 2001 and $64,900 in 2002.
The above net operating loss created deferred tax asset that has
been fully reserved. The amount is $1,185,209.
EXTRAORDINARY ITEM
On August 16, 1995 the Company's Bank debt was restructured
resulting in debt forgiveness of $1,232,728. This created a
deferred tax asset at July 31, 1995 of $492,352. When the debt
forgiveness occurred, the Company wrote off its deferred tax asset
against the forgiveness of debt, resulting in extraordinary income
of $740,376.
LEASES
The Company leases automobiles, machinery and equipment, and
furniture and fixtures under leases which expire over the next
three years. The rental payments are based on minimum rentals and
charges for mileage in excess of specified amounts for the
automobiles. The leases for machinery and equipment and furniture
and fixtures contain a bargain purchase option exercisable after
the initial lease term.
LEASES (CONTINUED)
Property, plant and equipment include the following amounts for
leases that have been capitalized:
July 31,
1996 1995
Machinery and equipment $ 303,574 $ 322,239
Less allowance for amortization 263,832 248,013
$ 39,742 $ 74,226
Lease amortization is included in depreciation expense.
Future minimum payments, by year and in the aggregate, under
capital leases consisted of the following as of July 31, 1996:
1997 $ 33,719
1998 5,050
Total minimum lease payments 38,769
Less amounts representing interest (514)
Present value of net minimum lease payments 38,255
Less, current maturities of capitalized lease 33,282
obligations
Long-term capitalized lease obligations $ 4,973
The Company leases various equipment under noncancellable operating
leases expiring through July 2000. Future minimum rental payments
under the above leases are follows:
Year Ended July 31,
1997 $ 7,659
1998 4,808
1999 4,808
$ 17,275
Total rental expense for all operating leases of the Company
amounted to approximately $10,353, $11,447 and $16,850 during the
years ended July 31, 1996, 1995 and 1994, respectively.
MAJOR CUSTOMERS AND EXPORT SALES
The following summarizes sales to major customers (each 10% or more
of net sales) by the Company:
Year Ended Sales to Number of Percentage
Major Customers of
Customers Total
1996 $ 401,840 1 21
1995 424,849 1 20
1994 597,000 1 29
During 1996 the Company had export sales of $401,840. In 1995 and
1994 the Company did not have any export sales.
SUBSEQUENT EVENTS
On September 11, 1996, the Company entered into an allonge
agreement with the bank whereby the bank may at any time before
April 15, 1997 convert the then unpaid amount of principal and
interest due under the Amended and Restated Term Note dated as of
August 2, 1995 in the original principal amount of $1,025,000 into
1,400,000 shares of the Company's Common Stock (the "Notes
Shares"). The outstanding balance of the note and unpaid interest
as of August 26, 1996 was $1,077,988.
On September 12, 1996 the bank entered into an option and purchase,
sale and assignment agreement (the "Option Agreement") with CNL
Holdings, Inc. (CNL) whereby the bank would sell the Note Shares
referred to above, along with the 375,000 common shares of the
Company it currently owns (the "Bank Shares") for $1,500,000 to
CNL.
On September 12, 1996 CNL entered into an agreement with the
Company whereby the Company would use its best
efforts to file a Registration Statement with the
Securities and Exchange Commission covering the
375,000 Bank Shares and the 1,400,000 Note Shares
(collectively the "Acquired Shares"). Such
Registration Statement shall be declared effective
as soon as possible after the filing thereof, and
kept current and effective for a period of two
years or until such time as all shares registered
pursuant therewith have been sold or otherwise
transferred. The proceeds of the sale of the
Acquired Shares shall be applied as follows: The
first $1,500,000 shall be paid to reimburse CNL
for payments made to the bank pursuant to the
Option Agreement. Fifty percent of the balance of
the proceeds, not to exceed $2,500,000, shall be
loaned to the Company by CNL. The balance of the
proceeds belong to CNL. The amounts loaned by CNL
to the Company shall be evidenced by notes which
shall be due twelve months after making such loan
and shall bear interest at the rate of 4% per
annum. At maturity of the loans, the Company will
have the option to repay the loan balance and
accrued interest by issuing a new Series C
Preferred Stock (the "Preferred Stock") valued at
$5.00 per share. The Preferred Stock will be non-
voting and will carry a cumulative dividend of 8%
per annum, which may be payable by the issuance of
shares of common stock valued at $5.00 per share
up to a maximum of 40,000 shares per annum.
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] JUL-31-1996
[PERIOD-END] JUL-31-1996
[CASH] 178,213
[SECURITIES] 0
[RECEIVABLES] 314,020
[ALLOWANCES] 10,000
[INVENTORY] 2,937,780
[CURRENT-ASSETS] 3,463,530
[PP&E] 2,314,314
[DEPRECIATION] 1,880,408
[TOTAL-ASSETS] 3,927,834
[CURRENT-LIABILITIES] 1,548,549
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 78,097
[COMMON] 5,436,822
[OTHER-SE] (3,008,873)
[TOTAL-LIABILITY-AND-EQUITY] 3,927,834
[SALES] 1,924,466
[TOTAL-REVENUES] 1,924,466
[CGS] 1,242,001
[TOTAL-COSTS] 1,292,282
[OTHER-EXPENSES] 946,954
[LOSS-PROVISION] 50,281
[INTEREST-EXPENSE] 131,854
[INCOME-PRETAX] (446,624)
[INCOME-TAX] 200
[INCOME-CONTINUING] (446,824)
[DISCONTINUED] 0
[EXTRAORDINARY] 740,376
[CHANGES] 0
[NET-INCOME] 293,552
[EPS-PRIMARY] .28
[EPS-DILUTED] .28
</TABLE>
