SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
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, 1997 (No Fee Required)
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from to (No Fee Required)
Commission File Number: 0-8174
CONOLOG CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-0853566
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5 Columbia Road, Somerville, NJ 08876
(Address of principal executive office) (Zip code)
Issuer's telephone number, including area code: (908) 722-8081
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange in which
registered
Common Stock, $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 $2.812 on
December 16, 1997 was $7,918,946
The number of shares outstanding of the Registrant's common stock
outstanding as of December 17, 1997 was 2,816,126
DOCUMENTS INCORPORATED BY REFERENCE
FORM 10-K/A
JULY 31, 1997
Item 6. SELECTED FINANCIAL DATA
Year Ended
July 31,
(in thousands, except 1997 1996 1995 1994 1993
per share amounts)
Operations Summary:
Net sales and other $1,123 $1,924 $2,091 $2,045 $1,486
income
Net income (loss) (3,810) 292 (537) (1,183) (322)
Income (loss)
per share -primary (2.41) 0.28 (0.12) (0.27) (0.07)
Income (loss) from
continuing operations
after
giving retroactive
effect to a 1 for - - (12.36) (27.22) (7.41)
100 reverse stock
split on August
16, 1995
Balance Sheet
Summary:
Total assets $4,340 $3,928 $3,882 $3,739 $4,601
Long-term debt and
capitalized lease - $5 $34 $3,830 $3,733
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 Years Ended July 31
1997 1996 1995 1996 to 1995 to 1994 to
1997 1996 1995
100.0% 100.0% 100.0% Sales & (41.6)% (8.0)% 2.3%
other
income
84.2%* 67.2* 92.2* Cost of (27.9) (32.9) (4.2)
products
sold
182.9 49.2 43.8 Selling, (117.0) 3.4 7.4
general &
administrative
7.4 6.8 13.3 Interest (38.0) (51.8) (23.4)
274.4 123.2 149.3 Total costs 29.9 (23.0) (3.3)
& expenses
(174.4) (23.2) (49.3) Income (338.5) (56.5) (13.0)
(loss)
before
taxes
.9 - (23.5) Income 494.2 (100.0) -
taxes
(credits)
(175.3)% (23.2)% (25.8)% Loss before (339.0)% (16.5)% (13.0)%
extraordinary
item
* Includes write-offs for obsolete or excess inventory which were
$28,101, $50,281 and $656,248 in 1997, 1996,and 1995 respectively.
Results of Operations
1997 Compared to 1996
Total revenue decreased $801,076 or 42% from $1,924,466 to
$1,123,391 in 1997. This decrease was attributable to delays in
the release of tone protection orders from the Bonneville Power
Administration and other customers. The Company attributes these
delays to the budget constraints for various utilities and to the
pending release of the new advanced tone protection device,
the PTR-1500. The Company essentially completed the prototypes
during the first fiscal quarter ended October 31, 1997. The
Company plans to ship prototypes to GE during November 1997.
Gross Margins, inclusive of inventory adjustments for the
years ended July 31, 1997 and 1996 totaled $177,910 & $632,185
representing 15.8% and 32.9% of revenues. Gross margins for 1997
were lower than 1996 due to the lower utilization of the factory
in fiscal 1997 over 1996.
Selling, General and Administrative expenses increased from
$946,954 in 1996 to $2,054,630 in 1997 representing an increase
of 117%. This increase is the result of the Company issuing
359,500 shares of Common Stock to eight employees, incurring an
additional $1,313,750 in salary expense.
Interest expense totaled $82,932 for the year ended July 31,
1997 compared to $133,652 for the year ended July 31, 1996. This
decrease was a result of lower loan outstanding balances resulting
from the pay-down of the credit facility during the year.
As a result of the foregoing, the Company reported a net loss
before extraordinary item of $1,969,736 or $1.24 per share. This
compares to a net loss before extraordinary item of $443,622 or $.43
per share for the same period last year.
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 1995
and did not have a comparable sale for Fiscal 1996.
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
$916,016 in 1995 to $946,954 in 1996, representing an increase
of 3.4%. These expenses increased as a result of an expansion of
the employment base and an increase in advertising and promotion
costs.
Interest expense totaled $133,652 for the year ended July
31, 1996 as compared to $277,440 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
income of $291,754, 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 $537,290 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 $916,000
or 43.8% 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 $737,000
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 $277,440
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 $537,290 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 tele-
communication 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.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital at July 31, 1997 was $2,456,122 compared to
$1,806,318 at year ended July 31, 1996. The improvement in the
working cpaital is the result of a planned inventory increase of
$236,012. This is primarily attributed to the building of the
PTR-1500 tone protection device. The Company will be delivering
to the General Electric Company under contract prototype units
during Nobember 1997. Production units are expected to be
delivered during the second quarter of fiscal 1998.
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:
December 18, 1997 /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.
December 18, 1997
/s/Robert S. Benou
President, Chief Executive Officer
and Chairman of the Board
December 18, 1997 /s/Arpad J. Havasy
Executive Vice President, Secretary,
Treasurer and Director
December 18, 1997 /s/Marc R. Benou
Vice President, Assistant Secretary and Director
December 18, 1997 /s/Louis S. Massad
Director
Annual Report on Form 10-K/A
Item 8, Item 14 (a)(1) and (2)
Financial Statements
Year Ended July 31, 1997
Conolog Corporation
Somerville, New Jersey 08876
Form 10-K/A Item 14(a)(1) and (2)
Index to the Financial Statements
Conolog Corporation
July 31, 1997
The following financial statements of the registrant are included
in Item 14:
Balance Sheets - July 31, 1997 and 1996 .................... F-2
Statements of Income - Years Ended July 31, 1997,
1996 and 1995 ......................................... F-3
Statements of Stockholders' Equity (Deficiency) - Years
Ended July 31, 1997, 1996 and 1995 .................... F-4
Statements of Cash Flows - Years Ended July 31,
1997, 1996 and 1995 ................................... F-5
Notes to Financial Statements .............................. F-6-13
Independent Auditors' Report
Board of Directors
Conolog Corporation
We have audited the accompanying balance sheets of Conolog
Corporation as of July 31, 1997 and 1996 and the related
statements of operations, stockholders' equity (deficiency)
and cash flows for each of the three years in the period
ended July 31, 1997. 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, 1997 and 1996,
and the results of its operations and its cash flows for
each of the three years in the period ended July 31, 1997
in conformity with generally accepted accounting principles.
Bridgewater, New Jersey
October 13, 1997, Except as to
Notes 11, 12, 13 which are
dated December 11, 1997
* The financial statements have been restated due to imputed
interest on unpaid officer's salaries, the effect of
issuing Common Stock to certain employees and the addition
to Contributed Capital for dividends not paid on Preferred
Stock and the difference between negotiated and fair
value of Common Stock issued in exchange for bank debt.
(Notes 11, 12, 13). The primary loss per share was increased
due to these transactions by $1.99 in 1997 and $.33 in 1995.
F-1
Conolog Corporation
Balance Sheets
July 31,
1997 1996
--------- ---------
RESTATED
ASSETS --------
Current Assets
Cash $503,217 $178,213
Accounts Receivable - less
allowances of $6,000 and
$14,000 in 1997 and 1996,
respectively 109,571 304,020
Inventories
Finished Goods 1,705,782 1,494,289
Work-in-process 498,070 129,675
Materials and supplies 969,940 1,313,816
---------- ----------
3,173,792 2,937,780
Other Current Assets 44,085 43,517
Deferred offering costs 113,813 -
---------- ----------
3,944,478 3,463,530
Property, Plant and Equipment
Land and improvements 34,524 34,524
Building and improvements 663,630 659,477
Machinery and equipment 1,291,838 1,289,578
Furniture and Equipment 336,001 330,735
---------- ----------
2,325,993 2,314,314
less allowance for depreciation
and amortization 1,938,188 1,880,408
---------- ----------
387,805 433,906
Other Assets 7,469 30,398
---------- ----------
TOTAL ASSETS $4,339,752 $3,927,834
========== ==========
July 31,
1997 1996
-------- --------
LIABILITIES RESTATED
--------
Current Liabilities
Notes Payable - Bank $ - $ 1,012,500
Notes Payable - Other 916,235 -
Accounts Payable 188,510 280,629
Accrued Payroll 15,645 39,811
Accrued Interest 17,374 64,699
Bridge Loan 200,000 -
Other Accrued Expenses 146,791 115,723
Current Maturities of 3,802 33,282
capitalized lease obligations
--------- -----------
Total Current Liabilities $1,488,357 $1,546,644
Other Liabilities
Capitalized lease obligations,
less current maturities - 4,973
--------- ----------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock, par value $.50;
Series A; 4% cumulative;162,000
shares authorized; 155,000 shares
issued and outstanding 77,500 77,500
Preferred Stock, par value $.50;
Series B; $.90 cumulative;
50,000 shares authorized, issued
and outstanding 1,197 shares 597 597
Common Stock, par value $1.00;
20,000,000 shares authorized;
issued 2,803,473 shares in 1997
and 1,035,186 in 1996, including
8,776 shares held in Treasury 2,803,473 1,035,186
Contributed Capital 7,034,008 4,512,204
Retained Earnings (Deficit) (6,932,449) (3,117,536)
Treasury Shares at Cost (131,734) (131,734)
----------- -----------
Total Stockholders' Equity (Deficiency) 2,851,395 2,376,217
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
$4,339,752 $3,927,834
========== ==========
F-2
Conolog Corporation
Statements of Operations
RESTATED
--------
Year Ended July 31,
1997 1996 1995
---------- ---------- -----------
Sales and other income $ 1,123,390 $1,924,466 $ 2,090,933
Costs and Expenses:
Cost of Products sold 917,379 1,242,001 1,270,771
Selling, general and
administrative 2,054,630 946,954 916,016
Interest 82,932 133,652 277,440
Write-off obsolete or
excess inventories 28,101 50,281 656,248
--------- --------- ---------
3,083,042 2,372,888 3,120,475
Loss Before Income Taxes and
Extraordinary Items (1,959,652) (448,422) (1,029,542)
Income taxes (benefit) 10,084 200 (492,252)
--------- --------- ----------
Net Loss before Extraordinary
Items (1,969,736) (448,622) (537,290)
Extraordinary Items (1,841,000) 740,376 -
--------- --------- ---------
Net Income (Loss) $(3,810,736) $ 291,754 $(537,290)
=========== ========= ==========
Earnings Per Share:
(Loss)from Operations-Per Share $ (1.24) $ (.43) $ (12.36)
Income(Loss) after Extraordinary
Item - Per Share $ (2.41) $ .28 $ (12.36)
Net Income (Loss) Per Share
- Primary $ (2.41) $ .28 $ (12.36)
- Fully Diluted $ (2.41) $ .25 $ (12.36)
========== ========== ==========
See notes to the financial statements
F-3
Conolog Corporation
Statement of Stockholders' Equity (Deficiency)
RESTATED
--------
Series A Series B
Preferred Preferred Common Contributed
Stock Stock Stock Capital
Balance @ July 31,
1994 $ 77,500 $ 10,661 $ 52,239 $ 952,994
Prior Period Adjustment - - - -
Net loss for the year - - - -
Dividends - - - 500,719
-------- -------- --------- ---------
Balance @ July 31,
1995 77,500 10,661 52,239 1,453,773
Public Stock Offering - (10,064) 982,947 3,448,642
Net Income for the year - - - -
Dividends - - - (390,211)
-------- -------- --------- ---------
Balance @ July 31,
1996 77,500 597 1,035,186 4,512,204
Debt to Equity
conversion - - 1,408,787 1,563,377
Additional shares issued
to employees - - 359,500 954,250
Net loss for the year - - - -
Dividends - - - 4,177
--------- -------- --------- ---------
Balance @ July 31,
1997 $ 77,500 $ 597 $ 2,803,473 $7,034,008
Conolog Corporation
Statement of Stockholders' Equity (Deficiency)
RESTATED
--------
Total
Retained Stockholders
Earnings Treasury Equity
(Deficit) Stock (Deficiency)
Balance @ July 31,
1994 $ (2,383,794) $ (131,734) $ (1,422,134)
Prior Period Adjustment 18,949 - 18,949
Net loss for the year (537,290) - (537,290)
Dividends (500,779) - -
------------ ----------- -----------
Balance @ July 31,
1995 (3,402,914) (131,734) (1,940,475)
Public Stock Offering - - 4,421,525
Net Income for the year 291,754 - 291,754
Dividends (6,376) - (396,587)
------------ --------- -----------
Balance @ July 31,
1996 (3,117,536) (131,734) 2,376,217
Debt to Equity
conversion - - 2,972,164
Additional shares issued
to employees - - 1,313,750
Net loss for the year (3,810,736) - (3,810,736)
Dividends (4,177) - -
------------ --------- -----------
Balance @ July 31,
1997 $(6,932,449) $(131,734) $2,851,395
See Notes to Financial Statements
F-4
Conolog Corporation
Statements of Cash Flows
RESTATED
--------
Year Ended July 31,
1997 1996 1995
----------- ---------- ------------
Cash Flows From Operating Activities
Net Income (Loss) $(3,810,736) $ 291,754 $ (537,290)
Adjustments to Reconcile Net Income
to Net Cash Provided (Used) by
Operating Activities
Prior Period Adjustment - - 18,949
Common stock base compensation 1,313,750 - -
Debt Retirement Cost 1,841,000 - -
Deferred income taxes - 492,352 (492,352)
Depreciation and amortization 57,781 64,994 60,396
Gain on disposition of equipment - (3,420) -
Provision for losses on accounts
receivable (8,000) 9,000 -
(Increase) Decrease in Operating Assets
Accounts receivable 202,449 (141,479) 74,529
Inventories (236,012) (339,653) 392,058
Other current assets (568) (17,834) (3,394)
Increase (Decrease) in Operating Liabilities
Accounts payable (92,119) (7,001) 12,330
Accrued expenses and other liabilities 78,241 (1,066,379) 413,781
----------- ---------- ----------
Net Cash Used by Operating Activities
(654,214) (717,666) (60,993)
Cash Flows From Investing Activities
Purchase of property, plant and equipment
(11,680) (43,163) (19,625)
Proceeds from sale of equipment - 18,666 -
----------- ---------- --------
Net Cash Used in Investing Activities
(11,680) (24,497) (19,625)
Cash Flows From Financing Activities
Deferred offering costs (113,813) 86,154 (86,154)
Increase from public stock offering - 4,421,525 -
Proceeds from borrowings 916,235 - -
Increase (Decrease) in bridge loan 200,000 (200,000) 200,000
Repayments of long-term borrowings (34,453) (2,836,008) (38,681)
(Increase) reduction in other assets 22,929 (20,580) 325
Dividends paid - (396,587) -
Increase (Decrease) in due to officers - (161,705) 17,302
---------- ---------- --------
Net Cash Provided by Financing
Activities 990,898 892,799 92,792
---------- ---------- --------
Net Increase in Cash 325,004 150,636 12,174
Cash at Beginning of Period 178,213 27,577 15,403
---------- ---------- --------
Cash at End of Period $ 503,217 $ 178,213 $ 27,577
========== ========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest Paid $ 77,349 $ 772,773 $ 102,816
Taxes Paid $ 10,084 $ 125 $ 50
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Capitalized lease stock obligations incurred for use of
equipment $ - $ - $ 56,550
Additional common stock was issued upon conversion of
$1,131,164 of long-term debt and accrued interest payable
See notes to the financial statements
F-5
CONOLOG CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(1) 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 recognized when the products are shipped. Sales
under certain fixed-price-type contracts, where progress
payments are received, are recognized when work is performed,
under the percentage-of-completion method, in accordance with
Statement of Position 81.1, Accounting for Performance of
Construction Type and Certain Production-Type
contracts.
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 the Series
B Preferred Stock in 1997 and 1995 would be anti-dilutive.
F-6
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 different 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 disclosures 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.
(2) WRITE-OFF OF OBSOLETE OR EXCESS INVENTORIES
During 1997, the Company recorded a write-off of obsolete or
excess inventories of $28,101. During 1996 and 1995, the
Company recorded a write-off of obsolete or excess
inventories of $50,281 and $656,248, respectively.
This inventory write-off was military related. In
management's opinion these items will not be reordered in
the foreseeable future.
(3) NOTES PAYABLE - BANK
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 Notes 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 "Note Shares").
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.
F-7
Note 3 - Notes Payable -Bank (Continued)
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.
On January 31, 1997, the Bank and Conolog entered into
Amendment No. 1 to the Option and Purchase, Sale and
Assignment Agreement dated September 12, 1996. The amended
Option Agreement now provides that on or before February 5,
1997, CNL will purchase from the Bank for an aggregate
purchase price of $600,000 no less than (i) 133,333 shares
of Common Stock for $399,999, subject to the approval of IAR
Securities Corp. and (ii) $200,001 of the Debt Claim
represented by the note. CNL thereafter may exercise the
remainer of the option on or before April 15, 1997. In
addition, CNL may purchase from the Bank additional shares
of Common Stock owned by the Bank at the price o f $3.00 per
share and portions of the Debt Claim from time to time. On
February 3, 1997, CNL paid the Bank $600,000 consummating
the purchase of the above 200,000 shares. On January 31,
1997, $200,001 of the Debt to the Bank was adjusted
resulting in all accrued interest in the amount o f $106,298
being reduced and the remaining being applied to principal.
On March 26, 1997, CNL completed the exercise of the "Option
Agreement" with the Bank effectively eliminating all debts
and liens with the Bank.
F-8
(4) NOTES PAYABLE - OTHER
CNL Holdings, Inc. loaned the Company $916,235. The note
will be due during the fiscal year July 31, 1998 and shall bear
interest at the rate of 4% per annum. The loans are payable
in cash or Series C Preferred Stock at $5.00 per share to a
maximum of 40,000 shares per annum.
There is no relationship between CNL Holdings Inc. and the
Company except as specifically detailed above.
(5) BRIDGE LOAN
The Company received $200,000 in net proceeds from several
investors in a private placement. Each investor received
two Promissory Notes. The first Promissory Note is payable
on the earlier of January 31, 1999 or the closing of the
Company's next public offering; (the "First Note") and the
Second Note (the "Second Note"), plus accrued interest for
the First Note, is payable on the earlier of January 31,
1999 or the closing of the Company's next public offering,
or convertible at the option of the holder into Preferred
Stock Purchase Warrants to purchase shares of Series D
Preferred Stock, which are new Preferred Stock securities
contemplated to be offered in the next public offering.
At the time the next registration statement is declared
effective by the Securities and Exchange Commission, the
Bridge Loan holders may exercise their respective option to
convert the Second Note into Class A Warrants. The interest
rate for the First Note is eight percent (8%) per annum.
The Company has granted the lenders a security interest in
the property located at 5 Columbia Road, Somerville, NJ
(collateral).
(6) LEASES
The Company leases automobiles, machinery and equipment,
and office 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.
Property, plant and equipment include the following amounts
for leases that have been capitalized.
July 31,
1997 1996
Machinery and Equipment $ 303,574 $ 303,574
Less allowance for amortization 273,538 263,832
--------- ---------
$ 30,036 $ 39,742
========= ========
F-9
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, 1997.
1998
----
Total minimum lease payments $ 4,208
Less amounts representing interest 406
-------
Present value of net minimum lease payments 3,802
Less current maturities of capitalized
lease obligations 3,802
-------
Long-term capitalized lease obligations $ 0
The Company leases various equipment under noncancellable
operating leases expiring through July 2000. Future
minimum rental payments under the above leases are as
follows:
Year Ended July 31,
-------------------
1998 $ 4,808
1999 4,808
2000 4,808
-------
$14,424
=======
Total rental expense for all operating leases of the Company
amounted to approximately $7,659, $10,353, and $11,447 during
the years ended July 31, 1997, 1996 and 1995, respectively.
(7) CAPITAL STOCK
The Series A Preferred Stock provides 4% ($.02 per share)
cumulative dividends, which were $86,800 in arrears at July
31, 1997. 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 the payment of $1,200 per share.
The Company may redeem the Series A Preferred Stock at $.50
per share plus accrued and unpaid dividends.
The Series B Preferred Stock provides cumulative dividends
of $.90 per share which were $27,937 in arrears at July 31,
1997. In addition, each five shares of Series B Preferred
Stock is convertible into 1 share of Common Stock. The
Company may redeem the Series B Preferred Stock at $15 per
share plus accrued and unpaid dividends.
The Company has reserved 155,392 shares of Common Stock for
Series A and B Preferred Stock.
F-10
(8) 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.
The cost of debt retirement (See Note 13) of $1,841,000, which
occurred in 1997, is considered an extraordinary item with no
tax effect due to the non-deductability of this expense.
(9) INCOME TAXES
Income taxes are comprised of the following:
July 31
1997 1996 1995
Deferred Income Taxes (Benefit) $ - $ - $ (492,352)
Current Income Taxes
Federal 9,884 - -
State 200 200 100
--------- --------- ----------
$ 10,084 $ 200 $ (492,252)
======== ========= ===========
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, 1997 the Company has a net operating loss carry-
forward of approximately $3,966,750 for financial reporting
purposes and approximately $2,443,000 for tax purposes which
is available of offset future Federal taxable income. For
Federal purposes, $253,000 of the carryforward expires in
2008, $1,232,000 expires in 2009 and $957,000 expires in
2010. For state purposes the carryforward is approximately
$1,604,000, $706,000 expires in 2001 and $898,000 expires
in 2002. Also at July 31, 1995 the Company has unused tax
credits available of approximately $103,000 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 $1,329,286.
F-11
(10)MAJOR CUSTOMERS AND EXPORT SALES
The following summarized sales to major customers (each 10%
or more of net sales) by the Company.
Sales to
Major Number of Percentage
Year Ended Customers Customers of Total
---------- --------- --------- -----------
1997 $ 625,134 3 57
1996 401,840 1 21
1995 424,849 1 20
During 1997 the Company had no export sales. During 1996
the Company had export sales of $401,840 and none and 1995.
(11) ACCRUED PAYROLL
At July 31, 1995 the Company had Accrued Payroll to an officer in the amount
of $492,775. During the year ended July 31, 1996 this amount was paid down
by a cash payment of $150,000 and $309,109 which was converted into common
stock. The Company made an adjustment in the amount of $55,691 for discounted
payroll/imputed interest.
The amount was adjusted as follows:
Prior Period $ 47,183
7/31/95 8,508
--------
$ 55,691
========
On the above accrued payroll the Company made an adjustment for imputed
interest. The adjustment was as follows:
Prior Period $ 28,234
7/31/95 23,754
7/31/96 1,797
7/31/97 1,906
--------
$ 55,691
(12) COMMON STOCK ISSUED TO EMPLOYEES
At July 31, 1997 the Company issued 359,500 shares of common stock to
eight employees. Two employees sold 4,500 shares of common stock and
$18,000 was charged to salary expense. An adjustment was to record
compensation as employees did not pay for the stock. The fair value
of the stock used at that time was $1,295,750 ($3.65 per share). The
effect on income was an increase in the loss by $1,295,750 or $.80
per share, and a corresponding increase in net operating loss carry-
forward for financial reporting purposes.
F-12
(13) CONTRIBUTED CAPITAL
During the years additional capital was contributed through the accumulation
of unpaid dividends on Preferred Stock, Series A & B.
Dividends which were not paid were considered as contributed capital and
amounts to $114,745 through July 31, 1997.
In addition to the above, During the year ended July 31, 1997, the Bank
converted 1,400,000 shares of Common Stock it was holding using a value
negotiated between Conolog and the Bank. The difference between the fair
value and the negotiated value was $1.315 and was considered to be
contributed capital and an extraordinary expense called Debt Retirement
Cost (see Footnote, Extraordinary Item). The total value placed upon
this transaction was $1,841,000. (1,400,000 shares X $1.315). The effect
on primary loss per share was an increase of $1.16.
(14) SUBSEQUENT EVENTS
On September 12, 1997 the Company filed a Registration
Statement (S-1) with the Securities and Exchange Commission.
This statement covers the primary offering of securities by
the Company and the offering of other securities by certain
selling security holders. The Company is registering,
under the primary prospectus 805,000 Units, each consisting
of one (1) share of Common Stock and four (4) Class A
Warrants. The selling security holders are registering
under an alternate prospectus 1,200,000 Class A Warrants.
At July 31, 1997 all costs associated with this offering
were deferred. These costs will be deducted from the
proceeds from the sale of stock.
F-13
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 503,217
<SECURITIES> 0
<RECEIVABLES> 115,571
<ALLOWANCES> 6,000
<INVENTORY> 3,173,792
<CURRENT-ASSETS> 3,944,478
<PP&E> 2,325,993
<DEPRECIATION> 1,938,188
<TOTAL-ASSETS> 4,339,752
<CURRENT-LIABILITIES> 1,488,357
<BONDS> 0
0
78,097
<COMMON> 2,803,473
<OTHER-SE> (30,175)
<TOTAL-LIABILITY-AND-EQUITY> 4,339,752
<SALES> 1,123,390
<TOTAL-REVENUES> 1,123,390
<CGS> 917,379
<TOTAL-COSTS> 945,480
<OTHER-EXPENSES> 2,054,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,932
<INCOME-PRETAX> (1,959,652)
<INCOME-TAX> 10,084
<INCOME-CONTINUING> (1,969,736)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,841,000)
<CHANGES> 0
<NET-INCOME> (3,810,736)
<EPS-PRIMARY> (2.41)
<EPS-DILUTED> (2.41)
</TABLE>
