Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number ___________0-8174________
Conolog Corporation
(Exact name of registrant as specified in its charter)
Delaware 52-0853566
(State or other jurisdiction of (I. R. S. Employer
organization) Identification No.)
5 Columbia Road, Somerville, NJ 08876
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (908) 722-8081
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such report(s), and (2) has
been subject to such filing requirement for the past 90 days.
YES X NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PROCEEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15 (d) of the
Securities Exchange Act of 1934 subsequently to the distribution of
securities under a plan confirmed by a court.
YES ______ NO ________
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, par value $1.00 per share; 2,816,126 shares outstanding as
of October 31, 1997 (inclusive or Treasury Stock).
Conolog Corporation
BALANCE SHEETS
Oct 31, 1997 July 31, 1997
ASSETS (Unaudited) (Audited)
Current Assets:
Cash $ 178,395 $ 503,217
Accounts Receivable, less
allowances of $6,000 48,929 109,571
Inventories 3,300,045 3,173,792
Other Current Assets 23,127 44,085
Deferred Offering Costs 139,492 113,813
------------ -----------
TOTAL CURRENT ASSETS $ 3,689,988 $ 3,944,478
Property, Plant and Equipment 373,516 387,805
less accumulated depreciation
of $1,952,477 and $1,938,188
respectively
Other Assets 7,469 7,469
------------ ----------
TOTAL ASSETS $ 4,070,973 $ 4,339,752
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Notes Payable - Other $ 916,235 $ 916,235
Accounts Payable 113,037 188,510
Accrued Payroll 19,467 15,645
Accrued Interest 30,682 17,374
Bridge Loan 200,000 200,000
Other Accrued Expenses 110,351 146,791
Current maturities of
capitalized lease 3,003 3,802
obligations
----------- -----------
TOTAL CURRENT LIABILITIES $ 1,392,775 $ 1,488,357
------------ -----------
CONOLOG CORPORATION
BALANCE SHEETS
Oct. 31, 1997 July 31, 1997
Stockholders' Equity
Preferred Stock, par value $.50;
Series A; 4% cumulative; 162,000
shares authorized;155,000 shares
issued and outstanding 77,500 77,500
Preferred Stock, par value $.50;
Series B; $.90 cumulative; 50,000
shares authorized issued and
outstanding 1,197 shares 597 597
Common Stock; par value $1.00;
20,000,000 shares authorized;
issued 2,816,126 shares, including
8,776 shares held in Treasury 2,816,126 2,803,473
Contributed Capital 7,022,400 7,034,008
Retained Earnings (Deficit) ( 7,106,691) (6,932,449)
Treasury Shares at Cost ( 131,734) ( 131,734)
------------ ------------
Total Stockholders' Equity $ 2,678,198 $ 2,851,395
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,070,973 $ 4,339,752
=========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
CONOLOG CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
OCTOBER 31,
1997 1996
TOTAL REVENUES $ 113,327 $ 418,734
COSTS OF GOODS SOLD 113,527 259,271
---------- -----------
GROSS MARGIN ( 200) 159,463
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 158,507 177,034
---------- -----------
OPERATING INCOME (LOSS) ( 158,707) ( 17,571)
INTEREST EXPENSE 13,350 25,676
---------- -----------
INCOME/(LOSS) BEFORE TAXES ON INCOME
AND EXTRAORDINARY ITEMS ( 172,057) ( 43,247)
PROVISION FOR INCOME TAXES 1,141 0
---------- -----------
NET INCOME/(LOSS) $( 173,198) $( 43,247)
=========== ==========
EARNINGS/(LOSS) PER SHARE $ (.06) $ (.04)
=========== ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
CONOLOG CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED OCTOBER 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (173,198) $(43,247)
Adjustments to Net Income to Reconcile to
Net Cash Provided by Operating Activities:
Depreciation and amortization 14,289 14,287
(Increase)/Decrease in Accounts Receivable 60,642 120,338
(Increase)/Decrease in Inventories (126,253) (29,512)
(Increase)/Decrease in Other Current Assets 20,958 23,127
(Increase)/Decrease in Deferred Offering
Costs ( 25,678) -
Increase/(Decrease) in Accounts Payable ( 75,473) (135,581)
Increase/(Decrease) in Accrued Expenses
and other liabilities ( 19,310) 42,729
---------- --------
Net Cash Provided/(Used) in Operating
Activities ( 324,023) ( 7,859)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment - ( 9,684)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in Capital Lease Obligations ( 799) ( 25,150)
----------- ---------
NET INCREASE/(DECREASE) IN CASH $ (324,822) $ ( 42,693)
CASH AT BEGINNING OF YEAR 503,217 178,213
---------- ----------
CASH AT END OF PERIOD $ 178,395 $ 135,520
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 0 $ 1,246
Income Taxes 1,141 0
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
CONOLOG CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1 - Computation of Earnings Per Share:
For the Three Months Ended
October 31,
1997 1996
Weighted Average Number of Shares
Outstanding: 2,816,126 1,035,186
COMMON STOCK
Reserve for Conversion:
Series A Preferred Stock* 155,000
Series B Preferred Stock (1 to 20
conversion factor) 0 0
Common Stock Equivalents
(Warrants)** 235,750 235,750
--------- ---------
Total 3,051,876 1,270,936
Gain/(Loss) Per Share:
Total Gain/(Loss) $(173,198) $( 43,247)
Pro-rata Dividends on Preferred
Stock Series A & B 1,045 1,045
Net Gain/(Loss) available for
Common Stock $(174,243) $( 44,292)
---------- ----------
Average Number of Shares of Common Stock 2,816,126 1,035,186
=========== ==========
Primary Gain/(Loss) Per Share $ (.06) $ (.04)
=========== ==========
*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 $1200
per share. In view of the large difference between the current market
value of the stock and the conversion rate, these shares have not been
added to the total common shares used in computing the net earnings per
share.
**Each Warrant may be exchanged for one share of Common Stock at an
exercise price of $6.00 per share. In view of the large difference
between the current market value of the stock and the exercise price,
these shares have not been added to the total common shares used in
computing net earnings per share.
Fully diluted earnings per share, assuming conversion of Series A and
Series B Preferred Stock, has not been reflected, as the effect would
be either anti-dilutive or not material.
NOTE 2 - Notes Payable - Other
Credit Facility and Agreement with CNL Holdings, Inc.
The principal amount owing to the Bank under the Company's Credit
Facility at June 30, 1996 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.
Subsequently, on September 12, 1996 the bank and CNL Holdings, Inc.,
a private investor group, entered into an Option and Purchase, Sale and
Assignment Agreement dated as of September 12, 1996 (the "Option Agreement").
Under the Option Agreement the Bank 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.
As part of the aforementioned transaction, 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"). As of October 31, 1997, CNL
Holdings, Inc. has loaned the company $916,235.
Each loan bears 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, or by issuing shares of a new Series C Preferred Stock
(the "Series C Preferred") having a value of $5.00 per share for
purposes of such repayment.
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.
NOTE 2 - Notes Payable - Other (Continued)
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 benefited the
Company and its stockholders. The exercise by CNL of its option under
the Option Agreement converted the Remaining Debt Claim, the Company
had the opportunity to, in effect, exchange its debt for equity and
eliminated the Company's default under the Credit Facility.
NOTE 3 - Capitalized Lease Obligations
October 31, 1997 July 31, 1997
Leases Payable $ 3,003 $ 3,802
less - Current Portion 3,003 3,802
------- -------
$ 0 $ 0
Maturities of Capitalized Leases, subsequent to October 31, 1997 are:
1997 $3,003
NOTE 4 - Taxes
At October 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 to offset
future Federal taxable income. For Federal purposes, $253,000 of the
carry forward expires in 2008, $1,232,000 expires in 2009 and $957,000
expires in 2010. For state purposes the carry forward is approximately
$1,604,000; $706,000 expires in 2001 and $898,000 expires in 2002. Also,
at October 31, 1997 the Company has unused tax credits 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 a deferred tax asset that has been
fully reserved. The amount is $1,329,286.
At October 31, 1997 no deferred income taxes have been provided for per
SFAS No. 109 - Accounting for Income Taxes since management estimated
that temporary differences due to operating losses and tax credit carry
forwards will not be absorbed by future taxable income.
NOTE 5 - Bridge Loan
In December 1996 and January 1997, the Company obtained Bridge financing
from seven (7) lenders in the amount of $200,000. These lenders are the
individuals identified as "Selling Security holders." In exchange for
making the loans to the Company, each Selling Security holder received
two (2) promissory notes (the "Bridge Notes"). Certain Bridge Notes
are in the aggregate principal amount of $150,000 (the "Principal Bridge
Notes") and the other Bridge Notes are in the aggregate principal amount
of $50,000 (the "Convertible Bridge Notes"). Each of the Bridge Notes
bears interest at the rate of eight percent (8%) per annum.
The Bridge Notes are due and payable upon the earlier of (i) January 31,
1999 or (ii) the date on the next public offering closes. The
Convertible Bridge Notes are convertible into a total of 1,200,000
Class A Warrants. The proceeds of the bridge financing were used by
the Company to pay certain expenses in connection with this offering
and to increase working capital. Each Class A Warrant contained in
the Convertible Bridge Notes is identical to the Class A Warrants
offered hereby.
The Company's agreement with the Selling Security holders provided that
the Company would include in its registration statement a prospectus
covering the Class A Warrants owned by the Selling Security holders.
On September 12, 1997 the Company filed a Registration Statement on
Form S-1 with the Securities and Exchange Commission. This statement
covers the primary offering of securities of the Company and the offering
of other securities by certain selling Security Holders. The Company is
registering, under primary Prospectus 805,000 Units, each Unit consisting
of one (1) share of common stock and four (4) Class A warrants. The
selling Security Holders 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 of the sale of stock.
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
QUARTER ENDED OCTOBER 31, 1997
A summary of income, costs and expenses for the current quarter and
corresponding quarter of the previous year follows:
For the Quarter
Ended October 31,
1997 1996
Revenues $ 113,327 $ 418,734
Costs and Expenses 286,525 461,981
---------- ---------
Net Income/(Loss)
after Taxes, before $ (173,198) $( 43,247)
extraordinary item =========== ===========
Item 2 - Management's Discussion (Continued)
Revenues for the quarter ended October 31, 1997 totaled $113,327,
representing a decrease of 72.9% or $305,407 from $418,734 reported
for the same quarter a year ago. Revenues decreased largely due to
a sharp decrease of expected release of several orders from the various
major power companies as well as the absence of new commercial orders
and releases against existing military contracts by the US Government.
Gross margin for the quarter totaled $( 200) representing 0% of revenues
as compared to $159,463 or 38% of revenues for the quarter ended October 31,
1996. The decrease in gross margin primarily attributed to the labor
inefficiencies resulting from reduced levels of factory utilization.
The Company was able to partially offset some of these losses by shifting
its internal resources to new product development. Prior to April 1997,
the Company engaged outside contractors almost exclusively to complete
its product development. During the quarter the Company used to a greater
extent its captive resources including design, engineering and production.
Historically, the Company has used part-time, temporary factory personnel
and outside contractors to adjust its workforce for large changes in
production demands.
Selling, general and administrative expenses decreased from $177,034 to
$158,507 for the quarter, representing a decrease of $18,527 as compared
to 1996. These savings are the direct result of downsizing initiatives
to offset the decreased production levels experienced during the quarter.
Interest expense decreased from $25,676 to $13,350 or $12,326 for the
quarter ended October 31, 1997 over the same period of 1996.
As a result of the foregoing, the Company reported a net loss of
$( 173,198), or $(.06) per share for the quarter compared to a net loss
of $( 43,247) or $(.04) per share.
LIQUIDITY AND FINANCIAL CONDITION
Inventories increased $126,253 from July 31, 1997 attributable to the
PTR-1500 Series product.
Accounts Receivable decreased $60,642 to $48,929 reflecting lower sales
during the current quarter.
Working Capital at October 31, 1997 was $2,297,213 compared to $2,456,121
at July 31, 1997. 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 December
1997. Production units are expected to be delivered during the second
quarter of fiscal 1998.
During 1997, the Company received a $200,000 bridge loan from several
investors. The money was received following the execution of two
promissory notes for each investor that aggregated $150,000 (Note 1)
and $50,000 (Note 2), respectively. Note 1 is payable on the earlier
of December 31, 1997 or upon closing of the next public offering.
Note 2 contains the same terms as with respect to Note 1, or at the
investors option is convertible into shares of Preferred Stock Purchase
Warrants (See Notes to the Financial Statements for a description on the
full terms of the conversion option). The funds received from the bridge
loan were applied to improve working capital and to reduce accounts payable.
Item 2 - Management's Discussion (Continued)
The Company has received $916,235 from CNL from the sale of stock it received
from the bank. The monies will be repaid plus accrued interest twelve months
from the date received or converted to Series C Preferred Stock (See notes to
financial statements).
The Company plans to use these additional funds to complete the development
of the PTR1500 and deliver the first prototypes to the General Electric Co.
for testing and approvals and to improve its financial condition and prepare
for an anticipated increase in business in the latter part of 1997. The
Company anticipates additional backlog releases from the Bonneville Power
Administration and the US Government as well as other key customers. This
should generate additional sales and resulting cash flow to support an
expanded operating level in fiscal 1998 versus fiscal 1997. In the event
that additional financing and backlog releases are not forthcoming, fiscal
1998 sales would be adversely impacted.
The Company presently meets its cash requirements through existing cash
balances, cash generated from operations, the bridge loans and loans from
CNL.
Management Representation
The information furnished reflects all adjustments which management considers
necessary to a fair statement of the results of the period.
As of October 31, 1997 the Registrant's backlog of orders stands at $2.6
million, 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.
Statement Regarding Present Operations
There was no material change in the nature of the operations of Registrant
during the three months ended October 31, 1997 from the information contained
in the Registrant's annual report of Form 10-K for the fiscal year ended
July 31, 1997.
Part II - Other Information
CONOLOG CORPORATION
1. Legal Proceedings - No material proceedings pending
October 31, 1997
2. Changes in Securities - None
3. Defaults upon Senior Securities - None
4. Submission of Matters to a Vote of Security Holders - See
Form S-1 filed September 12, 1997
5. Other Materially Important Events - See Management's
Discussion
6. No reports or Exhibits on Form 8-K have been filed during the
quarter.
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] JUL-31-1998
[PERIOD-END] OCT-31-1997
[CASH] 178,395
[SECURITIES] 0
[RECEIVABLES] 54,929
[ALLOWANCES] 6,000
[INVENTORY] 3,300,045
[CURRENT-ASSETS] 3,389,988
[PP&E] 2,325,993
[DEPRECIATION] 1,952,477
[TOTAL-ASSETS] 4,070,973
[CURRENT-LIABILITIES] 1,392,775
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 78,097
[COMMON] 2,816,126
[OTHER-SE] (216,025)
[TOTAL-LIABILITY-AND-EQUITY] 4,070,973
[SALES] 113,327
[TOTAL-REVENUES] 113,327
[CGS] 113,527
[TOTAL-COSTS] 158,507
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 13,350
[INCOME-PRETAX] (172,057)
[INCOME-TAX] 1,141
[INCOME-CONTINUING] (173,198)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (173,198)
[EPS-PRIMARY] (.06)
[EPS-DILUTED] (.06)
</TABLE>
