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 April 30, 1998
( ) 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; 3,686,071 shares outstanding as of
June 8, 1998 (inclusive of Treasury Stock).
Conolog Corporation
BALANCE SHEETS
April 30, 1998 July 31, 1997
ASSETS ( Unaudited) (Audited)
Current Assets:
Cash $ 1,389,960 $503,217
Accounts Receivable, less
allowances of $6,000 137,777 109,571
Inventories 3,676,947 3,173,792
Other Current Assets 50,371 44,085
Deferred Offering Costs 0 113,813
------------ -----------
TOTAL CURRENT ASSETS $ 5,255,055 $ 3,944,478
Property, Plant and Equipment 409,362 387,805
less accumulated depreciation
of $1,981,052 and $1,938,188
respectively
Other Assets 5,810 7,469
------------ -----------
TOTAL ASSETS $ 5,670,227 $ 4,339,752
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Notes Payable - Other $ 0 $ 916,235
Accounts Payable 62,302 188,510
Accrued Payroll 5,683 15,645
Accrued Interest 0 17,374
Bridge Loan 0 200,000
Other Accrued Expenses 91,490 146,791
Current maturities of
capitalized lease 0 3,802
obligations
------------ -----------
TOTAL CURRENT LIABILITIES $ 159,475 $ 1,488,357
CONOLOG CORPORATION
BALANCE SHEETS
April 30, 1998 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 3,686,071 shares, including
8,776 shares held in Treasury 3,686,071 2,803,473
Contributed Capital 8,979,074 7,034,008
Retained Earnings (Deficit) ( 7,100,756) (6,932,449)
Treasury Shares at Cost ( 131,734) ( 131,734)
------------ -----------
Total Stockholders' Equity $ 5,510,753 $ 2,851,395
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,670,227 $ 4,339,752
=========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
CONOLOG CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
APRIL 30, APRIL 30,
1998 1997 1998 1997
TOTAL REVENUES $276,071 $111,393 $ 629,688 $978,979
COSTS OF GOODS SOLD 50,353 52,153 215,049 528,498
--------- ---------- ---------- ----------
GROSS MARGIN 225,718 59,240 414,639 450,481
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES 194,433 140,466 552,949 518,944
--------- ---------- ---------- ----------
OPERATING INCOME
/(LOSS) 31,285 (81,226) (138,310) (68,463)
INTEREST EXPENSE 12 17,080 22,459 69,199
--------- ---------- ---------- ----------
INCOME/(LOSS) BEFORE
TAXES ON INCOME
AND EXTRAORDINARY
ITEMS 31,273 (98,306) (160,769) (137,662)
PROVISION FOR TAXES 2,142 9,884 4,402 9,884
--------- ---------- ---------- ----------
NET INCOME/(LOSS) $ 29,131 $(108,190) $(165,171) $(147,546)
========= ========== ========== ==========
BASIC EARNINGS/(LOSS)
PER SHARE $ .00 $(.04) $(.04) $(.06)
========= ========= ========== =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
CONOLOG CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED APRIL 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (165,171) $(147,546)
Adjustments to Net Income to Reconcile to
Net Cash Provided by Operating Activities:
Depreciation and amortization 42,864 42,864
(Increase)/Decrease in Accounts Receivable (28,206) 137,193
(Increase)/Decrease in Inventories (503,155) (294,800)
(Increase)/Decrease in Other Current Assets
(4,627) ( 6,387)
(Increase)/Decrease in Deferred Offer Costs
113,813 0
Increase/(Decrease) in Accounts Payable (126,208) (185,229)
Increase/(Decrease) in Accrued Expenses
and other liabilities (82,637) 20,744
--------- ---------
Net Cash Provided/(Used) in Operating
Activities (753,327) (433,161)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment (64,421) (14,721)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in Capital Lease Obligations (3,802) (30,071)
Bridge Loan (Repayments)/Borrowings (200,000) 200,000
Repayments to Investors (916,235) 0
Repayments of Long-term Borrowings 0 (1,012,500)
Issuance of Common Stock 882,598 1,408,787
Contributed Capital 1,945,066 (277,622)
Dividends (3,135) 0
From Investors 0 74,735
----------- ---------
Net Cash Provided/(Used) by Financing
Activities 1,704,491 363,329
---------- ---------
NET INCREASE/(DECREASE) IN CASH $ 886,743 $ (84,553)
CASH AT BEGINNING OF YEAR 503,217 178,213
---------- -----------
CASH AT END OF PERIOD $1,389,960 $ 93,660
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the quarter for:
Interest $ 12 $ 12,365
Income Taxes 2,142 17,324
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
CONOLOG CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1 - Computation of Earnings Per Share:
For the Nine Months Ended
April 30,
1998 1997
Weighted Average Number of Shares
Outstanding: 3,544,773 2,443,973
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)** 5,135,750 235,750
--------- ---------
Total 8,680,523 2,679,723
Gain/(Loss) Per Share:
Total Gain/(Loss) $(165,171) $(147,546)
Pro-rata Dividends on Preferred
Stock Series A & B 3,135 3,135
---------- ----------
Net Gain/(Loss) available for
Common Stock $(168,306) $(150,681)
---------- ----------
Average Number of Shares of Common Stock 3,544,773 2,443,973
========== ==========
Basic Earnings/(Loss) Per Share $ (.04) $ (.06)
========== ==========
Diluted Earnings/(Loss) Per Share N/A N/A
========== ==========
*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 owed 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 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 Bank or its assignee exercised the conversion right. The Bank
deferred all payments of principal and interest under the Note until April 16,
1997.
Subsequently, on September 12, 1996 the bank and CNL Holdings, Inc., a private
investor group, entered into an Option and Purchase, Sale and Assignment
Agreement dated September 12, 1996 (the "Option Agreement"). Under the
Option Agreement the Bank granted an option to CNL to purchase all of the
Bank's interest in (i) the Amended and Restated Term Loan Agreement dated
as of August 2, 1995 between the Company and the Bank, (ii) the Note and
(iii) the 375,000 shares of the Company's Common Stock owned by the Bank.
CNL paid $150,000 to the Bank for the option, which had an exercise price
of $1,500,000 (a balance of $1,350,000) and an expiration date of April 15,
1997.
As part of the aforementioned transaction, CNL agreed to loan up to $2,500,000
to the Company under certain circumstances (as described below) and the
Company agreed to file a registration statement (the "Registration Statement")
with the Securities and Exchange Commission to register the 375,000 shares of
Common Stock owned by the Bank and the 1,400,000 shares of Common Stock into
which the Note converted (collectively, the "Acquired Shares"). As of January
21, 1998 CNL Holdings, Inc. loaned the company $916,235 which was repaid at the
closing of the Company's public offering.
Each CNL loan carried interest at the rate of 4% per annum and became due 12
months from the date of such Loan. At maturity, the Company had the option
to pay each Loan, together with all accrued interest thereon, or by issuing
shares of a new Series C Preferred Stock (the "Series C Preferred") having
a value of $5.00 per share for purposes of such repayment.
Had the Series C Preferred been issued, it would have been non-voting and
carried a cumulative dividend of 8% per annum which would payable by the
issuance of shares of Common Stock valued at $5.00 per share up to a maximum
of 40,000 shares per annum. The Series C Preferred would have been convertible
into common stock at the rate of one share of common stock for each share of
Series C Preferred and had a liquidating preference of $5.00 per share.
The Agreement also provided that for the two year period commencing on the
issuance of any shares of Series C Preferred (the "Registration Period") CNL
may have elected to include its Series C Preferred in any post-effective
amendment to the Registration Statement or any new registration statement
under the Securities Act of 1933, as amended. In addition, the Agreement
also provided that during the Registration Period, CNL may have given notice
to the Company to the effect that it desired to register its shares under
the Act for public distribution in which case the Company would file a post-
effective amendment to a then current registration statement or a new
registration statement.
Management believes that these transactions benefited the Company and its
stockholders. The exercise by CNL of its option under the Option Agreement
converted the Remaining Debt Claim. The Company had the opportunity to, in
effect, exchange its debt for equity and eliminated the Company's default
under the Credit Facility.
(See Liquidity and Financial Condition section of Management Discussion for
Details on Public Offering)
NOTE 3 - Capitalized Lease Obligations
April 30, 1998 July 31, 1997
Leases Payable $ 0 $ 3,802
less - Current Portion 0 3,802
------- -------
$ 0 $ 0
NOTE 4 - Taxes
At April 30, 1998 the Company has a net operating loss carry forward of
approximately $2,671,000 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 April 30, 1998 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 April 30, 1998 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 were the individuals
identified as "Selling Security holders." In exchange for making the loans to
the Company, each Selling Security holder received two (2) promissory notes
(the "Bridge Notes"). Certain Bridge Notes were in the aggregate principal
amount of $150,000 (the "Principal Bridge Notes") and the other Bridge Notes
were in the aggregate principal amount of $50,000 (the "Convertible Bridge
Notes"). Each of the Bridge Notes bore interest at the rate of eight percent
(8%) per annum.
The Bridge Notes were due and payable upon the earlier of (i) January 31, 1999
or (ii) the date on which the next public offering closed. The Convertible
Bridge Notes were convertible into a total of 1,200,000 Class A Warrants.
The proceeds of the bridge financing were used by the Company to pay certain
expenses in connection with this offering and to increase working capital.
Each Class A Warrant contained in the Convertible Bridge Notes was identical
to the Class A Warrants offered therein.
The Company's agreement with the Selling Security holders provided that the
Company would include in its registration statement a prospectus covering the
Class A Warrants owned by the Selling Security holders.
On September 12, 1997 the Company filed a Registration Statement on Form S-1
with the Securities and Exchange Commission. This statement covered the
primary offering of securities of the Company and the offering of other
securities by certain selling Security Holders. The Company registered,
under a primary Prospectus 805,000 Units, each Unit consisting of one (1)
share of common stock and four (4) Class A warrants. The selling Security
Holders registered, under an alternate prospectus, 1,200,000 Class A warrants.
At July 31, 1997 all costs associated with this offering were deferred. The
costs were subsequently deducted from the proceeds of the sale of stock.
The Bridge loans were repaid on January 28, 1998 at the closing of the
Company's Public Offering.
(See Liquidity and Financial Condition Section of Management's Discussion
for details on Public offering).
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
A summary of income, costs and expenses for the current quarter and
corresponding quarter of the previous year follows:
For the Quarter For the 9 Months
Ended April 30, Ended April 30,
1998 1997 1998 1997
Revenues $ 276,071 $ 111,393 $ 629,688 $978,979
Costs and Expenses 246,940 219,583 794,859 1,126,525
---------- --------- --------- ---------
Net Income/(Loss)
after Taxes, before $ 29,131 $(108,190) $(165,171) $(147,546)
extraordinary item ========== ========== ========== ==========
QUARTER ENDED APRIL 30, 1998
Revenues for the quarter ended April 30, 1998 totaled $276,071, representing
an increase of 59.6% or $164,678 from $111,393 reported for the same quarter
a year ago. Revenues increased largely due to releases from the Bonneville
Power Authority in the amount of $136,987 as well as new commercial orders
and releases against existing military contracts by the US Government.
Gross margin for the quarter ended April 30, 1998 totaled $225,718 representing
81.7% of revenues as compared to $59,153 or 53.1% of revenues for the quarter
ended April 30, 1997. The increase in gross margin is primarily attributed to
the use of low-cost sub-contractors periodically throughout the period, as well
as military sales which had a zero cost basis due to previous write-off of
military inventory.
Selling, general and administrative expenses increased from $140,466 to
$194,433 for the quarter, representing an increase of $53,967 as compared to
1997. This is primarily due to the hiring of a Merger and Acquisition
manager to explore areas of further growth and the higher costs of health
care benefits.
Interest expense decreased from $17,080 to $12 or $17,068 for the quarter ended
April 30, 1998 over the same period of 1997 as a result of the elimination of
debt owed on the credit facility.
As a result of the foregoing, the Company reported net income of $29,131, or
$.00 per share for the quarter compared to a net loss of $(108,190) or $(0.04)
per share for the prior year.
NINE MONTHS ENDED APRIL 30, 1998
Revenues for the nine months ended April 30, 1998 totaled $629,688 representing
a decrease of 35.6% or $349,291 from $978,979 for the same period last year.
Revenues decreased largely due to a sharp decline in expected releases 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 in the first six months of the fiscal year.
Gross margin for the nine months totaled $414,639 representing 65.8% of
revenues as compared to $450,481 or 46.0% of revenues for the same nine-
month period one year ago. The increase in gross margin is primarily
attributable to the capitalization of costs associated with the production
of the PTR1500 product as well as greater levels of plant and labor
efficiencies.
Selling, general and administrative expenses increased from $518,944 to
$552,949 for the same period.
Interest expense decreased from $69,199 to $22,459 due to the repayment of the
credit facility to the bank.
As a result of the foregoing, the Company had a net loss of $(165,171) or
$(.04) per share as compared to a net loss of $(147,546) or $(.06) per share
one year ago.
LIQUIDITY AND FINANCIAL CONDITION
On January 21, 1998 the Company offered to the public 700,000 units (the Units)
at a price of $5.00 per unit. Each unit consisted of one (1) share of Common
Stock, par value $1.00 per share (Common Stock), and four (4) Redeemable Class
A Warrants for Common Stock (Class A Warrants). The Common Stock and Class A
Warrants are detachable and trade separately.
Each Class A Warrant entitles the holder to purchase one (1) share of the
Company's Common Stock, at a exercise price of $6.00, subject to adjustment,
from January 22, 1998 through August 30, 2002. The Class A Warrants are subject
to redemption by the Company commencing the earlier of ( i) 24 months from
the date of the offering or (ii) 12 months from the date of the offering, with
the consent of the underwriter, on not less than thirty (30) days notice at
$.05 per Warrant, provided the average closing price of the Common Stock
exceeds $7.20 per share for twenty (20) consecutive trading days ending within
fifteen (15) days prior to the notice.
On March 6, 1998, the Company raised an additional $110,055, net of expenses,
from the sale of an over-allotment of 25,300 shares of the Company's common
stock.
The results of the offering was $2,788,642 cash, net of offering costs.
Inventories increased $503,155 from July 31, 1997 attributable mostly to the
PTR-1500 Series product (GE Model MS50), which are being produced for
anticipated orders from the General Electric Company.
Working Capital at April 30, 1998 was $5,095,580 compared to $2,456,121 at July
31, 1997. This is primarily attributed to the public offering of 700,000 units
of the Company's Common Stock, Warrants and the building of the PTR-1500 tone
protection device for the General Electric Company.
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 1998. 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.
The Company presently meets its cash requirements through existing cash
balances and cash generated from operations.
MANAGEMENT REPRESENTATION
The information furnished reflects all adjustments which management considers
necessary for a fair statement of the results of the period.
As of April 30, 1998 the Registrant's backlog of orders stands at $2.4 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 nine months ended April 30, 1998 from the information contained
in the Registrant's annual report of Form 10-K for the fiscal year ended
July 31, 1997.
SUBSEQUENT EVENTS
On May 12, 1998 the Company signed a Letter of Intent to acquire American
Imaging Systems, Inc. for a combination of cash and stock. American Imaging
Systems, Inc. sells, services and supports X-ray equipment as well as a full
line of film processors, film, illuminators and protective apparel to small
and large users. The integration with Conolog will provide American Imaging
Systems, Inc. with engineering, instrumentation and technical expertise to
support future growth. Negotiations are still in process at this time.
On May 22, 1998 the Company entered into a contract for the sale of the
Company's facilities located at 5 Columbia Road, Somerville, NJ. Under the
terms of contract, the Company will leaseback a portion of the property at no
cost for the next three years. This sale has not been finalized as of June 10,
1998.
Part II - Other Information
CONOLOG CORPORATION
1. Legal Proceedings - No material proceedings pending
April 30, 1998
2. Changes in Securities - See Management Discussion
3. Defaults upon Senior Securities - None
4. Submission of Matters to a Vote of Security Holders - None
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> <C>
[PERIOD-TYPE] 3-MOS 9-MOS
[FISCAL-YEAR-END] JUL-31-1998 JUL-31-1998
[PERIOD-END] APR-30-1998 APR-30-1998
[CASH] 1,389,960 1,389,960
[SECURITIES] 0 0
[RECEIVABLES] 143,777 143,777
[ALLOWANCES] (6,000) (6,000)
[INVENTORY] 3,676,947 3,676,947
[CURRENT-ASSETS] 5,255,055 5,255,055
[PP&E] 2,390,414 2,390,414
[DEPRECIATION] (1,981,052) (1,981,052)
[TOTAL-ASSETS] 5,670,227 5,670,227
[CURRENT-LIABILITIES] 159,475 159,475
[BONDS] 0 0
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 78,097 78,097
[COMMON] 3,686,071 3,686,071
[OTHER-SE] 1,746,584 1,746,584
[TOTAL-LIABILITY-AND-EQUITY] 5,670,227 5,670,227
[SALES] 276,071 629,688
[TOTAL-REVENUES] 276,071 629,688
[CGS] 50,353 215,049
[TOTAL-COSTS] 50,353 215,049
[OTHER-EXPENSES] 194,433 552,949
[LOSS-PROVISION] 0 0
[INTEREST-EXPENSE] 12 22,459
[INCOME-PRETAX] 31,273 (160,769)
[INCOME-TAX] 2,142 4,402
[INCOME-CONTINUING] 29,131 (165,171)
[DISCONTINUED] 0 0
[EXTRAORDINARY] 0 0
[CHANGES] 0 0
[NET-INCOME] 29,131 (165,171)
[EPS-PRIMARY] 0 (0.04)
[EPS-DILUTED] 0 (0.04)
</TABLE>
