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, 1998 (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 $0.625 on
October 26, 1998 was $2,366,298
The number of shares outstanding of the Registrant's common stock outstanding
as of October 26, 1998 was 3,786,077
DOCUMENTS INCORPORATED BY REFERENCE
FORM 10-K
JULY 31, 1998
TABLE OF CONTENTS
PART I
Item 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . 22
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . 22
Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . 24
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION. . . . . . . . . . . . . . . . . . . . 25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . 29
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . 29
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS. . . . . . . . . . . . . . . . . 29
Item 11. EXECUTIVE COMPENSATION, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT. . . . . . 30
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . 34
PART IV
Item 14. EXHIBITS AND REPORTS. . . . . . . . . . . . . . . . . . . . . 36
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
PART I
BUSINESS
General
Conolog Corporation, a Delaware Corporation (the "Company"
or "Conolog") is engaged in the design, manufacture (directly or
through subcontractors) and distribution of small electronic and
electromagnetic components and subassemblies for use in
telephone, radio and microwave transmission and reception and
other communication areas that are used in both military and
commercial applications. The Company's products are used for
transceiving various quantities, data and protective relaying
functions in industrial, utility and other markets.
Conolog acquired Atlas Design, a human resource company, in
September 1998. Atlas Design provides short and long term qualified
Engineering and technical staff to major companies as well as human
Resource consulting. The Company plans to utilize the qualified
engineering and technical staff in support of Conolog's longer
term contracts including the PTR1500 series.
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 82% of sales in 1998
($616,752). The decision to embark on this program entailed a
major design effort, including the coordination of outside
engineering consultants to develop a complete line of products
aimed at the Company s target markets. The primary emphasis was
on products for electric utilities, co-generation of power, gas
and water companies, traffic control for departments of transport
(DOT) and airports utilizing DSP (Digital Signal Processing)
technology.
Testing of the Company's first commercial product group, the
Teleprotection Series PTR-1000, was under way in the latter part
of 1992 by Bonneville Power Administration. This detailed test
permitted the Company to "fine tune" the product for power
transmission applications. In March 1994, the PTR-1000 was
approved for use by such utility and thereafter by other
utilities and municipalities. To date, the Company has sold and
delivered approximately 1000 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. The Company launched its
industrial grade 1200 Baud Modem for data transmission/
communication, and completed the PTR-1000 Systems options.
Throughout 1997 and 1998, the Company designed and is in the process
of completing and building the PTR-1500 Quad System, Protection
Equipment, exclusively for the General Electric Company ("GE"),
to be labeled GE-NS50 Series, for worldwide sales as detailed in
the agreement between GE and Conolog dated April 1, 1997.
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 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. Sales in fiscal 1997 totaled $1,123,390, a 42% decrease
from $1,924,466 for the same period in 1996, and sales for the
year ended July 31, 1998 were $746,420, a 33.5% decrease for the
same period of 1997.
In September 1998, the Company acquired the assets of Atlas
Design, Inc., a human resource outsourcing company, to further
its strategy of mergers and acquisitions, and to assist in
providing qualified engineering and technical staff in support
of Conolog's longer term contracts. (See Recent Developments)
Also in September 1998, the Company completed a sale/leaseback
of its manufacturing facility. This enables the Company to
significantly reduce operating costs and increases the working
capital. (See Recent Developments)
Revenues from the Company's military product sales represented
approximately 23%, 14% and 5.6% of sales of the Company in
fiscal 1996, 1997 and 1998, 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 lines.
Such products are used in radio and other transmissions,
telephones and telephone exchanges, air and traffic control,
automatic transmission of data for utilities, tele-printing of
transmitted data such as news and stock market information and
for use by electric utilities in monitoring power transmission
lines for faults and/or failures. The Company's products may be
used independently or in combination with other products to form
a system type configuration, whereby the Company's equipment is
pre-assembled in a large cabinet with other equipment in a
configuration that would provide the end user with protection as
well as operational status displays.
Present Status/Business Product Description
The Company is presently engaged in four basic market segments:
(A) Commercial Sales (Under the trade-name " INIVEN" (a
Division of Conolog))
- Direct sales to end users
- Sales to system assemblers
- Sales to contractors/installers
(B) Military Sales - Direct contract sales to the
military
- As subcontractor to systems producers
- Foreign governments
(C) Commercial Sales - As Manufacturing Subcontractor
to Systems Producers.
(D) Other Ventures -Short and long term qualified engineering
and technical services as well as human resource consulting
(Under the trade name "Atlas Design")
(A) Military Sales
Since 1992 the Company's engineering staff is dedicated to
"INIVEN" commercial designs and does not engage in any new
designs for military applications. The Company actively
participates in bids only for parts the Company has designed
since inception in 1968. Presently there are approximately 400
designs that are applicable to these military sales.
Military sales are primarily for the Company's electromagnetic
wave filters used in military radios, vehicles (cars, trucks or
tanks), portable (backpack), special signaling equipment and
exchanges (as in field command posts), weapon/missile guidance
and control (Patriot missile, Tomahawk, Pave-Paws), torpedo active
signal recognition and differentiation mounted in the nose cone
of the torpedo (MK-30, Captor, MK-50 torpedoes), ship to ship
teletype signaling filters used in deployment of ships (UCC-1
and UCC-4 systems) as well as many other signaling applications
where accurate electromagnetic frequency control is required.
The Company markets the above military sales directly and
through independent manufacturing sales representatives on a
commission basis.
B) Commercial "INIVEN" Sales and Products
"INIVEN" equipment is designed around four (4) core product
groups:
(1) PTR Teleprotection Series
(Protective Tone Relaying Communications Terminal,
which includes the PTR-1000 and the PTR-1500,under
development and designed exclusively for GE to
market.
(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-1500, designed exclusively for GE in accordance with
a seven year agreement, is a quad system and performs as 2 duals
or 4 singles with many unique features such as multiple line
operation, event recording with date stamp with optional analog
or digital transmission modes including optic fiber interface.
The PTR Teleprotection Series is designed for global use
by electric utilities and any entity generating power for its own
consumption with resale of surplus power to an electric utility,
such as cities, municipalities, cooperatives and large
corporations that find it more economical to generate their own
electricity.
The PTR-1000 target market is worldwide, as follows:
New installations; i.e., new transmission lines, new
distribution segments, for utilities and cogenerators.
Existing installations not properly protected, improving
efficiency and 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 approximately 1000
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 electro-
magnetic modules.
"98" and "68" Series - The latest generation applies DSP and
microprocessor technology with full programmability, in the
field or at the factory.
"40" Series - Designed to function with the "98" or "68"
series; transmits and receives variable analog data.
GEN-1 and GEN-1 Programmable Series
The diversity of applications for this equipment makes it
available for a wide range of users who are not restricted to a
single industry. Typical industrial uses include: the
measurement of water and gas, waste water, gasoline, oil,
traffic, and electricity. Typical users include: utilities, co-
generators, airports, navy yards, telephone companies, paper and
pulp processors and wherever remote control and data acquisition
is required.
Because of the ease of use and installation, there is much
GEN-1 type equipment installed and used in the United States by a
wide spectrum of diverse users. Since the Company's line has a
distinct mechanical configuration, the Company designed its GEN-1
Programmable units and other improvements as replacements for
existing units. These account for approximately 18% of the
Company's commercial sales. The Company's line of GEN-1 equipment
is extensive and provides the user with the ability to perform
multiple control functions, status monitoring as well as
continuous variable data monitoring, such as a level in a tank or
pressure gauge.
Sales for this line are primarily for the replacement of
existing installations and for expansion of these installations
where it would not be economical to install the latest
technology, which would not be mechanically compatible.
Sales to this market are made in the same manner as the PTR-
1000 market except that manufacturers' representatives
specialize in selling to this diverse market.
"98," "68" and "40" Series
These series represent the Company's latest designs in the
audio tone equipment utilizing the more advanced DSP technology,
which provides high accuracy and long term stability. These
features have allowed the Company to greatly improve the scope,
density and number of functions that can be performed on a single
phone line, microwave link or direct line.
Given this technology and the high-reliability and quality
standards of the Company's products, the Company began in
the first quarter of 1994 to offer a 12 year warranty for all of
its commercial products. This warranty has been favorably
received by customers. Based upon its past experience, the
Company does not believe that its extended warranty will result
in any material repair or replacement expenses.
Sales of these products are made by the same agents who
sell the Company s GEN-1 products, but are also directed to
encompass more sophisticated users with larger amounts of data
and control points. The mechanical configuration of the "98"
series is more compact, permitting more equipment in a given
space, while performing many more functions when it is connected
to the "40" Series. The "68" Series is the "98" Series
repackaged mechanically specifically for customers with older
systems permitting them to upgrade their systems to DSP
technology. The "40" Series, when connected to the "98" or "68"
in the same chassis, permits the continuous monitoring of
variable data. Typical applications for these products include
transmission of the variable data (such as volume, temperature,
pressure and moisture) for water, gas, industrial gases, oil ,
gasoline, transportation equipment and telephone exchanges, and
for use at airports, tunnels and bridges and for security and
electricity systems.
(3) Multiplex Supervisory (IM) Control System
This product is a response to the cost and scarcity of
dedicated phone lines (connections whereby the phone link is
dedicated to one subscriber), and enables customers with high
volumes of supervisory data (where many functions are monitored
from a single site) to transmit data on fewer phone lines (i.e.,
with more data per channel, up to a maximum of 30 channels per
line).
Using the "98" DSP Series as its communications link, the
Company designed the Multiplexer Supervisory Control System to
handle 8 times the normal capacity per channel. The
microprocessor based system allows a single telephone line to
handle up to 900 data inputs.
This product line, because of its data density capability,
may be utilized for a very broad range of applications. This
product has only recently been introduced and the Company sales
efforts for it are being conducted through its existing
independent manufacturers sales representatives.
(4) Fiber Optic Link and Data Modem
The expansion of fiber lines by the Company's customers and
their need to switch equipment from phone lines to fiber prompted
the Company to design and introduce a fiber-optic-coupler line to
interface with the many different fiber heads. In addition to
complete data interface couplers the Company launched a series of
1200 Baud Modems (Industrial Grade) for operation under the same
environmental specifications in line with the Company's products.
(C) Commercial Subcontract Manufacturing to Systems Producers
Since the downsizing of the American Military, the Company
has actively sought manufacturing subcontract orders to fill the
production void created by the severe drop in military
production. In June 1996 the Company negotiated and entered
into a renewable annual agreement with the General Electric
Company, GE Electrical Distribution and Control and its
participating affiliated companies for the manufacture of sub-
systems, board assemblies and magnetic filters and other products
consistent with the Company's expertise. The success of this
agreement has prompted the Company to pursue other system
producers to more fully utilize the Company's manufacturing
capacity.
On April 1, 1997, the Company signed an exclusive distribution
with the General Electric Company to develop and manufacture an
advanced tone protection series product, the PTR 1500. Under the
terms of the agreement, General Electric plans to market the
product world wide beginning in 1999. ( SEE: Recent Developments).
Recent Developments
The Company delivered the first production PTR 1500 series tone
protection products to General Electric for evaluation in May 1998.
These units were part of the 7 year exclusive and renewable OEM
Purchase Agreement with GE Power Management a subsidiary of General
Electric Corporation (GE). The PTR-1500 will be marketed as the
GE Model NS50 and will have many advanced features including quad
channels and optional addressable status and event recorders. The
design of the prototypes for the PTR 1500 series were essentially
completed during fiscal 1997 and production boards were included
in inventory at July 31, 1997. Upon acceptance by GE, the Company
intends to commence shipping production units for delivery during
fiscal 1999.
The Company's new INIVEN Multiplexer was tested for 2 way radio
operation to provide 8 analog and 16 status functions bi-
directionally at a single site. The Company introduced this radio
link product line in the second half of 1998.
In September 1998, the Company completed the sale of its building
resulting in $717,000 net proceeds to the Company. The transaction
also provides for a three year rent-free lease to the Company of
approximately 38% of the total space.
Also in September 1998, the Company completed the acquisition of the
assets of Atlas Design, Inc. for $145,000 in cash. Atlas Design provides
short and long term qualified engineering and technical staff to the
country's leading companies as well as human resource consulting.
Atlas Design's integration with the Company will provide a pool of
project engineering leaders and software designers in support of
the Company's longer term contracts including the GE PTR-1500 series.
Both the sale of the building and the acquisition of Atlas Design, Inc.
is in line with the Company's expansion plan through acquisitions, mergers
and GE software support.
Public Offering, August 16, 1995
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 tradable.
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,
2002 (extended from August 6, 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.
Public Offering January 21, 1998
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 Class AWarrant,
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 offering raised $2,788,642 cash, net of offering costs.
STRATEGY
The Company's strategy is to exploit new commercial markets
by continuing to develop new products and enhance existing
products to improve both its market share and competitive
position. Growth in commercial sales is expected to come through
internal growth of existing products, new product introductions
and the expansion of regional markets to meet the growing needs
of its customers for more sophisticated and comprehensive
products and services. The Company introduced a fiber optic
digitizer during fiscal 1996. The Company believes the largest
growth opportunity remains with the electric utility market,
although it intends to reach other industrial and utility markets
such as railroad and waste water, respectively. The Company began
an advertisement program during 1996 and devoted substantial
resources as available for promotion. The Company intends to
participate in various trade shows, such as the Utilities
Communications Council and IEEE/PES during the forthcoming year.
The Company will continue to seek out and broaden its base of
manufacturer reps, other marketing strategies and acquisitions
to strengthen its market presence in both areas.
MARKETING AND SALES
In general, the Company's products are marketed by means of
telemarketing and customer contacts by the Company's direct sales
force and through independent manufacturing sales representatives
and distributors.
MILITARY - The Company markets its military sales directly
and through independent manufacturing sales representatives.
COMMERCIAL - The Company markets the PTR-1000 by means of
Company Sales personnel, through independent manufacturers
representatives, and through distributors, focusing mainly on the
largest utilities and co-generators. In the United States alone
there are over 500 large entities generating electricity which
are identified as investor-owned, municipal systems, cooperative
systems and federal, state and district systems. The Company
intends to expand its sales efforts and expand sales to
international markets. The Company markets its Gen-1 and Gen-1
Programmable Series, as well as its "98" Series, "68" Series and
"40" Series, in the same way as the PTR-1000 except that the
manufacturers representatives used by the Company specialize in
selling to the diverse markets that utilize such products.
Competition
The market for the Company's products is very competitive.
There are several companies engaged in the manufacture of
products of the type produced by the Company, most of which are
substantially larger and have substantially greater name
recognition or greater financial resources and personnel. The
major competitive factors include product quality and reliability
price, service and delivery. Competition is expected to continue
and intensify. The market is also characterized by rapid
technological changes and advances. The Company would be
adversely affected if its competitors introduced technology
superior products or offered these products at significantly
lower prices than the Company's products.
Largest Customers
Sales to the Company's major customer during fiscal 1998
(Bonneville Power Authority) totaled $205,868 (27.5% of all
sales). Sales to the Company's two major customers during
fiscal 1997 (General Electric and Bonneville Power Authority)
totaled $255,500 and $200,000 respectively (22.7% and 17.8%,
respectively of all sales). Sales to the Company's major
customer in fiscal 1996 (B.C. Hydro-Canada) totaled $380,000
(19.7% of all sales). 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.
In the past the Company manufactured and held in its
inventory finished products pursuant to the military
specifications and based upon the military forecast for future
quantities and delivery schedules. Widespread military
procurements were discontinued as a result of the end of the cold
war and the downsizing of the military establishment.
Consequently, management made a decision to write off a
substantial amount of the military inventory. As a result of
the Company no longer manufacturers military product in advance.
Rather, it only schedules production as purchase orders are
received.
During fiscal 1998, the Company wrote off $410,759 of its inventory
as obsolete.
Manufacturing
Of the 15,700 square feet that the Company occupies at
5 Columbia Road in Somerville, NJ, approximately 10,000 square
feet are dedicated to manufacturing. The Company assembles, under
normal workload conditions, all the product it sells. To
accommodate the peak demands that occur from time to time the
Company has developed a number of subcontractors to assemble
boards to the Company's specifications. All assemblies, however,
are inspected and fully tested by the Company's quality,
engineering and testing departments. The Company maintains test
equipment and every product is burned-in (i.e., each product is
run at full power for 48 hours) and tested prior to shipment. This
control, together with design reliability, has permitted the
Company to offer a 12-year warranty on all its commercial
products.
In September 1998 the Company sold the building and its improvements
and is leasing back approximately 38% of the total space of the
building in a three year rent-free lease.
Warranty and Service
The Company provides a twelve year warranty on its products
which covers parts and labor. The Company, at its option,
repairs or replaces products that are found defective during
the warranty period providing proper preventive
maintenance procedures have been followed by customers. Repairs
that are necessitated by misuse of such products are not
covered by the Company's warranty.
In cases of defective products, the customer typically
returns them to the Company's facility in Somerville, New Jersey.
The Company's service personnel then replace or repair the
defective items and ship them back to the customer. Generally all
servicing is completed at the Company's plant and customers are
charged a fee for those service items that are not covered by the
warranty. The Company does not offer its customers any formal
written service contracts.
Research and Development
New Products
Prior to fiscal 1997, amounts expended by the Company in
recent years for research and development activities have not
been material. During fiscal 1997-98, the Company invested
approximately $1 million for the design and development of the PTR
1500 for General Electric. The Company completed the PTR-
1000 series option modules and the standard modules of the
PTR-1500 Quad Series to be sold exclusively worldwide by GE as
its Model NS50. The first prototypes were delivered in May 1998.
( See: Recent Developments).
During 1996, the Company invested financial resources to
design a fiber optic digitizer and a 1200 baud modem to be
sold separately or jointly with INIVEN products. This product
enables the Company's INIVEN products to transmit directly onto
fiber optic cables, and opens a new market for the Company's products.
The Company intends to add designs 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, 1998, the Company had a backlog of
approximately $1.4 million. It is anticipated that this backlog
will be filled during the balance of calendar year 1998 and the
1999 fiscal year ending July 31, 1999. As of July 31, 1997 and
1996, the Company had a backlog of approximately $2,900,000
and $3,400,000, respectively.
The backlog of orders for the Company's PTR 1000 series of product
consists of multiple blanket contracts at fixed prices for the
duration of the contract. There is no obligation or penalty if the
contracts expire prior to additional orders being placed for the
total value of the contract.
Governmental Regulation
The Company's manufacturing facilities, in common with those
of industry generally, are subject to numerous existing and
proposed Federal and state regulations designed to protect the
environment, establish occupational safety and health standards
and cover other matters. The Company believes that its
operations are in compliance with existing regulations and does
not believe that such compliance has had or will have any
material effect upon its capital expenditures, earnings or
competitive position. With respect to military sales, the
Company is not subject to any special regulations. The products
manufactured are done so in accordance with accepted commercial
practices.
Renegotiation
No material portion of the Company's business has been
subject to renegotiation of profits at the election of the
Government since 1987.
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 1998 and 1997, the Company did not have any foreign
sales. The company had approximately $380,000 in foreign sales to
British Columbia Hydro Power Authority, Inc. during fiscal 1996.
Employees
As of July 31, 1998, the Company employed 20 persons on a
full-time basis, including 2 in management, 1 in sales, 1 in
clerical, 1 in accounting, 1 in purchasing, 3 in engineering and
11 in production. The Company has enjoyed good labor relations.
None of the Company's employees are represented by a labor union
or bound by a collective bargaining agreement. The Company has
never suffered a work stoppage. The Company believes its future
success will depend, in part, on its continued ability to recruit
and retain highly skilled management, marketing and technical
personnel.
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.
In September 1998, the Company sold the building and improvements
in a sale/leaseback transaction in which the Company is leasing
approximately 38% of the total space in a three year rent-free lease.
Credit Facility
Background
On 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 was to
accrue but not be payable until July 31, 1995.
Beginning on that date, interest payments were 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 would 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 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.
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:
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 was to 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").
In addition, the Bank released the existing guarantees
of Messrs. Benou and Havasy on the effective date of the August
1995 Public Offering. Finally, pursuant to the restructured
1996 Credit Facility the Bank was granted the right to appoint
a member to the Company's Board of Directors
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.
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 and amended as of January 1,1997
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 further 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 and provided for conversion to be exercised
by the Bank or its assignee. 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 as of 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 is convertible
(collectively, the "Acquired Shares"). As of January 21, 1998
CNL Holdings, Inc. had 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 convert-
ible 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.
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.
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.
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
During the fiscal quarter ended January 31, 1997, shareholders
of the Company approved an amendment to the Certificate of
Incorporation to increase the total number of authorized shares
of all classes of stock from 6,500,000 (of which 500,000 shares
were classified as Preferred Stock and 6,000,000 shares are
classified as Common Stock) to 22,000,000 shares of which
2,000,000 shares are classified as Preferred Stock and
20,000,000 shares are classified as Common Stock.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET PRICE FOR COMMON STOCK AND CLASS A WARRANTS
The Company's Common Stock and Warrants are thinly traded
on the Nasdaq SmallCap Market, under the symbols CNLG and CNLGW,
respectively. Prior to the August 1995 Offering, the Common Stock
was traded on the OTC Bulletin Board.
The following table sets forth, for the periods indicated,
the high and low prices of the Company's Units (which no longer
trade), Common Stock and Warrants traded on the Nasdaq SmallCap
Market for 1996, 1997 and the first, second and third quarters of
1998. As of October 22, 1998, the Company's Common Stock was held
by approximately 817 shareholders of record.
Units Common Stock Warrants
High Low High Low High Low
1996
First 15.00 11.00 8.125 3.875 2.00 .9375
Quarter
Second 11.25 11.25 6.5625 4.25 1.00 1.0156
Quarter
Third __ ___ 6.25 2.25 1.50 .5625
Quarter
Fourth __ ___ 3.875 2.375 1.25 .50
Quarter
1997
First ___ ____ 5.875 3.00 .9375 .625
Quarter
Second ___ ____ 6.125 2.375 1.000 .375
Quarter
Third ___ ____ 5.675 2.250 .875 .250
Quarter
Fouth
Quarter ___ ____ 4.250 2.500 1.000 .250
1998
First
Quarter ___ ____ 6.00 2.000 2.1875 .4375
Second
Quarter ___ ____ 3.875 1.375 1.000 .375
Third
Quarter ___ ____ 2.00 0.4375 0.4375 .0625
DIVIDENDS
Holders of Common Stock are entitled to receive such dividends as
may be declared by the Board of Directors of the Company. To date,
the Company has neither declared nor paid any dividends on its
Common Stock or on its Preferred A or Preferred B share. The
Company anticipate that no such dividends will be paid in the
foreseeable future. Rather, the Company intends to apply any
earnings to the expansion and development of its business. Any
payment of cash dividends on any of its securities in the future
will be dependent upon the future earnings of the Company,
including its financial condition, capital requirement and other
factors which the Board of Directors deems relevant
Item 6. SELECTED FINANCIAL DATA
Year Ended
July 31,
(in thousands, except 1998 1997 1996 1995 1994
per share amounts)
Operations Summary:
Net sales and other $746 $1,123 $1,924 $2,091 $2,045
income
Net income (loss)
from (1,765) (3,810) 292 (537) (1,183)
continuing operations
Income (loss) from
continuing operations
per primary (.54) (2.41) 0.28 (0.12) (0.27)
share
Income (loss) from
continuing operations
after
giving retroactive
effect to a 1 for - - - (12.36)(27.22)
100 reverse stock
split on August
16, 1995
Balance Sheet
Summary:
Total assets $4,819 $4,340 $3,928 $3,882 $3,739
Long-term debt and
capitalized lease - - $5 $34 $3,830
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
1998 1997 1996 1997 to 1996 to 1995 to
1998 1997 1996
100.0% 100.0% 100.0% Sales & (33.6%) (41.6%) (8.0%)
other
income
126.0%* 84.2%* 67.2* Cost of (0.5) (27.9) (32.9)
products
sold
207.4 182.9 49.2 Selling, (24.6) (117.0) 3.4
general &
administrat
ive
3.0 7.4 6.8 Interest (72.9) (38.0) (51.8)
336.5 274.4 123.2 Total costs (18.5) 29.9 (23.0)
& expenses
(236.5) (174.4) (23.2) Income (9.9) (338.5) (56.5)
(loss)
before
taxes
- .9 - Income (98.0) 494.2 (100.0)
taxes
(credits)
(236.5)%(175.3)%(23.2)% Loss before (10.4)% (339.0)% (16.5)%
extraordinary
item
* Includes write-offs for obsolete or excess inventory which were
$410,759, $28,101, and $50,281 in 1998, 1997,and 1996 respectively.
Results of Operations
1998 Compared to 1997
Total revenue decreased $376,970 or 33% from $1,123,391 to
$746,420 in 1998. This decrease was attributable, in part, to
delays in the release of tone protection orders from the Bonneville
Power Authority and other utilities customers which the Company
attributes to budget constraints and the delay in the release of
its new advanced PTR1500 tone protection system. The Company
shipped its PTR1500 prototype to the General Electric Company (GE)
in May 1998 for extensive electrical and environmental tests. As
a result of these tests, the Company has agreed to and is presently
redesigning some modules to accommodate modifications requested by
GE to expand the product's range. The Company plans to ship the
expanded prototypes in late 1998 and production models by the end
of the third quarter ending April 30, 1999.
1998 Compared to 1997 (Continued)
Gross Margins, exclusive of inventory adjustments for the
years ended July 31, 1998 and 1997 totaled $216,462 and $206,011
representing 29% and 18% of revenues. Gross margins for 1998 were
higher than 1997 due to efficiencies in lower operating costs.
Selling, General and Administrative expenses decreased from
$2,054,630 in 1997 to $1,548,446 in 1998 representing a decrease of
24.6% or $506,184. This decrease is attributable to less shares of
common stock being issued as compensation.
Interest expense totaled $22,447 for the year ended July 31,
1998 compared to $82,932 for the year ended July 31, 1997. This
decrease was a result of the debt repayment from proceeds of the
Company's Public Offering.
As a result of the foregoing, the Company reported a net loss
of $1,765,390 or $0.54 per share. This compares to a net loss of
$3,810,736 or $1.24 per share for the same period last year.
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 outstanding loan balances
resulting from the paydown 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 $448,622 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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 31, 1998 was $4,192,541 compared to
$2,456,121 at year ended July 31, 1997. The improvement in the
working capital is primarily attributable to higher cash reserves
and lower debt due to the Company's Public Offering.
Accounts receivable have decreased from $109,571 at year-end
July 31, 1997 to $44,477 at July 31, 1998. This decrease of
$65,094 is the result of lower average sales for fiscal 1998
versus 1997.
The Company plans to meet its cash requirements for the next
twelve months through existing cash balances and cash generated from
operations . In addition, the Company believes that it can obtain
financing from institutional investors secured by its assets, if
necessary.
Inflation
Management believes that the results of operations have not
been affected by inflation and management does not expect
inflation to have a significant effect on its operations in the
future.
Y2K Issues
The company has contracted a Y2K solution provider to review
its mainframe computer system for Y2K issues and to upgrade the
computer system to be Y2K compliant. The Company anticipates that
the upgrade will be completed by fiscal year end July 31, 1999.
The Company is also in the process of contacting all of its major
suppliers to request representations that their systems are or
will be Y2K compliant. The Company is in the process of determining
the impact, if any, that third parties who are not Y2K compliant may
have on its operations.
Management estimates that the cost of its Y2K compliance program
will be $5,000; In the event that this upgrade will not be ready, the
Company has a contingency plan that is not Y2K reliant.
The Company's entire product line is not date sensitive and the
Company presently believes that there are no potential product-related
implications that may result from Y2K issues.
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, 1998.
NAME AGE POSITION
Robert S. Benou 64 President and Director
Arpad J. Havasy 62 Executive Vice President,
Secretary, Treasurer and
Director
Louis S. Massad 61 Director
Marc R. Benou 31 Vice President, Assistant
Secretary and Director
Edward J. Rielly 31 Director
Thomas Fogg 63 Vice President-Engineering
Robert S. Benou has served as President and a Director of
the Company since 1968. Mr. Benou is responsible for military
products, new product development and supervision of sales and
marketing. Mr. Benou is a graduate of Victoria College and holds
a BS degree from Kingston College, England and a BSEE from Newark
College of Engineering, in addition to industrial management
courses at Newark College of Engineering. Robert S. Benou is
the father of Marc R. Benou.
Arpad J. Havasy has served as the Company's Executive Vice
President and Director since 1968. Mr. Havasy is a graduate of
Electromos E's Gepeszeti Technikum (Hungary) and the University
of Budapest. In addition, Mr. Havasy has attended courses at
both Rutgers University and the American Management Association.
Mr. Havasy is on total disability.
Louis S. Massad has been a Director of the Company since
April 1995. Mr. Massad 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.
Edward J. Rielly has been a Director of the Corporation since
January 1998. Mr. Rielly is an Application Developer with Chubb & Son.
From 1993 to 1998, Mr. Rielly was an Application Developer with the
United States Golf Association. Mr. Rielly is a graduate of Lehigh
University and holds a BS in Computer Science.
Directors hold office until the annual meeting of the
Company's stockholders and the election and qualification of
their successors. Officers hold office, subject to removal at
any time by the Board, until the meeting of directors immediately
following the annual meeting of stockholders and until their
successors are appointed and qualified.
Section 16 (a) Beneficial Ownership Reporting Requirements
There were no delinquent or untimely filers during the fiscal
year.
Item 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth the cash compensation
(consisting entirely of salary) paid (or accrued for) by the
Company to its President, the only executive officer whose
aggregate remuneration exceeded $100,000 in each of the
three Company's fiscal years ended July 31, 1998, 1997 and 1996:
Summary Compensation Table
Annual Compensation Long Term Compensation
Name and Other Annual
Principal Fiscal Compensation
Position Year-End Salary Bonus (1) Awards Payouts
1998 $170,000 0 0 0
Robert
Benou,
President 1997 $150,000 0 0 0
1996 $150,000 0 0 0
_________________
Incentive Stock Option Plan
On May 15, 1995, the Board of Directors of the Company
adopted and on August 14, 1995, the shareholders approved the
Conolog Corporation 1995/1996 Stock Option Plan ( the "Option
Plan"). The Option Plan is designed to permit the Company to
grant either incentive stock options under Section 422A of the
Internal Revenue Code (the "Code") or nonqualified stock options.
Under the Option Plan, a Stock Option Committee (the "Option
Committee") of the Board is authorized to grant options to
purchase up to 200,000 shares of stock to key employees, officers,
directors and consultants of the Company. The Option Committee
administers the Option Plan and designates the optionee's, the type
of options to be granted (i.e., nonqualified or incentive stock
options), the number of shares subject to the options, and the
terms and conditions of each option. The terms and conditions
include the exercise price, date of grant, and date of exercise
of each option. An employee may, at the discretion of the Option
Committee, be permitted to exercise an option and make payment by
giving a personal note.
Incentive stock options may only be granted to employees of
the Company and not to directors or consultants who are not so
employed. The exercise price for incentive stock options must be
at least one hundred percent (100%) of the fair market value of
the Common Stock as determined by the Option Committee on the
date of grant. All incentive stock options under the Option Plan
must be granted within ten (10) years from the date of adoption
of the Option Plan and each option must be exercised, if at all,
within ten (10) years of the date of grant. In no event may any
employee be given incentive stock options whereby more than
$100,000 of options become exercisable for the first time in a
single calendar year. All incentive stock options must be
exercised by an option within three (3) months after termination
of the optionee's employment, unless such termination is as a
result of death, disability or retirement. In the event an
optionee's employment is terminated as a result of death or
disability, such optionee or his designated beneficiary shall be
entitled to exercise any and all options for a period of twelve
(12) months after such termination. If an optionee's employment
is terminated as a result of retirement, the optionee shall be
entitled to exercise his options for a period of twenty four (24)
months following such termination.
Nonqualified stock options under the Option Plan are
generally subject to the same rules as discussed above.
Nonqualified stock options may, however, also be granted to
directors and consultants, whether or not such individuals are
employees of the Company. The exercise price for nonqualified
stock options may not be granted at less than eighty-five percent
(85%) of the fair market value of the shares on the date of
grant.
No incentive stock options or non-qualified options have
been granted.
EMPLOYMENT AGREEMENTS
The Company has entered into a 5-year employment agreement
commencing June 1, 1997 and ending May 31, 2002, with Robert Benou.
Under his employment agreement, Mr. Benou will receive an annual
base salary of $150,000 for the first year of employment with an
increase of $20,000 beginning November 1997 and every profitable
year thereafter. In addition, Mr. Benou is entitled to an
annual bonus equal to 6% of the Company's annual "income before
income tax provision" as stated in its annual Form 10-K. The
employment agreement also entitles Mr. Benou to the use of an
automobile and to employee benefit plans, such as life, health,
pension, profit sharing and other plans.
Under the employment agreement, employment terminates upon death
or disability of the employee and employee may be terminated by
the Company for cause. The company intends to maintain a $1
million life insurance policy on the life of Robert Benou.
The Company has entered into a 5-year employment agreement
commencing June 1, 1997 and ending May 31, 2002, with Marc Benou.
Under his employment agreement, Mr. Benou will receive an annual
base salary of $55,000 for the first year of employment with an
increase of $6,000 beginning June 1998 and every year thereafter.
Mr. Benou is entitled to an annual bonus equal to 3% of the
Company's annual "income before income tax provision" as stated
in its annual Form 10-K. The employment agreement also entitles
him to the use of an automobile and to employee benefit plans,
such as life, health, pension, profit sharing and other plans.
Under the employment agreement, employment terminated upon death
or disability of the employee and employee may be terminated by
the Company for cause.
On March 12, 1998, the Company entered into a five year employment
with Dina Stellwagen to serve as Corporate Development Manager.
Base salary is $50,000 per annum with annual increases of $4,000.
The agreement calls for the Corporate Development Manager to receive
a quarterly bonus of 5,000 shares of Common Stock that have not been
registered and eligible for sale under Rule 144 code. The employment
agreement also entitles her to the use of an automobile and to reimburse
her for all ordinary and necessary business expenses. Eligibility for
all employee benefit plans, such as life, health, pension, profit
sharing and other plans is provided under the agreement, however, the
Company is not obligated to establish or maintain any of the afore-
mentioned executive plans. Upon termination without cause, the agree-
ment provides for severance compensation equal to 2.99 times the
average annual compensation.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the beneficial ownership of
outstanding shares of Common Stock of the Company as of the date
hereof by any person who, to the knowledge of the Company, owns
beneficially more than 5% of the outstanding Common Stock, by all
directors of the Company, and by the directors and officers of
the Company as a group.
Name and Amount and
Address of Nature of After
Beneficial Owner(1) Beneficial Ownership Offering
Robert S. Benou 220,000 5.8%
Arpad J. Havasy 55,000 1.5%
Marc R. Benou 45,000 1.2%
Louis Massad 5,000 .1%
Edward J. Rielly 500 .0%
All Directors and Officers
as a Group (5 persons) 325,500 8.6%
(1) The address for these individuals is c/o Conolog
Corporation, 5 Columbia Road, Somerville, New Jersey 08876.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
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.
FORWARD LOOKING STATEMENTS
The foregoing contains certain forward looking statements.
Due to the uncertainties associated with doing business with
governmental entities and the release of backlog orders and
competition in a business characterized by rapid technologic
changes and advances, actual results may differ materially from
any such forward looking statements.
PART IV
Item 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)Financial Statements
Balance Sheets as of July 31, 1998 and 1997 F-2-3
Statements of Operations for the years ended
July 31, 1998 and 1997 F-4
Statements of Stockholders' Equity for the years
ended July 31, 1998 , 1997 and 1996 F-5-6
Statements of Cash Flows for the years ended July 31, 1998 and
1997 F-7-8
Notes to Financial Statements F-9 to-17
Index of Exhibits
Item 16. Exhibits - None.
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
10.1 Credit Facility documents between Manufacturers Hanover
Trust Company and the Registrant pursuant to which Registrant
obtained a Credit Facility for $4,000,000 - incorporated
by reference to Exhibit 6A-D to the Registrant's
Current Report on Form 8-K dated April 5, 1989.
10.2 * Conolog Corporation 1995/1996 Stock Option Plan.
10.3 *** Option and Purchase, Sale and Assignment Agreement,
dated as of September 12, 1996 by and between The
Chase Manhattan Bank and CNL Holdings, Inc.
10.4 *** Irrevocably Proxy dated as of September 12, 1996 by
and between CNL Holdings, Inc. and Conolog
Corporation.
10.5 *** Agreement dated September 12, 1996 by and between
CNL Holdings, Inc. and Conolog Corporation.
10.5 (A)** Amendment No. 1 dated January 31, 1997 to Conolog Corporation
Allonge.
10.6 Agreement with General Electric Company dated April 1, 1997
incorporated by reference to the Company s Form 10-Q for the
quarter ended April 30, 1997.
10.7**** Employment Agreement dated June 1, 1997 between Robert
Benou and Conolog Corporation
10.8**** Employment Agreement dated June 1, 1997 between Marc Benou
and Conolog Corporation
10.9***** Employment Agreement dated March 1, 1998 between Dina Stellwagen
and Conolog Corporation
___________________
* Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (33-92424).
** Filed by Amendment to the Registrant's Registration Statement
file on Form S-1 (File No. 0-8184) as filed on October 16, 1996.
*** Incorporated by reference to the Registrant's Registration
Statement file on Form S-1 (File No 0-8174) as filed on October
16, 1996
**** Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (File No. 0-8174) as filed on September 12,
1997
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Conolog Corporation
By:
October 29, 1998 /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 29, 1998
/s/Robert S. Benou
President, Chief Executive Officer
and Chairman of the Board
October 29, 1998 /s/Arpad J. Havasy
Executive Vice President, Secretary,
Treasurer and Director
October 29, 1998 /s/Marc R. Benou
Vice President, Assistant Secretary and Director
October 29, 1998 /s/Louis S. Massad
Director
Annual Report on Form 10-K
Item 8, Item 14 (a)(1) and (2)
Financial Statements
Year Ended July 31, 1998
Conolog Corporation
Somerville, New Jersey 08876
Form 10-K Item 14(a)(1) and (2)
Index to the Financial Statements
Conolog Corporation
July 31, 1998
The following financial statements of the registrant are included in
Item 14:
Balance Sheets - July 31, 1998 and 1997 ......................... F-2-3
Statements of Operations - Years Ended July 31, 1998,
1997 and 1996 ............................................. F-4
Statements of Stockholders' Equity (Deficiency) - Years
Ended July 31, 1998, 1997 and 1996 ......................... F-5-6
Statements of Cash Flows - Years Ended July 31, 1998,
1997 and 1996 .. . . ....................................... F-7-8
Notes to Financial Statements .................................... F-9-17
Independent Auditors' Report
To the Board of Directors
Conolog Corporation
We have audited the accompanying balance sheets of Conolog
Corporation as of July 31, 1998 and 1997 and the related
statements of operations, stockholders' equity (deficiency)
and cash flows for each of the three years in the period
ended July 31, 1998. 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, 1998 and 1997,
and the results of its operations and its cash flows for
each of the three years in the period ended July 31, 1998
in conformity with generally accepted accounting principles.
/s/Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
October 9, 1998
F-1
Conolog Corporation
Balance Sheets
July 31,
1998 1997
--------- ---------
ASSETS
Current Assets
Cash and equivalents $ 1,108,581 $ 503,217
Accounts receivable - less
allowances of $6,000 in
1998 and 1997 44,477 109,571
Inventories
Finished goods 905,939 1,705,782
Work-in-process 1,205,450 498,070
Materials and supplies 1,098,879 969,940
---------- ----------
3,210,268 3,173,792
Other current assets 36,347 44,085
Deferred offering costs - 113,813
---------- ----------
4,399,673 3,944,478
Property, Plant and Equipment
Land and improvements 34,524 34,524
Building and improvements 700,461 663,630
Machinery and equipment 1,328,218 1,291,838
Furniture and fixtures 341,607 336,001
---------- ----------
2,404,810 2,325,993
Less allowance for depreciation
and amortization 1,994,822 1,938,188
---------- ----------
409,988 387,805
Other assets 9,803 7,469
---------- ----------
TOTAL ASSETS $ 4,819,464 $ 4,339,752
========== ==========
See notes to financial statements
F-2
July 31,
1998 1997
-------- --------
LIABILITIES
Current Liabilities
Notes payable - other $ - $ 916,235
Accounts payable 60,845 188,510
Accrued payroll 30,950 15,645
Accrued interest - 17,374
Bridge loan - 200,000
Other accrued expenses 115,337 146,791
Current maturities of - 3,802
capitalized lease obligations
--------- -----------
Total Current Liabilities $ 207,132 $ 1,488,357
---------- -----------
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, 1197
shares issued and outstanding 597 597
Common Stock, par value $1.00;
20,000,000 shares authorized;
issued 3,724,773 shares in 1998
and 2,803,473 in 1997, including
8,776 shares held in Treasury 3,724,773 2,803,473
Contributed Capital 9,643,215 7,034,008
Retained Earnings (Deficit) (8,702,019) (6,932,449)
Treasury Shares at Cost (131,734) (131,734)
----------- -----------
Total Stockholders' Equity 4,612,332 2,851,395
---------- -----------
Total Liabilities and Stockholders' Equity
$ 4,819,464 $ 4,339,752
========== ==========
See notes to the financial statements
F-3
Conolog Corporation
Statements of Operations
July 31,
1998 1997 1996
------------ ------------ ------------
Sales and other income $ 746,420 $ 1,123,390 $ 1,924,466
------------ ------------ ------------
Costs and Expenses:
Cost of products sold 529,958 917,379 1,242,001
Selling, general and
administrative 1,548,446 2,054,630 946,954
Interest 22,447 82,932 133,652
Write-off obsolete or
excess inventories 410,759 28,101 50,281
------------ ------------ ------------
2,511,610 3,083,042 2,372,888
------------ ------------ ------------
Loss Before Income Taxes and
Extraordinary Items (1,765,190) (1,959,652) (448,422)
Income taxes 200 10,084 200
------------ ------------ ------------
Net Loss before Extraordinary
Items (1,765,390) (1,969,736) (448,622)
Extraordinary Items - (1,841,000) 740,376
------------ ------------ ------------
Net Income (Loss) $(1,765,390) $(3,810,736) $ 291,754
============ ============ ============
(Loss) from Continuing
Operations Per Share $ (.54) $ (1.24) $ (.43)
(Loss) Net Income Per Share
- Basic (loss) earnings
per share $ (.54) $ (2.41) $ .28
- Diluted (loss) earning
per share $ (.54) $ (2.41) $ .25
See notes to the financial statements
F-4
Conolog Corporation
Statement of Stockholders' Equity (Deficiency)
Series A Series B
Preferred Preferred Common Contributed
Stock Stock Stock Capital
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
Public stock offering - - 725,300 2,045,777
Additional shares issued
to employees - - 55,000 80,100
Additional shares issued
to consultant - - 141,000 429,150
Debt to equity conversion - - - 50,000
Net loss for the year - - - -
Dividends - - - 4,180
--------- -------- --------- ---------
Balance @ July 31,
1998 $ 77,500 $ 597 $ 3,724,773 $9,643,215
========= ========= =========== ==========
F-5
Conolog Corporation
Statement of Stockholders' Equity (Deficiency)
Total
Retained Stockholders'
Earnings Treasury Equity
(Deficit) Stock (Deficiency)
------------- ----------- --------------
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
Public stock offering - - 2,771,077
Additional shares issued to
employees - - 121,500
Additional shares issued to
consultant - - 570,150
Debt to Equity Conversion - - 50,000
Net Loss for the year (1,765,390) - (1,751,790)
Dividends (4,180) - -
------------ --------- -----------
Balance @ July 31, $(8,702,019) $(131,734) $4,612,332
1998 ============ ========== ==========
See notes to the financial statements
F-6
Conolog Corporation
Statements of Cash Flows
July 31,
1998 1997 1996
----------- ---------- ------------
Cash Flows From Operating Activities
Net (Loss)Income $(1,765,390) $(3,810,736) $ 291,754
Adjustments to Reconcile Net (Loss)
Income to Net Cash Used by
Operating Activities
Debt retirement cost - 1,841,000 -
Common stock base compensation 135,100 1,313,750 -
Common stock for consulting fees 570,150 - -
Deferred income taxes - - 492,352
Depreciation and amortization 56,634 57,781 64,994
Gain on disposition of equipment - - (3,420)
Provision for losses on accounts
receivable - (8,000) 9,000
(Increase)Decrease in Operating Assets
Accounts receivable 65,094 202,449 (141,479)
Inventories (36,476) (236,012) (339,653)
Other current assets 7,738 (568) (17,834)
Increase(Decrease) in Operating Liabilities
Accounts payable (127,665) (92,119) (7,001)
Accrued expenses and other liabilities (33,523) 78,241 (1,066,379)
---------- ---------- -----------
Net Cash Used by Operating Activities
(1,128,338) (654,214) (717,666)
----------- --------- ----------
Cash Flows From Investing Activities
Purchase of property, plant and equipment
(78,817) (11,680) (43,163)
Proceeds from sale of equipment - - 18,666
---------- --------- ---------
Net Cash Used in Investing Activities
(78,817) (11,680) (24,497)
---------- -------- --------
Cash Flows From Financing Activities
Deferred offering costs 113,813 (113,813) 86,154
Increase from public stock offering 2,771,077 - 4,421,525
(Repayments)proceeds from borrowings (916,235) 916,235 -
Increase (Decrease) in bridge loan (150,000) 200,000 (200,000)
Repayments of long-term borrowings (3,802) (34,453) (2,836,008)
(Increase)reductions in other assets (2,334) 22,929 (20,580)
Dividends paid - - (396,587)
Increase (Decrease) in due to officers - - (161,705)
--------- ----------- ----------
Net Cash Provided by Financing
Activities 1,812,519 990,898 892,799
---------- ----------- ----------
Net Increase in Cash and Equivalents 605,364 325,004 150,636
Cash and Equivalents at Beginning
of Period 503,217 178,213 27,577
----------- ---------- ---------
Cash and Equivalents at End of Period $1,108,581 $ 503,217 $ 178,213
========= ========== ==========
F-7
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid(received) during the year for:
Interest $ 39,821 $ 77,349 $ 772,773
Taxes $ (9,520) $ 10,084 $ 125
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
On January 21, 1998, the Company satisfied a $50,000 Bridge Loan with the
conversion of the loan to 1.2 million Class A Warrants.
See notes to the financial statements
F-8
Conolog Corporation
Notes to the Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
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.
Cash and Equivalents
For the purpose of the statements of cash flows, cash
equivalents include time deposits, certificates of deposit
and all highly liquid debt instruments with original
maturities of three months or less.
Inventories
Inventories are 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.
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.
Advertising Costs
Advertising costs are charges to operations when incurred.
Income Taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to
differences between the bases of assets and liabilities for
financial and income tax reporting. The deferred tax assets
and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled.
deferred taxes also are recognized for operating losses that
are available to offset future federal and state income taxes.
F-9
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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 number of shares used
in the computations were 3,251,150, 1,581,218 and 1,041,978
for 1998, 1997 and 1996, respectively. The effect of assuming
the exchange of the warrants, Series A Preferred Stock and
Series B Preferred Stock in 1997 and 1996 would be anti-
dilutive.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and 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.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
At times throughout the year, the Company may maintain certain
bank accounts in excess of FDIC insured limits.
The Company provides credit in the normal course of business.
The Company performs ongoing credit evaluations of its customers
and maintains allowances for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical
trends, and other information.
NOTES PAYABLE - OTHER
CNL Holdings, Inc. loaned the Company $916,235. The notes were
due during the fiscal year July 31, 1998 and bore interest at
the rate of 4% per annum. The loans were payable in cash or
Series C Preferred Stock, at the Company's option at $5.00 per
share. Interest was payable in Common Stock up to a maximum of
40,000 shares per annum. On January 21, 1998, the Company paid
CNL Holdings, Inc. $916,235 plus accrued interest of $25,421 in
cash. This effectively eliminated all debts and liens with CNL
Holdings, Inc.
F-10
BRIDGE LOAN
The Company received $200,000 in net proceeds from several
investors in a private placement. Each investor received
two (2) Promissory Notes. Promissory Notes (the "First
Note") totaling $150,000 was due and payable on the earlier
of January 31, 1999 or the closing of the Company's next
public offering. The Second Convertible Note (the "Second
Note"), totaling $50,000 plus accrued interest was payable
on the earlier of January 31, 1999 or the closing of the
Company's next public offering, or convertible at the time
the next Registration Statement was declared effective by
the Securities and Exchange Commission and at the option of
the selling security holders into a total of 1.2 million
Class A Warrants. Each Class A Warrant contained in the
Second Note is identical to the Company's currently out-
standing Class A Warrants. On January 21, 1998, at the
closing of the Company's public offering, $150,000 plus
accrued interest of $13,306 was paid in cash in full settle-
ment of the First Note. The Second Note was satisfied with
the 1.2 million Class A Warrants issued on January 21, 1998.
LEASES
The Company leases various equipment under operating leases.
The future minimum rental payments under the operating leases
that have initial or remaining lease terms in excess of one
year as of July 31, 1998 are as follows:
Year Ended July 31,
1999 $ 4,808
2000 4,808
-------
$ 9,616
=======
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, 1998, 1997 and 1996.
INCOME TAXES
The income tax provision is comprised of the following:
July 31
1998 1997 1996
-------- --------- -----------
Current Income Taxes
Federal - 9,884 -
State 200 200 200
--------- --------- ----------
$ 200 $ 10,084 $ 200
========= ========= ==========
F-11
INCOME TAXES, Continued
A reconciliation between taxes computed at the federal statutory
rate and the effective tax rate follows:
July 31,
1998 1997 1996
---- ---- ----
Federal statutory tax rate (34.0)% (34.0)% (34.0)%
Valuation Allowance on Net
Operating Loss Carryover 34.0 34.0 34.0
Permanent and other differences - .5 -
----- ----- -----
- % 0.5 % - %
===== ===== =====
Deferred taxes are recognized for temporary differences between
the bases of assets and liabilities for financial statement and
income tax purposes.
The temporary differences causing deferred tax benefits are
primarily due to net operating loss carry forwards.
At July 1, 1998, the Company has net operating loss carry
forwards for federal and state income tax purposes of
approximately $4,710,000 and $3,863,000, respectively, which
are available to offset future Federal and State taxable income,
if any. The federal and state net operating loss carry
forwards expire as follows:
Federal State
2001 $ - $ 706,241
2002 - 897,997
2004 - 542,540
2005 - 1,716,222
2008 253,276 -
2009 1,232,010 -
2010 957,538 -
2012 550,752 -
2013 1,716,424 -
---------- -----------
$ 4,710,000 $ 3,863,000
=========== ===========
At July 31, 1998 the Company has available unused general
business credits that may provide future tax benefits and
expire as follows:
Amount
2000 $ 12,100
2001 26,300
2002 64,900
---------
$ 103,300
=========
F-12
INCOME TAXES, Continued
The Company's deferred tax asset is comprised of the following
temporary differences:
Federal State
------- -----
Net operating losses and tax
credit carry forwards $ 1,704,562 $ 231,768
Less: valuation allowance (1,704,562) (231,768)
------------ -----------
Net Deferred Tax Assets $ - $ -
============ ===========
The net change in the valuation allowance increased by approximately
$607,000.
PROFIT SHARING PLAN
The Company sponsors a qualified profit sharing plan that covers
substantially all full time employees. Contribution to the plan
are discretionary and determined annually by management.
The Plan also provides an employee savings provision (401(k) plan
whereby eligible participating employees may elect to contribute
up to 15% of their compensation to an investment trust. The Company
contributes $2 for every $1 of the participant's elective contribution,
up to 6% of the participant's compensation.
The total expense for the above plan amounted to $52,721, $28,531,
and $29,603 for the years ended July 31, 1998, 1997 and 1996
respectively.
CAPITAL STOCK
The Series A Preferred Stock provides 4% ($.02 per share)
cumulative dividends, which may be exchanged for one share of
Common Stock upon surrender of the Preferred Stock and payment
of $1,200 per share. The Company may redeem the Series A Preferred
Stock at $.50 per share plus accrued and unpaid dividends.
The Series B Preferred Stock provides cumulative dividends
of $.90 per share which were $29,017 in arrears at July 31,
1998. 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-13
WARRANTS
The Company issued common stock purchase warrants separately
and as part of the previous offerings as follows:
Exercise Original Extended
Number of Price Per Expiration Expiration
Date of Grant Shares Share Date Date
------------- --------- ---------- ---------- -----------
08/16/95 1,135,750 $6.00 08/16/98 08/16/2002
01/21/98 2,901,200 $6.00 08/30/2002 -
01/21/98 1,200,000 $5.25 01/21/2001 -
MAJOR CUSTOMERS
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
---------- --------- --------- -----------
1998 $ 205,868 1 28
1997 625,134 3 57
1996 401,840 1 21
COMMITMENTS AND CONTINGENCIES
Employment Agreements
On June 1, 1997 the Company entered into an employment agreement
with Robert Benou to serve as the Company's President for a period
of five years. Base salary under the agreement is $150,000 per
annum with annual increases of $20,000 beginning November 1997
and every profitable year thereafter. The agreement also calls
for an annual bonus equal to 6% of the Company's income before
income taxes as stated in its annual Form 10-K. Employee benefit
plans, such as life, health, pension and other plans are provided
under the agreement. The Company will also provide reimbursement
of ordinary and necessary business expenses and a monthly car
allowance. A noncompetion/nonsolicitation restriction applies
for one year after termination of employment. Upon termination
without cause, the agreement provides for severance compensation
equal to 2.99 times the average annual compensation.
F-14
COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements (Continued)
The Vice President of the Company entered into an employment
agreement on June 1, 1997. The agreement is for a period of
five years expiring May 31, 2002. Pursuant to the terms of the
agreement, the officer is to receive a base salary of $55,000
for the period June 1, 1997 through May 31, 1998 and an increase
of $6,000 per annum for each twelve month period thereafter. The
agreement also calls for an annual bonus equal to 3% of the
Company's income before taxes as stated in its annual Form 10-K.
The Vice President is entitled to participate in all general
pension, profit-sharing, life, medical, disability and other
insurance and executive benefit plans at any time in effect for
executives of the Company, however, the Company is not obligated
to establish or maintain any of the aforementioned executive
benefit plans. The Company will also provide an automobile for
the use of the Vice President and reimburse him for all ordinary
and necessary business expenses. A noncompetition/nonsolicitation
restriction applies six months after termination of employment.
Upon termination without cause the agreement provides for severance
compensation equal to 2.99 times the average compensation paid by
the Company.
On March 1, 1998, the Company entered into an employment agreement
with a Company executive to serve as a Corporate Development Manager
for a period of five years. Base salary under the agreement is $50,000
per annum with annual increases of $4,000. The agreement calls for
the Corporate Development Manager to receive a quarterly bonus of
5,000 shares of Conolog Corporation stock that have not been
registered and eligible for sale under Rule 144 code. Eligibility
for all general pension, profit-sharing, life, medical disability
and other insurance and executive benefit plans is provided under
the agreement, however, the Company is not obligated to establish
or maintain any of the aforementioned executive plans. The Company
will also provide an automobile for the use of the Corporate
Development Manager and reimburse her for all ordinary and necessary
business expenses. Upon termination without cause, the agreement
provides for severance compensation equal to 2.99 times the average
annual compensation.
Consulting Agreements
In February of 1998 the Company entered into a management and
financial consulting agreement with Warren Schreiber ("Schreiber"},
whereby Schreiber would act as a consultant to the Company. In
consideration of such services, Schreiber was granted 75,000 shares
of common stock of the Company upon commencement of the contract.
Additionally, for the duration of the agreement, Schreiber is to
receive 25,000 shares of the Company's common stock on the last
day of March, June, September and December of each year. Under
the agreement, termination may occur by either party with or
without cause at any time upon 60 days prior written notice.
F-15
Stock Option Plan
On May 15, 1995, the Board of Directors of the Company adopted and
on August 14, 1995, the shareholders approved the Conolog Corporation
1995/1996 Stock Option Plan (the "Option Plan"). The Option Plan is
designed to permit the Company to grant either incentive stock options
under Section 422A of the Internal Revenue Code (the "Code") or
nonqualified stock options. Under the Option Plan, the Board is
authorized to grant options to purchase up to 200,000 shares of
stock to key employees, officers, directors and consultants of the
Company.
Incentive stock options may only be granted to employees of the
Company and not to directors or consultants who are not so employed.
The exercise price for incentive stock options must be at least
one hundred percent (100%) of the fair market value of the common
stock as determined on the date of the 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 the
grant. In no event may any employee be given incentive stock options
whereby more than $100,000 of options become exercisable for the
first time in a single calendar year. All incentive stock options
must be exercised by an optionee within three(3) months after termination
of the optionee's employment, unless such termination is a result of
death, disability or retirement. In the event of 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
a 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 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 nonqualified options have been granted.
COMMON STOCK ISSUED TO EMPLOYEES
In February 1998 the Company issued 45,000 shares of the Company's
common stock, as additional remuneration to certain employees.
Compensation expense was recorded at the average fair value of the
stock at the time of issuance, $121,500 ($2.70 per share).
In accordance with the employment agreement between the Company and
one of their executives the Company issued 10,000 shares of common
stock during fiscal year ended July 31, 1998. Compensation expense
was recorded at the average fair value of the stock at the time of
issuance, $13,600 ($1.36 per share)
F-16
COMMON STOCK ISSUED TO EMPLOYEES (Continued)
In July 1997 the Company issued 359,500 shares of common stock to
several employees. Compensation expense was recorded at the average
fair value of the stock at the time of issuance, $1,313,750 ($3.66
per share).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, other current assets,
accounts payable and accrued expenses approximates fair value because
of the short maturity of these instruments.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instru-
ment. These estimates are subjective in nature and involve uncertain-
ties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
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, 1996 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.
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. The total value placed upon this transaction was $1,841,000
(1,400,000 x $1.315).
The cost of debt retirement of $1,841,000, which occurred in 1997,
is considered an extraordinary item with no tax effect due to the
non-deductibility of this expense.
SUBSEQUENT EVENTS
Sales of Real Estate
In September 1998 the Company completed the sale of its land and
building resulting in approximately $725,000 net proceeds to the
Company. The transaction also provides for a three year rent-free
lease to the Company of approximately 38% of the total space of
the building.
Acquisition of Atlas Design, Inc.
In September1998, the Company acquired the assets of Atlas Design,
Inc. Atlas Design, Inc. provides short and long term qualified
engineering and technical services as well as human resource consulting.
F-17
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<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUL-31-1998 JUL-31-1997
<PERIOD-END> JUL-31-1998 JUL-31-1997
<CASH> 1,108,581 503,217
<SECURITIES> 0 0
<RECEIVABLES> 50,477 115,571
<ALLOWANCES> (6,000) (6,000)
<INVENTORY> 3,210,268 3,173,792
<CURRENT-ASSETS> 4,399,673 3,944,478
<PP&E> 2,404,810 2,325,993
<DEPRECIATION> (1,994,822) (1,938,188)
<TOTAL-ASSETS> 4,819,464 4,339,752
<CURRENT-LIABILITIES> 207,132 1,488,357
<BONDS> 0 0
77,500 77,500
597 597
<COMMON> 3,724,773 2,803,473
<OTHER-SE> 809,462 (30,175)
<TOTAL-LIABILITY-AND-EQUITY> 4,819,464 4,339,752
<SALES> 746,420 1,123,390
<TOTAL-REVENUES> 746,420 1,123,390
<CGS> 529,958 917,379
<TOTAL-COSTS> 940,717 945,80
<OTHER-EXPENSES> 1,548,446 2,054,630
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 22,447 82,932
<INCOME-PRETAX> (1,765,190) (1,959,652)
<INCOME-TAX> 200 10,084
<INCOME-CONTINUING> (1,765,390) (1,969,736)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (1,841,000)
<CHANGES> 0 0
<NET-INCOME> (1,765,390) (3,810,736)
<EPS-PRIMARY> (.54) (2.41)
<EPS-DILUTED> (.54) (2.41)
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