Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED January 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number ___________0-8174________
Conolog Corporation
(Exact name of registrant as specified in its charter)
Delaware 52-0853566
(State or other jurisdiction of (I. R. S. Employer
organization) Identification No.)
5 Columbia Road, Somerville, NJ 08876
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (908) 722-8081
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such report(s), and (2) has
been subject to such filing requirement for the past 90 days.
YES X NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PROCEEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15 (d) of the
Securities Exchange Act of 1934 subsequently to the distribution of
securities under a plan confirmed by a court.
YES ______ NO ________
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, par value $1.00 per share; 3,686,063 shares outstanding as
of March 11, 1998 (inclusive of Treasury Stock).
Conolog Corporation
BALANCE SHEETS
Jan 31, 1998 July 31, 1997
ASSETS (Unaudited) (Audited)
Current Assets:
Cash $1,536,193 $503,217
Accounts Receivable, less
allowances of $6,000 116,599 109,571
Inventories 3,461,730 3,173,792
Other Current Assets 52,025 44,085
Deferred Offering Costs 0 113,813
---------- ----------
TOTAL CURRENT ASSETS $5,166,547 $3,944,478
Property, Plant and Equipment 386,053 387,805
less accumulated depreciation
of $1,966,764 and $1,938,188
respectively
Other Assets 6,028 7,469
------------ --------
TOTAL ASSETS $5,558,628 $4,339,752
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Notes Payable - Other $ 0 $ 916,235
Accounts Payable 73,351 188,510
Accrued Payroll 2,896 15,645
Accrued Interest 320 17,374
Bridge Loan 0 200,000
Other Accrued Expenses 89,398 146,791
Current maturities of
capitalized lease 0 3,802
obligations
Due to Officers 7,000 0
------------ -----------
TOTAL CURRENT LIABILITIES $ 172,965 $1,488,357
CONOLOG CORPORATION
BALANCE SHEETS
Jan. 31, 1998 July 31, 1997
Stockholders' Equity
Preferred Stock, par value $.50;
Series A; 4% cumulative; 162,000
shares authorized;155,000 shares
issued and outstanding 77,500 77,500
Preferred Stock, par value $.50;
Series B; $.90 cumulative; 50,000
shares authorized issued and
outstanding 1,197 shares 597 597
Common Stock; par value $1.00;
20,000,000 shares authorized;
issued 3,519,473 shares, including
8,776 shares held in Treasury 3,519,473 2,803,473
Contributed Capital 9,048,668 7,034,008
Retained Earnings (Deficit) ( 7,128,841) (6,932,449)
Treasury Shares at Cost ( 131,734) ( 131,734)
------------ -----------
Total Stockholders' Equity $ 5,385,663 $ 2,851,395
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,558,628 $ 4,339,752
============ ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
CONOLOG CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
1998 1997 1998 1997
TOTAL REVENUES $240,290 $448,852 $ 353,617 $867,586
COSTS OF GOODS SOLD 51,169 217,074 164,696 476,345
--------- --------- ---------- ---------
GROSS MARGIN 189,121 231,778 188,921 391,241
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES 200,009 201,444 358,516 378,478
--------- --------- ---------- ---------
OPERATING INCOME
/(LOSS) (10,888) 30,334 (169,595) 12,763
INTEREST EXPENSE 9,097 26,443 22,447 52,119
--------- --------- ---------- ---------
INCOME/(LOSS) BEFORE
TAXES ON INCOME
AND EXTRAORDINARY
ITEMS (19,985) 3,891 (192,042) (39,356)
PROVISION FOR TAXES 1,119 0 2,260 0
--------- --------- ---------- ---------
NET INCOME/(LOSS) $(21,104) $ 3,891 $(194,302) $(39,356)
========= ========== ========== =========
EARNINGS/(LOSS) PER SHARE $ .00 $ .00 $(.06) $(.04)
========= ========== ========== =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
CONOLOG CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JANUARY 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (194,302) $(39,356)
Adjustments to Net Income to Reconcile to
Net Cash Provided by Operating Activities:
Depreciation and amortization 28,576 28,575
(Increase)/Decrease in Accounts Receivable (7,028) (7,879)
(Increase)/Decrease in Inventories (287,938) (36,066)
(Increase)/Decrease in Other Current Assets
(7,940) (10,226)
(Increase)/Decrease in Deferred Offering
Costs 113,813 -
Increase/(Decrease) in Accounts Payable (115,159) (226,930)
Increase/(Decrease) in Accrued Expenses
and other liabilities (85,755) (25,995)
Activities (555,733) (317,877)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment (26,824) (8,610)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in Capital Lease Obligations (3,802) (27,546)
Increase/(Decrease) in Other Assets 0 13,832
Bridge Loan (Repayments)/Borrowings (200,000) 200,000
Repayments to Investors (916,235) 0
Repayments of Long-term Borrowings 0 (93,703)
Issuance of Common Stock 716,000 200,001
Contributed Capital 2,014,660 0
Dividends (2,090) 0
----------- ---------
Net Cash Provided/(Used) by Financing
Activities 1,615,533 292,584
---------- ---------
NET INCREASE/(DECREASE) IN CASH $1,032,976 $ (33,903)
CASH AT BEGINNING OF YEAR 503,217 178,213
---------- ---------
CASH AT END OF PERIOD $1,536,193 $ 144,310
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 22,447 $ 106,428
Income Taxes 2,260 4,960
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
CONOLOG CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1 - Computation of Earnings Per Share:
For the Six Months Ended
January 31,
1998 1997
Weighted Average Number of Shares
Outstanding: 2,892,577 1,037,964
COMMON STOCK
Reserve for Conversion:
Series A Preferred Stock* 155,000
Series B Preferred Stock (1 to 20
conversion factor) 0 0
Common Stock Equivalents
(Warrants)** 5,135,750 235,750
--------- ---------
Total 8,028,327 1,273,714
Gain/(Loss) Per Share:
Total Gain/(Loss) $(194,302) $( 39,356)
Pro-rata Dividends on Preferred
Stock Series A & B 2,090 2,090
--------- ----------
Net Gain/(Loss) available for
Common Stock $(196,392) $( 41,446)
---------- ----------
Average Number of Shares of Common Stock 2,892,577 1,038,964
========== ==========
Primary Gain/(Loss) Per Share $ (.06) $ (.04)
========== ==========
*Each share of Series A Preferred Stock may be exchanged for one share of
Common Stock upon surrender of the Preferred Stock and payment of $1200 per
share. In view of the large difference between the current market value of
the stock and the conversion rate, these shares have not been added to the
total common shares used in computing the net earnings per share.
**Each Warrant may be exchanged for one share of Common Stock at an exercise
price of $6.00 per share. In view of the large difference between the current
market value of the stock and the exercise price, these shares have not been
added to the total common shares used in computing net earnings per share.
Fully diluted earnings per share, assuming conversion of Series A and Series
B Preferred Stock, has not been reflected, as the effect would be either
anti-dilutive or not material.
NOTE 2 - Notes Payable - Other
Credit Facility and Agreement with CNL Holdings, Inc.
The principal amount owed to the Bank under the Company's Credit Facility
at June 30, 1996 was $1,012,500 and the unpaid accrued interest was
$48,850. The Bank and the Company entered into the Conolog Corporation
Allonge, dated as of September 11, 1996, pursuant to which the Amended
and Restated Term Note dated as of August 2, 1995 between the Company and
the Bank (the "Note") was amended to permit the conversion by the Bank
of the unpaid principal and interest due under the Note into 1,400,000
shares of the Company's Common Stock. The conversion right was 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 September 12, 1996 (the "Option Agreement").
Under the Option Agreement the Bank granted an option to CNL to purchase
all of the Bank's interest in (i) the Amended and Restated Term Loan
Agreement dated as of August 2, 1995 between the Company and the Bank,
(ii) the Note and (iii) the 375,000 shares of the Company's Common Stock
owned by the Bank. CNL paid $150,000 to the Bank for the option, which
had an exercise price of $1,500,000 (a balance of $1,350,000) and an
expiration date of April 15, 1997.
As part of the aforementioned transaction, CNL agreed to loan up to
$2,500,000 to the Company under certain circumstances (as described
below) and the Company agreed to file a registration statement (the
"Registration Statement") with the Securities and Exchange Commission
to register the 375,000 shares of Common Stock owned by the Bank and
the 1,400,000 shares of Common Stock into which the Note converted
(collectively, the "Acquired Shares"). As of January 21, 1998 CNL
Holdings, Inc. loaned the company $916,235 which was repaid at the
closing of the Company's public offering.
Each CNL loan carried interest at the rate of 4% per annum and became
due 12 months from the date of such Loan. At maturity, the Company
had the option to pay each Loan, together with all accrued interest
thereon, or by issuing shares of a new Series C Preferred Stock (the
"Series C Preferred") having a value of $5.00 per share for purposes
of such repayment.
Had the Series C Preferred been issued, it would have been non-voting
and carried a cumulative dividend of 8% per annum which would payable
by the issuance of shares of Common Stock valued at $5.00 per share up
to a maximum of 40,000 shares per annum. The Series C Preferred would
have been convertible into common stock at the rate of one share of
common stock for each share of Series C Preferred and had a liquidating
preference of $5.00 per share.
The Agreement also provided that for the two year period commencing on
the issuance of any shares of Series C Preferred (the "Registration
Period") CNL may have elected to include its Series C Preferred in any
post-effective amendment to the Registration Statement or any new
registration statement under the Securities Act of 1933, as amended.
In addition, the Agreement also provided that during the Registration
Period, CNL may have given notice to the Company to the effect that it
desired to register its shares under the Act for public distribution in
which case the Company would file a post-effective amendment to a then
current registration statement or a new registration statement.
Management believes that these transactions benefited the Company and
its stockholders. The exercise by CNL of its option under the Option
Agreement converted the Remaining Debt Claim, the Company had the
opportunity to, in effect, exchange its debt for equity and eliminated
the Company's default under the Credit Facility.
(See Liquidity and Financial Condition section of Management Discussion for
Details on Public Offering)
NOTE 3 - Capitalized Lease Obligations
January 31, 1998 July 31, 1997
Leases Payable $ 0 $ 3,802
less - Current Portion 0 3,802
------- -------
$ 0 $ 0
NOTE 4 - Taxes
At January 31, 1998 the Company has a net operating loss carry forward of
approximately $2,671,000 for financial reporting purposes and approximately
$2,443,000 for tax purposes which is available to offset future Federal
taxable income. For Federal purposes, $253,000 of the carry forward expires
in 2008, $1,232,000 expires in 2009 and $957,000 expires in 2010. For state
purposes the carry forward is approximately $1,604,000; $706,000 expires in
2001 and $898,000 expires in 2002. Also, at January 31, 1998 the Company
has unused tax credits of approximately $103,300 of which $12,100 expires
in 2000, $26,300 in 2001 and $64,900 in 2002.
The above net operating loss created a deferred tax asset that has been fully
reserved. The amount is $1,329,286.
At January 31, 1998 no deferred income taxes have been provided for per
SFAS No. 109 - Accounting for Income Taxes since management estimated that
temporary differences due to operating losses and tax credit carry forwards
will not be absorbed by future taxable income.
NOTE 5 - Bridge Loan
In December 1996 and January 1997, the Company obtained Bridge financing
from seven (7) lenders in the amount of $200,000. These lenders are the
individuals identified as "Selling Security holders." In exchange for
making the loans to the Company, each Selling Security holder received
two (2) promissory notes (the "Bridge Notes"). Certain Bridge Notes
are in the aggregate principal amount of $150,000 (the "Principal Bridge
Notes") and the other Bridge Notes are in the aggregate principal amount
of $50,000 (the "Convertible Bridge Notes"). Each of the Bridge Notes
bear 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 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 is identical
to the Class A Warrants offered hereby.
The Company's agreement with the Selling Security holders provided that the
Company would include in its registration statement a prospectus covering
the Class A Warrants owned by the Selling Security holders.
On September 12, 1997 the Company filed a Registration Statement on Form S-1
with the Securities and Exchange Commission. This statement covered the
primary offering of securities of the Company and the offering of other
securities by certain selling Security Holders. The Company is registering,
under primary Prospectus 805,000 Units, each Unit consisting of one (1) share
of common stock and four (4) Class A warrants. The selling Security Holders
are registering, under an alternate prospectus, 1,200,000 Class A warrants.
At July 31, 1997 all costs associated with this offering were deferred. The
costs were subsequently deducted from the proceeds of the sale of stock.
The Bridge loans were repaid on January 28, 1998 at the closing of the
Company's Public Offering.
(See Liquidity and Financial Condition Section of Management's Discussion
for details on Public offering)
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
A summary of income, costs and expenses for the current quarter and
corresponding quarter of the previous year follows:
For the Quarter For the 6 Months
Ended January 31, Ended January 31,
1998 1997 1998 1997
Revenues $ 240,290 $448,852 $ 353,617 $867,586
Costs and Expenses 261,394 444,961 547,919 906,942
---------- --------- --------- ---------
Net Income/(Loss)
after Taxes,before
extraordinary item $ (21,104) $ 3,891 $(194,302) $(39,356)
=========== ========= ========== =========
QUARTER ENDED January 31, 1998
Revenues for the quarter ended January 31, 1998 totaled $240,290, representing
a decrease of 46.5% or $208,562 from $448,852 reported for the same quarter a
year ago. Revenues decreased largely due to a sharp decrease of several orders
from the various major power companies as well as the absence of new
commercial orders and releases against existing military contracts by the US
Government.
Gross margin for the quarter ended January 31, 1998 totaled $189,121
representing 78.7% of revenues as compared to $231,778 or 51.6% of revenues
for the quarter ended January 31, 1997. The increase in gross margin is
primarily attributed to the capitalization of costs incurred in the design
of the PTR-1500.
Selling, general and administrative expenses decreased from $201,444 to
$200,009 for the quarter, representing a decrease of $1,435 as compared to
1997.
Interest expense decreased from $26,443 to $9,097 or $17,346 for the quarter
ended January 31, 1998 over the same period of 1997 as a result of the
elimination of debt owed on the credit facility.
As a result of the foregoing, the Company reported a net loss of $(21,104),
or $(.00) per share for the quarter compared to a net income of $3,891 or
$0.00 per share for the prior year.
SIX MONTHS ENDED JANUARY 31, 1998
Revenues for the six months ended January 31, 1998 totaled $353,617
representing a decrease of 59.2% or $513,969 from $867,586 for the same
period last year. Revenues decreased largely due to a sharp decline in
expected releases of several orders from the various major power companies
as well as the absence of new commercial orders and releases against
existing military contracts by the US government.
Gross margin for the six months totaled $188,921 representing 53.4% of
revenues as compared to $476,345 or 45.0% of revenues for the same
six-month period one year ago. The increase in gross margin is primarily
attributable to the capitalization of costs associated with the development
of the PTR-1500 product line.
Selling, general and administrative expenses decreased from $378,478 to
$358,516 for the same period.
Interest expense decreased from $52,119 to 22,447 due to the repayment of
the credit facility to the bank.
As a result of the foregoing, the Company resulted a net loss of $194,302
or $(.06) per share as compared to a net loss of $(39,356) or $(.04) per
share one year ago.
LIQUIDITY AND FINANCIAL CONDITION
On January 21, 1998 the Company offered 700,000 units (the Units) at a
price of $5.00 per unit. Each unit consisted of one (1) share of Common
Stock, par value $1.00 per share (Common Stock), and four (4) Redeemable
Class A Warrants for Common Stock (Class A Warrants). The Common Stock
and Class A Warrants are detachable and trade separately.
Each Class A Warrant entitles the holder to purchase one (1) share of the
Company's Common Stock, at a exercise price of $6.00, subject to adjustment,
from January 22, 1998 through August 30, 2002. The Class A Warrants are
subject to redemption by the Company commencing the earlier of ( i)
24 months from the date of the offering or (ii) 12 months from the date of
the offering, with the consent of the underwriter, on not less than thirty
(30) days notice at $.05 per Warrant, provided the average closing price of
the Common Stock exceeds $7.20 per share for twenty (20) consecutive trading
days ending within fifteen (15) days prior to the notice.
The results to the offering were $2,678,571, net of offering costs.
Inventories increased $287,938 from July 31, 1997 attributable to the
PTR-1500 Series product.
Working Capital at January 31, 1998 was $4,993,582 compared to $2,456,121
at July 31, 1997. This is primarily attributed to the public offering of
700,000 units of the Company's Common Stock, Warrants and the building of
the PTR-1500 tone protection device. The Company delivered to the General
Electric Company under contract prototype units during December 1997.
Production units are expected to be delivered during the second quarter of
fiscal 1998.
Item 2 - Management's Discussion (Continued)
The Company plans to use these additional funds to complete the development
of the PTR1500 and deliver the first prototypes to the General Electric Co.
for testing and approvals and to improve its financial condition and prepare
for an anticipated increase in business in the latter part of 1998. The
Company anticipates additional backlog releases from the Bonneville Power
Administration and the US Government as well as other key customers. This
should generate additional sales and resulting cash flow to support an
expanded operating level in fiscal 1998 versus fiscal 1997. In the event
that additional financing and backlog releases are not forthcoming, fiscal
1998 sales would be adversely impacted.
The Company presently meets its cash requirements through existing cash
balances, cash generated from operations, and the public offering of the
Company's Common Stock.
Management Representation
The information furnished reflects all adjustments which management considers
necessary to a fair statement of the results of the period.
As of January 31, 1998 the Registrant's backlog of orders stands at
$3.1 million, a mix of military and commercial telecommunication products.
The company anticipates its commercial shipments to grow as a percentage of
total sales for the foreseeable future.
Statement Regarding Present Operations
There was no material change in the nature of the operations of Registrant
during the six months ended January 31, 1998 from the information contained
in the Registrant's annual report of Form 10-K for the fiscal year ended
July 31, 1997.
SUBSEQUENT EVENTS
On 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.
Part II - Other Information
CONOLOG CORPORATION
1. Legal Proceedings - No material proceedings pending
January 31, 1998
2. Changes in Securities - See Management Discussion
3. Defaults upon Senior Securities - None
4. Submission of Matters to a Vote of Security Holders - None
5. Other Materially Important Events - See Management's
Discussion
6. No reports or Exhibits on Form 8-K have been filed during the
quarter.
[ARTICLE] 5
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] 6-MOS 3-MOS
[FISCAL-YEAR-END] JUL-31-1998 JUL-31-1998
[PERIOD-END] JAN-31-1998 JAN-31-1998
[CASH] 1,536,193 1,536,193
[SECURITIES] 0 0
[RECEIVABLES] 122,599 122,599
[ALLOWANCES] (6,000) (6,000)
[INVENTORY] 3,461,730 3,461,730
[CURRENT-ASSETS] 5,166,547 5,166,547
[PP&E] 2,352,817 2,352,817
[DEPRECIATION] (1,966,764) (1,966,764)
[TOTAL-ASSETS] 5,558,628 5,558,628
[CURRENT-LIABILITIES] 172,965 172,965
[BONDS] 0 0
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 78,097 78,097
[COMMON] 3,519,473 3,519,473
[OTHER-SE] 1,788,093 1,788,093
[TOTAL-LIABILITY-AND-EQUITY] 5,558,628 5,558,628
[SALES] 353,617 240,290
[TOTAL-REVENUES] 353,617 240,290
[CGS] 164,696 51,169
[TOTAL-COSTS] 164,696 51,169
[OTHER-EXPENSES] 358,516 200,009
[LOSS-PROVISION] 0 0
[INTEREST-EXPENSE] 22,447 9,097
[INCOME-PRETAX] (192,042) (19,985)
[INCOME-TAX] 2,260 1,119
[INCOME-CONTINUING] (194,302) (21,104)
[DISCONTINUED] 0 0
[EXTRAORDINARY] 0 0
[CHANGES] 0 0
[NET-INCOME] (194,302) (21,104)
[EPS-PRIMARY] (.06) 0.00
[EPS-DILUTED] (.06) 0.00
</TABLE>
