NOTE: THIS INFORMATION STATMENT ALSO INCLUDES PROXY INFORMATION.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential; for use
[X] Definitive Proxy Statement of the Commission Only
[ ] Definitive Additional Materials (as permitted by Rule
[ ] Soliciting Material Pursuant to 14a-6(e)(2))
Rule 14a-11 or Rule 14a-12
CONOLOG CORPORATION
- ------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- ------------------------------------------------------------------------------
(Name of Person(s) Filing Information Statement)
CONOLOG CORPORATION
5 Columbia Road
Somerville, New Jersey 08876
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 11, 1998
To the Shareholders of
CONOLOG CORPORATION
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
CONOLOG CORPORATION (the "Company"), a Delaware corporation, will be held
at the offices of Milberg Weiss Bershad Hynes & Lerach LLP, One Pennsylvania
Plaza, New York, New York 10119, on Tuesday, August 11, 1998, at 6:30 p.m.,
local time, for the following purposes:
1. To elect five directors to serve, subject to the provisions
of the By-laws, until the next Annual Meeting of Shareholders and until their
respective successors have been duly elected and qualified;
2. To consider and act upon a proposal to approve the selection
of Rosenberg Rich Baker Berman & Company as the Company's independent auditors
for the 1998 fiscal year; and
3. To transact such other business as may properly come before
the meeting or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on July 6, 1998
as the record date for the meeting and only holders of shares of record at
that time will be entitled to notice of and to vote at the Annual Meeting of
Shareholders or any adjournment or adjournments thereof.
By order of the Board of Directors.
ROBERT S. BENOU
President
Somerville, New Jersey
July 15, 1998
IMPORTANT
IF YOU CANNOT PERSONALLY ATTEND THE MEETING, IT IS
REQUESTED THAT YOU INDICATE YOUR VOTE ON THE ISSUES
INCLUDED ON THE ENCLOSED PROXY AND DATE, SIGN AND MAIL
IT IN THE ENCLOSED SELF-ADDRESSED ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES
CONOLOG CORPORATION
5 Columbia Road
Somerville, New Jersey 08876
P R O X Y S T A T E M E N T
for
ANNUAL MEETING OF SHAREHOLDERS
to be held August 11, 1998
July 15, 1998
The enclosed proxy is solicited by the Board of Directors of Conolog
Corporation, a Delaware corporation (the "Company") in connection with the
Annual Meeting of Shareholders to be held at the offices of Milberg Weiss
Bershad Hynes & Lerach LLP, One Pennsylvania Plaza, New York, New York 10119
on Tuesday, August 11, 1998, at 6:30 p.m., local time, and any adjournments
thereof, for the purposes set forth in the accompanying Notice of Meeting.
Unless instructed to the contrary on the proxy, it is the intention of the
persons named in the proxy to vote the proxies in favor of (i) the election
as directors of the nominees listed below to serve until the next Annual
Meeting of Shareholders, and (ii) approval of the selection of Rosenberg
Rich Baker Berman & Company as the Company's independent auditors for the
1998 fiscal year. The record date with respect to this solicitation is the
close of business on July 6, 1998 and only shareholders of record at that
time will be entitled to vote at the meeting. The principal executive office
of the Company is 5 Columbia Road, Somerville, New Jersey 08876, and its
telephone number is (908) 722 - 8081. The shares represented by all validly
executed proxies received in time to be taken to the meeting and not previously
revoked will be voted at the meeting. This proxy may be revoked by the
shareholder at any time prior to its being voted. This proxy statement and
the accompanying proxy were mailed to you on or about July 15, 1998.
OUTSTANDING SHARES
The number of outstanding shares entitled to vote at the meeting is
3,780,961 common shares, par value $1.00 per share, not including 8,813
common shares held in treasury. Each common share is entitled to one vote.
The presence in person or by proxy at the Annual Meeting of the holders of a
majority of such shares shall constitute a quorum. There is no cumulative
voting. Assuming the presence of a quorum at the Annual Meeting, the
affirmative vote of a majority of the common shares present at the meeting
and entitled to vote on each matter is required for the approval of the
election as directors of the nominees listed below and the approval of the
Company's auditors, Rosenberg Rich Baker Berman & Company, as the Company's
auditors for fiscal 1998. Votes shall be counted by one or more persons who
shall serve as the inspectors of election. The inspectors of election will
canvas the shareholders present in person at the meeting, count their votes
and count the votes represented by proxies presented. Abstentions and broker
nonvotes are counted for purposes of determining the number of shares
represented at the meeting, but are deemed not to have voted on the proposal.
Broker nonvotes occur when a broker nominee (which has voted on one or more
matters at the meeting) does not vote on one or more other matters at the
meeting because it has not received instructions to so vote from the
beneficial owner and does not have discretionary authority to so vote.
ELECTION OF DIRECTORS
The five persons named below, who are currently members of the Board
of Directors, have been nominated for election to serve until the next Annual
Meeting of Shareholders and until their respective successors have been
elected and qualified. Unless specified to be voted otherwise, each proxy
will be voted for the nominees named below. All nominees have consented to
serve as directors if elected.
If at the time of the Annual Meeting, any nominee is unable or
declines to serve, the present Board of Directors shall nominate another
person to fill the vacancy and the proxies may be voted for any other person
nominated.
ELECTION OF DIRECTORS
The five persons named below, all of whom are presently directors of
the Corporation, have been nominated for re-election to serve until the Annual
Meeting of Shareholders and until their respective successors have been
elected and qualified.
Name (age) Positions Date of Number of Shares Percent
with Corporation Initial Beneficially of
and/or Principal Election Owned as of Class
Occupation as a Director June 26, 1998
Robert S. Benou (63)
President and Director
1968 220,000 5.8%
Arpad J. Havasy (61)
Executive Vice President, Secretary, Treasurer and Director
1968 55,000 1.5%
Louis S. Massad (60)
Director 1995 5,000 0.1%
Marc R. Benou (30)
Vice President, Assistant Secretary and Director
1995 45,000 1.2%
Edward J. Rielly (30)
Director 1998 500 0.0%
Each officer holds office at the pleasure of the Board of Directors.
The Corporation has no "significant" employees other than the executive
officers. There are no arrangements or understandings pursuant to which
either the directors or officers was selected as such.
Robert S. Benou has served as President and a Director of the
Corporation since 1968. Mr. Benou is responsible for 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 Corporation's Executive Vice
President and Director since 1968 and is responsible for manufacturing of
both components and hardware operations. 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 Corporation 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 Corporation in 1991 and is responsible for
material, purchasing and inventory control. In March 1995, he was elected
as 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 Corporation's President.
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.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the fiscal year ended July 31, 1997, the Board of Directors
held 4 meetings. All of the directors attended all of the meetings of the
Board of Directors.
The Company formed an Audit Committee as of February 20, 1998, which
consists of Messrs. Marc Benou, Massad and Rielly. The Audit Committee
reviews the financial reporting and internal controls of the Company and
meets with appropriate financial personnel of the Company, as well as its
independent auditors, in connection with these reviews. The Audit Committee
also recommends to the Board the firm which is to be presented to the
shareholders for designation as independent auditors to examine the corporate
accounts of the Company for the current fiscal year.
The Corporation does not have a standing compensation or nominating
committee.
EXECUTIVE OFFICERS
The executive officers of the Corporation are Robert S. Benou,
President, Arpad J. Havasy, Executive Vice President, Secretary and Treasurer,
Marc R. Benou, Vice President and Assistant Secretary, information as to each
of whom is set forth above and Thomas R. Fogg, Vice President -Engineering.
Mr. 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.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation (consisting
entirely of salary) paid (or accrued for) by the Corporation to its President,
the only executive officer whose aggregate remuneration exceeded $100,000 in
each of the three Corporation's fiscal years ended July 31, 1998, 1997 and
1996:
Summary Compensation Table
Annual Compensation
Other Annual
Name and Principal Position Fiscal Year-End Salary Bonus Compensation
Robert Benou, President 1998 $170,000 0 0
1997 $150,000 0 0
1996 $150,000 0 0
Long-Term Compensation
Awards Payouts
All O
Restricted Stock Awards Options/SARS LTIP Payouts Compensation
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 optionees,
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 non-
qualified 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 nonqualified options have been granted.
EMPLOYMENT AGREEMENTS
The Company entered into a five-year employment agreement, commencing
June 1, 1997 and ending May 31, 2002, with Robert S. 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 entitled 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 $1,000,000 life insurance policy on
the life of Robert S. Benou.
The Company entered into a five-year employment agreement, commencing
June 1, 1997 and ending May 31, 2002, with Marc R. Benou. Under his employ-
ment 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 November
1997 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 terminates upon
death or disability of the employee and employee may be terminated by the
Company for cause.
COMPENSATION OF DIRECTORS
No director of the Corporation receives any cash compensation for his
services as such. Currently, the Corporation has two directors who are not
employees, Mr. Massad and Mr. Rielly.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The full Board of Directors made all decisions concerning executive
compensation during fiscal 1997. During fiscal 1997, no executive officers
of the Corporation served as a member of the compensation committee or board
of directors of another entity.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of June 26, 1998, certain
information concerning stock ownership of the Company by (i) each person who
is known by the Company to own beneficially more than 5% of the outstanding
common shares of the Company, (ii) each of the Company's directors and (iii)
all current directors and officers of the Company as a group. Except as
otherwise indicated, all such persons have both sole voting and investment
power over the shares shown as being beneficially owned by them.
Name and Address of Amount and Nature Percent
Beneficial Owner of Beneficial Ownership of Class
Robert S. Benou (1) 220,000 5.8%
Arpad J. Havasy (1) 55,000 1.5%
Marc R. Benou (1) 45,000 1.2%
Louis Massad (1) 5,000 0.1%
Thomas Fogg (1) 25,200 0.7%
Edward J. Rielly (1) 500 0.0%
All Executive Officers
and Directors as a Group
(6 Persons) 350,700 9.3%
(1) The address for these individuals is c/o Conolog Corporation,
5 Columbia Road, Somerville, New Jersey 08876.
CERTAIN TRANSACTIONS
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.
SELECTION OF AUDITORS
The Board of Directors recommends the selection of Rosenberg Rich
Baker Berman & Company as independent auditors to examine its financial
statements for the fiscal year ending July 31, 1998.
Representatives of Rosenberg Rich Baker Berman & Company are expected
to be present at the annual meeting of shareholders with the opportunity to
make a statement if they desire to do so and will be available to respond to
appropriate questions.
OTHER MATTERS
The Board of Directors does not know of any matters other than those
mentioned above to be presented to the meeting.
SHAREHOLDER PROPOSALS
Proposals by any shareholders intended to be presented at the 1999
Annual Meeting of Shareholders must be received by the Corporation for
inclusion in material relating to such meeting not later than February 15,
1999.
By Order of the Board of Directors,
Robert S. Benou
President
2:1-3
CONOLOG CORPORATION
PROXY
Annual Meeting of Shareholders - Tuesday, August 11, 1998.
The undersigned shareholder of Conolog Corporation (the "Company")
hereby appoints Robert S. Benou the attorney and proxy of the undersigned,
with full power of substitution, to vote, as indicated herein, all the common
shares of the Company standing in the name of the undersigned at the close of
business on July 6, 1998 at the Annual Meeting of Shareholders of the Company
to be held at the offices of Milberg Weiss Bershad Hynes & Lerach LLP, One
Pennsylvania Plaza, New York, New York 10119 at 6:30 p.m., local time, on
Tuesday, August 11, 1998, and at any and all adjournments thereof, with all
the powers the undersigned would possess if then and there personally present
and especially (but without limiting the general authorization and power hereby
given) to vote as indicated on the proposals, as more fully described in the
Proxy Statement for the meeting.
(Please fill in the reverse side and return promptly in the enclosed envelope.)
Please mark boxes n or x in blue or black ink.
1. Election of Directors.
FOR all nominees / /
WITHHOLD authority only for those nominees whose name(s) I
have written below / /
WITHHOLD authority for ALL nominees / /
Nominees for Directors are: Robert S. Benou
Arpad J. Havasy
Louis S. Massad
Marc R. Benou
Edward J. Rielly
2. Proposal to approve the selection of Rosenberg Rich Baker Berman &
Company as the Company's independent auditors for the fiscal year ending
July 31, 1998.
For / / Against / / Abstain / /
3. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting or any adjournment
or adjournments thereof.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS AND WILL BE VOTED FOR THE
ELECTION OF THE PROPOSED DIRECTORS AND FOR THE ABOVE PROPOSALS UNLESS OTHERWISE
INDICATED.
[Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope.]
SIGNATURE(S) should be exactly as name or names appear on this proxy. If
stock is held jointly, each holder should sign. If signing is by attorney,
executor, administrator, trustee or guardian, please give full title.
Dated , 1998
Signature
________________________________
Print Name
Signature
_______________________________
Print Name
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, 1997 (No Fee Required)
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from to (No Fee Required)
Commission File Number: 0-8174
CONOLOG CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-0853566
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5 Columbia Road, Somerville, NJ 08876
(Address of principal executive office) (Zip code)
Issuer's telephone number, including area code: (908) 722-8081
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange in which registered
Common Stock, $1.00 par value NASDAQ SmallCap Market
Redeemable Class A Warrants NASDAQ SmallCap Market
Check whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to the Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates
of the Registrant based on the closing sale price of $4.125 on
October 24, 1997 was $8,408,701
The number of shares outstanding of the Registrant's common stock outstanding
as of October 24, 1997 was 2,803,473
DOCUMENTS INCORPORATED BY REFERENCE
FORM 10-K
JULY 31, 1997
TABLE OF CONTENTS
PART I
Item 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . 20
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . 20
Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . 22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION. . . . . . . . . . . . . . . . . . . . 23
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . 27
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . 27
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS. . . . . . . . . . . . . . . . . 28
Item 11. EXECUTIVE COMPENSATION, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT. . . . . . 29
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . 32
PART IV
Item 14. EXHIBITS AND REPORTS. . . . . . . . . . . . . . . . . . . . . 34
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
PART I
1. 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.
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 86% of sales in 1997
($966,115). 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, cogeneration of power, gas
and water companies, traffic control for departments of trans-
port(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 over 450 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.
Through 1997, 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 in fiscal 1995 were $2,090,933 a 2% increase over
fiscal 1994. 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 $1,123,350, a 42% decrease
from $1,924,466 for the same period in 1996.
Revenues from the Company's military product sales represented
approximately 30%, 23% and 14% of sales of the Company in
fiscal 1995, 1996 and 1997, 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, teleprinting 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 three 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.
(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 over 550 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 20% 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 1998. ( SEE: Recent Developments).
Recent Developments
The Company plans to have the PTR 1500 series tone protection
product available for General Electric evaluation during November
1997. 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. Final testing
and evaluation by GE of these prototypes are anticipated to be
completed by January 5, 1998. Upon acceptance by GE, the Company
intends to commence shipping production units for delivery during
March/April 1998.
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 plans to introduce
this radio link product line in the second half of 1998.
Public Offering
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 tradeable.
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,
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.
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 and other marketing strategies to strengthen
its market presence.
MARKETING AND SALES
In general, the Company's products are marketed be 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 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).Sales to
the Company's major customer in fiscal 1995 (United States
Government) totaled $424,849 (20% of net sales). During fiscal
1994, sales to the Company's major customer (Westinghouse Electric
Corp. - Naval Systems Division) totaled $597,000 (29% of net
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.
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.
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, the Company invested
approximately $700,000 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 are expected to be delivered
in November, 1997 ( 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
will enable the Company s INIVEN products to transmit
directly onto fiber optic cables, and open 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 Companys business.
Backlog
As of July 31, 1997, the Company had a backlog of
approximately $2.9 million. It is anticipated that this backlog
will be filled during the balance of calendar year 1997 and the
1998 fiscal year ending July 31, 1998. As of July 31, 1996 and
1995, the Company had a backlog of approximately $3,400,000
and $1,300,000, 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 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.
In fiscal 1995 the Company had foreign sales of $140,000 to the
Government of Israel.
Employees
As of July 31, 1997, the Company employed 31 persons on a
full-time basis, including 2 in management, 2 in sales, 2 in
clerical, 1 in accounting, 1 in purchasing, 3 in engineering and
20 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.
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 July 31, 1997, CNL
Holdings, Inc. has loaned the company $916,235.
Each loan bears interest at the rate of 4% per annum and
is be due 12 months from the date of such Loan. At maturity,
the Company will have the option to pay each Loan, together with
all accrued interest thereon in cash, or by issuing shares of a
new Series C Preferred Stock ( the "Series C Preferred")
valued at $5.00 per share for purposes of such repayment.
The Series C Preferred will be non-voting and carry a
cumulative dividend of 8% per annum which may be payable at the
Company s option by the issuance of shares of Common Stock
valued at $5.00 per share up to a maximum of 40,000 shares per
annum. The Series C Preferred will be convertible into common
stock at the rate of one share of common stock for each share
of Series C Preferred and have a liquidating preference of $5.00
per share.
The Agreement also provides that for the two year period
commencing on the issuance of any shares of Series C Preferred
(the "Registration Period") CNL may elect to include its Series C
Preferred in any post-effective amendment to the Registration
Statement or any new registration statement under the Securities
Act of 1933, as amended. In addition, the Agreement also
provides that during the Registration Period, CNL may give notice
to the Company to the effect that it desires to register its
shares under the Act for public distribution in which case the
Company will file a post-effective amendment to a then current
registration statement or a new registration statement.
Management believes that the foregoing transactions
benefited the Company and its stockholders. The exercise by
CNL of its option under the Option Agreement converted the
remaining Debt Claim into shares of Common Stock which provided,
the Company the opportunity to, in effect, exchange its debt
for equity and eliminated the Company's default under the Credit
Facility. As of July 31, 1997, CNL has fully exercised its
option to acquire all of the Banks shares. The Company s bank debt
has been cancelled and the bank liens on the Company s property
has been terminated.
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
are 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 will be classified as Preferred Stock and
20,000,000 shares will be 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 bid and asked quotations of the Common Stock,
based upon information supplied by the National Quotation Bureau
for the years 1995, 1996 and the first three quarters of
1997. Such quotations represent inter-dealer prices, without
retail markups, markdowns or commissions and may not necessarily
represent actual transactions. As of October 22, 1997, the
Company's Common Stock was held by approximately 817 shareholders
of record.
Bid Asked
High Low High Low
1995
First Quarter .02 .01 .10 .05
Second Quarter .04 .01 .15 .05
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 the third and fourth of 1995, 1996 and the first
second and third quarters of 1997:
Units Common Stock Warrants
1995 High Low High Low High Low
Third
Quarter 18.5 14.00 8.50 5.75 4.00 2.00
Fourth 19.25 14.75 9.25 6.25 3.25 1.25
Quarter
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
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 1997 1996 1995 1994 1993
per share amounts)
Operations Summary:
Net sales and other $1,123 $1,924 $2,091 $2,045 $1,486
income
Net income (loss)
from (672) 294 (522) (1,183) (322)
continuing operations
Income (loss) from
continuing operations
per primary (.42) 0.28 (0.12) (0.27) (0.07)
share
Income (loss) from
continuing operations
after
giving retroactive
effect to a 1 for - - (12.01)(27.22) (7.41)
100 reverse stock
split on August
16, 1995
Balance Sheet
Summary:
Total assets $4,340 $3,928 $3,882 $3,739 $4,601
Long-term debt and
capitalized lease $4 $5 $34 $3,830 $3,733
obligations
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Results of Operations
In order to summarize the Company's operating results for
the past three years, the following tables indicate the percentage
relationships of income and expense items in the statements of
income and the percentage changes in those items for such years.
Income & Expense Items as Income & Percentage
a Percentage Of Revenues Expense Items Increase/Decrease
From Operations
For The Years Ended July 31
1997 1996 1995 1996 to 1995 to 1994 to
1997 1996 1995
100.0% 100.0% 100.0% Sales & (41.6%) (8.0%) 2.3%
other
income
84.2%* 67.2* 92.2* Cost of (27.9) (32.9) (4.2)
products
sold
67.6 49.2 44.2 Selling, (19.9) 2.4 8.4
general &
administrat
ive
7.2 6.8 12.1 Interest (38.5) (48.0) (30.0)
158.9 123.2 148.5 Total costs (24.7) (23.5) (3.8)
& expenses
(52.9) (23.2) (48.5) Income 48.2 (56.0) (14.3)
(loss)
before
taxes
.9 - (23.5) Income 494.2 (100.0) -
taxes
(credits)
(59.8)% (23.2)%(25.0)% Loss before 50.4% (14.4)% (14.3)%
extraordinary
item
* Includes write-offs for obsolete or excess inventory which were
$28,101, $50,281 and $656,248 in 1997, 1996,and 1995 respectively.
Results of Operations
1997 Compared to 1996
Total revenue decreased $801,076 or 42% from $1,924,466 to
$1,123,391 in 1997. This decrease was attributable to delays in
the release of tone protection orders from the Bonneville Power
Administration and other customers. The Company attributes these
delays to the budget constraints for various utilities and to the
pending release of the new advanced tone protection device,
the PTR-1500. The Company essentially completed the prototypes
during the first fiscal quarter ended October 31, 1997. The
Company plans to ship prototypes to GE during November 1997.
Gross Margins, inclusive of inventory adjustments for the
years ended July 31, 1997 and 1996 totaled $177,910 & $632,185
representing 15.8% and 32.9% of revenues. Gross margins for 1997
were lower than 1996 due to the lower utilization of the factory
in fiscal 1997 over 1996.
Selling, General and Administrative expenses decreased from
$946,954 in 1996 to $758,880 in 1997 representing a decrease of
19.9%. This decrease is the result of cost cutting initiatives
in the form of manpower reductions and reduced expenditures for
sales and marketing expenses. These initiative were taken by
management during the year to help offset the drop in sales
during fiscal 1997.
Interest expense totaled $81,026 for the year ended July 31,
1997 compared to $131,854 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
of $672,080 or $0.42 per share. This compares to a net income of
$293,552 or $.28 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
$924,524 in 1995 to $946,954 in 1996, representing an increase
of 2.4%. These expenses increased as a result of an expansion of
the employment base and an increase in advertising and promotion
costs.
Interest expense totaled $131,854 for the year ended July
31, 1996 as compared to $253,686 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
loss of $293,552, 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 $522,044 or $.12 per
share for the same period last year (after retroactive effect to
a 1 for 100 reverse split on August 16, 1995 and after
extraordinary item in 1996).
As of July 31, 1996 the Registrant's backlog of orders was
approximately $3.4 million, representing a mix of military and
commercial telecommunication products. The Company anticipates
its commercial shipments to grow as a percentage of total sales
for the foreseeable future.
1995 Compared To 1994
Total revenue increased $46,000, or 2.3%, from $2,045,000 in
1994 to $2,091,000 in 1995. The increase was attributable to an
expansion in the commercial sector of the Company's business,
which contributed $1,422,000 or 68% to total revenues in 1995,
compared to $1,300,000 or 64% of total revenues in 1994.
Costs of sales totaled $1,271,000 for the year ended July 31,
1995 as compared to $1,068,000 for the comparable period ended
July 31, 1994, representing 60.8% and 52.2% of net revenues,
respectively. Cost of sales increased as a result of product mix
during the comparable years.
A charge of $656,000 for inventory write-off was recorded
during the year. This amount was exclusively due to certain
inventories purchased for military programs in prior periods that
were phased out. There was a comparable charge of $945,000 in
fiscal 1994.
The Company determined during the first quarter of 1995 that
there was not sufficient information from the Government's
Defense-Electronic Supply Center ("DESC") facility to permit the
Company to make a quantitative determination of future sales.
Inventory which totaled $656,000 was written off after management
made an analysis of parts maintained for military and government
orders compared to available inventories. This amount consisted
of $318,000 for raw materials, $249,000 for work in progress and
$89,000 for finished goods. There were comparable charges of
$945,000 in the twelve month period ended April 30, 1994. This
analysis consisted of a study of the forecasted requisitions of
upcoming orders of the DESC, Conolog's principal defense customer.
On examination of prospective sales, it was determined that the
government had no requirements for Conolog's military products
for at least the next twelve to eighteen months.
As a result of the foregoing, gross profit margins totaled
$163,914 or 7.8% of sales for the fiscal year ended July 31, 1995
as compared to $32,330 or 1.6% of sales for the same twelve month
period in 1994. Exclusive of inventory adjustments, gross profit
margins would have been 39% for the year ended July 31, 1995 and
48% for the year ended July 31, 1994.
Selling, General and Administrative Expense totaled $925,000
or 44.2% of revenues, as compared to $853,000 or 41.7% of revenues
for the comparable period last year.
As a result of the foregoing, an operating loss of $761,000
was realized for the year ended July 31, 1995 as compared to an
operating loss of $821,000 for the same period last year.
Interest expense for the twelve months totaled $254,000
compared to $362,000 for the fiscal year ended July 31, 1994. The
Bank had agreed to fix the total interest owed as of January 31,
1995 and to keep the amount unchanged through August 16, 1995.
Accordingly, no interest expense was accrued from February 1,1995
through July 31, 1995.
As a result of the foregoing, the Company incurred a net loss
of $522,000 for the twelve months ended July 31, 1995, compared to
a net loss of $1,183,000 for the same period last year. The loss
in 1995 was reduced by the income tax benefit derived from
previously incurred operating losses not deducted. The losses, as
a result of the Registration, will be deductible against
forgiveness of indebtedness income.
As of July 31, 1995 the Company's backlog totaled $1.3
million, consisting of a mix of military and commercial tele-
communication products, compared to $1.5 million at July 31,1994.
The Company anticipates its commercial shipments to continue to
grow as a percentage of total sales in the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 31, 1997 was $2,456,122 compared to
$1,914,981 at year ended July 31, 1996. The improvement in the
working capital is the result of a planned inventory increase
of $236,012. This is primarily attributed to the building of the
PTR-1500 tone protection device. The Company will be delivering
to the General Electric Company under contract prototype units
during November 1997. Production units are expected to be
delivered during the second quarter of fiscal 1998.
Accounts receivable have decreased from $304,020 at year-end
July 31, 1996 to $109,571 at July 31, 1997. This decrease of
$194,449 is the result of lower average sales for fiscal 1997
versus 1996.
During the year, the Company received a total of $1,116,235
in loans from private investors. The proceeds of these loans
were used primarily for working capital purposes. Loans totaling
$916,235 were received during the year from CNL Holdings,Inc.
In addition to the CNL Holdings, Inc. loans, an additional
$200,000 in loans were received as bridge loans from certain
investors, the " Bridge Lenders". Each of the bridge loans bear
interest at the rate of eight percent (8%) per annum. The Bridge
Lenders have the right to convert $50,000 in the aggregate
principal amount of their loans into a total of 1.2 million Class
A Warrants. Each Class A Warrant contained in the Convertible
Bridge Notes is identical to the Company s currently outstanding
Class A Warrants. The CNL Holdings, Inc. loans are due 12 months
from the date of each loan. At maturity, the Company will have
the option to pay each loan, together with accrued interest, by
issuing shares of a new Series C Preferred Stock. The bridge loan
amounts are due and payable, with accrued interest, upon the
earlier of (1)January 31, 1999, or (ii) the date of closing of a
public offering of common stock and common stock warrants of the
Company. A Registration statement was filed on Form S-1 with the
Securities and Exchange Commission on September 12, 1997
Each of the bridge loans bear interest at the rate of eight
percent (8%) per annum. The Bridge Lenders have the right to
convert $50,000 in the aggregate principal amount of their loans
into a total of 1.2 million Class A Warrants. Each Class A
Warrant contained in the Convertible Bridge Notes is identical
to the Company s currently outstanding Class A Warrants.
On September 12, 1997 the Company filed a Registration Statement
on Form S-1 with the Securities and Exchange Commission. This
Registration Statement covers the primary offering of securities
of the Company and the offering of other securities by the Bridge
Lenders. 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 Bridge Lenders are
registering, under an alternate prospectus, 1.2 million Class A
Warrants. At July 31, 1997 all costs associated with this
offering were deferred. These costs will be deducted from the
Proceeds of the sale of stock. The Company plans to use proceeds
from the public offering to satisfy its loan obligations to CNL
Holdings, Inc. and the Bridge Lenders.
The Company plans to meet its cash requirements for the next
twelve months through existing cash balances, cash generated from
operations and the net proceeds of the public offering. 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.
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, 1997.
NAME AGE POSITION
Robert S. Benou 63 President and Director
Arpad J. Havasy 61 Executive Vice President,
Secretary, Treasurer and
Director
Louis S. Massad 60 Director
Marc R. Benou 30 Vice President, Assistant
Secretary and Director
Thomas Fogg 62 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.
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, 1997, 1996 and 1995:
Summary Compensation Table
Annual Compensation Long Term Compensation
Name and Other Annual
Principal Fiscal Compensation
Position Year-End Salary Bonus (1) Awards Payouts
1997 $150,000 0 0 0
Robert
Benou,
President 1996 $150,000 0 0 0
1995 $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 optionees,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 exerciseable 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 November 1997 and every profitable
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.
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 Percentage of
Address of Nature of Outstanding Shares After
Beneficial Owner Beneficial Ownership Before Offering Offering
Robert S. Benou (2) 710,039 25.00% 20.27%
Arpad J. Havasy (2) 50,117 1.79% 1.43%
CNL Holdings, Inc.(5) 510,000 18.19%
750 Lexington Ave.
New York, NY 10022
Marc R. Benou (2) 40,000 1.43% 1.14%
Louis Massad (2) 5,000 .18% .142%
Thomas Fogg (2) 20,200 .72% .57%
All Directors and Officers
as a Group (5 persons) 825,356 22.44% 23.56%
(1) Does not include treasury stock. Does not include possible
issuance of (i) 70,000 shares of Common Stock issuable upon
exercise of a Unit Purchase Option issued to the Public
Offering Underwriter, (ii) 280,000 shares of Common Stock
issuable upon exercise of Class A Warrants contained in such
Unit Purchase Option and (iii) the over-allocation options.
(2) 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.
As of April 30, 1995, Messrs. Benou and Havasy have advanced
$139,196 to the Company for working capital purposes. No formal
repayment plan or interest charges have been established at this
time. In addition, the officers had not been paid their
salaries since August 1, 1992.
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.
PART IV
Item 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)Financial Statements
Balance Sheets as of July 31, 1997 and 1996 F-2
Statements of Income for the years ended July 31,1997 and 1996 F-3
Statements of Stockholders' Equity ( Deficiency )for the years
ended July 31,1997 ,1996 and 1995 F-4
Statements of Cash Flows for the years ended July 31, 1997 and
1996 F-5
Notes to Financial Statements F-6 to-10
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 Mac Benou
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 28, 1997 /s/ Robert S. Benou
President, Chief Executive
Officer and Chairman of the Board
In accordance with the Exchange Act, this report has been signed
below by the following persons, on behalf of the registrant and
in the capacities and on the dates indicated.
October 28, 1997
/s/Robert S. Benou
President, Chief Executive Officer
and Chairman of the Board
October 28, 1997 /s/Arpad J. Havasy
Executive Vice President, Secretary,
Treasurer and Director
October 28, 1997 /s/Marc R. Benou
Vice President, Assistant Secretary and Director
October 28, 1997 /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, 1997
Conolog Corporation
Somerville, New Jersey 08876
Form 10-K Item 14(a)(1) and (2)
Index to the Financial Statements
Conolog Corporation
July 31, 1997
The following financial statements of the registrant are included in
Item 14:
Balance Sheets - July 31, 1997 and 1996 ......................... F-2
Statements of Income - Years Ended July 31, 1997,
1996 and 1995 ............................................. F-3
Statements of Stockholders' Equity (Deficiency) - Years
Ended July 31, 1997, 1996 and 1995 ......................... F-4
Statements of Cash Flows - Years Ended July 31,
1997, 1996 and 1995 ........................................ F-5
Notes to Financial Statements .................................... F-6-10
Independent Auditors' Report
Board of Directors
Conolog Corporation
We have audited the accompanying balance sheets of Conolog
Corporation as of July 31, 1997 and 1996 and the related
statements of operations, stockholders' equity (deficiency)
and cash flows for each of the three years in the period
ended July 31, 1997. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining on
a test basis evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Conolog Corporation at July 31, 1997 and 1996,
and the results of its operations and its cash flows for
each of the three years in the period ended July 31, 1997
in conformity with generally accepted accounting principles.
Bridgewater, New Jersey
October 13, 1997
Conolog Corporation
Balance Sheets
July 31,
1997 1996
--------- ---------
ASSETS
Current Assets
Cash $503,217 $178,213
Accounts Receivable - less
allowances of $6,000 and
$14,000 in 1997 and 1996,
respectively 109,571 304,020
Inventories
Finished Goods 1,705,782 1,494,289
Work-in-process 498,070 129,675
Materials and supplies 969,940 1,313,816
---------- ----------
3,173,792 2,937,780
Other Current Assets 44,085 43,517
Deferred offering costs 113,813 -
---------- ----------
3,944,478 3,463,530
Property, Plant and Equipment
Land and improvements 34,524 34,524
Building and improvements 663,630 659,477
Machinery and equipment 1,291,838 1,289,578
Furniture and Equipment 336,001 330,735
---------- ----------
2,325,993 2,314,314
less allowance for depreciation
and amortization 1,938,188 1,880,408
---------- ----------
387,805 433,906
Other Assets 7,469 30,398
---------- ----------
TOTAL ASSETS $4,339,752 $3,927,834
========== ==========
See notes to financial statements
July 31,
1997 1996
-------- --------
LIABILITIES
Current Liabilities
Notes Payable - Bank $ - $ 1,012,500
Notes Payable - Other 916,235 -
Accounts Payable 188,510 280,629
Accrued Payroll 15,644 41,716
Accrued Interest 17,374 64,699
Bridge Loan 200,000 -
Other Accrued Expenses 146,791 115,723
Current Maturities of 3,802 33,282
capitalized lease obligations
--------- -----------
total current liabilities $1,488,356 $1,548,549
Other Liabilities
Capitalized lease obligations,
less current maturities - 4,973
--------- ----------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock, par value $.50;
Series A; 4% cumulative;162,000
shares authorized; 155,000 shares
issued and outstanding 77,500 77,500
Preferred Stock, par value $.50;
Series B; $.90 cumulative;
50,000 shares authorized, issued
and outstanding 1,197 shares
in 1997 and 1,167 in 1996 597 597
Common Stock, par value $1.00;
20,000,000 shares authorized;
issued 2,803,473 shares in 1997
and 1,035,186 in 1996, including
8,776 shares held in Treasury 2,803,473 1,035,186
Additional Paid-in Capital 3,782,513 4,401,636
Retained Earnings (Deficit) (3,680,953) (3,008,873)
Treasury Shares at Cost (131,734) (131,734)
----------- -----------
Total Stockholders' Equity (Deficiency) 2,851,396 2,374,312
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
$4,339,752 $3,927,834
========== ==========
Conolog Corporation
Statements of Operations
Year Ended July 31,
1997 1996 1995
---------- --------- -----------
Sales and other income $ 1,123,390 $1,924,466 $ 2,090,933
Costs and Expenses:
Cost of Products sold 917,379 1,242,001 1,270,771
Selling, general and
administrative 758,880 946,954 924,524
Interest 81,026 131,854 253,686
Write-off obsolete or
excess inventories 28,101 50,281 656,248
--------- --------- ---------
1,785,386 2,371,090 3,105,229
Loss Before Income Taxes and
Extraordinary Items (661,996) (446,624) (1,014,296)
Income taxes (benefit) 10,084 200 (492,252)
--------- --------- ----------
Net Loss before Extraordinary
Items (672,080) (446,824) (522,044)
Extraordinary Items - 740,376 -
--------- --------- ---------
Net Income (Loss) $(672,080) $ 293,552 $(522,044)
========== ========= ==========
(Loss) from Continuing
Operations Per Share $ (.42) $ (.43) $ (12.01)
========== ========== ==========
Net Income (Loss) Per Share
- Primary $ (.42) $ .28 $ (12.01)
========== ========== ==========
- Fully Diluted $ (.42) $ .20 $ (12.01)
========== ========== ==========
See notes to the financial statements
Conolog Corporation
Statement of Stockholders' Equity (Deficiency)
Series A Series B Additional
Preferred Preferred Common Paid-In
Stock Stock Stock Capital
Balance @ July 31,
1994 $ 77,500 $ 10,661 $ 52,239 $ 952,994
Net loss for the year - - - -
-------- -------- --------- ---------
Balance @ July 31,
1995 77,500 10,661 52,239 952,994
Public Stock Offering - (10,064) 982,947 3,448,642
Net Income for the year - - - -
-------- -------- --------- --------
Balance @ July 31,
1996 77,500 597 1,035,186 4,401,636
Debt to Equity
conversion - - 1,408,787 (227,623)
Additional shares issued
to employees - - 359,500 (341,500)
Net loss for the year - - - -
--------- -------- --------- ---------
Balance @ July 31,
1997 $ 77,500 $ 597 $ 2,803,473 $3,782,513
========= ========= =========== ==========
Conolog Corporation
Statement of Stockholders' Equity (Deficiency)
Total
Earnings Treasury Equity
(Deficit) Stock (Deficiency)
Balance @ July 31,
1994 $ (2,383,794) $ (131,734) $ (1,422,134)
Net loss for the year (522,044) - (522,044)
---------- ---------- ------------
Balance @ July 31,
1995 (2,905,838) (131,734) (1,944,178)
Public Stock Offering (396,587) - 4,024,938
Net Income for the year 293,552 - 293,552
--------- ----------- -----------
Balance @ July 31,
1996 (3,008,873) (131,734) 2,374,312
Debt to Equity
conversion - - 1,131,164
Additional shares issued
to employees - - 18,000
Net loss for the year (672,080) - (672,080)
----------- --------- ----------
Balance @ July 31,
1997 $(3,680,953) $(131,734) $2,851,396
See notes to the financial statements
Conolog Corporation
Statements of Cash Flows
Year Ended July 31,
1997 1996 1995
----------- ---------- ------------
Cash Flows From Operating Activities
Net Income (Loss) $ (672,080) $ 293,552 $ (522,044)
Adjustments to Reconcile Net Income
to Net Cash Provided (Used) by
Operating Activities
Common stock base compensation 18,000 - -
Deferred income taxes - 492,352 (492,352)
Depreciation and amortization 57,781 64,994 60,396
Gain on disposition of equipment - (3,420) -
Provision for losses on accounts
receivable ` (8,000) 9,000 -
(Increase) Decrease in Operating Assets
Accounts receivable 202,449 (141,479) 74,529
Inventories (236,012) (339,653) 392,058
Other current assets (568) (17,834) (3,394)
Increase (Decrease) in Operating Liabilities
Accounts payable (92,119) (7,001) 12,330
Accrued expenses and other liabilities 76,335 (1,068,177) 417,484
----------- ------------ ---------
Net Cash Used by Operating Activities
(654,214) (717,666) (60,993)
Cash Flows From Investing Activities
Purchase of property, plant and equipment
(11,680) (43,163) (19,625)
Proceeds from sale of equipment - 18,666 -
---------- --------- ---------
Net Cash Used in Investing Activities
(11,680) (24,497) (19,625)
Cash Flows From Financing Activities
Deferred offering costs (113,813) 86,154 (86,154)
Increase from public stock offering - 4,421,525 -
Proceeds from borrowings 916,235 - -
Increase (Decrease) in bridge loan 200,000 (200,000) 200,000
Repayments of long-term borrowings (34,453) (2,836,008) (38,681)
(Increase) reduction in other assets 22,929 (20,580) 325
Dividends paid - (396,587) -
Increase (Decrease) in due to officers - (161,705) 17,302
--------- ----------- ----------
Net Cash Provided by Financing
Activities 990,898 892,799 92,792
---------- ----------- ----------
Net Increase in Cash 325,004 150,636 12,174
Cash at Beginning of Period 178,213 27,577 15,403
----------- ---------- ---------
Cash at End of Period $ 503,217 $ 178,213 $ 27,577
========= ========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest Paid $ 77,349 $ 772,773 $ 102,816
Taxes Paid $ 10,084 $ 125 $ 50
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Capitalized lease stock obligations incurred for use of
equipment $ - $ - $ 56,550
Additional common stock was issued upon conversion of
$1,131,164 of long-term debt and accrued interest payable
See notes to the financial statements
Conolog Corporation
Notes to the Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The principal business activity of Conolog Corporation
(the "Company") is the design, manufacturing and distribution
of small electronic and electromagnetic components and
subassemblies for use in telephone, radio and microwave
transmission and reception and other communication areas.
The Company's products are used for transceiving various
quantities, data and protective relaying functions in
industrial, utility and other markets. The Company's
customers include primarily industrial customers, which
include power companies and various branches of the military.
Revenue Recognition
Sales are recognized when the products are shipped. Sales
under certain fixed-price-type contracts, where progress
payments are received, are recognized when work is performed,
under the percentage-of-completion method,in accordance with
Statement of Position 81.1, Accounting for Performance of
Construction Type and Certain Production-Type
contracts.
Inventories
Inventories are stated principally at average cost which is
not in excess of market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less
allowances for depreciation and amortization. Depreciation
and amortization are computed by the straight-line method
over the estimated useful lives of the assets.
Income (Loss) Per Share of Common Stock
Income (loss) per share of common stock is computed by
dividing net earnings (loss) (after dividends on preferred
shares) by the weighted average number of shares of Common
Stock outstanding during the year. The effect of assuming
the exchange of the Series A Preferred Stock and the Series
B Preferred Stock in 1997 and 1995 would be anti-dilutive.
Income Taxes
Deferred income taxes have been provided for in accordance
with Statement No, 109 of the Financial Accounting Standards
Board. Deferred income taxes arise from timing differences
resulting from income and expense items reported for
financial accounting and tax purposes in different periods.
Deferred taxes are classified as current or noncurrent,
depending on the classification of the assets and liabilities
to which they related. Deferred taxes arising from timing
differences that are not related to an asset or liability
are classified as current or noncurrent depending on the
periods in which the timing differences are expected to
reverse.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of asssets 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.
WRITE-OFF OF OBSOLETE OR EXCESS INVENTORIES
During 1997, the Company recorded a write-off of obsolete or
excess inventories of $28,101. During 1996 and 1995, the
Company recorded a write-off of obsolete or excess
inventories of $50,281 and $656,248, respectively.
This inventory write-off was military related. In
management's opinion these items will not be reordered in
the foreseeable future.
NOTES PAYABLE - BANK
On September 11, 1996 the Company entered into an allonge
agreement with the bank, whereby the bank may at any time
before April 15, 1997 convert the then unpaid amount of
principal and interest due under the Amended and Restated
Term Notes dated as of August 2, 1995 in the original
principal amount of $1,025,000 into 1,400,000 shares of the
Company's Common Stock (the "Note Shares").
On September 12, 1996, the bank entered into an option and
purchase, sale and assignment agreement (the "Option
Agreement") with CNL Holdings, Inc (CNL) whereby the bank
would sell the Note Shares referred to above, along with the
375,000 common shares of the Company it currently owns (the
"Bank Shares") for $1,500,000 to CNL.
On September 12, 1996 CNL entered into an agreement with
the Company whereby the Company would use its best efforts
to file a Registration Statement with the Securities and
Exchange Commission covering the 375,000 Bank Shares and the
1,400,000 Note Shares (collectively the "Acquired Shares").
Such Registration Statement shall be declared effective as
soon as possible after the filing thereof, and kept current
and effective for a period of two years or until such time
as all shares registered pursuant therewith have been sold
or otherwise transferred. The proceeds of the sale of the
Acquired Shares shall be applied as follows: The first
$1,500,000 shall be paid to reimburse CNL for payments made
to the bank pursuant to the Option Agreement. Fifty percent
of the balance of the proceeds not to exceed $2,500,000,
shall be loaned to the Company by CNL. The balance of the
proceeds belong to CNL. The amounts loaned by CNL to the
Company shall be evidenced by notes which shall be due
twelve months after making such loan and shall bear interest
at the rate of 4% per annum. At maturity of the loans, the
Company will have the option to repay the loan balance and
accrued interest by issuing a new Series C Preferred Stock
(the "Preferred Stock") valued at $5.00 per share. The
Preferred Stock will be non-voting and will carry a
cumulative dividend of 8% per annum, which may be payable by
the issuance of shares of common stock valued at $5.00 per
share up to a maximum of 40,000 shares per annum.
On January 31, 1997, the Bank and Conolog entered into
Amendment No. 1 to the Option and Purchase, Sale and
Assignment Agreement dated September 12, 1996. The amended
Option Agreement now provides that on or before February 5,
1997, CNL will purchase from the Bank for an aggregate
purchase price of $600,000 no less than (i) 133,333 shares
of Common Stock for $399,999, subject to the approval of IAR
Securities Corp. and (ii) $200,001 of the Debt Claim
represented by the note. CNL thereafter may exercise the
remainer of the option on or before April 15, 1997. In
addition, CNL may purchase from the Bank additional shares
of Common Stock owned by the Bank at the price o f $3.00 per
share and portions of the Debt Claim from time to time. On
February 3, 1997, CNL paid the Bank $600,000 consummating
the purchase of the above 200,000 shares. On January 31,
1997, $200,001 of the Debt to the Bank was adjusted
resulting in all accrued interest in the amount o f $106,298
being reduced and the remainding being applied to principal.
On March 26, 1997, CNL completed the exercise of the "Option
Agreement" with the Bank effectively eliminating all debts
and liens with the Bank.
NOTES PAYABLE - OTHER
CNL Holdings, Inc. loaned the Company $916,235. The notes
will be due during the fiscal year July 31,1998 and shall bear
interest at the rate of 4% per annum. The loans are payable
in cash or Series C Preferred Stock, at the Company's option
at $5.00 per share. Interest is payable in Common Stock up
to a maximum of 40,000 shares per annum.
There is no relationship between CNL Holdings Inc. and the
Company except as specifically detailed above.
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 are due and payable on the earlier
of Janury 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 is 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 is 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.
LEASES
The Company leases automobiles, machinery and equipment,
and office furniture and fixtures under leases which expire
over the next three years. The rental payments are based on
minimum rentals and charges for mileage in excess of
specified amounts for the automobiles. The leases for
machinery and equipment and furniture and fixtures contain a
bargain purchase option exercisable after the initial lease
term.
Property, plant and equipment include the following amounts
for leases that have been capitalized.
July 31,
1997 1996
Machinery and Equipment $ 303,574 $ 303,574
Less allowance for amortization 273,538 263,832
--------- ---------
$ 30,036 $ 39,742
========= ========
Lease amortization is included in depreciation expense.
Future minimum payments, by year and in the aggregaate,
under capital leases consisted of the following as of July
31, 1997.
1998
----
Total minimum lease payments $ 4,208
Less amounts representing interest 406
-------
Present value of net minimum lease payments 3,802
Less current maturities of capitalized
lease obligations 3,802
-------
Long-term capitalized lease obligations $ 0
The Company leases various equipment under noncancellable
operating leases expiring through July 2000. Future
minimum rental payments under the above leases are as
follows:
Year Ended July 31,
-------------------
1998 $ 4,808
1999 4,808
2000 4,808
-------
$14,424
=======
Total rental expense for all operating leases of the Company
amounted to approximately $7,659, $10,353, and $11,447 during
the years ended July 31, 1997, 1996 and 1995, respectively.
CAPITAL STOCK
The Series A Preferred Stock provides 4% ($.02 per share)
cumulative dividends, which were $86,800 in arrears at July
31, 1997. In addition, each share of Series A Preferred Stock
may be exchanged for one share of Common Stock upon surrender
of the Preferred Stock and the payment of $1,200 per share.
The Company may redeem the Series A Preferred Stock at $.50
per share plus accrued and unpaid dividends.
The Series B Preferred Stock provides cumulative dividends
of $.90 per share which were $27,937 in arrears at July 31,
1997. In addition, each five shares of Series B Preferred
Stock is convertible into 1 share of Common Stock. The
Company may redeem the Series B Preferred Stock at $15 per
share plus accrued and unpaid dividends.
The Company has reserved 155,392 shares of Common Stock for
Series A and B Preferred Stock.
EXTRAORDINARY ITEM
On August 16, 1995 the Company's Bank debt was restructured
resulting in debt forgiveness of $1,232,728. This created
a deferred tax asset at July 31, 1995 of $492,352. When
the debt forgiveness occurred, the Company wrote off its
deferred tax asset against the forgiveness of debt,resulting
in extraordinary income of $740,376.
INCOME TAXES
Income taxes are comprised of the following:
July 31
1997 1996 1995
Deferred Income Taxes (Benefit) $ - $ - $ (492,352)
Current Income Taxes
Federal 9,884 - -
State 200 200 100
--------- --------- -----------
$ 10,084 $ 200 $ (492,252)
======== ========= ============
Taxable income differs from financial statement income due
to the effect of non-deductible permanent tax differences.
These permanent tax differences include officer's life
insurance premiums and non-deductible entertainment expenses.
At July 31, 1997 the Company has a net operating loss carry-
forward of approximately $2,671,000 for financial reporting
purposes and approximately $2,443,000 for tax purposes which
is available of offset future Federal taxable income. For
Federal purposes, $253,000 of the carryforward expires in
2008, $1,232,000 expires in 2009 and $957,000 expires in
2010. For state purposes the carryforward is approximately
$1,604,000, $706,000 expires in 2001 and $898,000 expires
in 2002. Also at July 31, 1997 the Company has unused tax
credits available of approximately $103,000 of which
$12,100 expires in 2000, $26,300 in 2001 and $64,900 in 2002.
The above net operating loss created deferred tax asset that
has been fully reserved. The amount is $1,329,286.
MAJOR CUSTOMERS AND EXPORT SALES
The following summarized sales to major customers (each 10%
or more of net sales) by the Company.
Sales to
Major Number of Percentage
Year Ended Customers Customers of Total
---------- --------- --------- -----------
1997 $ 625,134 3 57
1996 401,840 1 21
1995 424,849 1 20
During 1997 the Company had no export sales. During 1996
the Company had export sales of $401,840 and none and 1995.
SUBSEQUENT EVENTS
On September 12, 1997 the Company filed a Registration
Statement (S-1) with the Securities and Exchange Commission.
This statement covers the primary offering of securities by
the Company and the offering of other securities by certain
selling security holders. The Company is registering,
under the primary prospectus 805,000 Units, each consisting
of one (1) share of Common Stock and four (4) Class A
Warrants. The selling security holders are registering
under an alternate prospectus 1,200,000 Class A Warrants.
At July 31, 1997 all costs associated with this offering
were deferred. These costs will be deducted from the
proceeds from the sale of stock.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
X Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended July 31, 1997 (No Fee Required)
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from to (No Fee Required)
Commission File Number: 0-8174
CONOLOG CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-0853566
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5 Columbia Road, Somerville, NJ 08876
(Address of principal executive office) (Zip code)
Issuer's telephone number, including area code: (908) 722-8081
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange in which
registered
Common Stock, $1.00 par value NASDAQ SmallCap Market
Redeemable Class A Warrants NASDAQ SmallCap Market
Check whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to the Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates
of the Registrant based on the closing sale price of $2.812 on
December 16, 1997 was $7,918,946
The number of shares outstanding of the Registrant's common stock
outstanding as of December 17, 1997 was 2,816,126
DOCUMENTS INCORPORATED BY REFERENCE
FORM 10-K/A
JULY 31, 1997
Item 6. SELECTED FINANCIAL DATA
Year Ended
July 31,
(in thousands, except 1997 1996 1995 1994 1993
per share amounts)
Operations Summary:
Net sales and other $1,123 $1,924 $2,091 $2,045 $1,486
income
Net income (loss) (3,810) 292 (537) (1,183) (322)
Income (loss)
per share -primary (2.41) 0.28 (0.12) (0.27) (0.07)
Income (loss) from
continuing operations
after
giving retroactive
effect to a 1 for - - (12.36) (27.22) (7.41)
100 reverse stock
split on August
16, 1995
Balance Sheet
Summary:
Total assets $4,340 $3,928 $3,882 $3,739 $4,601
Long-term debt and
capitalized lease - $5 $34 $3,830 $3,733
obligations
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Results of Operations
In order to summarize the Company's operating results for
the past three years, the following tables indicate the percentage
relationships of income and expense items in the statements of
income and the percentage changes in those items for such years.
Income & Expense Items as Income & Percentage
a Percentage Of Revenues Expense Items Increase/Decrease
From Operations
For The Years Ended July 31
1997 1996 1995 1996 to 1995 to 1994 to
1997 1996 1995
100.0% 100.0% 100.0% Sales & (41.6)% (8.0)% 2.3%
other
income
84.2%* 67.2* 92.2* Cost of (27.9) (32.9) (4.2)
products
sold
182.9 49.2 43.8 Selling, (117.0) 3.4 7.4
general &
administrative
7.4 6.8 13.3 Interest (38.0) (51.8) (23.4)
274.4 123.2 149.3 Total costs 29.9 (23.0) (3.3)
& expenses
(174.4) (23.2) (49.3) Income (338.5) (56.5) (13.0)
(loss)
before
taxes
.9 - (23.5) Income 494.2 (100.0) -
taxes
(credits)
(175.3)% (23.2)% (25.8)% Loss before (339.0)% (16.5)% (13.0)%
extraordinary
item
* Includes write-offs for obsolete or excess inventory which were
$28,101, $50,281 and $656,248 in 1997, 1996,and 1995 respectively.
Results of Operations
1997 Compared to 1996
Total revenue decreased $801,076 or 42% from $1,924,466 to
$1,123,391 in 1997. This decrease was attributable to delays in
the release of tone protection orders from the Bonneville Power
Administration and other customers. The Company attributes these
delays to the budget constraints for various utilities and to the
pending release of the new advanced tone protection device,
the PTR-1500. The Company essentially completed the prototypes
during the first fiscal quarter ended October 31, 1997. The
Company plans to ship prototypes to GE during November 1997.
Gross Margins, inclusive of inventory adjustments for the
years ended July 31, 1997 and 1996 totaled $177,910 & $632,185
representing 15.8% and 32.9% of revenues. Gross margins for 1997
were lower than 1996 due to the lower utilization of the factory
in fiscal 1997 over 1996.
Selling, General and Administrative expenses increased from
$946,954 in 1996 to $2,054,630 in 1997 representing an increase
of 117%. This increase is the result of the Company issuing
359,500 shares of Common Stock to eight employees, incurring an
additional $1,313,750 in salary expense.
Interest expense totaled $82,932 for the year ended July 31,
1997 compared to $133,652 for the year ended July 31, 1996. This
decrease was a result of lower loan outstanding balances resulting
from the pay-down of the credit facility during the year.
As a result of the foregoing, the Company reported a net loss
before extraordinary item of $1,969,736 or $1.24 per share. This
compares to a net loss before extraordinary item of $443,622 or $.43
per share for the same period last year.
1996 Compared To 1995
Revenues for the year ended July 31, 1996 decreased to
$1,924,466 from $2,090,933 for the twelve months of the prior
year, representing a decrease of 8.0%. Revenues declined as a
result of a decline in sales in the military sector. The Company
completed a large sale of switches to the military in Fiscal 1995
and did not have a comparable sale for Fiscal 1996.
Gross margins for the year totaled $632,184 and $163,194,
respectively, representing 32.9 % and 7.8%, respectively, of
revenues. Gross margins were higher in 1996 due to the obsolete
inventory write-off in 1995. Without the inventory write-off the
1996 and 1995 gross margin would have been 35,5% and 39.3%,
respectively. The gross margin for 1996 was lower than 1995
without the inventory write-off due to the fact that higher than
normal discounts were offered and taken on two major sales.
Selling, general and administrative expenses increased from
$916,016 in 1995 to $946,954 in 1996, representing an increase
of 3.4%. These expenses increased as a result of an expansion of
the employment base and an increase in advertising and promotion
costs.
Interest expense totaled $133,652 for the year ended July
31, 1996 as compared to $277,440 in interest expense for the year
ended July 31, 1995. The Company reached a debt restructuring
agreement with the Bank during 1995 that resulted in having no
interest expense for the quarter ended April 30, 1996.
As a result of the foregoing, the Company reported a net
income of $291,754, or $.28 per share. The 1996 net profit was
inclusive of a debt compromise of $740,376, net of a tax benefit
of $492,352. This compares to a net loss of $537,290 or $.12 per
share for the same period last year (after retroactive effect to
a 1 for 100 reverse split on August 16, 1995 and after
extraordinary item in 1996).
As of July 31, 1996 the Registrant's backlog of orders was
approximately $3.4 million, representing a mix of military and
commercial telecommunication products. The Company anticipates
its commercial shipments to grow as a percentage of total sales
for the foreseeable future.
1995 Compared To 1994
Total revenue increased $46,000, or 2.3%, from $2,045,000 in
1994 to $2,091,000 in 1995. The increase was attributable to an
expansion in the commercial sector of the Company's business,
which contributed $1,422,000 or 68% to total revenues in 1995,
compared to $1,300,000 or 64% of total revenues in 1994.
Costs of sales totaled $1,271,000 for the year ended July 31,
1995 as compared to $1,068,000 for the comparable period ended
July 31, 1994, representing 60.8% and 52.2% of net revenues,
respectively. Cost of sales increased as a result of product mix
during the comparable years.
A charge of $656,000 for inventory write-off was recorded
during the year. This amount was exclusively due to certain
inventories purchased for military programs in prior periods that
were phased out. There was a comparable charge of $945,000 in
fiscal 1994.
The Company determined during the first quarter of 1995 that
there was not sufficient information from the Government's
Defense-Electronic Supply Center ("DESC") facility to permit the
Company to make a quantitative determination of future sales.
Inventory which totaled $656,000 was written off after management
made an analysis of parts maintained for military and government
orders compared to available inventories. This amount consisted
of $318,000 for raw materials, $249,000 for work in progress and
$89,000 for finished goods. There were comparable charges of
$945,000 in the twelve month period ended April 30, 1994. This
analysis consisted of a study of the forecasted requisitions of
upcoming orders of the DESC, Conolog's principal defense customer.
On examination of prospective sales, it was determined that the
government had no requirements for Conolog's military products
for at least the next twelve to eighteen months.
As a result of the foregoing, gross profit margins totaled
$163,914 or 7.8% of sales for the fiscal year ended July 31, 1995
as compared to $32,330 or 1.6% of sales for the same twelve month
period in 1994. Exclusive of inventory adjustments, gross profit
margins would have been 39% for the year ended July 31, 1995 and
48% for the year ended July 31, 1994.
Selling, General and Administrative Expense totaled $916,000
or 43.8% of revenues, as compared to $853,000 or 41.7% of revenues
for the comparable period last year.
As a result of the foregoing, an operating loss of $737,000
was realized for the year ended July 31, 1995 as compared to an
operating loss of $821,000 for the same period last year.
Interest expense for the twelve months totaled $277,440
compared to $362,000 for the fiscal year ended July 31, 1994. The
Bank had agreed to fix the total interest owed as of January 31,
1995 and to keep the amount unchanged through August 16, 1995.
Accordingly, no interest expense was accrued from February 1,1995
through July 31, 1995.
As a result of the foregoing, the Company incurred a net loss
of $537,290 for the twelve months ended July 31, 1995, compared to
a net loss of $1,183,000 for the same period last year. The loss
in 1995 was reduced by the income tax benefit derived from
previously incurred operating losses not deducted. The losses, as
a result of the Registration, will be deductible against
forgiveness of indebtedness income.
As of July 31, 1995 the Company's backlog totaled $1.3
million, consisting of a mix of military and commercial tele-
communication products, compared to $1.5 million at July 31,1994.
The Company anticipates its commercial shipments to continue to
grow as a percentage of total sales in the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital at July 31, 1997 was $2,456,122 compared to
$1,806,318 at year ended July 31, 1996. The improvement in the
working cpaital is the result of a planned inventory increase of
$236,012. This is primarily attributed to the building of the
PTR-1500 tone protection device. The Company will be delivering
to the General Electric Company under contract prototype units
during Nobember 1997. Production units are expected to be
delivered during the second quarter of fiscal 1998.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Conolog Corporation
By:
December 18, 1997 /s/ Robert S. Benou
President, Chief Executive
Officer and Chairman of the Board
In accordance with the Exchange Act, this report has been signed
below by the following persons, on behalf of the registrant and
in the capacities and on the dates indicated.
December 18, 1997
/s/Robert S. Benou
President, Chief Executive Officer
and Chairman of the Board
December 18, 1997 /s/Arpad J. Havasy
Executive Vice President, Secretary,
Treasurer and Director
December 18, 1997 /s/Marc R. Benou
Vice President, Assistant Secretary and Director
December 18, 1997 /s/Louis S. Massad
Director
Annual Report on Form 10-K/A
Item 8, Item 14 (a)(1) and (2)
Financial Statements
Year Ended July 31, 1997
Conolog Corporation
Somerville, New Jersey 08876
Form 10-K/A Item 14(a)(1) and (2)
Index to the Financial Statements
Conolog Corporation
July 31, 1997
The following financial statements of the registrant are included
in Item 14:
Balance Sheets - July 31, 1997 and 1996 .................... F-2
Statements of Income - Years Ended July 31, 1997,
1996 and 1995 ......................................... F-3
Statements of Stockholders' Equity (Deficiency) - Years
Ended July 31, 1997, 1996 and 1995 .................... F-4
Statements of Cash Flows - Years Ended July 31,
1997, 1996 and 1995 ................................... F-5
Notes to Financial Statements .............................. F-6-13
Independent Auditors' Report
Board of Directors
Conolog Corporation
We have audited the accompanying balance sheets of Conolog
Corporation as of July 31, 1997 and 1996 and the related
statements of operations, stockholders' equity (deficiency)
and cash flows for each of the three years in the period
ended July 31, 1997. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining on
a test basis evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Conolog Corporation at July 31, 1997 and 1996,
and the results of its operations and its cash flows for
each of the three years in the period ended July 31, 1997
in conformity with generally accepted accounting principles.
Bridgewater, New Jersey
October 13, 1997, Except as to
Notes 11, 12, 13 which are
dated December 11, 1997
* The financial statements have been restated due to imputed
interest on unpaid officer's salaries, the effect of
issuing Common Stock to certain employees and the addition
to Contributed Capital for dividends not paid on Preferred
Stock and the difference between negotiated and fair
value of Common Stock issued in exchange for bank debt.
(Notes 11, 12, 13). The primary loss per share was increased
due to these transactions by $1.99 in 1997 and $.33 in 1995.
F-1
Conolog Corporation
Balance Sheets
July 31,
1997 1996
--------- ---------
RESTATED
ASSETS --------
Current Assets
Cash $503,217 $178,213
Accounts Receivable - less
allowances of $6,000 and
$14,000 in 1997 and 1996,
respectively 109,571 304,020
Inventories
Finished Goods 1,705,782 1,494,289
Work-in-process 498,070 129,675
Materials and supplies 969,940 1,313,816
---------- ----------
3,173,792 2,937,780
Other Current Assets 44,085 43,517
Deferred offering costs 113,813 -
---------- ----------
3,944,478 3,463,530
Property, Plant and Equipment
Land and improvements 34,524 34,524
Building and improvements 663,630 659,477
Machinery and equipment 1,291,838 1,289,578
Furniture and Equipment 336,001 330,735
---------- ----------
2,325,993 2,314,314
less allowance for depreciation
and amortization 1,938,188 1,880,408
---------- ----------
387,805 433,906
Other Assets 7,469 30,398
---------- ----------
TOTAL ASSETS $4,339,752 $3,927,834
========== ==========
July 31,
1997 1996
-------- --------
LIABILITIES RESTATED
--------
Current Liabilities
Notes Payable - Bank $ - $ 1,012,500
Notes Payable - Other 916,235 -
Accounts Payable 188,510 280,629
Accrued Payroll 15,645 39,811
Accrued Interest 17,374 64,699
Bridge Loan 200,000 -
Other Accrued Expenses 146,791 115,723
Current Maturities of 3,802 33,282
capitalized lease obligations
--------- -----------
Total Current Liabilities $1,488,357 $1,546,644
Other Liabilities
Capitalized lease obligations,
less current maturities - 4,973
--------- ----------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock, par value $.50;
Series A; 4% cumulative;162,000
shares authorized; 155,000 shares
issued and outstanding 77,500 77,500
Preferred Stock, par value $.50;
Series B; $.90 cumulative;
50,000 shares authorized, issued
and outstanding 1,197 shares 597 597
Common Stock, par value $1.00;
20,000,000 shares authorized;
issued 2,803,473 shares in 1997
and 1,035,186 in 1996, including
8,776 shares held in Treasury 2,803,473 1,035,186
Contributed Capital 7,034,008 4,512,204
Retained Earnings (Deficit) (6,932,449) (3,117,536)
Treasury Shares at Cost (131,734) (131,734)
----------- -----------
Total Stockholders' Equity (Deficiency) 2,851,395 2,376,217
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
$4,339,752 $3,927,834
========== ==========
F-2
Conolog Corporation
Statements of Operations
RESTATED
--------
Year Ended July 31,
1997 1996 1995
---------- ---------- -----------
Sales and other income $ 1,123,390 $1,924,466 $ 2,090,933
Costs and Expenses:
Cost of Products sold 917,379 1,242,001 1,270,771
Selling, general and
administrative 2,054,630 946,954 916,016
Interest 82,932 133,652 277,440
Write-off obsolete or
excess inventories 28,101 50,281 656,248
--------- --------- ---------
3,083,042 2,372,888 3,120,475
Loss Before Income Taxes and
Extraordinary Items (1,959,652) (448,422) (1,029,542)
Income taxes (benefit) 10,084 200 (492,252)
--------- --------- ----------
Net Loss before Extraordinary
Items (1,969,736) (448,622) (537,290)
Extraordinary Items (1,841,000) 740,376 -
--------- --------- ---------
Net Income (Loss) $(3,810,736) $ 291,754 $(537,290)
=========== ========= ==========
Earnings Per Share:
(Loss)from Operations-Per Share $ (1.24) $ (.43) $ (12.36)
Income(Loss) after Extraordinary
Item - Per Share $ (2.41) $ .28 $ (12.36)
Net Income (Loss) Per Share
- Primary $ (2.41) $ .28 $ (12.36)
- Fully Diluted $ (2.41) $ .25 $ (12.36)
========== ========== ==========
See notes to the financial statements
F-3
Conolog Corporation
Statement of Stockholders' Equity (Deficiency)
RESTATED
--------
Series A Series B
Preferred Preferred Common Contributed
Stock Stock Stock Capital
Balance @ July 31,
1994 $ 77,500 $ 10,661 $ 52,239 $ 952,994
Prior Period Adjustment - - - -
Net loss for the year - - - -
Dividends - - - 500,719
-------- -------- --------- ---------
Balance @ July 31,
1995 77,500 10,661 52,239 1,453,773
Public Stock Offering - (10,064) 982,947 3,448,642
Net Income for the year - - - -
Dividends - - - (390,211)
-------- -------- --------- ---------
Balance @ July 31,
1996 77,500 597 1,035,186 4,512,204
Debt to Equity
conversion - - 1,408,787 1,563,377
Additional shares issued
to employees - - 359,500 954,250
Net loss for the year - - - -
Dividends - - - 4,177
--------- -------- --------- ---------
Balance @ July 31,
1997 $ 77,500 $ 597 $ 2,803,473 $7,034,008
Conolog Corporation
Statement of Stockholders' Equity (Deficiency)
RESTATED
--------
Total
Retained Stockholders
Earnings Treasury Equity
(Deficit) Stock (Deficiency)
Balance @ July 31,
1994 $ (2,383,794) $ (131,734) $ (1,422,134)
Prior Period Adjustment 18,949 - 18,949
Net loss for the year (537,290) - (537,290)
Dividends (500,779) - -
------------ ----------- -----------
Balance @ July 31,
1995 (3,402,914) (131,734) (1,940,475)
Public Stock Offering - - 4,421,525
Net Income for the year 291,754 - 291,754
Dividends (6,376) - (396,587)
------------ --------- -----------
Balance @ July 31,
1996 (3,117,536) (131,734) 2,376,217
Debt to Equity
conversion - - 2,972,164
Additional shares issued
to employees - - 1,313,750
Net loss for the year (3,810,736) - (3,810,736)
Dividends (4,177) - -
------------ --------- -----------
Balance @ July 31,
1997 $(6,932,449) $(131,734) $2,851,395
See Notes to Financial Statements
F-4
Conolog Corporation
Statements of Cash Flows
RESTATED
--------
Year Ended July 31,
1997 1996 1995
----------- ---------- ------------
Cash Flows From Operating Activities
Net Income (Loss) $(3,810,736) $ 291,754 $ (537,290)
Adjustments to Reconcile Net Income
to Net Cash Provided (Used) by
Operating Activities
Prior Period Adjustment - - 18,949
Common stock base compensation 1,313,750 - -
Debt Retirement Cost 1,841,000 - -
Deferred income taxes - 492,352 (492,352)
Depreciation and amortization 57,781 64,994 60,396
Gain on disposition of equipment - (3,420) -
Provision for losses on accounts
receivable (8,000) 9,000 -
(Increase) Decrease in Operating Assets
Accounts receivable 202,449 (141,479) 74,529
Inventories (236,012) (339,653) 392,058
Other current assets (568) (17,834) (3,394)
Increase (Decrease) in Operating Liabilities
Accounts payable (92,119) (7,001) 12,330
Accrued expenses and other liabilities 78,241 (1,066,379) 413,781
----------- ---------- ----------
Net Cash Used by Operating Activities
(654,214) (717,666) (60,993)
Cash Flows From Investing Activities
Purchase of property, plant and equipment
(11,680) (43,163) (19,625)
Proceeds from sale of equipment - 18,666 -
----------- ---------- --------
Net Cash Used in Investing Activities
(11,680) (24,497) (19,625)
Cash Flows From Financing Activities
Deferred offering costs (113,813) 86,154 (86,154)
Increase from public stock offering - 4,421,525 -
Proceeds from borrowings 916,235 - -
Increase (Decrease) in bridge loan 200,000 (200,000) 200,000
Repayments of long-term borrowings (34,453) (2,836,008) (38,681)
(Increase) reduction in other assets 22,929 (20,580) 325
Dividends paid - (396,587) -
Increase (Decrease) in due to officers - (161,705) 17,302
---------- ---------- --------
Net Cash Provided by Financing
Activities 990,898 892,799 92,792
---------- ---------- --------
Net Increase in Cash 325,004 150,636 12,174
Cash at Beginning of Period 178,213 27,577 15,403
---------- ---------- --------
Cash at End of Period $ 503,217 $ 178,213 $ 27,577
========== ========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest Paid $ 77,349 $ 772,773 $ 102,816
Taxes Paid $ 10,084 $ 125 $ 50
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Capitalized lease stock obligations incurred for use of
equipment $ - $ - $ 56,550
Additional common stock was issued upon conversion of
$1,131,164 of long-term debt and accrued interest payable
See notes to the financial statements
F-5
CONOLOG CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The principal business activity of Conolog Corporation
(the "Company") is the design, manufacturing and distribution
of small electronic and electromagnetic components and
subassemblies for use in telephone, radio and microwave
transmission and reception and other communication areas.
The Company's products are used for transceiving various
quantities, data and protective relaying functions in
industrial, utility and other markets. The Company's
customers include primarily industrial customers, which
include power companies and various branches of the military.
Revenue Recognition
Sales are recognized when the products are shipped. Sales
under certain fixed-price-type contracts, where progress
payments are received, are recognized when work is performed,
under the percentage-of-completion method, in accordance with
Statement of Position 81.1, Accounting for Performance of
Construction Type and Certain Production-Type
contracts.
Inventories
Inventories are stated principally at average cost which is
not in excess of market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less
allowances for depreciation and amortization. Depreciation
and amortization are computed by the straight-line method
over the estimated useful lives of the assets.
Income (Loss) Per Share of Common Stock
Income (loss) per share of common stock is computed by
dividing net earnings (loss) (after dividends on preferred
shares) by the weighted average number of shares of Common
Stock outstanding during the year. The effect of assuming
the exchange of the Series A Preferred Stock and the Series
B Preferred Stock in 1997 and 1995 would be anti-dilutive.
F-6
Income Taxes
Deferred income taxes have been provided for in accordance
with Statement No, 109 of the Financial Accounting Standards
Board. Deferred income taxes arise from timing differences
resulting from income and expense items reported for
financial accounting and tax purposes in different periods.
Deferred taxes are classified as current or noncurrent,
depending on the classification of the assets and liabilities
to which they related. Deferred taxes arising from timing
differences that are not related to an asset or liability
are classified as current or noncurrent depending on the
periods in which the timing differences are expected to
reverse.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
(2) WRITE-OFF OF OBSOLETE OR EXCESS INVENTORIES
During 1997, the Company recorded a write-off of obsolete or
excess inventories of $28,101. During 1996 and 1995, the
Company recorded a write-off of obsolete or excess
inventories of $50,281 and $656,248, respectively.
This inventory write-off was military related. In
management's opinion these items will not be reordered in
the foreseeable future.
(3) NOTES PAYABLE - BANK
On September 11, 1996 the Company entered into an allonge
agreement with the bank, whereby the bank may at any time
before April 15, 1997 convert the then unpaid amount of
principal and interest due under the Amended and Restated
Term Notes dated as of August 2, 1995 in the original
principal amount of $1,025,000 into 1,400,000 shares of the
Company's Common Stock (the "Note Shares").
On September 12, 1996, the bank entered into an option and
purchase, sale and assignment agreement (the "Option
Agreement") with CNL Holdings, Inc (CNL) whereby the bank
would sell the Note Shares referred to above, along with the
375,000 common shares of the Company it currently owns (the
"Bank Shares") for $1,500,000 to CNL.
F-7
Note 3 - Notes Payable -Bank (Continued)
On September 12, 1996 CNL entered into an agreement with
the Company whereby the Company would use its best efforts
to file a Registration Statement with the Securities and
Exchange Commission covering the 375,000 Bank Shares and the
1,400,000 Note Shares (collectively the "Acquired Shares").
Such Registration Statement shall be declared effective as
soon as possible after the filing thereof, and kept current
and effective for a period of two years or until such time
as all shares registered pursuant therewith have been sold
or otherwise transferred. The proceeds of the sale of the
Acquired Shares shall be applied as follows: The first
$1,500,000 shall be paid to reimburse CNL for payments made
to the bank pursuant to the Option Agreement. Fifty percent
of the balance of the proceeds not to exceed $2,500,000,
shall be loaned to the Company by CNL. The balance of the
proceeds belong to CNL. The amounts loaned by CNL to the
Company shall be evidenced by notes which shall be due
twelve months after making such loan and shall bear interest
at the rate of 4% per annum. At maturity of the loans, the
Company will have the option to repay the loan balance and
accrued interest by issuing a new Series C Preferred Stock
(the "Preferred Stock") valued at $5.00 per share. The
Preferred Stock will be non-voting and will carry a
cumulative dividend of 8% per annum, which may be payable by
the issuance of shares of common stock valued at $5.00 per
share up to a maximum of 40,000 shares per annum.
On January 31, 1997, the Bank and Conolog entered into
Amendment No. 1 to the Option and Purchase, Sale and
Assignment Agreement dated September 12, 1996. The amended
Option Agreement now provides that on or before February 5,
1997, CNL will purchase from the Bank for an aggregate
purchase price of $600,000 no less than (i) 133,333 shares
of Common Stock for $399,999, subject to the approval of IAR
Securities Corp. and (ii) $200,001 of the Debt Claim
represented by the note. CNL thereafter may exercise the
remainer of the option on or before April 15, 1997. In
addition, CNL may purchase from the Bank additional shares
of Common Stock owned by the Bank at the price o f $3.00 per
share and portions of the Debt Claim from time to time. On
February 3, 1997, CNL paid the Bank $600,000 consummating
the purchase of the above 200,000 shares. On January 31,
1997, $200,001 of the Debt to the Bank was adjusted
resulting in all accrued interest in the amount o f $106,298
being reduced and the remaining being applied to principal.
On March 26, 1997, CNL completed the exercise of the "Option
Agreement" with the Bank effectively eliminating all debts
and liens with the Bank.
F-8
(4) NOTES PAYABLE - OTHER
CNL Holdings, Inc. loaned the Company $916,235. The note
will be due during the fiscal year July 31, 1998 and shall bear
interest at the rate of 4% per annum. The loans are payable
in cash or Series C Preferred Stock at $5.00 per share to a
maximum of 40,000 shares per annum.
There is no relationship between CNL Holdings Inc. and the
Company except as specifically detailed above.
(5) BRIDGE LOAN
The Company received $200,000 in net proceeds from several
investors in a private placement. Each investor received
two Promissory Notes. The first Promissory Note is payable
on the earlier of January 31, 1999 or the closing of the
Company's next public offering; (the "First Note") and the
Second Note (the "Second Note"), plus accrued interest for
the First Note, is payable on the earlier of January 31,
1999 or the closing of the Company's next public offering,
or convertible at the option of the holder into Preferred
Stock Purchase Warrants to purchase shares of Series D
Preferred Stock, which are new Preferred Stock securities
contemplated to be offered in the next public offering.
At the time the next registration statement is declared
effective by the Securities and Exchange Commission, the
Bridge Loan holders may exercise their respective option to
convert the Second Note into Class A Warrants. The interest
rate for the First Note is eight percent (8%) per annum.
The Company has granted the lenders a security interest in
the property located at 5 Columbia Road, Somerville, NJ
(collateral).
(6) LEASES
The Company leases automobiles, machinery and equipment,
and office furniture and fixtures under leases which expire
over the next three years. The rental payments are based on
minimum rentals and charges for mileage in excess of
specified amounts for the automobiles. The leases for
machinery and equipment and furniture and fixtures contain a
bargain purchase option exercisable after the initial lease
term.
Property, plant and equipment include the following amounts
for leases that have been capitalized.
July 31,
1997 1996
Machinery and Equipment $ 303,574 $ 303,574
Less allowance for amortization 273,538 263,832
--------- ---------
$ 30,036 $ 39,742
========= ========
F-9
Lease amortization is included in depreciation expense.
Future minimum payments, by year and in the aggregate,
under capital leases consisted of the following as of July
31, 1997.
1998
----
Total minimum lease payments $ 4,208
Less amounts representing interest 406
-------
Present value of net minimum lease payments 3,802
Less current maturities of capitalized
lease obligations 3,802
-------
Long-term capitalized lease obligations $ 0
The Company leases various equipment under noncancellable
operating leases expiring through July 2000. Future
minimum rental payments under the above leases are as
follows:
Year Ended July 31,
-------------------
1998 $ 4,808
1999 4,808
2000 4,808
-------
$14,424
=======
Total rental expense for all operating leases of the Company
amounted to approximately $7,659, $10,353, and $11,447 during
the years ended July 31, 1997, 1996 and 1995, respectively.
(7) CAPITAL STOCK
The Series A Preferred Stock provides 4% ($.02 per share)
cumulative dividends, which were $86,800 in arrears at July
31, 1997. In addition, each share of Series A Preferred Stock
may be exchanged for one share of Common Stock upon surrender
of the Preferred Stock and the payment of $1,200 per share.
The Company may redeem the Series A Preferred Stock at $.50
per share plus accrued and unpaid dividends.
The Series B Preferred Stock provides cumulative dividends
of $.90 per share which were $27,937 in arrears at July 31,
1997. In addition, each five shares of Series B Preferred
Stock is convertible into 1 share of Common Stock. The
Company may redeem the Series B Preferred Stock at $15 per
share plus accrued and unpaid dividends.
The Company has reserved 155,392 shares of Common Stock for
Series A and B Preferred Stock.
F-10
(8) EXTRAORDINARY ITEM
On August 16, 1995 the Company's Bank debt was restructured
resulting in debt forgiveness of $1,232,728. This created
a deferred tax asset at July 31, 1995 of $492,352. When
the debt forgiveness occurred, the Company wrote off its
deferred tax asset against the forgiveness of debt, resulting
in extraordinary income of $740,376.
The cost of debt retirement (See Note 13) of $1,841,000, which
occurred in 1997, is considered an extraordinary item with no
tax effect due to the non-deductability of this expense.
(9) INCOME TAXES
Income taxes are comprised of the following:
July 31
1997 1996 1995
Deferred Income Taxes (Benefit) $ - $ - $ (492,352)
Current Income Taxes
Federal 9,884 - -
State 200 200 100
--------- --------- ----------
$ 10,084 $ 200 $ (492,252)
======== ========= ===========
Taxable income differs from financial statement income due
to the effect of non-deductible permanent tax differences.
These permanent tax differences include officer's life
insurance premiums and non-deductible entertainment expenses.
At July 31, 1997 the Company has a net operating loss carry-
forward of approximately $3,966,750 for financial reporting
purposes and approximately $2,443,000 for tax purposes which
is available of offset future Federal taxable income. For
Federal purposes, $253,000 of the carryforward expires in
2008, $1,232,000 expires in 2009 and $957,000 expires in
2010. For state purposes the carryforward is approximately
$1,604,000, $706,000 expires in 2001 and $898,000 expires
in 2002. Also at July 31, 1995 the Company has unused tax
credits available of approximately $103,000 of which
$12,100 expires in 2000, $26,300 in 2001 and $64,900 in 2002.
The above net operating loss created deferred tax asset that
has been fully reserved. The amount is $1,329,286.
F-11
(10)MAJOR CUSTOMERS AND EXPORT SALES
The following summarized sales to major customers (each 10%
or more of net sales) by the Company.
Sales to
Major Number of Percentage
Year Ended Customers Customers of Total
---------- --------- --------- -----------
1997 $ 625,134 3 57
1996 401,840 1 21
1995 424,849 1 20
During 1997 the Company had no export sales. During 1996
the Company had export sales of $401,840 and none and 1995.
(11) ACCRUED PAYROLL
At July 31, 1995 the Company had Accrued Payroll to an officer in the amount
of $492,775. During the year ended July 31, 1996 this amount was paid down
by a cash payment of $150,000 and $309,109 which was converted into common
stock. The Company made an adjustment in the amount of $55,691 for discounted
payroll/imputed interest.
The amount was adjusted as follows:
Prior Period $ 47,183
7/31/95 8,508
--------
$ 55,691
========
On the above accrued payroll the Company made an adjustment for imputed
interest. The adjustment was as follows:
Prior Period $ 28,234
7/31/95 23,754
7/31/96 1,797
7/31/97 1,906
--------
$ 55,691
(12) COMMON STOCK ISSUED TO EMPLOYEES
At July 31, 1997 the Company issued 359,500 shares of common stock to
eight employees. Two employees sold 4,500 shares of common stock and
$18,000 was charged to salary expense. An adjustment was to record
compensation as employees did not pay for the stock. The fair value
of the stock used at that time was $1,295,750 ($3.65 per share). The
effect on income was an increase in the loss by $1,295,750 or $.80
per share, and a corresponding increase in net operating loss carry-
forward for financial reporting purposes.
F-12
(13) CONTRIBUTED CAPITAL
During the years additional capital was contributed through the accumulation
of unpaid dividends on Preferred Stock, Series A & B.
Dividends which were not paid were considered as contributed capital and
amounts to $114,745 through July 31, 1997.
In addition to the above, During the year ended July 31, 1997, the Bank
converted 1,400,000 shares of Common Stock it was holding using a value
negotiated between Conolog and the Bank. The difference between the fair
value and the negotiated value was $1.315 and was considered to be
contributed capital and an extraordinary expense called Debt Retirement
Cost (see Footnote, Extraordinary Item). The total value placed upon
this transaction was $1,841,000. (1,400,000 shares X $1.315). The effect
on primary loss per share was an increase of $1.16.
(14) SUBSEQUENT EVENTS
On September 12, 1997 the Company filed a Registration
Statement (S-1) with the Securities and Exchange Commission.
This statement covers the primary offering of securities by
the Company and the offering of other securities by certain
selling security holders. The Company is registering,
under the primary prospectus 805,000 Units, each consisting
of one (1) share of Common Stock and four (4) Class A
Warrants. The selling security holders are registering
under an alternate prospectus 1,200,000 Class A Warrants.
At July 31, 1997 all costs associated with this offering
were deferred. These costs will be deducted from the
proceeds from the sale of stock.
F-13
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED April 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number ___________0-8174________
Conolog Corporation
(Exact name of registrant as specified in its charter)
Delaware 52-0853566
(State or other jurisdiction of (I. R. S. Employer
organization) Identification No.)
5 Columbia Road, Somerville, NJ 08876
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (908) 722-8081
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such report(s), and (2) has been
subject to such filing requirement for the past 90 days.
YES X NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PROCEEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequently to the distribution of securities under a
plan confirmed by a court.
YES ______ NO ________
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $1.00 per share; 3,686,071 shares outstanding as of
June 8, 1998 (inclusive of Treasury Stock).
Conolog Corporation
BALANCE SHEETS
April 30, 1998 July 31, 1997
ASSETS ( Unaudited) (Audited)
Current Assets:
Cash $ 1,389,960 $503,217
Accounts Receivable, less
allowances of $6,000 137,777 109,571
Inventories 3,676,947 3,173,792
Other Current Assets 50,371 44,085
Deferred Offering Costs 0 113,813
------------ -----------
TOTAL CURRENT ASSETS $ 5,255,055 $ 3,944,478
Property, Plant and Equipment 409,362 387,805
less accumulated depreciation
of $1,981,052 and $1,938,188
respectively
Other Assets 5,810 7,469
------------ -----------
TOTAL ASSETS $ 5,670,227 $ 4,339,752
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Notes Payable - Other $ 0 $ 916,235
Accounts Payable 62,302 188,510
Accrued Payroll 5,683 15,645
Accrued Interest 0 17,374
Bridge Loan 0 200,000
Other Accrued Expenses 91,490 146,791
Current maturities of
capitalized lease 0 3,802
obligations
------------ -----------
TOTAL CURRENT LIABILITIES $ 159,475 $ 1,488,357
CONOLOG CORPORATION
BALANCE SHEETS
April 30, 1998 July 31, 1997
Stockholders' Equity
Preferred Stock, par value $.50;
Series A; 4% cumulative; 162,000
shares authorized;155,000 shares
issued and outstanding 77,500 77,500
Preferred Stock, par value $.50;
Series B; $.90 cumulative; 50,000
shares authorized issued and
outstanding 1,197 shares 597 597
Common Stock; par value $1.00;
20,000,000 shares authorized;
issued 3,686,071 shares, including
8,776 shares held in Treasury 3,686,071 2,803,473
Contributed Capital 8,979,074 7,034,008
Retained Earnings (Deficit) ( 7,100,756) (6,932,449)
Treasury Shares at Cost ( 131,734) ( 131,734)
------------ -----------
Total Stockholders' Equity $ 5,510,752 $ 2,851,395
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,670,227 $ 4,339,752
=========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
CONOLOG CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
APRIL 30, APRIL 30,
1998 1997 1998 1997
TOTAL REVENUES $276,071 $111,393 $ 629,688 $978,979
COSTS OF GOODS SOLD 50,353 52,153 215,049 528,498
--------- ---------- ---------- ----------
GROSS MARGIN 225,718 59,240 414,639 450,481
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES 194,433 140,466 552,949 518,944
--------- ---------- ---------- ----------
OPERATING INCOME
/(LOSS) 31,285 (81,226) (138,310) (68,463)
INTEREST EXPENSE 12 17,080 22,459 69,199
--------- ---------- ---------- ----------
INCOME/(LOSS) BEFORE
TAXES ON INCOME
AND EXTRAORDINARY
ITEMS 31,273 (98,306) (160,769) (137,662)
PROVISION FOR TAXES 2,142 9,884 4,402 9,884
--------- ---------- ---------- ----------
NET INCOME/(LOSS) $ 29,131 $(108,190) $(165,171) $(147,546)
========= ========== ========== ==========
BASIC EARNINGS/(LOSS)
PER SHARE $ .00 $(.04) $(.04) $(.06)
========= ========= ========== =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
CONOLOG CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED APRIL 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (165,171) $(147,546)
Adjustments to Net Income to Reconcile to
Net Cash Provided by Operating Activities:
Depreciation and amortization 42,864 42,864
(Increase)/Decrease in Accounts Receivable (28,206) 137,193
(Increase)/Decrease in Inventories (503,155) (294,800)
(Increase)/Decrease in Other Current Assets
(4,627) ( 6,387)
(Increase)/Decrease in Deferred Offer Costs
113,813 0
Increase/(Decrease) in Accounts Payable (126,208) (185,229)
Increase/(Decrease) in Accrued Expenses
and other liabilities (82,637) 20,744
--------- ---------
Net Cash Provided/(Used) in Operating
Activities (753,327) (433,161)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment (64,421) (14,721)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in Capital Lease Obligations (3,802) (30,071)
Bridge Loan (Repayments)/Borrowings (200,000) 200,000
Repayments to Investors (916,235) 0
Repayments of Long-term Borrowings 0 (1,012,500)
Issuance of Common Stock 882,598 1,408,787
Contributed Capital 1,945,065 (277,622)
Dividends (3,135) 0
From Investors 0 74,735
----------- ---------
Net Cash Provided/(Used) by Financing
Activities 1,704,491 363,329
---------- ---------
NET INCREASE/(DECREASE) IN CASH $ 886,743 $ (84,553)
CASH AT BEGINNING OF YEAR 503,217 178,213
---------- -----------
CASH AT END OF PERIOD $1,389,960 $ 93,660
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the quarter for:
Interest $ 12 $ 12,365
Income Taxes 2,142 17,324
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
CONOLOG CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1 - Computation of Earnings Per Share:
For the Nine Months Ended
April 30,
1998 1997
Weighted Average Number of Shares
Outstanding: 3,544,773 2,443,973
COMMON STOCK
Reserve for Conversion:
Series A Preferred Stock* 155,000
Series B Preferred Stock (1 to 20
conversion factor) 0 0
Common Stock Equivalents
(Warrants)** 5,135,750 235,750
--------- ---------
Total 8,680,523 2,679,723
Gain/(Loss) Per Share:
Total Gain/(Loss) $(165,171) $(147,546)
Pro-rata Dividends on Preferred
Stock Series A & B 3,135 3,135
---------- ----------
Net Gain/(Loss) available for
Common Stock $(168,306) $(150,681)
---------- ----------
Average Number of Shares of Common Stock 3,544,773 2,443,973
========== ==========
Basic Earnings/(Loss) Per Share $ (.04) $ (.06)
========== ==========
Diluted Earnings/(Loss) Per Share N/A N/A
========== ==========
*Each share of Series A Preferred Stock may be exchanged for one share of
Common Stock upon surrender of the Preferred Stock and payment of $1200 per
share. In view of the large difference between the current market value of
the stock and the conversion rate, these shares have not been added to the
total common shares used in computing the net earnings per share.
**Each Warrant may be exchanged for one share of Common Stock at an exercise
price of $6.00 per share. In view of the large difference between the current
market value of the stock and the exercise price, these shares have not been
added to the total common shares used in computing net earnings per share.
Fully diluted earnings per share, assuming conversion of Series A and Series B
Preferred Stock, has not been reflected, as the effect would be either anti-
dilutive or not material.
NOTE 2 - Notes Payable - Other
Credit Facility and Agreement with CNL Holdings, Inc.
The principal amount owed to the Bank under the Company's Credit Facility
at June 30, 1996 was $1,012,500 and the unpaid accrued interest was $48,850.
The Bank and the Company entered into the Conolog Corporation Allonge, dated
as of September 11, 1996, pursuant to which the Amended and Restated Term
Note dated as of August 2, 1995 between the Company and the Bank (the "Note")
was amended to permit the conversion by the Bank of the unpaid principal and
interest due under the Note into 1,400,000 shares of the Company's Common
Stock. The Bank or its assignee exercised the conversion right. The Bank
deferred all payments of principal and interest under the Note until April 16,
1997.
Subsequently, on September 12, 1996 the Bank and CNL Holdings, Inc., a private
investor group, entered into an Option and Purchase, Sale and Assignment
Agreement dated September 12, 1996 (the "Option Agreement"). Under the
Option Agreement the Bank granted an option to CNL to purchase all of the
Bank's interest in (i) the Amended and Restated Term Loan Agreement dated
as of August 2, 1995 between the Company and the Bank, (ii) the Note and
(iii) the 375,000 shares of the Company's Common Stock owned by the Bank.
CNL paid $150,000 to the Bank for the option, which had an exercise price
of $1,500,000 (a balance of $1,350,000) and an expiration date of April 15,
1997.
As part of the aforementioned transaction, CNL agreed to loan up to $2,500,000
to the Company under certain circumstances (as described below) and the
Company agreed to file a registration statement (the "Registration Statement")
with the Securities and Exchange Commission to register the 375,000 shares of
Common Stock owned by the Bank and the 1,400,000 shares of Common Stock into
which the Note converted (collectively, the "Acquired Shares"). As of January
21, 1998 CNL Holdings, Inc. loaned the Company $916,235 which was repaid at the
closing of the Company's public offering.
Each CNL loan carried interest at the rate of 4% per annum and became due 12
months from the date of such Loan. At maturity, the Company had the option
to pay each Loan, together with all accrued interest thereon, or by issuing
shares of a new Series C Preferred Stock (the "Series C Preferred") having
a value of $5.00 per share for purposes of such repayment.
Had the Series C Preferred been issued, it would have been non-voting and
carried a cumulative dividend of 8% per annum which would payable by the
issuance of shares of Common Stock valued at $5.00 per share up to a maximum
of 40,000 shares per annum. The Series C Preferred would have been convertible
into common stock at the rate of one share of common stock for each share of
Series C Preferred and had a liquidating preference of $5.00 per share.
The Agreement also provided that for the two year period commencing on the
issuance of any shares of Series C Preferred (the "Registration Period") CNL
may have elected to include its Series C Preferred in any post-effective
amendment to the Registration Statement or any new registration statement
under the Securities Act of 1933, as amended. In addition, the Agreement
also provided that during the Registration Period, CNL may have given notice
to the Company to the effect that it desired to register its shares under
the Act for public distribution in which case the Company would file a post-
effective amendment to a then current registration statement or a new
registration statement.
Management believes that these transactions benefited the Company and its
stockholders. The exercise by CNL of its option under the Option Agreement
converted the Remaining Debt Claim. The Company had the opportunity to, in
effect, exchange its debt for equity and eliminated the Company's default
under the Credit Facility.
(See Liquidity and Financial Condition section of Management Discussion for
Details on Public Offering)
NOTE 3 - Capitalized Lease Obligations
April 30, 1998 July 31, 1997
Leases Payable $ 0 $ 3,802
less - Current Portion 0 3,802
------- -------
$ 0 $ 0
NOTE 4 - Taxes
At April 30, 1998 the Company has a net operating loss carry forward of
approximately $2,671,000 for financial reporting purposes and approximately
$2,443,000 for tax purposes which is available to offset future Federal
taxable income. For Federal purposes, $253,000 of the carry forward expires
in 2008, $1,232,000 expires in 2009 and $957,000 expires in 2010. For state
purposes the carry forward is approximately $1,604,000; $706,000 expires in
2001 and $898,000 expires in 2002. Also, at April 30, 1998 the Company has
unused tax credits of approximately $103,300 of which $12,100 expires in
2000, $26,300 in 2001 and $64,900 in 2002.
The above net operating loss created a deferred tax asset that has been fully
reserved. The amount is $1,329,286.
At April 30, 1998 no deferred income taxes have been provided for per SFAS
No. 109 - Accounting for Income Taxes since management estimated that
temporary differences due to operating losses and tax credit carry forwards
will not be absorbed by future taxable income.
NOTE 5 - Bridge Loan
In December 1996 and January 1997, the Company obtained Bridge financing from
seven (7) lenders in the amount of $200,000. These lenders were the individuals
identified as "Selling Security Holders." In exchange for making the loans to
the Company, each Selling Security Holder received two (2) promissory notes
(the "Bridge Notes"). Certain Bridge Notes were in the aggregate principal
amount of $150,000 (the "Principal Bridge Notes") and the other Bridge Notes
were in the aggregate principal amount of $50,000 (the "Convertible Bridge
Notes"). Each of the Bridge Notes bore interest at the rate of eight percent
(8%) per annum.
The Bridge Notes were due and payable upon the earlier of (i) January 31, 1999
or (ii) the date on which the next public offering closed. The Convertible
Bridge Notes were convertible into a total of 1,200,000 Class A Warrants.
The proceeds of the bridge financing were used by the Company to pay certain
expenses in connection with this offering and to increase working capital.
Each Class A Warrant contained in the Convertible Bridge Notes was identical
to the Class A Warrants offered therein.
The Company's agreement with the Selling Security holders provided that the
Company would include in its registration statement a prospectus covering the
Class A Warrants owned by the Selling Security Holders.
On September 12, 1997 the Company filed a Registration Statement on Form S-1
with the Securities and Exchange Commission. This statement covered the
primary offering of securities of the Company and the offering of other
securities by certain Selling Security Holders. The Company registered,
under a primary Prospectus 805,000 Units, each Unit consisting of one (1)
share of common stock and four (4) Class A warrants. The selling Security
Holders registered, under an alternate prospectus, 1,200,000 Class A warrants.
At July 31, 1997 all costs associated with this offering were deferred. The
costs were subsequently deducted from the proceeds of the sale of stock.
The Bridge loans were repaid on January 28, 1998 at the closing of the
Company's Public Offering.
(See Liquidity and Financial Condition Section of Management's Discussion
for details on Public Offering).
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
A summary of income, costs and expenses for the current quarter and
corresponding quarter of the previous year follows:
For the Quarter For the 9 Months
Ended April 30, Ended April 30,
1998 1997 1998 1997
Revenues $ 276,071 $ 111,393 $ 629,688 $978,979
Costs and Expenses 246,940 219,583 794,859 1,126,525
---------- --------- --------- ---------
Net Income/(Loss)
after Taxes, before $ 29,131 $(108,190) $(165,171) $(147,546)
extraordinary item ========== ========== ========== ==========
QUARTER ENDED APRIL 30, 1998
Revenues for the quarter ended April 30, 1998 totaled $276,071, representing
an increase of 147.8% or $164,678 from $111,393 reported for the same quarter
a year ago. Revenues increased largely due to releases from the Bonneville
Power Authority in the amount of $136,987 as well as new commercial orders
and releases against existing military contracts by the US Government.
Gross margin for the quarter ended April 30, 1998 totaled $225,718 representing
81.7% of revenues as compared to $59,153 or 53.1% of revenues for the quarter
ended April 30, 1997. The increase in gross margin is primarily attributed to
the use of low-cost sub-contractors periodically throughout the period, as well
as military sales which had a zero cost basis due to previous write-off of
military inventory.
Selling, general and administrative expenses increased from $140,466 to
$194,433 for the quarter, representing an increase of $53,967 as compared to
1997. This is primarily due to the hiring of a Merger and Acquisition
manager to explore areas of further growth and the higher costs of health
care benefits.
Interest expense decreased from $17,080 to $12 or $17,068 for the quarter ended
April 30, 1998 over the same period of 1997 as a result of the elimination of
debt owed on the credit facility.
As a result of the foregoing, the Company reported net income of $29,131, or
$.00 per share for the quarter compared to a net loss of $(108,190) or $(0.04)
per share for the prior year.
NINE MONTHS ENDED APRIL 30, 1998
Revenues for the nine months ended April 30, 1998 totaled $629,688 representing
a decrease of 35.6% or $349,291 from $978,979 for the same period last year.
Revenues decreased largely due to a sharp decline in expected releases of
several orders from the various major power companies as well as the absence
of new commercial orders and releases against existing military contracts by
the US government in the first six months of the fiscal year.
Gross margin for the nine months totaled $414,639 representing 65.8% of
revenues as compared to $450,481 or 46.0% of revenues for the same nine-
month period one year ago. The increase in gross margin is primarily
attributable to the capitalization of costs associated with the production
of the PTR1500 product as well as greater levels of plant and labor
efficiencies.
Selling, general and administrative expenses increased from $518,944 to
$552,949 for the same period.
Interest expense decreased from $69,199 to $22,459 due to the repayment of the
credit facility to the bank.
As a result of the foregoing, the Company had a net loss of $(165,171) or
$(.04) per share as compared to a net loss of $(147,546) or $(.06) per share
one year ago.
LIQUIDITY AND FINANCIAL CONDITION
On January 21, 1998 the Company offered to the public 700,000 units (the Units)
at a price of $5.00 per unit. Each unit consisted of one (1) share of Common
Stock, par value $1.00 per share (Common Stock), and four (4) Redeemable Class
A Warrants for Common Stock (Class A Warrants). The Common Stock and Class A
Warrants are detachable and trade separately.
Each Class A Warrant entitles the holder to purchase one (1) share of the
Company's Common Stock, at a exercise price of $6.00, subject to adjustment,
from January 22, 1998 through August 30, 2002. The Class A Warrants are subject
to redemption by the Company commencing the earlier of ( i) 24 months from
the date of the offering or (ii) 12 months from the date of the offering, with
the consent of the underwriter, on not less than thirty (30) days notice at
$.05 per Warrant, provided the average closing price of the Common Stock
exceeds $7.20 per share for twenty (20) consecutive trading days ending within
fifteen (15) days prior to the notice.
On March 6, 1998, the Company raised an additional $110,055, net of expenses,
from the sale of an over-allotment of 25,300 shares of the Company's common
stock.
The proceeds of the offering was $2,788,642 cash.
Inventories increased $503,155 from July 31, 1997 attributable mostly to the
PTR-1500 Series product (GE Model MS50), which is being produced for
anticipated orders from the General Electric Company.
Working Capital at April 30, 1998 was $5,095,580 compared to $2,456,121 at July
31, 1997. This is primarily attributed to the public offering of 700,000 units
of the Company's Common Stock and Warrants.
The Company plans to use these additional funds to complete the development of
the PTR1500 and deliver the first prototypes to the General Electric Co. for
testing and approvals and to improve its financial condition and prepare for
an anticipated increase in business in the latter part of 1998. The Company
anticipates additional backlog releases from the Bonneville Power
Administration and the US Government as well as other key customers. This
should generate additional sales and resulting cash flow to support an
expanded operating level in fiscal 1998 versus fiscal 1997.
The Company presently meets its cash requirements through existing cash
balances and cash generated from operations.
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 technological changes and advances, actual results may differ
materially from any such forward looking statements.
MANAGEMENT REPRESENTATION
The information furnished reflects all adjustments which management considers
necessary for a fair statement of the results of the period.
As of April 30, 1998 the Registrant's backlog of orders stands at $2.4 million,
a mix of military and commercial telecommunication products. The company
anticipates its commercial shipments to grow as a percentage of total sales
for the foreseeable future.
STATEMENT REGARDING PRESENT OPERATIONS
There was no material change in the nature of the operations of Registrant
during the nine months ended April 30, 1998 from the information contained
in the Registrant's annual report of Form 10-K for the fiscal year ended
July 31, 1997.
SUBSEQUENT EVENTS
On May 12, 1998 the Company signed a Letter of Intent to acquire American
Imaging Systems, Inc. for a combination of cash and stock. American Imaging
Systems, Inc. sells, services and supports X-ray equipment as well as a full
line of film processors, film, illuminators and protective apparel to small
and large users. The integration with Conolog will provide American Imaging
Systems, Inc. with engineering, instrumentation and technical expertise to
support future growth. Negotiations are still in process at this time.
On May 22, 1998 the Company entered into a contract for the sale of the
Company's facilities located at 5 Columbia Road, Somerville, NJ. Under the
terms of contract, the Company will leaseback a portion of the property at no
cost for the next three years. This sale has not been finalized as of June 10,
1998.
Part II - Other Information
CONOLOG CORPORATION
1. Legal Proceedings - No material proceedings pending
April 30, 1998
2. Changes in Securities - See Management Discussion
3. Defaults upon Senior Securities - None
4. Submission of Matters to a Vote of Security Holders - None
5. Other Materially Important Events - See Management's
Discussion
6. No reports or Exhibits on Form 8-K have been filed during the
quarter.
