Item 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2.
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.
Item 3. LEGAL PROCEEDINGS
The Company is not subject to any material pending legal proceedings.
Item 4.
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.
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
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
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
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.
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.
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.
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.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10.
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.
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.
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.
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.
Item 14. EXHIBITS AND REPORTS ON FORM 8-K (a)Financial Statements
Balance Sheets as of July 31, 1997 and 1996 Statements of Income for the years ended July 31,1997 and 1996
Statements of Stockholders' Equity ( Deficiency )for the years ended July 31,1997 ,1996 and 1995 Statements of Cash Flows for the years ended July 31, 1997 and 1996 Notes to Financial Statements 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,
(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 .........................
Statements of Income - Years Ended July 31, 1997, 1996 and 1995 .............................................
Statements of Stockholders' Equity (Deficiency) - Years Ended July 31, 1997, 1996 and 1995 .........................
Statements of Cash Flows - Years Ended July 31, 1997, 1996 and 1995 ........................................
Notes to Financial Statements ....................................-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 "Final 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.
---- 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.