Filed Pursuant to 424(b)3
Registration No. 333-122891
CONOLOG CORPORATION
2,327,904 SHARES OF COMMON STOCK
PROSPECTUS
This prospectus relates to the public offering of an aggregate of 2,327,904
shares of our common stock which may be sold from time to time by the selling
stockholders named in this prospectus. Of these shares, 958,549 shares are
issuable upon the exercise of warrants issued to the selling stockholders.
Our common stock is traded on the Nasdaq SmallCap Market under the symbol
"CNLG." The closing price of our common stock on February 11, 2005 was $ 3.43
per share.
OUR BUSINESS IS SUBJECT TO MANY RISKS AND AN INVESTMENT IN OUR COMMON STOCK WILL
ALSO INVOLVE A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FACTORS
DESCRIBED UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 4 BEFORE
INVESTING IN OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted. You should not assume that the information contained in
this prospectus or any prospectus supplement or information incorporated in
such documents is accurate as of any date other than the date of such documents.
Our business, financial condition, results of operations and prospects may have
changed since that date.
The date of this prospectus is February 28, 2005
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY.............................................................3
RECENT DEVELOPMENTS............................................................3
RISK FACTORS...................................................................4
FORWARD-LOOKING STATEMENTS.....................................................7
USE OF PROCEEDS................................................................7
SELLING STOCKHOLDERS...........................................................7
PLAN OF DISTRIBUTION..........................................................11
LEGAL PROCEEDINGS.............................................................13
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS..................13
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................15
DESCRIPTION OF SECURITIES.....................................................16
INTERESTS OF NAMED EXPERTS AND COUNSEL........................................16
DISCLOSURE OF SEC POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES................................................................17
DESCRIPTION OF BUSINESS.......................................................17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS............................26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................33
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................33
EQUITY COMPENSATION PLAN INFORMATION..........................................34
EXECUTIVE COMPENSATION........................................................35
CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................................36
WHERE YOU CAN FIND MORE INFORMATION...........................................37
CONSOLIDATED FINANCIAL STATEMENTS............................................F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM......................F-2
CONSOLIDATED BALANCE SHEET...................................................F-3
CONSOLIDATED STATEMENTS OF OPERATIONS........................................F-5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY...............................F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS........................................F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS...............................F-9
2
As used in this prospectus, the terms "we", "us", "our, the "Company" and
Conolog means Conolog Corporation, unless otherwise indicated.
PROSPECTUS SUMMARY
Our Company
We provide digital signal processing and digital security solutions to
electric utilities worldwide. We design and manufacture electromagnetic products
to the military and provide engineering and design services to a variety of
industries, government organizations and public utilities nationwide. Our INIVEN
division manufactures a line of digital signal processing systems, including
transmitters, receivers and multiplexers. Our headquarters are located at 5
Columbia Road, Somerville, New Jersey 08876. Our telephone number is (800)
526-3984 or (908) 722-8081.
RECENT DEVELOPMENTS
On December 3, 2004, we entered into a Subscription Agreement with nine
investors relating to the issuance and sale, in a private placement by us of
1,369,355 shares of our common stock at a price of $3.10 per share and warrants
to purchase 684,678 shares of our common stock at a price of $5.15 per share
which are exercisable for a period commencing on June 5, 2005 and terminating on
the fifth anniversary of the issuance of such warrant. The issuance of the
Common Stock and warrants pursuant to the Subscription Agreement was subject to
the approval by our stockholders. Our stockholders approved the issuance of our
common stock pursuant to the Subscription Agreement on February 10, 2005 and on
February 15, 2005, we issued the Subscribers 1,369,355 shares of our common
stock, and warrants to purchase 684,678 shares of our common stock. From the
sale of our securities to the Subscribers, we received gross proceeds of
$4,245,000. We paid First Montauk Securities Corp., the selling agent in the
private placement, a cash fee of $424,500 and $127,350 as a non-accountable
expense allowance. First Montauk also was issued a warrant to purchase 273,871
shares of our common stock on the same terms as the warrants issued to the
Subscribers. We paid a fee of $10,000 to the subscribers' attorneys.
The issuance and sale of the Common Stock and warrants pursuant to the
Subscription Agreement was made in reliance upon the exemption provided in
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act")
and Regulation S promulgated under the Securities Act. No form of general
solicitation or general advertising was conducted in connection with the private
placement. Each of the certificates representing shares of the Company's common
stock and warrants issued pursuant to the Subscription Agreement contain
restrictive legends preventing the sale, transfer or other disposition of such
shares and warrants unless registered under the Securities Act.
Pursuant to the Subscription Agreement with the subscribers, we are
required under the Security Act to register for resale the common stock sold to
the subscribers as well as the securities issuable upon the exercise of
warrants. Pursuant to the selling agent agreement between us and First Montauk
Securities Corp., we are also registering 273,871 shares issuable upon the
exercise of warrants issued to First Montauk.
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The Offering
This prospectus relates to the resale of up to 2,327,904 shares of our
common stock in connection with the resale of:
o 1,369,355 shares of our common stock which were issued to the Selling
Stockholders pursuant to a Subscription Agreement dated as of December 3, 2004;
and
o 684,678 shares of our common stock which may be issued upon the exercise
of warrants issued to the selling stockholders pursuant to the Subscription
Agreement.
o 273,871 shares which may be issued upon the exercise of warrants issued
to First Montauk Securities Corp.
Number of Shares Outstanding
As of February 15, 2005 there were 6,074,061 shares of our common stock
issued and outstanding.
RISK FACTORS
An investment in our common stock involves a very significant risk. You
should carefully consider the following risks and uncertainties in addition to
other information in this prospectus in evaluating our company and its business
before purchasing shares of our company's common stock. Our business, operating
results and financial condition could be seriously harmed due to any of the
following risks. You could lose all or part of your investment due to any of
these risks.
The price of our common stock may fluctuate significantly as a result of
the shares we are registering for the selling stockholders and you may find it
difficult for you to realize the current trading price of our common stock.
Sales of a substantial number of shares of our common stock in the public
market could cause a reduction in the market price of our common stock. Any
significant downward pressure on the price of our common stock as the selling
stockholders sell shares of our common stock could encourage short sales. Any
such short sales could place further downward pressure on the price of our
common stock.
We have a history of operating losses and thus we may not be profitable in the
future.
Our continued existence is dependent upon us successfully expanding our
business and attaining profitable operations. We have historically had net
losses from operations and there can be no assurance that we will be profitable
in the future. If we are not profitable and cannot attain sufficient capital to
fund our operations we may have to cease our operations.
We have many competitors and we may not be able to compete effectively against
them.
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The market for our manufactured products is very competitive. There are
several companies which manufacture products of the type we produce. Most of
these companies are substantially larger than us and have substantially greater
name recognition, financial resources and personnel than we do.
Our success depends on keeping up with technological changes.
The market for our manufactured products is characterized by rapid
technological changes and advances. Our failure to introduce new products in a
timely or cost effective manner or our failure to improve our existing products
in a timely or cost effective manner would materially adversely affect our
operating results.
We are dependent on a few large customers.
Our dependence on major customers subjects us to significant financial
risks in the operation of our business if a major customer were to terminate or
materially reduce, for any reason, its business relationship with us.
We may not be able to attract the qualified personnel we need to succeed.
Because of the technical nature of our business, we are dependent upon our
ability to attract and retain technologically qualified personnel. Competition
for individuals with proven professional or technical skills is intense, and the
demand for these individuals is expected to remain very strong for the
foreseeable future. Larger companies may be able to pay substantially higher
salaries than we are able to pay. Therefore, we may not be successful,
especially during increased economic activity, in attracting qualified
personnel.
Our minimal staff may have difficulty managing our operations.
We only employ about 13 people on a full time basis. Approximately 8 of our
full time employees are involved in production. Our success is dependent upon
the services of our current management, particularly Robert S. Benou, our
Chairman, Chief Executive Officer and Chief financial Officer and Marc Benou our
President, Chief Operating Officer and Secretary. Messrs. Robert Benou and Marc
Benou are currently serving under employment contracts that renew on a
year-to-year basis unless terminated by either party thereto upon at least 90
days notice prior to the expiration of the then current term of such agreement.
If the employment of Messrs. Robert Benou or Marc Benou terminates, or if either
is unable to perform his duties, we may be materially and adversely affected.
We are dependent on component manufacturers to provide us with the parts we
need.
We are dependent on outside suppliers for all of the subcomponent parts and
raw materials we need to manufacture our products. A shortage, delay in
delivery, or lack of availability of a part could lead to manufacturing delays,
which could reduce sales. We also purchase some custom parts, primarily printed
circuit boards. The failure of a supplier of one of these customized components
could cause a lengthy delay in production, resulting in a loss of revenues.
We have limited cash and may not be able to receive additional financing.
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As of October 31, 2004, we had approximately $1,019,619 in cash. We believe
that this, together with anticipated cash flows from operation will be
sufficient to satisfy our working capital requirements for the foreseeable
future. However, we may need to seek additional financing sooner than we
anticipate as a result of factors including but not limited to the following:
o changes in operating plans
o lower than anticipated sales
o increased operating costs; and
o potential acquisitions
However, additional financing may not be available on commercially
reasonable terms, if at all.
Our stock price may fluctuate, which may make it difficult to resell your shares
at attractive prices.
The market price of our common stock may experience fluctuations that are
unrelated to our operating performance. The market price of our common stock has
been volatile, and may continue to be volatile. Factors that could cause
volatility in our stock price include:
o fluctuations in our quarterly operating results;
o stock market prices and volume fluctuations generally;
o economic conditions specific to any of the industries that we conduct
business in;
o announcements by us or our competitors relating to new services or
technologies, significant acquisitions, strategic relationships, joint
ventures or capital commitments; and
o applicable regulatory developments.
If we are delisted from the Nasdaq SmallCap Market, you may also find it more
difficult to trade our common stock due to "penny stock" rules.
If we are unable to satisfy the requirements for continued quotation on
Nasdaq, trading, if any, in our common stock would be conducted in the
over-the-counter market in what is commonly referred to as the "pink sheets" or
on the NASD OTC Bulletin Board. If our shares become subject to the regulations
on penny stocks, the price and ability to sell our shares would be severely
affected because the shares could only be sold in compliance with the penny
stock rules.
The issuance of shares upon conversion of our convertible securities and
exercise of outstanding warrants may cause immediate and substantial dilution to
our existing stockholders.
As of February 15, 2005, we had outstanding warrants to purchase 1,052,957
shares of our common stock, of which warrants to purchase 94,408 shares of our
common stock have an exercise price of $1.8375 per share and warrants to
purchase 958,549 shares of our common stock have an exercise price of $5.15 per
share. The issuance of shares upon the exercise of warrants may result in
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substantial dilution to the interests of other stockholders since the selling
stockholder may ultimately sell the full amount issuable on exercise of such
warrant conversion.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements which relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may", "should", "expects",
"plans", "anticipates", "believes", "estimates", "predicts", "potential" or
"continue" or the negative of these terms or other comparable terminology. These
statements are only predictions and involve known and unknown risks,
uncertainties and other factors, including the risks discussed in the section
entitled "Risk Factors" that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by these
forward-looking statements.
While these forward-looking statements, and any assumptions upon which they
are based, are made in good faith and reflect our current judgment regarding the
direction of our business, actual results will almost always vary, sometimes
materially, from any estimates, predictions, projections, assumptions or other
future performance suggested herein. Except as required by applicable law,
including the securities laws of the United States, we do not intend to update
any of the forward-looking statements to conform these statements to actual
results.
USE OF PROCEEDS
The shares of common stock offered hereby are being registered for the
account of the selling stockholders named in this prospectus. As a result, all
proceeds from the sales of the common stock will go to the selling stockholders
and we will not receive any proceeds from the resale of the common stock by the
selling stockholders. We did receive net proceeds of $3,683,150 from the sale of
the shares to the selling stockholders. We are using the proceeds for working
capital. We will incur all costs associated with this registration statement and
prospectus, which are currently estimated to be approximately $32,975.42. If
the Warrants are completely exercised, we would receive a maximum of
$4,936,527.35 as a result of such exercises. Notwithstanding, there is no
assurance that any of the Warrants will be exercised. If we receive any proceeds
from the exercise of the Warrants, these proceeds will be used for general
working capital purposes.
SELLING STOCKHOLDERS
The following table sets forth, as of February 15, 2005, information
regarding the beneficial ownership of our common stock by the Selling
Shareholders. In the table below, the percentage ownership after the offering is
based upon the assumed sale by the Selling Shareholders of all shares they may
offer for sale pursuant to this prospectus. Beneficial ownership is determined
according to the rules of the SEC, and generally means that person has
beneficial ownership of a security if he or she possesses sole or shared voting
or investment power of that security, and includes options that are currently
exercisable or exercisable within 60 days. The percentages for each Selling
Stockholder are calculated based on 6,074,061 shares our common stock issued and
outstanding as of February 15, 2005, plus the additional shares that the Selling
Stockholder is deemed to beneficially own as set forth in the
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table. The shares offered by this prospectus shall be deemed to include shares
offered by any pledge, donee, transferee or other successor in interest of any
of the Selling Shareholders below, provided that this prospectus is amended or
supplemented if required by applicable law.
The information in this table is based upon information provided by each
respective Selling Shareholder.
- ----------------------------------------------------------------------------------------------------------------
Beneficial Ownership Before This Beneficial Ownership After
Offering This Offering
- ----------------------------------------------------------------------------------------------------------------
Shares Being
# of Shares % of Shares Offered # of Shares % of Shares
- ----------------------------------------------------------------------------------------------------------------
Bristol Investment Fund Ltd. (1)** 96,774 1.59 145,161 0 *
Caledonian House, Jennet Street
George Town, Grand Cayman
Cayman Islands
- ----------------------------------------------------------------------------------------------------------------
Cityplatz Limited (2)** 338,710 5.57 508,065 0 *
12-14 Finch Road
Douglas
Isle of Man IM99 ITT
- ----------------------------------------------------------------------------------------------------------------
DKR Soundshore Strategic Holding** 127,837 2.10 150,000 27,837 *
Fund Ltd. (3)
29 Richmond Road
Pembroke HM08
Bermuda
- ----------------------------------------------------------------------------------------------------------------
DKR Soundshore Oasis Holding Fund** 511,926 8.42 600,000 111,962 1.84
Ltd. (4)
29 Richmond Road
Pembroke HM08
Bermuda
- ----------------------------------------------------------------------------------------------------------------
Excalibur Limited Partnership (5)** 150,000 2.46 225,000 0 *
33 Prince Arthur Avenue
Toronto, Ontario
Canada M5R 1B2
- ----------------------------------------------------------------------------------------------------------------
Omicron Master Trust (6)** 50,000 * 75,000 0 *
c/o Winchester Global Trust
Company
Williams House
20 Reid Street
Hamilton HM 11
Bermuda
- ----------------------------------------------------------------------------------------------------------------
SRG Capital Off-shore** 129,032 2.12 193,548 0 *
Walkers (7)
P.O. Box 265 GT
Walker House, Mary Street
Grand Cayman, Cayman Islands
BWI
- ----------------------------------------------------------------------------------------------------------------
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- ----------------------------------------------------------------------------------------------------------------
Beneficial Ownership Before This Beneficial Ownership After
Offering This Offering
- ----------------------------------------------------------------------------------------------------------------
Shares Being
# of Shares % of Shares Offered # of Shares % of Shares
- ----------------------------------------------------------------------------------------------------------------
StoneStreet Limited** 48,387 * 72,581 0 *
Partnership (8)
33 Prince Arthur Avenue
Toronto, Ontario M5R 1B2
Attention: Michael Finkelstein
- ----------------------------------------------------------------------------------------------------------------
Whalehaven Capital Fund Limited** 56,452 * 84,678 0 *
(9)
3rd Floor, 14 Par-Laville Road
Hamilton HM08
Bermuda
- ----------------------------------------------------------------------------------------------------------------
First Montauk Securities Corp.** 0 * 273,871 0 *
(10)
- ----------------------------------------------------------------------------------------------------------------
* Less than one percent.
** The warrants issued to the selling stockholders provide that the
holder of such warrant shall not be entitled to exercise the warrant
on an exercise date in connection with that number of shares of common
stock set which would be in excess of the sum of (i) the number of
shares of common stock beneficially owned by the holder and its
affiliates on an exercise date, and (ii) the number of shares of
common stock issuable upon the exercise of the warrant with respect to
which the determination of this limitation is being made on an
exercise date, which would result in beneficial ownership by the
holder and its affiliates of more than 9.99% of the outstanding shares
of common stock on such date. For the purposes of the immediately
preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act and
Regulation 13d-3 thereunder. Subject to the foregoing, the holder
shall not be limited to aggregate exercises which would result in the
issuance of more than 9.99%. The restriction described in this
paragraph may be revoked upon sixty-one (61) days prior notice from
the holder to the Company. The holder may allocate which of the equity
of Conolog Corporation deemed beneficially owned by it shall be
included in the 9.99% and which shall be allocated to the excess above
9.99%.
(1) The beneficial ownership of Bristol Investment Fund does not include
48,387 shares of our common stock which will be acquired upon exercise
of a warrant with an exercise price of $5.15 per share, because this
warrant cannot be exercised until June 5, 2005. The number of shares
being offered includes 48,387 shares of our common stock which may be
acquired upon the exercise of warrants. Paul Kessler is the manager of
Bristol Capital Advisors LLC, the investment advisor to Bristol
Investments, Ltd., and as such has voting and investment control over
these securities. Mr. Kessler disclaims beneficial ownership of these
securities.
(2) The beneficial ownership of Citiplatz Limited does not include 169,355
shares of our common stock which will be acquired upon exercise of a
warrant with an exercise price of $5.15 per share, because this
warrant cannot be exercised until June 5, 2005. The number of shares
being offered includes 169,355 shares of our common stock, which may
be acquired upon the exercise of warrants. Gordon Mundy is the
director of Citiplatz Limited and as such has voting and investment
control over these securities. Mr. Mundy disclaims beneficial
ownership of these securities.
(3) The beneficial ownership of DKR Soundshore Strategic Holding Fund Ltd.
does not include 50,000 shares of our common stock which will be
acquired upon exercise of a warrant with an exercise price of $5.15
per share, because this warrant cannot be exercised until June 5,
2005. The number of shares being offered includes 50,000 shares of our
common stock which may be acquired upon the exercise of warrants. DKR
Capital Partners L.P., pursuant to an investment management agreement
with DKR Soundshore Strategic Holding Fund Ltd., has voting and
investment authority over DKR Soundshore Stragegic Holding Fund Ltd.
DKR Soundshore Strategic Holding Fund Ltd. is multimanaged with
respect to the shares covered by this prospectus. Seth Fischer has
ultimate trading authority. Mr. Fischer disclaims beneficial ownership
over these securities.
(4) The beneficial ownership of DKR Soundshore Oasis Holding Fund Ltd.
does not include 200,000 shares of our common stock which will be
acquired upon exercise of a warrant with an exercise price of $5.15
per share, because this warrant cannot be exercised until June 5,
2005. The number of shares being offered includes 200,000 shares of
our common stock, which may be acquired upon the exercise of warrants.
DKR Oasis Management Company LP, pursuant to an investment management
agreement with DKR Shounshore Oasis Holding Fund Ltd., has voting and
investment authority over DKR Soundshore Oasis Holding Fund Ltd. Seth
Fisher is the managing partner of Oasis Management Holdings LLC, one
of the general partners of DKR Oasis Management Company, LP. and as
such has ultimate trading authority over DKR Soundshore Oasis Holding
Fund Ltd. Mr. Fischer disclaims beneficial ownership over these
securities.
(5) The beneficial ownership of Excalibur Limited Partnership does not
include 75,000 shares of our common stock which will be acquired upon
exercise of a warrant with an exercise price of $5.15 per share,
because this warrant cannot be exercised until June 5, 2005. The
number of shares being offered includes 75,000 shares of our common
stock, which may be acquired upon the exercise of warrants. Will
Hechter is the president of Excalibur Limited Partnership and as such
has voting and investment control over these securities. Mr. Hechter
disclaims beneficial ownership of these securities.
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(6) The beneficial ownership of Omnicron Master Trust does not include
25,000 shares of our common stock which will be acquired upon exercise
of a warrant with an exercise price of $5.15 per share, because this
warrant cannot be exercised until June 5, 2005. The number of shares
being offered includes 25,000 shares of our common stock, which may be
acquired upon the exercise of warrants. Omicron Capital; L.P., a
Delaware limited partnership ("Omicron Capital"), serves as investment
manager to omicron Master Trust, a trust formed under the laws of
Bermuda ("Omicron"), Omicron Capital, Inc., a Delaware corporation
MCI"), serves-as general partner of Omicron Capital and Winchester
Global Trust Company Limited ("Winchester") serves as the trustee of
Omicron. By reason of such relationships, Omicron Capital and OCI may
be deemed to share dispositive power over the shares of our common
stock owned by Omicron, and Winchester may be deemed to share voting
and dispositive power over the shares of our common stock owned by
Omicron. Omicron Capital, OCI and Winchester disclaim beneficial
ownership of such shares of our common stock. Omicron, Capital has
delegated authority from the board of directors of Winchester
regarding the portfolio management decisions with respect to the
shares of common stock owned by Omicron and, as of February 15, 2005,
Mr. Olivier H. Morali and Mr. Bruce T. Bernstein, officers of OCI,
have delegated authority from the board of directors of OCI regarding
the portfolio management decisions of Omicron Capital with respect to
the shares of common stock owned by Omicron. By reason of such
delegated authority, Messrs. Morali and Bernstein may be deemed to
share dispositive power over the shares of our common stock owned by
0micron. Messrs. Morali and Bernstein disclaim beneficial ownership of
such shares of our common stock and neither of such persons has any
legal right to maintain such delegated authority. No other person has
sole or shared voting or dispositive power with respect to the shares
of our common stock being offered by Omicron, as those terms are used
for purposes under Regulation 13D-G of the Securities Exchange Act of
1934, as amended. Omicron and Winchester are not "affiliates" of one
another, as that term is used for purposes of the Securities Exchange
Act of 1934, as amended, or of any other person named in this
prospectus as a selling stockholder. No person or "group" (as that
term is used in Section 13(d) of the Securities Exchange Act of 1984,
as amended, or the SEC's Regulation 13D-G) controls Omicron and
Winchester.
(7) The beneficial ownership of SRG Capital Offshore Walkers does not
include 64,516 shares of our common stock which will be acquired upon
exercise of a warrant with an exercise price of $5.15 per share,
because this warrant cannot be exercised until June 5, 2005. SRG
Capital is an affiliate of a broker-dealer. At the time SRG Capital
purchased the shares it is offering pursuant to this prospectus, it
did not have any agreements or understandings directly or indirectly
with any person to distribute shares of Conolog's common stock. The
number of shares being offered includes 64,516 shares of our common
stock, which may be acquired upon the exercise of warrants. Edwin
Mecake and Tai May Lee are employees of SRG Capital Offshore Walkers
and jointly have voting and investment control over these securities.
Edwin Mecake and Tai May Lee disclaim beneficial ownership of these
securities.
(8) The beneficial ownership of StoneStreet Limited Partnership does
not include 24,194 shares of our common stock which will be acquired
upon exercise of a warrant with an exercise price of $5.15 per share,
because this warrant cannot be exercised until June 5, 2005. The
number of shares being offered include 24,194 shares of our common
stock, which may be acquired upon the exercise of warrants. Michael
Finkelstein is the president of StoneStreet Limited Partnerhsip and
as such has voting and investment control over these securities.
Mr. Finkelstein disclaims beneficial ownership of these securities.
(9) The beneficial ownership of Whalehaven Capital Fund Limited does not
include 28,226 shares of our common stock which will be acquired upon
exercise of a warrant with an exercise price of $5.15 per share,
because this warrant cannot be exercised until June 5, 2005. The
number of shares being offered include 28,226 shares of our common
stock, which may be acquired upon the exercise of warrants. Elkan
Schemenauer, Arthur Jones and Jennifer Kelly have voting and
investment control over these securities. Elkan Schemenauer, Arthur
Jones and Jennifer Kelly disclaim beneficial ownership of these
securities.
(10) First Montauk Securities Corp. acted as the selling agent in the sale
of our common stock and received a warrant to purchase 273,871 shares
of our common stock at a purchase prince of $5.15 per share. The
shares of our securities beneficially owned by First Montauk
Securities Corp. do not include shares issuable upon the exercise of
the warrant issued to it because such warrants cannot be exercised
until June 5, 2005. First Montauk Securities Corp. is a registered
broker-dealer.
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PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
stockholders. We are paying all costs, expenses and fees in connection with the
registration of shares offered by this prospectus. We were introduced to the
Selling Stockholders by Montauk Securities Corp. and paid Montauk Securities a
finder's fee of $424,500 and a non-accountable expense allowance of $127,350.
Brokerage commissions, if any, attributable to the sale of shares will be borne
by the selling stockholders. We also issued First Montauk a warrant to purchase
273,871 shares of our common stock at a purchase price of $5.15 per share.
The selling stockholders or their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the Nasdaq SmallCap Market or any other stock exchange,
market or trading facility on which our shares are traded or in private
transactions. These sales may be at fixed or negotiated prices. The selling
stockholders may use any one or more of the following methods when selling
shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales effected after the date of the registration statement of
which this prospectus is a part is declared effective by the
Securities and Exchange Commission.
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
o any other method permitted pursuant to applicable law and the
Subscription Agreement.
The Selling Shareholders may, from time to time, pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured, obligations, the pledgees or
secured parties may offer and sell the shares of common stock, from time to
time, under this prospectus, or under an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act amending the list
of Selling Shareholders to include the pledgee, transferee or other successors
in interest as selling stockholders under this prospectus. The Selling
Shareholders also may transfer the shares of common stock in other
circumstances, in which
11
case the transferees, pledgees or other successors in interest will be the
selling beneficial owners for purposes of this prospectus.
In connection with the sale of our common stock or interests therein, the
Selling Shareholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The Selling
Shareholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Shareholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The aggregate proceeds to the Selling Shareholders from the sale of the
common stock offered by them will be the purchase price of the common stock less
discounts or commissions, if any. Each of the Selling Shareholders reserves the
right to accept and, together with their agents from time to time, to reject, in
whole or in part, any proposed purchase of common stock to be made directly or
through agents. We will not receive any of the proceeds from this offering. Upon
any exercise of the warrants by payment of cash, however, we will receive the
exercise price of the warrants.
The Selling Shareholders also may resell all or a portion of the shares in
open market transactions in reliance upon Rule 144 under the Securities Act of
1933, provided that they meet the criteria and conform to the requirements of
that rule.
The Selling Shareholders and any underwriters, broker-dealers or agents
that participate in the sale of the common stock or interests therein may be
"underwriters" within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling Shareholders who are "underwriters" within the meaning of Section
2(11) of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act.
To the extent required, the shares of our common stock to be sold, the
names of the Selling Shareholders, the respective purchase prices and public
offering prices, the names of any agents, dealer or underwriter, any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this prospectus.
In order to comply with the securities laws of some states, if applicable,
the common stock may be sold in these jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the common stock may
not be sold unless it has been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.
We have advised the Selling Shareholders that the anti-manipulation rules
of Regulation M under the Securities Exchange Act of 1934, as amended, may apply
to sales of shares in the market and to the activities of the Selling
Shareholders and their affiliates.
12
In addition, we will make copies of this prospectus (as it may be
supplemented or amended from time to time) available to the Selling Shareholders
for the purpose of satisfying the prospectus delivery requirements of the
Securities Act. The Selling Shareholders may indemnify any broker-dealer that
participates in transactions involving the sale of the shares against certain
liabilities, including liabilities arising under the Securities Act.
We have agreed to indemnify the Selling Shareholders against liabilities,
including liabilities under the Securities Act and state securities laws,
relating to material misrepresentations by us or breach by us in any of our
agreements with the subscribers of any warranty or after any applicable notice
and/or cure periods, any breach or default in performance by the Company of any
covenant or undertaking to be performed by the Company under any of the
documents related to the sale of the shares to the subscribers.
We have also agreed to indemnify First Montauk Securities Corp. against
liability losses and expenses related to any untrue statement of a material fact
contained in the Subscription Agreement and related agreements and any breach of
any representations contained in the Selling Agent Agreement.
We have agreed with the Selling Shareholders to keep the registration
statement of which this prospectus constitutes a part effective until the
earlier of (1) two years from February 15, 2005 or (2) such time as all of the
shares covered by this prospectus have been disposed of pursuant to and in
accordance with the registration statement or pursuant to Rule 144(k) of the
Securities Act.
LEGAL PROCEEDINGS
We know of no existing or pending legal proceedings against our company,
nor are we involved as a plaintiff in any proceeding or pending litigation.
There are no proceedings in which any of our directors, officers or affiliates,
or any registered or beneficial shareholder, is an adverse party or has a
material interest adverse to our interest.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
All directors of our company hold office until the next annual general
meeting of the stockholders or until their successors are elected and qualified.
The officers of our company are appointed by our board of directors and hold
office until their earlier death, retirement, resignation or removal.
Our directors, executive officers and other significant employees, their
ages and positions held are as follows:
Name Age Position with the Company
- ---- --- -------------------------
Robert S. Benou 70 Chairman, Chief Executive Officer, Chief Financial
Officer and Director
13
Marc R. Benou 36 President, Chief Operating Officer, Secretary and
Director
Louis S. Massad 65 Director
Edward J. Rielly 36 Director
David M. Peison 36 Director
Robert S. Benou has been the Company's Chairman and Chief Executive Officer
since May 1, 2001. Mr. Benou is also the Company's Chief Financial Officer. From
1968 until May 1, 2001, he served as the Company's President. Mr. Benou is
responsible for new product development and supervision of sales and marketing.
Since June, 2001, Mr. Benou has served as a director of Diversified Security
Solutions, Inc., a publicly held company that is a single-source/turn-key
provider of technology-based security solutions for medium and large companies
and government agencies. 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.
Marc R. Benou has been the Company's President and Chief Operating Officer
since May 1, 2001. Mr. Benous is also the Company's Secretary. Mr. Benou joined
the Company in 1991 and is responsible for material purchasing and inventory
control. From March 1995 until May 1, 2001, he served as Vice President. Mr.
Benou has been on the company's Board and has served as the Company's assistant
secretary. Mr. Benou attended Lehigh and High Point University and holds a BS
degree in Business Administration and Management. Marc R. Benou is the son of
Robert S. Benou, the Company's Chairman and Chief Executive Officer.
Louis S. Massad has been a Member of the Company Board of Directors since
April 1995. Mr. Massad was the Chief Financial Officer and a Director of
Diversified Security Solutions, Inc. from 2000 until August 2002. From 1997 to
2000, Mr. Massad was a consultant to Diversified Security Solutions, Inc. From
1986 to 1997, Mr. Massad was a Vice President, Chief Financial Officer and
Director of Computer Power Inc. Mr. Massad holds a BS and MS degree from Cairo
University (Egypt) and an MBA from Long Island University, New York.
Edward J. Rielly has been a member of the Company's Board of Directors
since January 1998. Mr. Rielly is a Senior Application Developer with Household
International, a financial corporation. From March 2000 to November, 2001, Mr.
Rielly was a Senior Consultant with Esavio Corporation. From February 1998 to
February 2000, Mr. Rielly was an Application Developer with Chubb Corporation.
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.
David M. Peison has been as a Director of the Company since October 2004.
Since 2002, Mr. Peison has been with Deutsche Bank's Global Markets Division in
New York City. From 1992 to 2000, Mr. Peison was in a Private Law Practice in
Florida and New York City. Mr. Peison holds an MBA from Emory University in
Atlanta, GA, a Juris Doctor from The Dickinson School of Law of Pennsylvania
14
State University and is admitted to the Florida, New York and Massachusetts
Bars. Mr. Peison obtained his BA degree from Lehigh University in Bethlehem, PA.
Our Board of Directors has determined that Mr. Massad is an audit committee
financial expert.
We have a separately-designated audit committee. Our Audit Committee is
made up of Louis Massad, David Peison and Edward Reilly.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 11, 2005, certain
information with respect to the beneficial ownership of our common stock by each
stockholder known by us to be the beneficial owner of more than 5% of our common
stock and by each of our current directors and executive officers. Each person
has sole voting and investment power with respect to the shares of common stock,
except as otherwise indicated. Information relating to beneficial ownership of
common stock by our principal stockholders and management is based upon
information furnished by each person using "beneficial ownership" concepts under
the rules of the Securities and Exchange Commission. Under these rules, a person
is deemed to be a beneficial owner of a security if that person has or shares
voting power, which includes the power to vote or direct the voting of the
security, or investment power, which includes the power to vote or direct the
voting of the security. The person is also deemed to be a beneficial owner of
any security of which that person has a right to acquire beneficial ownership
within 60 days. Under the Securities and Exchange Commission rules, more than
one person may be deemed to be a beneficial owner of the same securities, and a
person may be deemed to be a beneficial owner of securities as to which he or
she may not have any pecuniary beneficial interest.
Unless otherwise noted, the address for each of the named individuals is
c/o Conolog Corporation, 5 Columbia Road, Somerville, New Jersey 08876.
Shares of common stock which an individual or group has a right to acquire
within 60 days pursuant to the exercise or conversion of options are deemed to
be outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person shown in the table. The
applicable percentage of ownership is based on 5,968,469 shares issued and
outstanding.
Amount and Nature
of Percent of
Name and Title Beneficial Ownership Class
- -------------- -------------------- ----------
Robert S. Benou, Chairman, Chief Executive 229,000 3.77%
Officer, Chief Financial Officer and Director
Marc R. Benou, President, Chief Operating 232,000 3.88%
Officer, Secretary and Director
Thomas Fogg, Vice President - Engineering 35,000 *
Louis Massad, Director 20,000 *
Edward J. Rielly, Director 20,000 *
15
Amount and Nature
of Percent of
Name and Title Beneficial Ownership Class
- -------------- -------------------- ----------
David M. Peison, Director 20,000
All Officers and Directors as a Group
(6 Persons) 556,000 9.15%
DKR Soundshore Oasis Holding Fund Ltd. 511,926(1) 8.42%
Barclays Global Investors, N.A. 461,862(2) 7.60
Citiplatz Limited 338,710(3) 5.57
* Less than 1%.
(1) The beneficial ownership of DKR Soundshore Oasis Holding Fund Ltd. does not
include 200,000 shares of our common stock which will be acquired upon
exercise of a warrant with an exercise price of $5.15 per share, because
this warrant cannot be exercised until June 5, 2005. The address for
DKR Soundshore Oasis Holding Fund Ltd. is 29 Richmond Road Pembroke HM08
Bermuda.
(2) The information for Barclays Global Investors, N.A. is based on
information contained in a Schedule 13G filed with the
Securities and Exchange Commission on February 10, 2005. The principal
business address for Barclays Global Investors, N.A. is
45 Fremont Street, San Francisco, CA 94105.
(3) The beneficial ownership of Citiplatz Limited does not include 169,355
shares of our common stock which will be acquired upon exercise of a
warrant with an exercise price of $5.15 per share, because this warrant
cannot be executed until June 5, 2005.
DESCRIPTION OF SECURITIES
We are authorized to issue 20,000,000 shares of common stock. Each
outstanding share of our common stock is entitled to one vote on all matters
submitted to a vote of stockholders. There are no cumulative voting rights in
the election of directors. Our By-laws require that only a majority of the
issued and outstanding shares of our common stock must be represented to
constitute a quorum and to transact business at a stockholders meeting.
Holders of our common stock are entitled to receive such dividends as may
be declared by our Board of Directors. To date, we have not declared nor paid
any dividends on our common stock and we do not anticipate that dividends will
be declared in the foreseeable future. Rather, we intend to apply any earnings
to the expansion and development of our business. Any payment of cash dividends
on our common stock in the future will be dependent upon our earnings, financial
condition, capital requirements and other factors which our Board of Directors
deems relevant. In the event of liquidation, dissolution or winding up of the
Company, holders of our common stock are entitled to share ratably in all assets
remaining after payment of liabilities and payments to holders of our preferred
stock.
Holders of our common stock have no preemptive or conversion rights and are
not subject to further calls or assessments. There are no redemption or sinking
fund provisions applicable to our common stock.
We are authorized to issue is authorized to issue 2,000,000 shares of
Preferred Stock, issuable in series, of which there are outstanding 155,000
shares of Series A Preferred Stock, $.50 par value (162,000 authorized) and
1,197 shares of Series B Preferred Stock, $.50 par value (50,000 authorized).
Holders of Series A Preferred Stock are entitled to receive, out of funds
legally available therefore, dividends at the rate of 4% per annum. In addition,
each share of series A preferred stock may be exchanged for one share of common
stock upon the surrender of the preferred stock and payment of $48,000 per
share. The Series A Preferred Stock has no voting rights. We may redeem the
Series A Preferred Stock at $.50 per share plus accrued and unpaid dividends.
Holders of Series B Preferred Stock are entitled to receive, out of funds
legally available therefor, dividends at the rate of $.90 per share. The Series
B Preferred Stock has no voting rights. The Series B Preferred is convertible
into .005 of one share of common stock.
INTERESTS OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this prospectus as having prepared or
certified any part of this prospectus or having given an opinion upon the
validity of the securities being registered or upon other
16
legal matters in connection with the registration or offering of the common
stock was employed on a contingency basis or had, or is to receive, in
connection with the offering, a substantial interest, directly or indirectly, in
the registrant or any of its parents or subsidiaries. Nor was any such person
connected with the registrant or any of its parents, subsidiaries as a promoter,
managing or principal underwriter, voting trustee, director, officer or
employee.
DISCLOSURE OF SEC POSITION OF
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Certificate of Incorporation provides that we shall, to the fullest
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
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. If a
claim for indemnification against such liabilities (other than the payment by us
of expenses incurred or paid by a director, officer or controlling person of
Conolog in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered) we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
DESCRIPTION OF BUSINESS
History
We were organized in 1968 and were engaged primarily in the design and
manufacture of electronic components and systems for military applications.
17
In July 1971, we merged with DSI Systems, Inc., then engaged in the
development and manufacture of terminal viewers for digital retrieval of
microfilm. Later that year, we changed our name to Conolog Corporation.
In 1981 we acquired one of our customers, INIVEN Corporation ("INIVEN"). At
that time, we were 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, we have 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,
our components are currently used by the military in tanks, the Apache
helicopters and the MK-50 torpedoes.
During 1987, we made a strategic decision to redirect our focus from
military to commercial markets. Since that time, we have refocused on
manufacturing and marketing our products for the commercial marketplace rather
than depend on the military and defense-related markets. Our primary emphasis
was on products for electric utilities, co-generation of power, gas and water
companies, traffic control for departments of transport (DOT) and airports
utilizing DSP (Digital Signal Processing) technology.
In September 1998, we acquired the assets of Atlas Design, Inc., a human
resource outsourcing company, to further our strategy of mergers and
acquisitions, and to assist in providing qualified engineering and technical
staff in support of our longer term contracts.
In January 2001, we acquired substantially all of the assets of Prime Time
Staffing Inc. and Professional Temp Solutions, Inc. These companies provided
permanent and temporary employees for the graphics design firms, book publishing
companies and engineering businesses.
During the year ended July 31, 2001, we formed a wholly owned subsidiary,
Lonogoc Corporation. In August, 2000, Lonogoc Corporation purchased the assets
of Independent Computer Maintenance Corporation, which provided installation,
maintenance, and troubleshooting of computer systems and networks. On October
22, 2002, we entered an agreement to rescind the Asset Purchase Agreement
between us and Independent Computer Maintenance Corporation. Under the
rescission agreement, Conolog and its subsidiary agreed to transfer all assets
previously purchased pursuant to the Asset Purchase Agreement, to the extent
they still exist, to the former seller. The return of the purchase price paid
for the assets was $600,000, $300,000 in cash at closing, a note, which is
secured by a first mortgage on a condominium, for $150,000 bearing an interest
rate of 7.5% of which will be paid over 24 months in equal monthly installments
of $6,750 per month beginning December 2002, and an unsecured note receivable
for $137,350 payable over 10 years beginning December 2004 bearing an interest
rate of 5%.
In March 2004, we ceased operating our staffing business. The assets of the
our wholly-owned subsidiary, Nologoc, Inc. trading as Atlas Design, were sold to
the subsidiary's Vice President. In consideration of the sale, we received
$34,000 in cash.
18
Products
We are 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 us); (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 us) or convert such signals into mechanical or other form of
energy, such as opening or closing valves, or starting or stopping a motor; (v)
magnetic "networks" which are devices that permit the matching or coupling of
different types of communication equipment together or many identical or similar
equipment together or onto telephone or other transmission lines so as not to
cause interference; and (vi) analog transmitters and receivers, which permit the
coding/transmission and receiving/decoding of a constantly variable data, such
as the water level in a tank, pressure in a pipe or temperature, by actually
displaying the exact information at the receiving end in digital form for
storing in a computer or other devices, or by physically displaying the
information in a visual fashion such as a numerical readout or meter, and (vii)
multiplexer supervisory controls, which enable callers with high volumes of
supervisory data to transmit on fewer phone lines.
Such products are used in radio and other transmissions, telephones and
telephone exchanges, air and traffic control, automatic transmission of data for
utilities, tele-printing of transmitted data such as news and stock market
information and for use by electric utilities in monitoring power transmission
lines for faults and/or failures. Our products may be used independently or in
combination with other products to form a system type configuration, whereby our
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
We are engaged in three basic market segments:
(A) Commercial Sales (Under the trade name "INIVEN" (a Division of Conolog))
o Direct sales to end-users
o Sales to system assemblers
o Sales to contractors/installers
(B) Military Sales
o Direct contract sales to the military
o As subcontractor to systems producers
19
o Foreign governments
(C) Commercial Sales - As Manufacturing Subcontractor to Systems Producers.
Military Sales
Military sales are primarily for our 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.
Our military sales are received through independent sales representatives
who are paid a commission
Commercial "INIVEN" Sales and Products
"INIVEN" equipment is designed around four (4) core product groups:
(1) PTR and PDR Teleprotection Series (Protective Tone Relaying
Communications Terminal, which includes the PTR-1000, PTR-1500 and
PDR-2000.
(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.
PTR Teleprotection Series
This product is designed for use exclusively by electric power generators
(electric utilities and co-generators) 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 hundredth 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
20
transmitters at each end are independent and transmit (continuously) the status
(information being monitored) at their end of the line.
The PTR-1500, 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 PDR 2000 is an 8 channel high speed communication system for use in
electric power transmission protection schemes. Unique features include event
recording, on-board and remote programming, and ID (unit to unit identification
on all communications), Packet Forwarding (ability to forward information such
as trips and all events through indirect communication paths), password
protection and multiple communication ports.
The PTR/PDR Teleprotection Series are 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/PDR market is:
New installations; i.e., new transmission lines, new distribution segments,
for utilities and cogenerators.
Existing installations not properly protected, improving efficiency and
reducing down time.
Existing installations for upgrading to PTR/PDR technology, again improving
efficiency and down time.
Sales efforts for the PTR/PDR 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.
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.
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
21
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.
Since our line has a distinct mechanical configuration, we designed our
GEN-1 Programmable units and other improvements as replacements for existing
units.
Our 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/PDR market
except that manufacturers' representatives specialize in selling to this diverse
market.
"98," "68" and "40" Series represent our latest designs in the audio tone
equipment utilizing the more advanced DSP technology, which provides high
accuracy and long-term stability. These features
22
have allowed us to greatly improve the scope, density and number of functions
that can be performed on a single phone line, microwave link or direct line.
Sales of these products are made by the same agents who sell our 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.
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, we 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 our sales efforts for it are being
conducted through its existing independent manufacturers sales representatives.
Fiber Optic Link and Data Modem
The expansion of fiber lines by our customers and their need to switch
equipment from phone lines to fiber prompted us to design and introduce a
fiber-optic-coupler line to interface with the many different fiber heads. In
addition to complete data interface couplers we launched a series of 1200 Baud
Modems (Industrial Grade) for operation under the same environmental
specifications in line with our products.
OUR STRATEGY
Our strategy is to develop 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 our customers for
more sophisticated and comprehensive products and services.
23
MARKETING AND SALES
In general, our products are marketed through telemarketing and customer
contacts by our President and through independent manufacturing sales
representatives and distributors.
COMPETITION
The market for our products and staffing services is very competitive.
There are several companies engaged in providing the services and in the
manufacturing the products of the type produced by us, most of which are
substantially larger and have substantially greater name recognition or greater
financial resources and personnel. The major competitive factors include
availability of personnel, product quality, reliability, price, service and
delivery. Competition is expected to continue and intensify. he market is also
characterized by rapid technological changes and advances. We would be adversely
affected if our competitors introduced technology superior products or offered
these products and services at significantly lower prices than our products.
LARGEST CUSTOMERS
Our major customers during fiscal 2004 were Bonneville Power and Tusan
Power. Sales to these customers totaled $414,684. None of these customers has or
had any material relationship other than business with the Company.
INVENTORY
Raw Materials
We believe that we have adequate sources of raw materials available for use
in our business. Our 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.
We are not dependent upon any single supplier. We also purchase a number of
other electronic components and sub-assemblies from various suppliers.
In the past, we manufactured and held in our 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 in 2001 and 2002. As a result, we
no longer manufacturer military products in advance. Rather, we only schedule
production as purchase orders are received.
MANUFACTURING
The Company assembles, under normal workload conditions, the product it
sells, however, to accommodate the peak demands that occur from time to time we
can engage a number of subcontractors to assemble boards to our specifications.
All assemblies, however, are inspected and fully tested by our quality,
engineering and testing departments. We maintain 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.
24
WARRANTY AND SERVICE
We provide a twelve-year warranty on our 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 our warranty.
In cases of defective products, the customer typically returns them to our
facility in Somerville, New Jersey. Our service personnel then replace or repair
the defective items and ship them back to the customer. Generally all servicing
is completed at our plant and customers are charged a fee for those service
items that are not covered by the warranty. We do not offer our customers any
formal written service contracts.
RESEARCH AND DEVELOPMENT
During fiscal 2001-2002 we invested approximately $800,000 for product
development and amortization of product costs.
During fiscal 2000-2001, we proceeded with the design of the PDR-2000 8
channel digital transfer trip communications product. During fiscal 2001-2002 we
invested approximately $774,757 to complete its design of the PDR-2000,
eight-channel digital transfer trip communications.
The Company also developed a new platform for its GEN1 products allowing
for its use by the Canadian utilities.
PATENTS AND TRADEMARKS
We do not have any patents covering any of our present products. We do not
have any registered trademarks. We use the name INIVEN for our commercial
products. We believe that this name is recognized in our industry. We believe
that our prospects are dependent primarily on our ability to offer our customers
high quality, reliable products at competitive prices rather than on our ability
to obtain and defend patents and trademarks. We do not believe that our INIVEN
name is of material importance to the Company's business.
GOVERNMENTAL REGULATION
Our manufacturing facilities 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. We believe
that our operations are in compliance with existing regulations and we do not
believe that such compliance has had or will have any material effect upon our
capital expenditures, earnings or competitive position. With respect to military
sales, we are not subject to any special regulations. The products manufactured
are done so in accordance with accepted commercial practices.
25
EMPLOYEES
As of July 31, 2004, we employed 15 persons on a full-time basis, including
two in management, two in sales, one clerical, one in accounting, one in
purchasing, three in engineering and five in production. We have enjoyed good
labor relations.
None of our employees are represented by a labor union or bound by a
collective bargaining agreement. We have never suffered a work stoppage. We
believe our future success will depend, in part, on our continued ability to
recruit and retain highly skilled management, marketing and technical personnel.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operations should be read in conjunction with our financial
statements and their notes appearing elsewhere in this prospectus.
Overview
Comparison of the quarter ended October 31, 2004, to the quarter ended
October 31, 2003.
A summary of income, costs and expenses for the current quarter and nine
months and corresponding quarter and nine months of the previous year follows:
October 31,
---------------------
2004 2003
--------- ---------
Product Revenues $ 179,640 $ 237,717
Costs and expenses 518,745 398,259
--------- ---------
Net Loss from Continuing Operations before
Income Taxes (339,105) (160,542)
--------- ---------
Benefit from Income Taxes 216,470 --
Other income (expense) 2,472 (8,683)
Earning (Loss) from Discontinued Operations -- 62,127
--------- ---------
Net (Loss) $(120,163) $(107,098)
--------- ---------
QUARTER ENDED OCTOBER 31, 2004
Product revenues for the three months ended October 31, 2004 totaled
$179,640 representing a decrease of 24% or $58,077 from $237,717 reported for
the same three months last year. The Company attributed the decrease in revenue
to a decrease in the Company's utility sales.
Product Cost for the three months ended October 31, 2004 totaled $126,592 a
decrease of 11% or $16,038 as compared to $142,630 for the three months ended
October 31, 2003. Product Cost decreased as a result in decreased sales of 24%
for the comparable periods.
26
Gross profit for products for the three months ended October 31, 2004
totaled $ 53,048 representing 30% of revenues as compared to $95,087 or 40% of
revenues for the three months ended October 31, 2003.The Company attributes the
decrease in gross profit for products to an decrease in sales.
Selling, general and administrative expenses increased from $255,629 for
the three months ended October 31, 2003 to $392,153 for the three months ended
October 31, 2004, which represents an increase of 53% or $136,524. The Company
attributes the increase in Selling, General and Administrative expense over the
three month period to an increase in administrative costs; such as, payroll
reinstatements, professional fees and a charge relating to stock issued for
engineering consulting services. In addition, the increase in sales and
marketing efforts has also increased the expenses for the three month period
ended October 31, 2004 and 2003.
There were no Research and Development expenses for the three months ended
October 31, 2004 and 2003.
As a result of the foregoing, the Company reported a net loss from
continuing operations of $120,163 or $0.03 per share compared to $169,225 or
$0.13 per share for the three months October 31, 2004 and 2003, respectively.
LIQUIDITY AND FINANCIAL CONDITION
Inventories from the Company's product segment increased from $1,924,417
from the year ended July 31, 2004 to $1,924,989 for the quarter ended October
31, 2004, an increase of $572. The Company continues to turn over existing
inventory in lieu of purchasing additional inventory, however, with the increase
in military demands some specialty purchases have been made.
Accounts Receivable decreased to $106,698 at October 31, 2004 from $148,171
as of July 31, 2004, as a result of a decrease in the Company's product segment
for the three months ended October 31, 2004. The decrease is attributed to a
decrease in sales within the Company's utility division.
On April 27, 2004 the Company issued a secured convertible debenture (the
"Debenture") due on April 26, 2007 with a principal amount of $1,200,000 and an
interest rate of 4% per annum. The proceeds of the Debenture were used to fund
the Company's current operations and also to pay off its current line of credit.
At October 31, 2004 this convertible debenture had been fully converted to
1,132,075 common shares, with an additional 270,000 warrants converted to common
shares in exchange for $429,300.
Conolog received initial orders for its PDR2000 during the fourth quarter
of fiscal 2004, shipping them during the first quarter of fiscal 2005, and
anticipates additional option modules that are currently being tested to be
released in the near future.
The Company expects to meet its cash requirements for the next 12 months
through existing cash balances and cash generated from its operations.
27
STATEMENT REGARDING PRESENT OPERATIONS
There were no material changes in the nature of the operations of the
Registrant during the three months ended October 31, 2004.
Comparison of the year ended July 31, 2004 to the year ended July 31, 2003
Subsequent to July 31, 2004, (1) the remaining principal balance of $
1,094,000 from the issuance of convertible debentures during the fiscal year
ended July 31, 2004, was converted into 1,032,075 common shares. (2)
Additionally, warrants expiring April 26,2011 were exercised resulting in the
issuance of 270,000 common shares in exchange for $429,300. The effect on
Stockholders' Equity, as of August 9, 2004 is an increase in the Equity balance
of $1,523,300, increasing Stockholders' Equity to $3,468,407, from its July
31, 2004 balance of $1,945,107.
In order to summarize the Company's operating results for the past two
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 a Percentage Income & Expense Percentage
Of Revenues From Operations Items Increase/Decrease
For The Year Ended July 31, 2004 2003 2003 to 2004
- ------------------------------------------------------------------------------
100.0% Product Sales & other Income 100.0% 0.0%
- ------------------------------------------------------------------------------
N/A Service Sales & other Income N/A --
- ------------------------------------------------------------------------------
(66.9%) Product Cost of Revenue (58.3%) 8.6%
- ------------------------------------------------------------------------------
N/A Service Cost of Revenue N/A --
- ------------------------------------------------------------------------------
(485.9%) Selling, general & (272.9%) (213.0%)
administrative
- ------------------------------------------------------------------------------
(126.8%) Interest (0.3%) (123.5%)
- ------------------------------------------------------------------------------
(679.6%) Total costs & expenses (361.5%) (318.1%)
- ------------------------------------------------------------------------------
(579.6%) Income (loss) before loss
from discontinued operation (261.5%) (318.1%)
& income taxes
- ------------------------------------------------------------------------------
28
- ------------------------------------------------------------------------------
Income & Expense Items as a Percentage Income & Expense Percentage
Of Revenues From Operations Items Increase/Decrease
For The Year Ended July 31, 2004 2003 2003 to 2004
- ------------------------------------------------------------------------------
(23.1%) Loss from discontinued (20.7%) (2.4%)
operation
- ------------------------------------------------------------------------------
0.0% Income taxes (credits) 53.6% (53.6%)
- ------------------------------------------------------------------------------
(602.7%) Net Loss (228.6%) (374.1%)
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
2004 Compared to 2003
(Comparison does not include Atlas Design, which provided placement
services, was sold during the fiscal year and is reported as a discontinued
operation at July 31, 2004 and 2003)
Product revenue for the fiscal year ended July 31, 2004 totaled $963,008 a
increase of 59.4% or $358,744 from $604,264 reported for fiscal year ended July
31, 2003. The Company attributed the increase in product revenue to increased
orders for its Series PTR-1500 high speed communications system.
Product cost for the fiscal year ended July 31, 2004 totaled $913,561 an
increase of 159% or $561,336 from $352,225 reported for fiscal year ended July
31, 2003. The Company attributes the increase in product cost to the increase in
sales of the PTR-1500 and to the write down of additional obsolete inventory in
the amount of $263,700.
Gross profit for products for the years ended July 31, 2004 and July 31,
2003 totaled $49,447 and $252,039, respectively, representing 5.1% and 41.7% of
product revenue. The decrease in gross profit for products is attributed to the
product mix and the additional write down of obsolete inventory.
Selling, General and Administrative expense for the years ended July 31,
2004 and July 31, 2003 totaled $1,522,714 and $1,136,061, respectively. The
Company attributed the increase of $386,653 in selling, general and
administrative expense to a higher commission expense, additional trade show
costs and increased professional fees due to compliance with increased
regulations under the Sarbanes-Oxley Act.
There are no research and development expenses for the fiscal year ended
July 31, 2004. The development of the PDR 2000, a high speed communications
system for use in electric power transmission pilot protection schemes, was
completed during the year.
The Company's interest income for the fiscal year ended July 31, 2004
totaled $7,034 compared to $13,711 for fiscal year ended July 31, 2003. The
totals for fiscal years 2004 and 2003 include interest income derived from the
Company's interest bearing accounts through several banks. The decrease in
interest income reflects the company's proactive purchasing policy of seeking
benefits through purchasing agreements.
29
The Company's interest expense for the fiscal year ended July 31, 2004
totaled $1,220,960, compared to $17,432 for fiscal year ended July 31, 2003.
The company's interest expense for fiscal 2004 includes $1,200,000 of
detachable warrants issued with a convertible debt having a beneficial
conversion option. The value assigned to these warrants was recorded as interest
expense and not amortized. The Company's interest expense for fiscal 2003 was
due to interest payments on the Company's line of credit through Unity Bank; the
maturity date of this line of credit is December 17, 2003.
As a result of the foregoing, the Company reported a net loss from
continuing operations of $6,275,886 or $4.08 per share for fiscal 2004,
compared to a net loss from continuing operations of $1,256,405 or $1.38 per
share for fiscal 2003.
The net loss from discontinued operations for fiscal year ended July 31,
2004 totaled $222,404 and $124,708 for fiscal year ended July 31, 2003. The
discontinued operations were a result of the sale of the Company's Atlas Design
subsidiary. The decision to sell the component was based on the intensely
competitive and highly fragmented nature of the placement services business.
2003 Compared to 2002
(Comparison does not include Atlas Design, which was sold during the fiscal
year and is reported as a discontinued operation at July 31, 2004 and 2003)
Product revenue for the fiscal year ended July 31, 2003 totaled $604,264 a
decrease of 25.8% or $210,421 from $814,687 reported for fiscal year ended
July 31, 2002. The Company attributed the decrease in product revenue to a
decline in the Company's military sales during fiscal 2003.
Product cost for the fiscal year ended July 31, 2003 totaled $352,225 a
decrease of 73.9% or $997,151 from $1,349,376 reported for fiscal year ended
July 31, 2002. The Company attributes the decrease in product cost to the write
off of obsolete inventory from fiscal 2002 totaling $1,294,323.
Service cost for the fiscal year ended July 31, 2003 totaled $527,562 a
decrease of 13.7% or $84,050 from $611,612 reported for fiscal year ended July
31, 2002. The Company attributes the decrease in service cost to a decrease in
sales brought about by the loss of two customers to larger staffing firms.
Gross profit for products for the years ended July 31, 2003 and July
31, 2002 totaled $252,039 and $(534,689), respectively, representing 41.7% and
(66%)of product revenue. The increase in gross profit for products is attributed
to the write off of obsolete inventory for fiscal 2002 totaling $1,294,323.
Gross profit for services for the years ended July 31, 2003 and July
31,2002 totaled $255,633 and $261,714, respectively, representing 32.6% and
30% of service revenue. The decrease in gross profit for services of $6,081 is
a result of the increase in placements of positions that realize a lower profit
margin and a decrease in managerial positions that possess a high-end margin.
Selling, General and Administrative expense for the years ended July
31,2003 and July 31, 2002 totaled $1,584,988 and $1,813,587, respectively. The
Company attributed the decrease of $228,599 in selling, general and
administrative expense to a reduction of payroll from the layoff of two
employees and a decrease in employee benefits.
30
Research and development for fiscal 2002 totaled $774,757, as a result of
the final stages of development of the PDR2000. There are no R&D expenses for
the fiscal year ended July 31, 2003.
The Company's interest income for the fiscal year ended July 31, 2003
totaled $13,711 compared to $1,652 for fiscal year ended July 31, 2002. The
totals for fiscal years 2003 and 2002 include interest income derived from the
Company's interest bearing accounts through Unity Bank.
The Company's interest expense for the fiscal year ended July 31, 2003
totaled $(17,684), compared to $(11,684) for fiscal year ended July 31, 2002.
The Company's interest expense for both fiscal 2003 and 2002 was due to interest
payments on the Company's line of credit through Unity Bank; the maturity date
of this line of credit is December 17, 2003.
As a result of the foregoing, the Company reported a net loss from
continuing operations of $(1,376,683) or $(1.51) per share for fiscal
2003,compared to a net loss from continuing operations of $(3,103,410) or
$(8.18) per share for fiscal 2002.
The net loss from discontinued operations for fiscal year ended July
31, 2003 totaled $(28,876) or $0 per share and for fiscal year ended July 31,
2002 totaled $18,516 or $(0.05) per share. The discontinued operations were a
result of the Rescission of the Asset Purchase Agreement for the Company's
former computer sales and manufacturing company.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 31, 2004 was $285,360 compared to $630,316 at
year ended July 31, 2003. The decrease in the working capital is attributable to
the issuance of convertible debentures, of which the proceeds were partially
used for general and administrative expenses.
Accounts receivable have increased from $88,778 as of July 31, 2003 to
$148,171 at July 31, 2003. This increase of $59,393 is the result of increased
sales during the 4th quarter.
The Company expects to meet its cash requirements for the next twelve
months through existing cash balances and cash generated from operations. In
addition, the Company believes that it can obtain financing from institutional
investors secured by its assets, if necessary.
INFLATION
Management believes that the results of operations have not been affected
by inflation and management does not expect inflation to have a significant
effect on its operations in the future.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in
conformity with generally accepted accounting principles in the United States of
America, which require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities, at the date of the financial statements and reported
amount of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Management uses its best judgment in valuing
these estimates and may, as warranted, solicit external professional advice and
other assumptions believed to be reasonable. The following critical accounting
31
policies, some of which are impacted significantly by judgments, assumptions and
estimates, affect the Company's consolidated financial statements.
Income Recognition Revenue for product sales are recognized at the time of
shipment, products are not sold on a conditional basis. Therefore, when delivery
has occurred the sale is complete as long as the collection of the resulting
receivable is probable.
Revenue for services provided under time and material contracts are
recognized as services are provided by the temporary, contract or leased
employees. Revenue from direct placements or "fixed fee contracts" is recognized
at the time the candidate begins the first full day after the completion of a
30-day contingency period. Revenue from permanent placements, which are also
considered fixed fee contracts, is recognized at the time the candidate begins
the first full day after the completion of a required amount of temporary hours
as stipulated in the Temp to Perm contract.
RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The preparation of financial statements requires our management to make
estimates and assumptions relating to the collectivity of our accounts
receivable. Management specifically analyzes historical bad debts, customer
credit worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. The
Company has a concentration risk in trade accounts receivable with significant
sales to the government and local agencies. The credit evaluation process has
mitigated the credit risk, such losses have been minimal, and within management
expectations.
INVENTORY VALUATIONS
Inventories are valued at the lower cost or market. Determined by a
first-in, first-out ("FIFO") method. Management reviews inventory for
salability.
WARRANTY
The Company provides a twelve-year warranty on its products; the warranty
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 necessitated by
misuse of such products are not covered by our 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
will replace or repair the defective items and ship them back to the customer.
All servicing is completed at the Company's main facility and customers are
charged a fee for those service items that are not covered by the warranty. We
do not offer our customers any formal written service contracts.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of assets and liabilities for
financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or
32
deductible when the assets and liabilities are recovered or settled. Deferred
taxes also are recognized for operating losses that are available to offset
future federal and state income taxes.
DESCRIPTION OF PROPERTY
Our principal executive offices are located at 5 Columbia Somerville, New
Jersey. The space consists of approximately 7,000 square feet of which
approximately 5,000 square feet is dedicated to manufacturing, production and
testing and approximately 2,000 square feet is dedicated to administrative and
storage needs. We rent our offices on a month-to-month basis and have not
entered into a written lease with the landlord. We pay a monthly rent of $4,640.
In the opinion of management, the space is adequately covered by insurance.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Robert Benou, our Chairman, Chief Executive Officer and Chief Financial
Officer has made a series of non-recourse loans to the Company totaling
$180,427. The Company repaid $56,499 of the total balance during the fiscal year
ended July 31, 2003. Of the remaining amount $123,928 has been forgiven.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. Our Common Stock is traded on the Nasdaq SmallCap
Market, under the symbol CNLG.
The following table sets forth, for the periods indicated, the high and low
prices of the Company's Common Stock traded on the Nasdaq SmallCap Market for
fiscal years ended July 31, 2004 and July 31, 2003.
Common Stock
-------------
Fiscal Year 2004 High Low
- ---------------- ----- -----
First Quarter $1.45 $0.55
Second Quarter $1.25 $0.73
Third Quarter $8.77 $0.60
Fourth Quarter $7.88 $1.65
Common Stock
-------------
Fiscal Year 2003 High Low
- ---------------- ----- -----
First Quarter $6.90 $0.60
Second Quarter $3.70 $0.91
Third Quarter $1.24 $0.73
Fourth Quarter $1.30 $0.68
33
(b) Holders. As of October 19, 2004, our Common Stock was held by approximately
740 shareholders of record. Our transfer agent is Continental Stock Transfer &
Trust Company, with offices at 17 Battery Place, 8th Floor, New York, New York,
phone number (212) 509-4000, as transfer agent for our shares of common stock.
The transfer agent is responsible for all record-keeping and administrative
functions in connection with the common shares of stock.
(c) Dividends. Holders of our common stock are entitled to receive such
dividends as may be declared by our Board of Directors. To date, we have neither
declared nor paid any dividends on our common stock or on our Preferred A or
Preferred B shares. We anticipate that no such dividends will be paid in the
foreseeable future. Rather, we intend to apply any earnings, if any, to the
expansion and development of our 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.
(d) Securities Authorized for Issuance Under Equity Compensation Plans.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth the information indicated with respect to
our compensation plans under which our common stock is authorized for issuance.
- ----------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Weighted average future issuance under
Number of Securities to be issued exercise price of equity compensation plans
upon exercise of outstanding outstanding options, (excluding securities
options, warrants and rights warrants and rights reflected in column (a))
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------
Equity compensation plans On July 9, 2002 our stockholders N/A 190,000
approved by security approved our 2002 Stock Option
holders Plan under which up to 190,000
shares of our common stock may be
granted to our employees,
directors and consultants. To
date, no options have been
granted under this plan. The
exercise price of options granted
under the 2002 Stock Option Plan
will be the fair market value of
our common stock on the date
immediately preceding the date on
which the option is granted.
- ----------------------------------------------------------------------------------------------------------------
Equity compensation plans N/A
not approved by security
holders
- ----------------------------------------------------------------------------------------------------------------
Total 190,000
- ----------------------------------------------------------------------------------------------------------------
34
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid to, accrued and
forgiven by each executive for each of our last three completed fiscal years.
SUMMARY COMPENSATION TABLE
The table below reflects information concerning the annual compensation for
services in all capacities to the corporation for the fiscal years ended July
31, 2004, 2003, 2002 of those persons who were, as of July 31, 2004, (a) the
Chief Executive Officer, and (b) the four most highly compensated executive
officers to the extent that such persons, total annual salary and bonus exceeded
$100,000.
- ------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
- ------------------------------------------------------------------------------------------------------------
Closing Price of
Common Stock on Securities
Fiscal Restricted the Date of the Underlying
Year-End Stock Restricted Stock Options/ Other
Name and Principal (July 31) Salary Awards Award SARS Compensation
- ------------------------------------------------------------------------------------------------------------
Robert Benou, Chairman, 2004 $312,000 $390,000 $4.49 $12,780'D'
Chief Executive Officer, ---------------------------------------------------------------------------------
Chief Financial Officer 2003 $291,666* 0 $0.00 0 $12,780'D'
and Director ---------------------------------------------------------------------------------
2002 $271,000 90,000 $7.00 0 $12,780'D'
- ------------------------------------------------------------------------------------------------------------
Marc Benou, President, 2004 $ 98,500** 340,000 $4.49
Chief Operating Officer, ---------------------------------------------------------------------------------
Secretary and Director 2003 $ 91,333** 0 $0.00 0
---------------------------------------------------------------------------------
2002 $ 83,500** 70,200 $7.00 0
- ------------------------------------------------------------------------------------------------------------
* For the fiscal year ended July 31, 2002, Robert Benou forgave $142,499 of
his salary. For the fiscal year ended July 31, 2003, Robert Benou forgave
his entire salary for such fiscal year and for the fiscal year ended July
31, 2004, Mr. Benou forgave his entire salary for such fiscal year.
** For the fiscal year ended July 31, 2002, Marc Benou forgave $2,773 of his
salary. For the fiscal year ended July 31, 2003, Marc Benou forgave $54,644
of his salary and for the fiscal year ended July 31, 2004, Mr. Benou
forgave $63,500 of his salary.
'D' Other compensation consisted of a car allowance.
EMPLOYMENT AGREEMENTS
We entered into a 5-year employment agreement with Robert Benou which
commenced on June 1, 1997, and which, pursuant to its terms, automatically
renews on a year-to-year basis unless Mr. Benou or the Company gives the other
notice of termination at least 90 days prior to May 31st. Mr. Benou's annual
base salary is $310,000 and increases by $20,000 annually. 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-KSB.
35
This 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 the employee may be terminated by the Company for
cause.
We entered into a 5-year employment agreement with Marc Benou which
commenced on June 1, 1997, and which, pursuant to its terms, renews for one-year
terms until cancelled by either the Company or Mr. Benou. Mr. Benou's base
salary is $98,000 and he receives annual increases of $6,000. 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-KSB. 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 is terminated upon death or
disability of the employee and employee may be terminated by the Company for
cause.
CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On September 13, 2004, Rosenberg Rich Baker Berman & Company resigned and
provided written notice to us that the auditor-client relationship had ceased.
The reports of Rosenberg Rich Baker Berman & Company ("Rosenberg Rich Baker") on
the consolidated financial statements of the Company and its subsidiaries for
the Company's last two fiscal years did not contain an adverse opinion or a
disclaimer of opinion, nor were they modified as to uncertainty or audit scope
or accounting principles. The decision to resign was made by Rosenberg Rich
Baker and, accordingly, no action was taken by the Company's audit committee to
recommend or approve this change of accountants.
During the Company's two most recent fiscal years and the subsequent interim
period through September 13, 2004, there were no disagreements between the
Company and Rosenberg Rich Baker on any matter of accounting principles or
practices, financial statement disclosures, or auditing scope or procedure,
which, if not resolved to Rosenberg Rich Baker's satisfaction, would have caused
Rosenberg Rich Baker to make reference to the subject matter of the
disagreements in its report on the Company's financial statements for such
periods. In addition, during the Company's two most recent fiscal years and the
subsequent interim period through September 13, 2004, Rosenberg Rich Baker did
not advise the Company that: (i) internal controls necessary to develop reliable
financial statements did not exist; (ii) information has come to Rosenberg Rich
Baker's attention which made it unwilling to rely on management's
representations or unwilling to be associated with the financial statements
prepared by management; or that (iii) the scope of the audit should be expanded
significantly, or information has come to the attention of Rosenberg Rich Baker
that it has concluded will, or if further investigated might, materially impact
the fairness or reliability of a previously issued audit report or the
underlying financial statements, or the financial statements issued or to be
issued covering the fiscal period(s) subsequent to the date of the most recent
audited financial statements and the issue was not resolved to the satisfaction
of Rosenberg Rich Baker prior to its resignation or dismissal.
As of September 21, 2004, the Company engaged Bagell, Josephs & Company, L.L.C.
("Bagell Josephs") as the independent accountant for the Registrant to audit the
Company's financial statements.
36
Prior to engaging the new accountant, neither the Registrant nor any one on the
Company's behalf consulted with the new accountant on any matter except to
ascertain whether the accountant had the time and resources to accept the
Company as a new client.
WHERE YOU CAN FIND MORE INFORMATION
You may read and copy any report, proxy statement or other information we
file with the Commission at the Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition,
we file electronic versions of these documents on the Commission's Electronic
Data Gathering Analysis and Retrieval, or EDGAR, System. The Commission
maintains a web site at http://www.sec.gov that contains reports, proxy
statements and other information filed with the Commission.
We have filed a registration statement on Form SB-2 with the Commission to
register shares of our common stock to be sold by the selling stockholders. This
prospectus is part of that registration statement and, as permitted by the
Commission's rules, does not contain all of the information set forth in the
registration statement. For further information with respect to us or our common
stock, you may refer to the registration statement and to the exhibits and
schedules filed as part of the registration statement. You can review a copy of
the registration statement and its exhibits and schedules at the public
reference room maintained by the Commission, and on the Commission's web site,
as described above. You should note that statements contained in this prospectus
that refer to the contents of any contract or other document are not necessarily
complete. Such statements are qualified by reference to the copy of such
contract or other document filed as an exhibit to the registration statement.
37
Financials Inserts Index
to the
CONSOLIDATED FINANCIAL STATEMENTS
CONOLOG CORPORATION AND SUBSIDIARIES JULY 31, 2004
The following consolidated financial statements of the registrant are included
in Item 14:
Page
----
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheet............................................... F-3
Consolidated Statements of Operations.................................... F-5
Consolidated Statements of Stockholders' Equity.......................... F-6
Consolidated Statements of Cash Flows.................................... F-7
Notes to the Consolidated Financial Statements........................... F-9
See notes to the Consolidated Financial Statements F-9
BAGELL, JOSEPHS & COMPANY, L.L.C.
Certified Public Accountants
High Ridge Commons
Suites 400-403
200 Haddonfield Berlin Road
Gibbsboro, New Jersey 08026
(856) 346-2828 Fax (856) 346-2882
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Conolog Corporation
Somerville, New Jersey
We have audited the accompanying consolidated balance sheet of Conolog
Corporation and Subsidiaries (the "Company") as of July 31, 2004 and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). 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
audit provides a reasonable basis for our opinions.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Conolog
Corporation and its Subsidiaries as of July 31, 2004, and the results of its
operations, changes in stockholders' equity, and cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
BAGELL, JOSEPHS & COMPANY, L.L.C.
BAGELL, JOSEPHS & COMPANY, L.L.C.
Certified Public Accountants
Gibbsboro, New Jersey
October 21, 2004
MEMBER OF
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
NEW JERSEY SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
PENNSYLVANIA INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
NEW YORK STATE SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
See notes to the Consolidated Financial Statements F-2
Conolog Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET - JULY 31, 2004
ASSETS
Current Assets
Cash $1,119,768
Accounts receivable - net allowance for doubtful accounts of $1,000 148,171
Note receivable --
Current portion of note receivable 7,920
Inventory 500,000
Other current assets 44,099
----------
Total Current Assets 1,819,958
----------
Property, Plant and Equipment
Machinery and equipment 1,328,898
Furniture and fixtures 409,459
Computer software 147,203
Leasehold improvements 30,265
----------
1,915,825
Less accumulated depreciation and amortization 1,821,215
----------
94,610
Inventory 1,424,417
Note receivable, net of current portion 140,720
----------
Total Assets $3,479,705
==========
See notes to the Consolidated Financial Statements F-3
Conolog Corporation and Subsidiaries
Consolidated Balance Sheet
July 31, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 209,575
Accrued expenses 66,734
Loan from officer 77,427
Accrued legal fees 74,417
Accrued payroll 12,445
Convertible debt 1,094,000
------------
Total Current Liabilities 1,534,598
------------
Stockholders' Equity:
Preferred stock, par value $.50; Series A; 4% cumulative; 162,000 shares
authorized; 155,000 shares issued and outstanding 77,500
Preferred stock, par value $.50; Series B; $.90 cumulative; 50,000 shares
authorized; 1,197 shares issued and outstanding 597
Common stock, par value $0.01; 20,000,000 shares authorized; issued
2,879,001 shares, including 220 shares held in treasury 28,795
Contributed capital 25,895,647
Contributed capital - warrants 1,599,401
Retained (deficit) (25,400,429)
Treasury shares at cost (131,734)
Prepaid consulting (124,670)
------------
Total Stockholders' Equity 1,945,107
Total Liabilities and Stockholders' Equity $ 3,479,705
============
See notes to the Consolidated Financial Statements F-4
Conolog Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended July 31,
-------------------------
2004 2003
----------- -----------
Product revenue $ 963,008 $ 604,264
Costs of product revenue 913,561 352,225
Gross Profit 49,447 252,039
----------- -----------
Operating Expenses
Selling, general and administrative 1,522,714 1,136,061
Stock based compensation 3,592,000 443,135
Impairment of goodwill -- 322,338
----------- -----------
Total Operating Expenses 5,114,714 1,901,534
----------- -----------
Loss Before Other Income (Expense) (5,065,267) (1,649,495)
----------- -----------
Other Income (Expense)
Interest income 7,034 13,711
Interest expense (1,220,960) (17,432)
Other Expense -- (18,148)
Other Income 3,307 91,000
----------- -----------
Total Other Income (Expense) (1,210,619) 69,131
----------- -----------
Loss From Continuing Operations Before Income Taxes (6,275,886) (1,580,364)
Benefit from Income Taxes -- 323,959
----------- -----------
Loss From Continuing Operations (6,275,886) (1,256,405)
Discontinued Operations:
Loss From Discontinued Operations (Net of income tax benefit of $0) (94,515) (149,154)
(Loss) Gain From Disposal of Discontinued Operations (Net of income
tax expense of $0) (127,889) 24,446
----------- -----------
Net Loss $(6,498,290) $(1,381,113)
=========== ===========
Loss Per Common Share - Continuing Operations $ (4.08) $ (1.38)
=========== ===========
Income Per Common Share - Discontinuing Operations $ (0.14) $ (0.13)
=========== ===========
See notes to the Consolidated Financial Statements F-5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Series A Series B Contributed Retained
Preferred Preferred Common Contributed Capital- Earnings
Stock Stock Stock Capital Warrants (Deficit)
--------- --------- ------- ----------- ----------- -----------
Balance at July 31, 2002 $77,500 $597 $49,805 $20,494,003 $ -- $(17,512,666)
Forgiveness of salary by officer -- -- -- 95,000 -- --
Common shares issued to employees -- -- 15,253 650,094 -- --
Common shares issued to consultants -- -- 925 27,223 -- --
Common shares issued for commissions -- -- 6 270 -- --
Shares issued for services to be provided -- -- 3,100 248,900 -- --
Forgiveness of salary by employees -- -- -- 247,622 -- --
Effect of 1-for-10 reverse stock split -- -- (56,090) 56,090 -- --
Write-off of subscription receivable -- -- -- (93,750) -- --
Amortization of consultant services -- -- -- -- -- --
Net loss for the year -- -- -- (1,381,113)
Dividends -- -- -- 4,180 -- (4,180)
------- --- ------- ---------- --------- -----------
Balance at July 31, 2003 $77,500 $597 $12,999 $21,729,632 $ -- $(18,897,959)
------- --- ------- ---------- --------- -----------
Common shares issued to directors -- -- 8,000 3,584,000 --
Common shares issued to consultants -- -- 5 527 --
Issuance of warrants with convertible debt -- -- -- -- 1,200,000 --
Conversion of debt -- -- 1,000 105,000 -- --
Common shares and warrants issued in
subscription agreement -- -- 4,791 284,308 399,401 --
Shares issued for services to be provided -- -- 2,000 188,000 -- --
Amortization of consultant services -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Net loss for the year -- -- -- -- -- (6,498,290)
Dividends -- -- -- 4,180 (4,180)
------- ---- ------- ---------- --------- -----------
Balance at July 31, 2004 $77,500 $597 $28,795 $25,895,647 $1,599,401 $(25,400,429)
======= ==== ======= ========== ========= ===========
Consultant
Services Total
Treasury Subscription Deferred to be Stockholders'
Stock Receivable Compensation Provided Equity
-------- ------------ ------------ ---------- -------------
Balance at July 31, 2002 $(131,734) $(93,750) $ -- $ (70,196) $ 2,813,559
Forgiveness of salary by officer -- -- -- -- 95,000
Common shares issued to employees -- -- (222,212) -- 443,135
Common shares issued to consultants -- -- -- -- 28,148
Common shares issued for commissions -- -- -- -- 276
Shares issued for services to be provided -- -- -- (252,000) --
Forgiveness of salary by employees -- -- -- -- 247,622
Effect of 1-for-10 reverse stock split -- -- -- -- --
Write-off of subscription receivable -- 93,750 -- -- --
Amortization of consultant services -- -- -- 253,738 253,738
Net loss for the year -- -- -- -- (1,381,113)
Dividends -- -- -- -- --
-------- ------- ---------- --------- ----------
Balance at July 31, 2003 $(131,734) $ -- $(222,212) $ (68,458) $ 2,500,365
-------- ------- ---------- --------- ----------
Common shares issued to directors -- -- -- -- 3,592,000
Common shares issued to consultants -- -- -- -- 532
Issuance of warrants with convertible debt -- -- -- -- 1,200,000
Conversion of debt -- -- -- -- 106,000
Common shares and warrants issued in
subscription agreement -- -- -- -- 688,500
Shares issued for services to be provided -- -- -- (190,000) --
Amortization of consultant services -- -- -- 133,788 133,788
Amortization of deferred compensation -- -- 222,212 -- 222,212
Net loss for the year -- -- -- -- (6,498,290)
Dividends -- -- -- -- --
-------- ------- ---------- --------- ----------
Balance at July 31, 2004 $(131,734) $ -- $ -- $(124,670) $ 1,945,107
======== ======= ========== ========= ==========
See notes to the Consolidated Financial Statements F-6
Conolog Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended July 31,
-------------------------
2004 2003
----------- -----------
Cash Flows From Operating Activities
Continuing Operations Net Loss $(6,275,886) $(1,256,405)
Adjustments to Reconcile Net Loss to Net Cash (Used in) Provided by
Operating Activities
Net (loss) gain on sale of subsidiaries (127,889) 24,446
Impairment of goodwill -- 322,338
Common stock for commissions and consulting 593 --
Common stock base compensation 3,592,000 443,135
Amortization of prepaid consulting expense 133,788 253,738
Amortization of deferred compensation 222,212
Warrants issued with convertible debt 1,200,000 --
Depreciation 41,255 57,394
(Increase) Decrease in Operating Assets
Accounts receivable (114,639) (22,070)
Inventories 24,711 281,802
Other current assets (19,959) 2,433
Other assets -- (300)
Deferred income taxes 323,959 (123,662)
Increase (Decrease) in Operating Liabilities
Accounts payable 97,263 54,120
Accrued expenses and other liabilities (189) 1,095
----------- -----------
Net Cash (Used in) Provided by Continuing Operations (902,781) 38,064
----------- -----------
Discontinued Operations
Net (loss) (94,515) (149,154)
Change in net assets of discontinued operations 230,995 (443,419)
----------- -----------
Cash Provided by (Used in) Discontinued Operations 136,480 (592,573)
----------- -----------
Net Cash Used in Operating Activities (766,301) (554,509)
----------- -----------
Cash Flows From Investing Activities
Purchase of equipment and leasehold improvements -- (8,900)
----------- -----------
Net Cash Used in Investing Activities -- (8,900)
----------- -----------
Cash Flows From Financing Activities
Repayment of line of credit (250,000) --
Proceeds from loan from officer 44,498 --
Proceeds from issuance of convertible debentures 1,200,000 --
Proceeds from issuance of stock and warrants 688,500 --
Proceeds from other loan -- 123,928
Proceeds from note receivable 97,629 42,539
Proceeds from sale of subsidiary 34,000 300,000
----------- -----------
Net Cash Provided by Financing Activities 1,814,627 466,467
----------- -----------
Net Increase (Decrease) in Cash and Equivalents 1,048,326 (96,942)
Cash and Equivalents at Beginning of Period 71,442 168,384
----------- -----------
Cash and Equivalents at End of Period $ 1,119,768 $ 71,442
=========== ===========
See notes to the Consolidated Financial Statements F-7
Consolidated Statements of Cash Flows - (Continued)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Year Ended July 31,
-------------------------
2004 2003
----------- -----------
Interest $ 12,294 $ 17,432
Noncash investing and financing activities:
Conversion of debentures 106,000 --
Common stock issued for prepaid consulting services 124,670 252,000
Forgiveness of loan from officer -- 91,000
Notes payable issued for sale of ICM -- 287,350
Write-off of subscription receivable -- 93,750
See notes to the Consolidated Financial Statements F-8
Conolog Corporation and Subsidiaries - (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 2004
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Conolog Corporation (the "Company") is in the business of design,
manufacturing and distribution of small electronic and electromagnetic
components and subassemblies for use in telephone, radio and microwave
transmissions 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.
The Company formed a wholly owned Subsidiary, Nologoc Corporation. In
September 1998, Nologoc Corporation purchased the assets of Atlas Design,
Incorporated. In January, 2001, Nologoc Corporation purchased the assets of
Prime Time Staffing, Incorporated and Professional Temp Solutions Incorporated.
Atlas Design, Prime Time Staffing and Professional Temp Solutions provide
short-term and long-term qualified engineering and technical staff, as well as
human resource consulting to various industries. In March 2004 the Company
ceased operating its staffing business. The assets of the Company's wholly-owned
subsidiary, Nologoc, Inc. trading at Atlas Design, were sold to the Company's
vice-president of operations of Atlas Design.
During the year ended July 31, 2000, the Company formed a wholly owned
Subsidiary, Lonogoc Corporation. In August, 2000, Lonogoc Corporation purchased
the assets of Independent Computer Maintenance Corporation ("ICM") and was
operating under the trade name, "ICM". "ICM" provides installation, maintenance,
and troubleshooting of computer systems and networks. In October 2002, the
Company rescinded the asset purchase agreement with Independent Computer
Maintenance Corporation ("ICM") and discontinued its operations.
Principles of Consolidation
The consolidated financial statements include the accounts of Conolog
Corporation and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Cash and Equivalents
For the purpose of the statements of cash flows, cash equivalents include
time deposits, certificates of deposit and all highly liquid debt instruments
with original maturities of three months or less.
Inventories
Inventories are valued at the lower of cost (determined on a first-in,
first-out basis) or market.
F-9
Conolog Corporation and Subsidiaries - (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 2004
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. Depreciation
and amortization was $41,255 and $57,394 for the years ended July 31, 2004 and
2003, respectively. Repairs and maintenance expenditures which do not extend the
useful lives of the related assets are expensed as incurred.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Research and Development
Research and Development costs are expensed as incurred.
Revenue Recognition
Revenue from product sales are recognized at the time of shipment; products
are not sold on a conditional basis. Therefore, when delivery has occurred the
sale is complete as long as the collection of the resulting receivable is
probable.
Revenue from services provided under time and material contracts are
recognized as services are provided by the temporary, contract or leased
employees. Revenue from direct placements or "fixed fee contracts" is recognized
at the time the candidate begins the first full day after the completion of a
30-day contingency period. Revenue from permanent placements, which are also
considered fixed fee contracts, is recognized at the time the candidate begins
the first full day after the completion of a required amount of temporary hours
as stipulated in the Temp to Perm contract. Revenue from services is included
loss from discontinued operations on the Consolidated Statement of Operations.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising
expense was $6,994 and $9,941 for the years ended July 31, 2004 and 2003,
respectively.
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and amounted to
$25,627 and $16,770 for the years ended July 31, 2004 and 2003, respectively.
Securities Issued for Services
The Company accounts for common stock issued for services by reference to
the fair market value of the Company's stock on the date of stock issuance.
Compensation, consulting and commission expense is recorded at the fair market
value of the stock issued.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, other current assets,
accounts payable and accrued exp expenses approximates fair 67value because of
the short maturity of these instruments.
F-10
Conolog Corporation and Subsidiaries - (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 2004
Limitations on Fair Value Estimates
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of assets and liabilities for
financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes also are recognized for operating losses that are
available to offset future federal and state income taxes.
Loss Per Share of Common Stock
Loss per share of common stock is computed by dividing net loss (after
dividends on preferred shares) by the weighted average number of shares of
Common Stock outstanding during the year. The preferred dividends are not
reflected in arriving at the net loss as they are not material and would have no
effect on earning per share available to common shareholders. The number of
weighted average shares used in the computations were 1,537,801 and 917,349 for
2004 and 2003 respectively. The effect of assuming the exchange of Series A
Preferred Stock and Series B Preferred Stock in 2004 and 2003 would be
anti-dilutive. The following transactions occurred after July 31, 2004, which,
had they taken place during fiscal 2004, would have changed the number of shares
used in the computations of earnings per share: (1) $1,094,000 debenture was
converted into 1,032,075 common shares were issued; (2) 270,000 common shares
were issued as a result of warrants being exercised.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of Business and Credit Risk
At times throughout the year, the Company may maintain certain bank
accounts in excess of FDIC insured limits. The company provides credit in the
normal course of business. The Company performs ongoing credit evaluations of
its customers and maintains allowances for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends, and other
information.
F-11
Conolog Corporation and Subsidiaries - (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 2004
INVENTORY
At July 31, 2004 inventory consisted of the following:
Finished goods $ 783,348
Work-in-process 14,790
Raw materials 1,126,279
----------
$1,924,417
==========
Inventory of $1,424,417 was classified as non-current as only the amount the
Company expects to realize in the next operating cycle has been classified as
current.
IMPAIRMENT OF GOODWILL
Goodwill is assigned to specific reporting units and is reviewed for
possible impairment at least annually or more frequently upon the occurrence of
an event or when circumstances indicate that a reporting unit's carrying amount
is greater than its fair value. During the year ended July 31, 2003, the Company
determined that the carrying amount of the goodwill exceeded its fair value,
which was estimated based on the present value of expected future cash inflows.
Accordingly, a goodwill impairment loss of $322,338 was recognized during the
year ended July 31, 2003.
OPERATING LEASE COMMITMENTS
The Company leases their facilities and various equipment under operating
leases. Total rental expense for all operating leases of the Company amounted to
approximately $54,302 and $36,256 during the years ended July 31, 2004 and 2003,
respectively. The Company currently leases its facilities on a month-to-month
basis.
INCOME TAXES
The income tax (benefit) is comprised of the following:
July 31,
----------------
2004 2003
---- ---------
Current Income Taxes
Federal $-- $ --
State -- (323,959)
--- ---------
$-- $(323,959)
=== =========
In 1998, the State of New Jersey enacted legislation allowing emerging
technology and/or biotechnology companies to sell their unused New Jersey Net
Operating Loss ("NOL") Carryover and Research and Development Tax Credits ("R&D"
Credits) to corporate taxpayers in New Jersey. During fiscal year ended July 31,
2003, the Company entered into an agreement under which it sold a portion of its
NOL carryover. The total estimated proceeds of this transaction was recorded as
a benefit in the accompanying financial statements.
F-12
Conolog Corporation and Subsidiaries - (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 2004
A reconciliation between taxes computed at the federal statutory rate and
the effective tax rate follows:
July 31,
--------------
2004 2003
------ -----
Federal statutory tax rate 34.0% 34.0%
Valuation Allowance on Net Operating Loss Carryover (34.0) 15.0)
Permanent and other differences --
----- ----
--% 19.0%
===== ====
Deferred taxes are recognized for temporary differences between the bases
of assets and liabilities for financial statement and income tax purposes, and
net operating losses.
The temporary differences causing deferred tax benefits are primarily due
to net operating loss carry forwards.
At July 31, 2004, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $32,900,000, which is
available to offset future Federal and State taxable income, if any. The federal
and state net operating loss carryforwards expire as follows:
Federal State
----------- -----------
2007 $ -- $ 2,740,000
2008 -- 3,270,000
2010 -- 90,000
2011 -- 6,400,000
2013 250,000 --
2014 1,230,000 --
2015 960,000 --
2017 550,000 --
2018 1,660,000 --
2019 860,000 --
2020 2,140,000 --
2021 2,650,000 --
2022 3,150,000 --
2023 550,000 --
2024 6,400,000 --
----------- -----------
$20,400,000 $12,500,000
=========== ===========
The Company's deferred tax asset is comprised of the following temporary
differences:
Federal State
----------- ----------
Net operating losses and tax credit carryforwards $ 5,710,000 $ 750,000
Less: valuation allowance (5,710,000) (750,000)
----------- ---------
Net Deferred Tax Assets $ -- $ --
=========== =========
F-13
Conolog Corporation and Subsidiaries - (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 2004
The net change in the valuation allowance for the year ended July 31, 2004 was
approximately $1,340,000.
LOAN FROM OFFICER
Loan from officer represents advances made by an officer of the company.
The advances are due one year after the date of receipt and bear interest at a
rate of 4% per annum. Total advances made by the officer during the year were
$202,500. Repayments to the officer were $158,000. The balance due to the
officer at July 31, 2004 was $77,427.
During 2003, the Company adopted the provisions of SFAS 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement rescinds SFAS 4, "Reporting Gains and
Losses from Extinguishment of Debt" wherein the FASB determined that gains and
losses from debt extinguishments were to be recorded as extraordinary items.
Accordingly, other income for the year ended July 31, 2003 includes $91,000 of
gain related to the forgiveness of loans from an officer.
PROFIT SHARING PLAN
The Company sponsors a qualified profit sharing plan that covers
substantially all full time employees. Contributions to the plan are
discretionary and determined annually by management. No contributions to the
plan were made during the years ended July 31, 2004 and 2003.
The Plan also provides an employee savings provision (401(k) plan) whereby
eligible participating employees may elect to contribute up to 15% of their
compensation to an investment trust.
SHAREHOLDERS' EQUITY
On January 10, 2003, the Board of Directors authorized a 1 for 10 reverse
stock split of the Company's $.01 par value common stock.
The Series A Preferred Stock provides 4% cumulative dividends, which were
$108,383 ($0.70 per share) in arrears at July 31, 2004. 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 payment of $48,000 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 $0.90 per
share, which were $35,616 ($29.76 per share) in arrears at July 31, 2003. In
addition, each share of Series B Preferred Stock is convertible into .005 of one
share of Common Stock.
The Company has reserved 155,059 shares of Common Stock for Series A and B
Preferred Stock.
F-14
Conolog Corporation and Subsidiaries - (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 2004
On July 29, 2004, the Company entered into a subscription agreement with a
group of investors for common stock and warrants to purchase shares of common
stock. The Company sold to the investors 479,000 shares of common stock and
200,000 warrants with an exercise price of $1.84, which expire on July 30, 2029.
The Company received $688,500 in exchange for the shares and warrants. The
warrants were valued using the Black-Scholes option valuation model with a
resulting allocation of the aggregate proceeds from the subscription
attributable to the warrants of $399,401. The following assumptions were
utilized to value the warrants: price per share of common stock of $1.84;
expected life of five years; expected volatility of 149%; a risk free interest
rate of 3.7%; and an expected yield of 0.0%.
SHAREHOLDERS' EQUITY (Continued)
A summary of the Company's warrant activity is as follows:
Year Ended July 31, 2004
----------------------------
Number of Weighted-average
Warrants exercise price
--------- ----------------
Balance at July 31, 2003 -- --
Issued 470,000 $1.69
Forfeited -- --
------- -----
Balance at July 31, 2004 470,000 $1.69
======= =====
CONVERTIBLE DEBENTURES
On April 26, 2004, the Company entered into a Securities Purchase Agreement
with an investor, whereby the Company issued and sold to the investor, in a
private placement, a $1,200,000 principal amount Secured Convertible Term Note
and a warrants to purchase 270,000 shares of common stock. The principal amount
of the note is repayable at the rate of $50,000 per month, plus accrued
interest, if any, commencing on May 1, 2005 and may be paid at the investors'
option in cash or shares of the Company's common stock at the conversion rate of
$1.06.
The 270,000 warrants expire April 26, 2011 and have a weighted average
exercise price of 1.59. The warrants were valued using the Black-Scholes option
valuation model with a resulting allocation to interest expense of $1,200,000.
The following assumptions were utilized to value the warrants: price per share
$4.55; expected life of seven years; expected volatility of 151%; a risk free
interest rate of 3.4%; and an expected yield of 0.0%.
During the year ended July 31, 2004, $106,000 of principal was converted
into 100,000 common shares.
F-15
Conolog Corporation and Subsidiaries - (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 2004
MAJOR CUSTOMERS
The following summarizes sales to major customers (each 10% or more of net
sales) by the Company:
Sales to Major Number of Percentage of
Year Ended Customers Customers Total
- ---------- -------------- --------- -------------
2004 $414,684 2 49.0%
2003 $665,668 3 44.5%
STOCK OPTION PLAN
2002 Stock Option Plan
On April 23, 2002, the Board of Directors of the Company adopted the 2002
Stock Option Plan ("the 2002 Plan"). Under the 2002 Plan, the Company may grant
up to 190,000 shares of common stock as either incentive stock options under
Section 422A of the Internal Revenue Code or nonqualified stock options. Subject
to the terms of the 2002 Plan, options may be granted to eligible persons at any
time and under such terms and conditions as determined by the 2002 Stock Option
Committee ("the Committee"). Unless otherwise determined by the Committee, each
stock option shall terminate no later than ten years (or such shorter time as
may be fixed by the Committee) after the date in which it was granted. The
exercise price for incentive stock options must be at least one hundred percent
(100%) of the fair market value of common stock as determined on the date of the
grant. 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.
As of July 31, 2004, there had been no shares granted under the 2002 Plan.
PREPAID CONSULTING
The Company issued 200,599 shares of common stock to various consultants
for services. 200,000 of the shares issued were for services that extend into
the future and are amortized monthly over the period of the agreement. 599 of
the shares issued were for services performed in fiscal year 2004 and were
expensed in value at the date of the agreement, as there was no readily
determinable value for the consulting services provided or to be provided. The
Company accounted for the prepaid value of consulting services in accordance
with EITF 00-18, Accounting Recognition for Certain Transactions Involving
Equity Instruments Granted to Other Than Employees.
DISCONTINUED OPERATIONS
On October 22, 2002, the Company entered an agreement to rescind the Asset
Purchase Agreement between Conolog and Independent Computer Maintenance
Corporation ("ICM"). Under the rescission agreement, the Company and ICM agreed
to transfer all assets previously purchased pursuant to the Asset Purchase
Agreement to the extent they still exist to Natony Corp., the former seller. The
return of purchase price paid for the assets was $600,000, $300,000 in cash, at
closing, a note receivable for $150,000 payable over 24 monthly in equal
installments of $6,750 beginning December 31, 2002 and a note receivable of
$142,340 ($150,000 less fees of $7,660) unsecured and payable over 10 years
beginning December 2004 bearing an interest rate of 5% per annum. The
outstanding balance of the $142,340 note receivable at July 31, 2004 is $148,640
which includes $6,300 of the accrued interest. Net sales of ICM were $0 and
$116,687 for the years ended July 31, 2004 and 2003, respectively.
F-16
Conolog Corporation and Subsidiaries - (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 2004
On April 30, 2004, the Company sold the assets of its' wholly owned
subsidiary, Nologoc Corporation, T/A Atlas Design, Incorporated. The decision to
sell the component was based on the intensely competitive and highly fragmented
nature of the placement services business. The subsidiary was sold to the
Company's vice-president of operations of Atlas Design. The Company received
$34,000 of proceeds and recorded a loss from the disposal of $127,889. Net sales
of Atlas Design, Incorporated were $439,174 and $783,195 for the years ended
July 31, 2004 and 2003, respectively.
SUBSEQUENT EVENTS
The Company did not meet its minimum financial requirement of $2,500,000 in
Stockholders' Equity for continued listing on the NASDAQ Small Cap Market. This
deficiency was cured subsequent to July 31, 2004 when (1) the remaining
principal balance of $1,904,000 from the issuance of convertible debentures
during the fiscal year ended July 31, 2004, was converted into 1,032,075 common
shares (2) Additionally, warrants expiring April 26, 2011 were exercised
resulting in the issuance of 270,000 common shares in exchange for $429,300. The
effect on Stockholders' Equity, as of August 9, 2004 is an increase in the
Equity balance of $1,523,300, increasing Stockholders' Equity to $3,468,407,
from its July 31, 2004 balance of $1,945,107.
F-17