Filed Pursuant to Rule 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 (the "Selling Stockholders"). 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 Capital Market under the symbol "CNLG."
The closing price of our common stock on December 14, 2005 was $1.03 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 3 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.
The information in this prospectus is not complete and may be changed. The
Selling Stockholders may not sell or offer these securities until this
registration statement filed with the Securities and Exchange Commission is
effective. 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.
The date of this prospectus is December 21, 2005
Table of Contents
Page
PROSPECTUS SUMMARY ............................................................... 1
RECENT DEVELOPMENTS .............................................................. 1
RISK FACTORS ..................................................................... 3
FORWARD-LOOKING STATEMENTS ....................................................... 6
USE OF PROCEEDS .................................................................. 6
LEGAL PROCEEDINGS ............................................................... 12
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS .................... 13
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .................. 14
DESCRIPTION OF SECURITIES ....................................................... 16
INTERESTS OF NAMED EXPERTS AND COUNSEL .......................................... 17
DISCLOSURE OF SEC POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES .... 17
DESCRIPTION OF BUSINESS ......................................................... 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS .............................. 26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................................. 33
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ........................ 34
EQUITY COMPENSATION PLAN INFORMATION ............................................ 35
EXECUTIVE COMPENSATION .......................................................... 36
CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ...................................................... 37
WHERE YOU CAN FIND MORE INFORMATION ............................................. 38
INDEPENDENT AUDITOR'S REPORT ................................................... F-1
CONSOLIDATED BALANCE SHEET ..................................................... F-2
CONSOLIDATED STATEMENT OF OPERATIONS ........................................... F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ................................. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS .......................................... F-6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ................................. F-8
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 (the "December
2004 Subscription Agreement") with nine subscribers (the "December 2004
Subscribers") 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 December 2004 Subscription Agreement
was subject to the approval by our stockholders. Our stockholders approved the
issuance of our common stock pursuant to the December 2004 Subscription
Agreement on February 10, 2005 and on February 15, 2005, we issued the December
2004 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
December 2004 Subscribers, we received gross proceeds of $4,245,000. We paid
First Montauk Securities Corp. ("First Montauk"), 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
December 2004 Subscribers. We paid a fee of $10,000 to the December 2004
Subscribers' attorneys.
On June 17, 2005, First Montauk requested that its warrant to purchase an
aggregate of 273,871 shares of our common stock be transferred to certain First
Montauk employees and affiliates. On July 6, 2005, the Company canceled the
warrant issued to First Montauk in connection with the above-described
transaction and re-issued warrants to First Montauk, Ernest Pellegrino, Max
Povolotsky, Victor M. Kurylak, Herb Kurinsky, Scott Rudnick and Angela Metelitsa
for the purchase of up to 31,733, 92,702, 92,702, 15,867, 15,867, 20,000 and
5,000 shares of the our common stock, respectively.
The common stock purchase warrant issued pursuant to the December 2004
Subscription Agreement, a form of which was filed with the Commission and
disclosed as an exhibit to a Form 8-K on December 10, 2004, provided that the
exercise price may be changed at any time by us and may be reduced without the
consent of the warrant holder. On July 19, 2005, we
lowered the exercise price of the warrants issued to the nine investors and to
First Montauk, described above, from $5.15 a share to $1.25 a share and delayed
the date when the warrants may first be exercised to January 20, 2006. The
exercise price of the warrants was lowered to more closely reflect the recent
trading price of our common stock and, thus, to provide an incentive to the
warrant holders to exercise their warrants.
The issuance and sale of the Common Stock and warrants pursuant to the December
2004 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 December 2004 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 December 2004 Subscription Agreement with the December 2004
Subscribers, we are required under the Securities Act to register for resale the
common stock sold to the December 2004 Subscribers as well as the securities
issuable upon the exercise of warrants. Pursuant to the selling agent agreement
between us and First Montauk, we are also registering 273,871 shares issuable
upon the exercise of warrants issued to First Montauk and its employees and
affiliates.
On July 19, 2005, we entered into a Subscription Agreement (the "July 2005
Subscription Agreement") with 5 subscribers (the "July 2005 Subscribers")
relating to the issuance and sale, in a private placement by us of 1,200,000
shares of our common stock at a price of $1.25 per share and warrants to
purchase 1,200,000 shares of our common stock at a price of $1.6892 per share
which are exercisable for a period commencing on January 18, 2006 and
terminating on the fifth anniversary of the issuance of such warrant. The
issuance of the common stock and warrants pursuant to the July 2005 Subscription
Agreement was approved by our board of directors. From the sale of our
securities to the July 2005 Subscribers, we received gross proceeds of
$1,500,000. We paid First Montauk, the selling/placement agent in the private
placement, a cash fee of $150,000. First Montauk, including certain of First
Montauk's affiliates and employees, was also issued warrants to purchase an
aggregate of 240,000 shares of our common stock on the same terms as the
warrants issued to the July 2005 Subscribers. We also paid attorneys fees of
$10,000 to the July 2005 Subscribers' attorneys.
The issuance and sale of the common stock and warrants pursuant to the July 2005
Subscription Agreement was made in reliance upon the exemption provided in
Section 4(2) of 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 July 2005 Subscription Agreement contain restrictive legends preventing
the sale, transfer or other disposition of such shares and warrants unless
registered under the Securities Act.
2
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 the December 2004 Subscription Agreement; 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 December 2004
Subscription Agreement.
o 273,871 shares which may be issued upon the exercise of warrants issued
to First Montauk and certain of its employees and affiliates.
Number of Shares Outstanding
As of September 27, 2005, 7,417,854 shares of our common stock were 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.
3
The market for our manufactured products is very competitive. There are several
companies that manufacture products similar to the products we sell. 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 including Bonneville Power Authority and The
U.S. Military, which accounted for approximately $168,149 and $174,120 of sales,
respectively during the fiscal year ended July 31, 2005, 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.
4
We have limited cash and may not be able to receive additional financing.
As of July 31, 2005, we had approximately $4,471,000 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, significant orders, strategic
relationships, joint ventures or capital commitments; and
o applicable regulatory developments.
If we are delisted from the Nasdaq Capital 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 the
Nasdaq Capital Market, 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 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.
5
As of July 31, 2005, we had outstanding warrants to purchase 2,398,549 shares of
our common stock, of which warrants to purchase 1,440,000 shares of our common
stock have an exercise price of $1.6892 per share and warrants to purchase
958,549 shares of our common stock have an exercise price of $1.25 per share.
The issuance of shares upon the exercise of warrants may result in 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 $1,198,186.25
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 July 31, 2005, information regarding the
beneficial ownership of our common stock by the Selling Stockholders. In the
table below, the percentage ownership after the offering is based upon the
assumed sale by the Selling Stockholders 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 a person has beneficial ownership of
a security if he, she or it possesses sole or shared voting or investment power
of that security, and
6
includes options that are currently exercisable or exercisable within 60 days.
The percentages for each Selling Stockholder are calculated based on 7,417,847
shares our common stock issued and outstanding as of July 31, 2005, plus the
additional shares that the Selling Stockholder is deemed to beneficially own as
set forth in the 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 Stockholders below, provided that this prospectus
is amended or supplemented if required by applicable law.
The selling stockholder table is being updated to reflect the transfer by First
Montauk of portions of its warrant to purchase 273,871 shares of our common
stock to certain of its employees and affiliates.
The information in this table is based upon information provided by each
respective Selling Stockholder.
7
- ----------------------------------------------------------------------------------------------------------------
Beneficial Ownership Before This Beneficial Ownership After
Offering This Offering
- ----------------------------------------------------------------------------------------------------------------
Shares Being
# of Shares % of Shares Offered # of Shares % of Shares
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
First Montauk Securities Corp. (1)* 0 * 31,733 0 *
Parkway 109 Office Center
328 New Spring Road
Red Bank, New Jersey 07701
- ----------------------------------------------------------------------------------------------------------------
Ernest Pellegrino (2)** + 0 * 92,702 0 *
Parkway 109 Office Center
328 New Spring Road
Red Bank, New Jersey 07701
- ----------------------------------------------------------------------------------------------------------------
Max Povolotsky (3) ** + 0 * 92,702 0 *
Parkway 109 Office Center
328 New Spring Road
Red Bank, New Jersey 07701
- ----------------------------------------------------------------------------------------------------------------
Victor K. Kurylak (4) ** + 0 * 15,867 0 *
Parkway 109 Office Center
328 New Spring Road
Red Bank, New Jersey 07701
- ----------------------------------------------------------------------------------------------------------------
Herb Kurinsky (5) ** + 0 * 15,867 0 *
Parkway 109 Office Center
328 New Spring Road
Red Bank, New Jersey 07701
- ----------------------------------------------------------------------------------------------------------------
Scott Rudnick (6) ** + 0 * 20,000 0 *
Parkway 109 Office Center
328 New Spring Road
Red Bank, New Jersey 07701
- ----------------------------------------------------------------------------------------------------------------
Angela Metelitsa (7)** + 0 * 5,000 0 *
Parkway 109 Office Center
328 New Spring Road
Red Bank, New Jersey 07701
- ----------------------------------------------------------------------------------------------------------------
* 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%.
8
+ Selling Stockholder is an employee of First Montauk and received these
warrants as compensation from First Montauk. Selling Stockholder may be deemed
to be an associated person of a registered broker-dealer firm under the rules of
the Securities and Exchange Commission and National Association of Security
Dealers. Further, based upon information provided to us by Selling Stockholder,
we have been advised that at the time Selling Stockholder acquired the warrant,
there were no agreements or understandings, directly or indirectly, with any
person to distribute the securities of the Company held by Selling Stockholder.
(1) First Montauk 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. As noted elsewhere in this prospectus, the exercise
price was lowered to $1.25 a share. Moreover, portions of the warrant were
transferred to First Montauk's employees and affiliates as listed in this table.
The shares of our securities beneficially owned by First Montauk do not include
shares issuable upon the exercise of the warrant issued to it under the December
2004 Subscription Agreement because such warrant cannot be exercised until
January 20, 2006. In addition, First Montauk's beneficial ownership does not
include 30,000 shares of our common stock issuable upon the exercise of a
warrant with an exercise price of $1.6892 because this warrant cannot be
exercised until January 18, 2006. In addition, First Montauk's beneficial
ownership does not include 30,000 shares of our common stock issuable upon the
exercise of a warrant with an exercise price of $1.6892 because this warrant
cannot be exercised until January 18, 2006. First Montauk is a registered
broker-dealer and is controlled by the Board of Directors of First Montauk,
which has the control and power to vote and/or sell the securities owned by
First Montauk.
(2) The shares of our common stock beneficially owned by Ernest Pellegrino do
not include 92,702 shares of our common stock issuable upon exercise of a
warrant with an exercise price of $1.25 per share because this warrant cannot be
exercised until January 20, 2006. In addition, Mr. Pellegrino's beneficial
ownership does not include 86,250 shares of our common stock issuable upon the
exercise of a warrant with an exercise price of $1.6892 per share because this
warrant cannot be exercised until January 18, 2006. In addition, Mr.
Pellegrino's beneficial ownership does not include 86,250 shares of our common
stock issuable upon the exercise of a warrant with an exercise price of $1.6892
per share because this warrant cannot be exercised until January 18, 2006.
(3) The shares of our common stock beneficially owned by Max Povolotsky do not
include 92,702 shares of our common stock issuable upon exercise of a warrant
with an exercise price of $1.25 per share because this warrant cannot be
exercised until January 20, 2006. In addition, Mr. Povolotsky's beneficial
ownership does not include 86,250 shares of our common stock issuable upon the
exercise of a warrant with an exercise price of $1.6892 per share because this
warrant cannot be exercised until January 18, 2006. In addition, Mr.
Povolotsky's beneficial ownership does not include 86,250 shares of our common
stock issuable upon the exercise of a warrant with an exercise price of $1.6892
per share because this warrant cannot be exercised until January 18, 2006.
(4) The shares of our common stock beneficially owned by Victor Kurylak do not
include 15,867 shares of our common stock issuable upon exercise of a warrant
with an exercise price of $1.25 per share because this warrant cannot be
exercised until January 20, 2006. In addition, Mr. Kurylak's beneficial
ownership does not include 15,000 shares of our common stock issuable upon the
exercise of a warrant with an exercise price of $1.6892 per share because this
warrant cannot be exercised until January 18, 2006. In addition, Mr. Kurylak's
beneficial ownership does not include 15,000 shares of our common stock issuable
upon the exercise of a warrant with an exercise price of $1.6892 per share
because this warrant cannot be exercised until January 18, 2006.
(5) The shares of our common stock beneficially owned by Herb Kurinsky do not
include 15,867 shares of our common stock issuable upon exercise of a warrant
with an exercise price of $1.25 per share because this warrant cannot be
exercised until January 20, 2006. In addition, Mr. Kurinsky's beneficial
ownership does not include 15,000 shares of our common stock issuable upon the
exercise of a warrant with an exercise price of $1.6892 per share because this
warrant cannot be exercised until January 18, 2006. In addition, Mr. Kurinsky's
beneficial ownership does not include 15,000 shares of our common stock issuable
upon the exercise of a warrant with an exercise price of $1.6892 per share
because this warrant cannot be exercised until January 18, 2006.
(6) The shares of our common stock beneficially owned by Scott Rudnick do not
include 5,000 shares of our common stock issuable upon exercise of a warrant
with an exercise price of $1.25 per share because this warrant cannot be
exercised until January 20, 2006.
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(7) The shares of our common stock beneficially owned by Angela Metelitsa do not
include 5,000 shares of our common stock issuable upon exercise of a warrant
with an exercise price of $1.25 per share because this warrant cannot be
exercised until January 20, 2006. In addition, Ms. Metelitsa's beneficial
ownership does not include 7,500 shares of our common stock issuable upon the
exercise of a warrant with an exercise price of $1.6892 per shares because this
warrant cannot be exercised until January 18, 2006. In addition, Ms. Metelitsa's
beneficial ownership does not include 7,500 shares of our common stock issuable
upon the exercise of a warrant with an exercise price of $1.6892 per shares
because this warrant cannot be exercised until January 18, 2006.
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 First Montauk and paid First Montauk 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 $5.25 per share, portions of
which warrant have now been transferred to First Montauk employees and
affiliates as disclosed in the Recent Developments section of this prospectus.
In addition, as also noted above, the warrants' exercise price was lowered to
$1.25 a 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 Capital 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
10
options exchange or otherwise; or
o any other method permitted pursuant to applicable law and the December 2004
Subscription Agreement.
The Selling Stockholders 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 Stockholders to include the pledgee, transferee or other successors
in interest as Selling Stockholders under this prospectus. The Selling
Stockholders also may transfer the shares of common stock in other
circumstances, in which 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 Stockholders 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
Stockholders 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
Stockholders 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 Stockholders 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 Stockholders 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 Stockholders 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 Stockholders 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 Stockholders who are "underwriters" within the meaning of Section 2(11)
of the
11
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 Stockholders, 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 Stockholders 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 Stockholders
and their affiliates.
In addition, we will make copies of this prospectus (as it may be supplemented
or amended from time to time) available to the Selling Stockholders for the
purpose of satisfying the prospectus delivery requirements of the Securities
Act.
We have agreed to indemnify the Selling Stockholders 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 against liability losses and
expenses related to any untrue statement of a material fact contained in the
December 2004 Subscription Agreement and related agreements and any breach of
any representations contained in the Selling Agent Agreement.
We have agreed with the Selling Stockholders 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.
12
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 71 Chairman, Chief Executive Officer, Chief Financial
Officer and Director
Marc R. Benou 37 President, Chief Operating Officer, Secretary and
Director
Louis S. Massad 68 Director
Edward J. Rielly 37 Director
David M. Peison 37 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.
From June 2001 until August 2005, Mr. Benou served as a director of Henry Bros.
Electronics, Inc. (formerly known as 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 also a member of the Board of Directors of
eXegenics Inc. The common stock of eXegenics Inc. is traded on the OTC Bulletin
Board. 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. Benou 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.
13
Louis S. Massad has been a member of the Company's Board of Directors since
April 1995. Mr. Massad was the Chief Financial Officer and a Director of Henry
Bros. Electronics, Inc. (formerly known as Diversified Security Solutions, Inc.)
from 2000 until August 2002. From 1997 to 2000, Mr. Massad was a consultant to
Henry Bros. Electronics, 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 a member of the Company's Board of Directors since
October 2004. Since 2005, Mr. Peison has been with HSBC. From 2002 until 2005,
Mr. Peison was 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 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 July 31, 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.
This table is prepared based on information supplied to us by the listed
security holders, any Schedules 13D or 13G and Forms 3 and 4, and other public
documents filed with the SEC.
Under thee rules of the Securities and Exchange Commission, 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
14
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 7,417,847 shares issued and
outstanding.
Amount and Nature
of Percent of
Name and Title Beneficial Ownership Class
- -------------- -------------------- ----------
Robert S. Benou, Chairman, Chief Executive 205,900 2.78%
Officer, Chief Financial Officer and Director
Marc R. Benou, President, Chief Operating 229,000 3.09%
Officer, Secretary and Director
Thomas Fogg, Vice President - Engineering 20,000 *
Louis Massad, Director 0 *
Edward J. Rielly, Director 0 *
David M. Peison, Director 20,000 *
All Officers and Directors as a Group
(6 Persons) 474,900 6.40%
DKR Soundshore Oasis Holding Fund Limited 400,000 (1) 5.39%
Barclays Global Investors, N.A. 417,709 (2) 5.63%
Excalibur Limited Partnership 590,000 (3) 7.95%
* Less than 1%.
(1) The beneficial ownership of DKR Soundshore Oasis Holding Fund Limited does
not include (i) 200,000 shares of our common stock issuable upon exercise of a
warrant with an exercise price of $1.25 per share because this warrant cannot be
exercised until January 20, 2006, and (ii) 400,000 shares of our common stock
issuable upon the exercise of a warrant with an exercise price of $1.6892 per
share because this warrant cannot be executed until January 18, 2006. DKR Oasis
Management Company LP, pursuant to an investment management agreement with DKR
Soundshore 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
15
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. The
address for DKR Soundshore Oasis Holding Fund Limited is 18 Church Street,
Hamilton, HM11 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 16, 2005. The principal business address for Barclays Global Investors,
N.A. is 45 Fremont Street, San Francisco, CA 94105.
(3) The beneficial ownership of Excalibur Limited Partnership does not include
(i) 75,000 shares of our common stock issuable upon exercise of a warrant with
an exercise price of $1.25 per share because this warrant cannot be exercised
until January 20, 2006 and (ii) 440,000 shares of our common stock issuable upon
the exercise of a warrant with an exercise price of $1.6892 per share because
this warrant cannot be exercised until January 18, 2006. William 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.
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 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
16
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 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.
17
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.
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
18
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.
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
19
o Sales to contractors/installers
(B) Military Sales
o Direct contract sales to the military
o As subcontractor to systems producers
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.
20
The PTR-1000 are installed in pairs, one unit at each end of the line. Each unit
is connected and in constant communication with the other, as they continuously
monitor the line for faults. In the event of a fault occurring (such as a downed
line or a short circuit) at either end and when confirmed by the receiving
PTR-1000 unit, the line is immediately isolated for shut down, averting costly
damage and downtime.
The PTR-1000 system is composed of a transmitter, dual receivers, a logic card
(brain center and controller of the system), relay module, line interface module
and power supply module. The transmitters at each end are independent and
transmit (continuously) the status (information being monitored) at their end of
the line.
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:
o Municipal Systems
o Cooperative Systems
o Federal, State and District Systems
o Audio Tone and Telemetry Equipment
21
For many years there has been a need for a modularly independent system that
would permit a user, from a distance, to control functions such as opening a
valve, starting a motor, shutting down a compressor, changing a traffic signal,
control landing lights at an airport, activate a hazard warning on a highway,
and in return allow the user to receive information, such as the liquid level in
a tank, the pressure in a pipe, the rate of flow out of a compressor, the flow
of traffic, the status of a traffic light, airport lights, or confirmation that
a command was performed. Such information is transmitted and received and the
control functions are performed from a distance utilizing telephone lines,
microwave link or direct wire.
These applications, by their nature, can be accomplished with slow speed
signaling systems composed of a transmitter on one end and a receiver on the
other to carry out the necessary instructions provided by the transmitter. Each
set (transmitter/receiver combination) is called a channel. Because of the slow
speed, up to 30 channels could be made to transmit and receive signals, in
either direction on a single telephone line, microwave link or direct-wired line
at the same time. This parallel transmission permits each transmitter/receiver
pair to be independent of all the others.
This product segment includes the first generation equipment, known as GEN-1,
followed by later generations which include technological improvements and
programmable capabilities to include:
GEN-1 Series - First generation with electromagnetic modules and first
generation programmable modules without electro-magnetic modules.
"98" and "68" Series - The latest generation applies DSP and microprocessor
technology with full programmability, in the field or at the factory.
"40" Series - Designed to function with the "98" or "68" series; transmits and
receives variable analog data.
GEN-1 and GEN-1 Programmable Series
The diversity of applications for this equipment makes it available for a wide
range of users who are not restricted to a single industry. Typical industrial
uses include: the measurement of water and gas, waste water, gasoline, oil,
traffic, and electricity. Typical users include: utilities, co-generators,
airports, navy yards, telephone companies, paper and pulp processors and
wherever remote control and data acquisition is required.
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.
22
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 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
23
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.
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. The 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 2005 were Bonneville Power Authority and The
U.S. Military. Sales to these customers totaled $342,271. 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 manufacture military products in advance. Rather, we only schedule
production as purchase orders are received.
24
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.
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 years 2003-2004 and 2004-2005, we invested approximately $93,984
and $177,338, respectively, in product development.
During fiscal year 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 GEN-1 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.
25
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.
EMPLOYEES
As of July 31, 2005, we employed 13 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.
Subsequent to July 31, 2004, 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. Additionally, warrants
expiring April 26, 2011 were exercised resulting in the issuance of 270,000
common shares in exchange for $429,300.
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%.
On December 3, 2004, the Company entered into a subscription agreement
with nine investors relating to the issuance and sale of its securities in a
private placement exempt from the registration requirements of the Securities
Act. On February 16, 2005, the private placement was completed and the
company issued 1,369,355 shares of its common stock at price of $3.10 per
share and warrants to purchase 684,678 shares of the Company's common stock,
which may be exercised for a period commencing on January 20, 2006 and
terminating on the fifth anniversary of the issuance of such warrant and
have an exercise price of $1.25 per share. The Company received gross
proceeds of $4,245,000 and net proceeds of $3,685,650 before deducting
attorneys' fees, printing fees and other miscellaneous fees related to the
private placement. First Montauk acted as Selling Agent in the private
placement. Pursuant to the Selling Agent agreement between the Company and
First Montauk, First Montauk was paid a cash fee of $424,500 (10% of the
aggregate purchase price of the common stock sold to the Subscribers) and
also received $127,350 as a non-accountable expense allowance. The Company
also issued First Montauk, including certain of its employees and affiliates
warrants to purchase an aggregate of 273,871 shares of its common stock on
the same terms as those issued to Subscribers.
On February 15, 2005, the above 200,000 warrants were exercised and the Company
received proceeds of $367,500.
26
On July 19, 2005, the Company entered into a Subscription Agreement with five
investors relating to the issuance and sale of its securities in a private
placement exempt from the registration requirements of the Securities
Act. Pursuant to the Subscription Agreement, the Company issued 1,200,000
shares of its common stock at a price of $1.25 per share and warrants to
purchase 1,200,000 shares of the Company's common stock at a price of
$1.25 per share which are exercisable for a period commencing six months from
July 19, 2005 and terminating on the fifth anniversary of the issuance of such
warrant. The Company received gross proceeds of $1,500,000 and net proceeds
of $1,339,993.50 before deducting attorneys' fees, printing fees and other
miscellaneous fees related to the private placement. First Montauk
acted as Selling Agent in the private placement. Pursuant to the Selling
Agent agreement between the Company and First Montauk, First Montauk was
paid a cash fee of $150,000 (10% of the aggregate purchase price of the
common stock sold to the Subscribers). The Company also issued First Montauk,
including First Montauk's employees and affiliates, a warrants to purchase an
aggregate of 240,000 shares of its common stock on the same terms as those
issued to Subscribers.
RESULTS OF OPERATIONS
2005 Compared to 2004
Product revenue for the fiscal year ended July 31, 2005 totaled $549,222 a
decrease of 42.9% or $413,786 from $963,008 reported for fiscal year ended July
31, 2004. The Company attributed the decrease in product revenue to delayed and
extended deliveries, and a decrease in orders. Subsequent to the events of
September 11, 2001, utilities were required to upgrade security on newly
developed products such as the PDR-2000 system. This extensive re-design and
testing resulted in extended delivery dates to customers. The company also saw a
decrease in military contract orders.
Product cost for the fiscal year ended July 31, 2005 totaled $494,605, a
decrease of 45.8% or $418,956 from $913,561 reported for fiscal year ended July
31, 2004. The decrease in product cost is a direct result of a decrease in sales
orders.
Gross profit for products for the years ended July 31, 2005 and July 31, 2004
totaled $54,617 and $49,447, respectively, representing 10.0% and 5.1% of
product revenue. The increase in gross profit for products is attributed to the
product mix, whereby Conolog produced established products with lower cost
margins and, in part, to outsourcing.
General and Administrative expenses for the years ended July 31, 2005 and July
31, 2004 totaled $2,498,039 and $4,366,919, respectively. The Company attributes
the decrease of $1,868,880 in general and administrative expense, in part, to
the decrease in stock-based compensation; however, this decrease was partially
off-set by (i) salaries paid to officers in fiscal 2005 which had not been paid
in fiscal 2004; (ii) reinstatement of certain employee benefits, which had been
suspended in fiscal 2004; and (iii) an increase in expenses related to increased
sales and marketing efforts. At a meeting on February 10, 2005, the Company's
shareholders approved a proposal that authorized the Company's Board to issue
from time-to-time an aggregate of 350,000 shares of the Company's common stock
to its directors and employees, including its officers, and on February 10,
2005, the Company's Board of Directors granted an aggregate of 350,000 shares of
the Company's common stock to its directors and employees, including its
officers. Stock grants to the Company's employees, officers and directors are an
expense which is reflected as a part of the Company's general and administrative
cost. The amount of this expense is determined by multiplying the number of
shares granted by the closing price of the Company's common stock as reported on
the Nasdaq Capital Market on the day before the grant Stock-based compensation
expenses for the year ended July 31, 2005 was $547,750, which was a decrease of
$3,044,250 from the $3,592,000 in stock-based compensation expenses for the
fiscal year ended July 31, 2004.
27
Research and development expenses for the fiscal year ended July 31, 2005
increased $83,354 over fiscal 2004 to $177,338 resulting in upgrades to the PDR
2000, a high speed communications system for use in electric power transmission
pilot protection schemes, and the development of a new CM-100 product were
completed during the year.
The Company's interest income for the fiscal year ended July 31, 2005 totaled
$58,154 compared to $7,034 for fiscal year ended July 31, 2004. The totals for
fiscal years 2005 and 2004 include interest income derived from the Company's
interest bearing accounts through several banks.
The Company's interest expense for the fiscal year ended July 31, 2005 totaled
$23,371, compared to $1,220,960 for fiscal year ended July 31, 2004. 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.
As a result of the foregoing, the Company reported a net loss from continuing
operations of $2,987,329 or $ .59 per share for fiscal 2005, compared to a net
loss from continuing operations of $6,275,886 or $ 4.08 per share for fiscal
2004.
The net loss from discontinued operations for fiscal year ended July 31, 2004
totaled $222,404. 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.
2004 Compared to 2003
(Comparison does not include Atlas Design, which provided placement services,
was sold during the fiscal year 2004 and is reported as a discontinued operation
at July 31, 2004.)
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.
General and Administrative expense for the years ended July 31, 2004 and July
31, 2003 totaled
28
$4,366,919 and $1,579,196, respectively. The Company attributed the increase of
$2,787,723 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. At the
Annual Meeting of Shareholders of the Company held on June 25, 2003, the
Company's shareholders approved a proposal that authorized the Company's Board
to issue from time-to-time an aggregate of 800,000 shares to the Company's
officers and/or directors. In April 2004, the Board granted an aggregate of
800,000 shares of the Company's common stock to its directors and officers. At
the Annual Meeting of Shareholders of the Company held on June 25, 2003, the
Company's shareholders approved a proposal that authorized the Company's Board
to issue from time-to-time an aggregate of 800,000 shares to the Company's
officers and/or directors. In April 2004, the Board granted an aggregate of
800,000 shares of the Company's common stock to its directors and officers.
Stock grants to the Company's employees, officers and directors are an expense
which is reflected as a part of the Company's general and administrative costs.
The amount of this expense is determined by multiplying the number of shares
granted by the closing price of the Company's common stock as reported on the
Nasdaq Capital Market on the day before the grant. Stock-based compensation
expenses for the year ended July 31, 2004 was $3,592,000, which was a increase
of $3,148,865 from the $443,135 in stock-based compensation expenses for the
fiscal year ended July 31, 2003.
Research and development expenses for the fiscal year ended July 31, 2004
totaled $93,984. 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.
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 was 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
29
business.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 31, 2005 was $5,281,191 compared to $285,360 at year
ended July 31, 2004. The increase in the working capital is attributed to the
sale of Company's stock in private placements.
Accounts receivable have decreased from $148,171 at July 31, 2004 to $89,194 at
July 31, 2005. This decrease of $58,977 is the result of decreased 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
policies, some of which are impacted significantly by judgments, assumptions and
estimates, affect the Company's consolidated financial statements.
REVENUE RECOGNITION
Revenue is recorded in accordance with the guidance of the SEC's Staff
Accounting Bulletin (SAB) No. 104, which supercedes SAB No. 101. Revenue from
product sales are recognized at the time of shipment (when title and risks and
rewards of ownership have passed) upon fulfillment of acceptance terms; 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
30
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.
The Company's products are used in radio and other transmissions, telephone and
telephone exchanges, air and traffic controls, automatic transmission of data
for utilities, tele-printing of transmission data such as news and stock market
information and for use by electric utilities in monitoring power transmissions
lines for faults and/or failures.
The Company currently manufactures and supports over 400 products and assemblies
that have been in the market place since 1970. The Company's inventory
represents approximately 10,000 different components and 2,500 assemblies.
The Company's inventory falls into three categories: Raw Materials,
Work-in-Process and Finished Goods. Raw Materials represents components in their
original packaging stored in a secured warehouse area, and may consist, in part,
of face plates, PC boards, digital screen assemblies, guide rails, capacitors,
terminals, power supplies, process ships, chassis and racks, relays, keypads and
resistors. Work-in-Process represents components that have been requisitioned
from the warehouse and are being assembled in the assembly areas. Depending on
the configurations required by a customer, products are completed and tested
within 8 to 10 business days. Finished Goods represents products that have been
completed in connection with specific orders and are awaiting shipment. Finished
Goods can consist of products like the PDR-2000, PTR-1500 and 1000, Gen 1, 98
and 68 series.
The Company provides a twelve-year warranty on all commercial products and is
required by Government regulation to design and produce military products with a
minimum 25-year operating life in addition to shelf life.
Every component, regardless of age, has been purchased to meet the above
criteria and may be used in any and all above said assemblies. Management
believes that this inventory, which is minimally adequate, is required to
implement the Company's commitments to military
31
requirements for present and delivered orders.
The Company, together with its independent auditors, following inventory
analysis and repeated annual testing, established a 3-year rule for maintaining
inventory, which dictates a write-down policy for inventory parts depending on
their age. Based on the results of their testing and analysis, and also on their
experience in the industry, the Company determined that components in its
inventory have been used as infrequently as once in a three-year period. Any
component used less frequently is deemed impaired and is assigned a value of
zero.
At its annual audit, the Company considers the demand for its inventory in order
to determine whether it has become impaired prior to the expiration of three
years. The Company tests its inventory under its three-year rule and classifies
as current assets only that amount of inventory it expects to realize in the
next one-year operating cycles, the balance of the inventory is classified as
non-current.
The current portion of our inventory falls into one of three categories:
back-log on hand, long term contracts and price quoted items. The "back-log on
hand" represents orders that have been received, have not yet been assembled and
will be shipped within the next fiscal year. "Long term contracts" represent
orders under a contract for the delivery of products over a 2, 3, or 5 year
period. Such contracts state a minimum and maximum quantity to be delivered in
each year of the contract. For purposes of calculating our current portion of
inventory for a fiscal year, we use the minimum quantity to be delivered for
that year. "Price quoted items" represent requests from customers for the price
of a product, which are presumed will become actual orders to be delivered
within the next fiscal year.
The non-current portion of the inventory consists of the same or like components
as the current portion, however, the Company does not project these components
being used in production in the next fiscal period. The Company expects to
realize the non-current portion of the inventory through its normal sales
activity over the next two fiscal years. Any parts which have not been used for
3 years are valued at zero. Any parts, written down to a zero value under the
3-year rule, are maintained in inventory to satisfy the requirements under our
long-term warranty programs.
We did not recognize any inventory impairment for the fiscal years ended July
31, 2004 and July 31, 2005.
While our inventory value at July 31, 2005 was approximately $ 1.8 million, the
total of actual parts held in inventory exceeds $ 4.5 million.
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.
32
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 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 loans to the Company. The Company repaid $103,000 of the
principal balance during the fiscal year ended July 31, 2004. The Company repaid
the remaining balance of $166,929, and paid $23,371 in simple interest at 4%
principal over the life of loans, during the fiscal year ended July 31, 2005.
33
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. Our Common Stock is traded on the Nasdaq Capital 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 Capital Market for
fiscal years ended July 31, 2005 and July 31, 2004.
Common Stock
-------------
Fiscal Year 2005 High Low
---------------- ----- -----
First Quarter $6.61 $1.41
Second Quarter $6.30 $3.40
Third Quarter $4.29 $1.50
Fourth Quarter $2.07 $1.46
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
(b) Holders. As of August 26, 2005, our Common Stock was held by approximately
744 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.
34
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
- --------------------------------------------------------------------------------------------------------------------
35
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, 2005, 2004, and 2003 of those persons who were, as of July 31, 2005, (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 Bonus Awards Award SARS Compensation
- ------------------------------------------------------------------------------------------------------------------------
Robert Benou, Chairman, 2005 $323,333 $125,000(1) 85,000 $3.13 0 $18,000***
Chief Executive Officer, ---------------------------------------------------------------------------------------------
Chief Financial Officer 2004 $312,000 0 390,000 $4.49 0 $12,780***
and Director ---------------------------------------------------------------------------------------------
2003 $291,666* 0 0 $0.00 0 $12,780***
- ------------------------------------------------------------------------------------------------------------------------
Marc Benou, President, 2005 $111,000** $ 60,000(2) 80,000 $3.13 0
Chief Operating Officer, ---------------------------------------------------------------------------------------------
Secretary and Director 2004 $98,500** 0 340,000 $4.49 0
---------------------------------------------------------------------------------------------
2003 $91,333** 0 0 $0.00 0
- ------------------------------------------------------------------------------------------------------------------------
Thomas Fogg, 2005 $40,602 0 20,000 $3.13 0
Vice President - ---------------------------------------------------------------------------------------------
Engineering 2004 $40,602 0 0 $0 0
---------------------------------------------------------------------------------------------
2003 $40,602 0 50,000 $1.08 0
- ------------------------------------------------------------------------------------------------------------------------
* 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, 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.
*** Other compensation consisted of a car allowance.
(1) The Company began paying Robert Benou's 2005 bonus in September 2005, in
monthly installments of $9,000, which may increase depending on the Company's
cash requirements. Mr. Benou's entire bonus of $125,000 will be paid in the next
fiscal year. The Company is recording the liability in fiscal year-ended July
31, 2005 because the bonus was paid for Mr. Benou's contributions to the Company
during the 2005 fiscal year.
36
(2) The Company paid Marc Benou's bonus in two installments of $30,000 in August
and September 2005, respectively. The Company is recording the liability in
fiscal year-ended July 31, 2005 because the bonus was paid for Mr. Benou's
contributions to the Company during the 2005 fiscal year.
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.
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 ("Rosenberg Rich
Baker") resigned and provided written notice to us that the auditor-client
relationship had ceased.
The reports of Rosenberg Rich Baker on the consolidated financial statements of
the fiscal years ended July 31, 2004 and July 31, 2003, 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 fiscal years ended July 31, 2004 and July 31, 2003 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,
37
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 fiscal years ended July 31, 2004
and July 31, 2003, 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, Levine & Company,
L.L.C. ("Bagell Josephs") as the independent accountant for the Registrant to
audit the Company's financial statements.
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.
38
CONOLOG CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
Page(s)
-------
Report of Independent Registered Public Accounting Firm F1
Consolidated Balance Sheets as of July 31, 2005 and 2004 F2 - F3
Consolidated Statements of Operations for the Years Ended
July 31, 2005 and 2004 F4
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended July 31, 2005 and 2004 F5
Consolidated Statements of Cash Flows for the Years Ended
July 31, 2005 and 2004 F6 - F7
Notes to Consolidated Financial Statements F8 - F20
BAGELL, JOSEPHS, LEVINE & 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 sheets of Conolog
Corporation and Subsidiaries (the "Company") as of July 31, 2005 and 2004 and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years 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 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, 2005 and 2004, and the results of its
operations, changes in stockholders' equity, and cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.
BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.
Certified Public Accountants
Gibbsboro, New Jersey
September 30, 2005
MEMBER OF: AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
NEW JERSEY SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
PENNSYLVANIA INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
F-1
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2005 and 2004
ASSETS
2005 2004
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,471,072 $ 1,119,768
Accounts receivable - net of allowance for doubtful
accounts of $1,000. 89,194 148,171
Prepaid expenses 23,755 --
Current portion of note receivable 14,864 7,920
Inventory 900,000 500,000
Other current assets 252,599 44,099
-------------- --------------
Total Current Assets 5,751,484 1,819,958
-------------- --------------
Property, Plant and Equipment:
Machinery and equipment 1,324,504 1,307,558
Furniture and fixtures 423,342 409,459
Automobiles 34,097 21,340
Computer software 147,203 147,203
Leasehold improvements 30,265 30,265
-------------- --------------
1,959,411 1,915,825
Less: accumulated depreciation and amortization (1,868,405) (1,821,215)
-------------- --------------
91,006 94,610
-------------- --------------
OTHER ASSETS:
Inventory, net of current portion 970,212 1,424,417
Note receivable, net of current portion 125,106 140,720
-------------- --------------
Total Other Assets 1,095,318 1,565,137
-------------- --------------
TOTAL ASSETS $ 6,937,808 $ 3,479,705
============== ==============
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2005 AND 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
2005 2004
-------------- --------------
LIABILITIES:
Current Liabilities:
Convertible debt $ -- $ 1,094,000
Accounts payable 46,650 209,575
Accrued expenses 248,643 66,734
Accrued legal fees 175,000 74,417
Loan from officer -- 77,427
Accrued payroll -- 12,445
-------------- --------------
Total Liabilities 470,293 1,534,598
-------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.50; Series A; 4% cumulative;
162,000 shares authorized; 155,000 shares issued and
outstanding at July 31, 2005 and 2004, respectively. 77,500 77,500
Preferred stock, par value $.50; Series B; $.90 cumulative;
50,000 shares authorized; 1,197 shares issued and outstanding
at July 31, 2005 and 2004, respectively. 597 597
Common stock, par value $0.01; 20,000,000 shares authorized;
7,417,847 and 2,879,001 shares issued and outstanding at
July 31, 2005 and 2004 respectively including 220 shares
held in treasury. 74,172 28,795
Contributed capital 35,425,721 27,495,048
Retained (deficit) (28,391,938) (25,400,429)
Treasury shares at cost (131,734) (131,734)
Deferred compensation (547,750) --
Prepaid consulting (39,053) (124,670)
-------------- --------------
Total Stockholders' Equity 6,467,515 1,945,107
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,937,808 $ 3,479,705
============== ==============
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 2005 AND 2004
2005 2004
-------------- --------------
OPERATING REVENUES
Product revenue $ 549,222 $ 963,008
COST OF PRODUCT REVENUES 494,605 913,561
-------------- --------------
GROSS PROFIT 54,617 49,447
-------------- --------------
OPERATING EXPENSES
General and administrative costs 2,498,039 4,366,919
Selling and trade shows 274,503 124,857
Professional fees 374,292 528,954
Research and development 177,338 93,984
-------------- --------------
Total Operating Expenses 3,324,172 5,114,714
-------------- --------------
LOSS BEFORE OTHER INCOME (EXPENSE) (3,269,555) (5,065,267)
-------------- --------------
OTHER INCOME (EXPENSE)
Interest income 58,154 7,034
Interest expense (23,371) (20,960)
Beneficial interest -- (1,200,000)
Other income 720 3,307
-------------- --------------
Total Other Income (Expense) 35,503 (1,210,619)
-------------- --------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAX BENEFIT (3,234,052) (6,275,886)
Benefit from income taxes 246,723 --
-------------- --------------
LOSS FROM CONTINUING OPERATIONS (2,987,329) (6,275,886)
DISCONTINUED OPERATIONS:
Loss from discontinued operations (net of
income tax benefit of $0) -- (94,515)
(Loss) from disposal of discontinued operations (Net
of income tax expense of $0) -- (127,889)
-------------- --------------
NET LOSS APPLICABLE TO COMMON SHARES $ (2,987,329) $ (6,498,290)
============== ==============
NET LOSS PER COMMON SHARE - CONTINUING OPERATIONS $ (0.59) $ (4.08)
============== ==============
NET LOSS PER COMMON SHARE - DISCONTINUED OPERATIONS $ -- $ (0.14)
============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,024,671 1,537,801
============== ==============
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 2005 AND 2004
Series A Series B
Preferred Stock Preferred Stock Common Stock Contributed
Shares Amount Shares Amount Shares Amount Capital
-------- -------- -------- -------- ----------- --------- -------------
Balance at July 31, 2003 155,000 $ 77,500 1,197 $ 597 1,299,182 $ 12,999 $ 21,729,632
Common shares issued to directors -- -- -- -- 800,000 8,000 3,584,000
Common shares issued to consultants -- -- -- -- 599 5 527
Issuance of warrants with
convertible debt -- -- -- -- 0 0 0
Conversion of debt -- -- -- -- 100,000 1,000 105,000
Common shares and warrants
issued in subscription agreement -- -- -- -- 479,000 4,791 284,308
Shares issued for services to
be provided -- -- -- -- 200,000 2,000 188,000
Amortization of consultant services -- -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- -- --
Net loss for the year -- -- -- -- -- -- --
Dividends -- -- -- -- -- -- 4,180
-------- -------- -------- -------- ----------- --------- -------------
--
Balance at July 31, 2004 155,000 $ 77,500 1,197 $ 597 2,878,781 $ 28,795 $ 25,895,647
======== ======== ======== ======== =========== ========= =============
Conversion of debt -- -- -- -- 1,032,076 10,321 1,083,679
Common shares issued for cash -- -- -- -- 2,569,355 25,686 3,049,649
Costs directly related to stock
subscriptions -- -- -- -- -- -- (1,093,781)
Warrants issued for common stock shares -- -- -- -- -- -- (1,187,928)
Warrants converted to common
stock shares -- -- -- -- 470,000 4,700 2,391,501
Shares issued for services to be
provided -- -- -- -- 117,000 1,170 333,181
Amortization of consultant services -- -- -- -- -- -- --
Common shares issued to officers,
directors and employees -- -- -- -- 350,000 3,500 1,092,000
Amortization officers, directors and
employee compensation -- -- -- -- -- -- --
Exchange lots / escheatment -- -- -- -- 635 -- --
Net loss for the Year -- -- -- -- -- -- --
Dividends -- -- -- -- -- -- 4,180
-------- -------- -------- -------- ----------- --------- -------------
Balance at July 31, 2005 155,000 $ 77,500 1,197 $ 597 7,417,847 $ 74,172 $ 31,568,128
======== ======== ======== ======== =========== ========= =============
Contributed Retained Total
Capital- Earnings Treasury Deferred Prepaid Stockholders'
Warrants (Deficit) Stock Compensation Consulting Equity
------------- ------------ ----------- ------------ ------------ -------------
Balance at July 31, 2003 $ -- $(18,897,959) $ (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 -- -- -- -- 1,200,000
Conversion of debt -- -- -- -- -- 106,000
Common shares and warrants
issued in subscription agreement 399,401 -- -- -- -- 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) -- -- -- (6,498,290)
Dividends -- (4,180) -- -- -- --
------------- ------------ ----------- ------------ ------------ -------------
Balance at July 31, 2004 $ 1,599,401 $(25,400,429) $ (131,734) $ -- $ (124,670) $ 1,945,107
============= ============ =========== ============ ============ =============
Conversion of debt -- -- -- -- -- 1,094,000
Common shares issued for cash -- -- -- -- -- 3,075,335
Costs directly related to stock
subscriptions -- -- -- -- -- (1,093,781)
Warrants issued for common stock shares 3,857,593 -- -- -- -- 2,669,665
Warrants converted to common
stock shares (1,599,401) -- -- -- -- 796,800
Shares issued for services to be
provided -- -- -- -- (334,351) --
Amortization of consultant services -- -- -- -- 419,968 419,968
Common shares issued to officers,
directors and employees -- -- -- (1,095,500) -- --
Amortization officers, directors and
employee compensation -- -- -- 547,750 -- 547,750
Exchange lots / escheatment -- -- -- -- -- --
Net loss for the Year -- (2,987,329) -- -- -- (2,987,329)
Dividends -- (4,180) -- -- -- --
------------ ----------- ------------ ------------ -------------
Balance at July 31, 2005 $ 3,857,593 $(28,391,938) $ (131,734) $ (547,750) $ (39,053) $ 6,467,515
============= ============ =========== ============ ============ =============
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2005 AND 2004
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $(2,987,329) $(6,275,886)
Adjustments to reconcile net loss to net cash
(used in) continuing operations:
Depreciation 50,530 41,255
Amortization of deferred compensation 547,750 222,212
Amortization of prepaid consulting expense 419,968 133,788
Net (loss) on sale of subsidiaries -- (127,889)
Gain on sale of equipment (400) --
Common stock issued for services -- 593
Common stock based compensation -- 3,592,000
Warrants issued with convertible debt -- 1,200,000
Changes in assets and liabilities
(Increase) decrease in accounts receivable 58,977 (114,639)
Decrease in inventories 54,205 24,711
(Increase) in other current assets (232,255) (19,959)
Decrease in deferred income taxes -- 323,959
Increase (decrease) in accounts payable (162,925) 97,263
Increase (decrease) in accrued expenses and other liabilities 270,047 (189)
----------- -----------
Net cash (used in) continuing operations (1,981,432) (902,781)
----------- -----------
DISCONTINUED OPERATIONS
Net (loss) -- (94,515)
Change in net assets of discontinued operations -- 230,995
----------- -----------
Net cash provided by discontinued operations -- 136,480
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment 400 --
Purchase of equipment and leasehold improvements (46,926) --
----------- -----------
Net cash (used in) investing activities (46,526) --
----------- -----------
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 2005 AND 2004
2005 2004
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of line of credit $ -- $ (250,000)
Proceeds of loan from officer -- 202,500
Repayment of loan from officer (77,427) (158,002)
Proceeds from issuance of convertible debt -- 1,200,000
Proceeds from issuance of stock, net of issuance costs 4,651,219 --
Proceeds from issuance of stock and warrants 796,800 688,500
Proceeds from note receivable 8,670 97,629
Proceeds from sale of subsidiary -- 34,000
----------- -----------
Net cash provided by financing activities 5,379,262 1,814,627
----------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 3,351,304 1,048,326
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR 1,119,768 71,442
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 4,471,072 $ 1,119,768
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest expense $ 23,371 $ 12,294
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Debt converted to equity $ 1,094,000 $ 106,000
=========== ===========
Common stock issued for services to be provided $ 334,350 $ 124,670
=========== ===========
Common stock issued for deferred compensation $ 1,095,500 $ --
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
NOTE 1- 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 as Atlas Design, were sold to the
Company's vice-president of operations of Atlas Design.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 twelve months or less.
Inventories
Inventories are valued at the lower of cost (determined on a first-in,
first-out basis) or market.
F-8
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $50,530 and $41,255
for the years ended July 31, 2005 and 2004, respectively. Repairs and
maintenance expenditures which do not extend the useful lives of the
related assets are expensed as incurred.
Research and Development
Research and Development costs are expensed as incurred. Research and
Development costs were $177,338 and $ 93,984 for the years ended July
31, 2005 and 2004 respectively.
Revenue Recognition
Revenue is recorded in accordance with the guidance of the SEC's Staff
Accounting Bulletin (SAB) No. 104, which supersedes SAB No. 101.
Revenue from product sales are recognized at the time of shipment
(when title and risks and rewards of ownership have passed) upon
fulfillment of acceptance terms; 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.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising
expense was $7,301 and $6,994 for the years ended July 31, 2005 and
2004, respectively.
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and amounted to
$10,373 and $25,627 for the years ended July 31, 2005 and 2004,
respectively.
F-9
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities Issued for Services
The Company accounts for common stock issued for compensation services
of Officers, Directors and employees by reference to the fair market
value of the Company's stock on the date of stock issuance. Consulting
service and commission expense is recorded at the rate that such
services are normally paid at.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, other current
assets, accounts payable and accrued expenses approximates fair value
because of the short maturity of these instruments.
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 5,024,671 and 1,537,801 for 2005 and 2004
respectively. The effect of assuming the exchange of Series A
Preferred Stock and Series B Preferred Stock in 2005 and 2004 would be
anti-dilutive.
F-10
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loss Per Share of Common Stock (Continued)
The effect of assuming the exercise of outstanding warrants at July
31, 2005 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
1,032,076 common stock shares; (2) 470,000 common stock shares were
issued as a result of warrants being exercised.
The following is a reconciliation of the computation for basic and
diluted EPS:
July 31, July 31,
2005 2004
------------ ------------
Net Loss $ (2,987,329) $ (6,498,290)
------------ ------------
Weighted-average common shares
outstanding (Basic) 5,024,671 1,537,801
Weighted-average common stock
equivalents:
Stock options -- --
Warrants -- --
------------ ------------
Weighted-average common shares
outstanding (Diluted) 5,024,671 1,537,801
============ ============
F-11
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board
("FASB") published Statement of Financial Accounting Standards No. 123
(Revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R requires
that compensation cost related to share-based payment transactions be
recognized in the financial statements. Share-based payment
transactions within the scope of SFAS 123R include stock options,
restricted stock plans, performance-based awards, stock appreciation
rights, and employee share purchase plans. The provisions of SFAS 123R
are effective for small business issuers as of the first interim
period that begins after December 15, 2005. Accordingly, the Company
will implement the revised standard in the third quarter of fiscal
year 2006. Currently, the Company accounts for its share-based payment
transactions under the provisions of APB 25, which does not
necessarily require the recognition of compensation cost in the
financial statements. Management is assessing the implications of this
revised standard, which may materially impact the Company's results of
operations in the third quarter of fiscal year 2006 and thereafter.
In November 2004, the FASB issued Financial Accounting Standards No.
151 (FAS 151), "Inventory Costs - an amendment of ARB No. 43, Chapter
4". FAS 151 clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs and spoilage. In addition,
FAS 151 requires companies to base the allocation of fixed production
overhead to the costs of conversion on the normal capacity of
production facilities. FAS 151 is effective for the Company in 2006.
The Company does not expect FAS 151 to have a material impact on its
results or financial statements.
F-12
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
NOTE 3- 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.
NOTE 4- INVENTORY
Inventory consisted of the following as of July 31,:
2005 2004
------------ ------------
Finished Goods $ 454,377 $ 783,348
Work-in-process 10,448 14,790
Raw materials 1,405,387 1,126,279
------------ ------------
$ 1,870,212 $ 1,924,417
============ ============
Inventory of $970,212 was classified as non-current. Only the amount
the Company expects to realize in the next operating cycle has been
classified as current.
NOTE 5- 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 $55,680 and $54,302 during the years
ended July 31, 2005 and 2004, respectively. The Company currently
leases its facilities on a month-to-month basis.
F-13
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
NOTE 6- INCOME TAXES
The income tax (benefit) is comprised of the following:
July 31,
2005 2004
------------ ------------
Current Income Taxes $ -- $ --
Federal -- --
State ( 246,723) --
------------ ------------
$ (246,723) $ --
============ ============
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.
A reconciliation between taxes computed at the federal statutory rate
and the effective tax rate follows:
July 31,
2005 2004
------------ ------------
Federal statutory tax rate 34.0% 34.0%
Valuation Allowance on Net
Operating Loss Carryover (34.0%) (34.0%)
Permanent and other differences -- --
------------ ------------
--% --%
============ ============
F-14
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
NOTE 6- INCOME TAXES (CONTINUED)
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, 2005, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $32,860,000,
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
------------ -----------
2010 $ -- $ 90,000
2011 -- 6,400,000
2013 250,000 2,985,000
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 --
2025 2,985,000 --
------------ -----------
$ 23,385,000 $ 9,475,000
============ ===========
At July 31, 2005, deferred tax assets consist of the following:
Net operating loss carry-forwards $ 8,516,400
Less: valuation allowance (8,516,400)
-----------
$ -0-
===========
At July 31, 2005, the Company had deficits accumulated in the
approximate amount of $28,388,000, available to offset future taxable
income through 2025. The Company established valuation allowances
equal to the full amount of the deferred tax assets due to the
uncertainty of the utilization of the operating losses in future
periods.
F-15
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
NOTE 7- 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 were $0 and $202,500 for the years ended July 31, 2005 and
2004, respectively. Repayments to the officer were $77,427 and
$158,002 for the years ended July 31, 2005 and 2004, respectively. The
balance due to the officer at July 31, 2005 was $0.
NOTE 8- 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, 2005 and 2004.
The Plan also provides an employee savings provision (401(k) plan
whereby eligible participating employees may elect to contribute up to
15% of their compensation to an investment trust. The Company made
matching contributions to the plan of $160,542 and $ 0 for the fiscal
years ended July 31, 2005 and 2004 respectively.
NOTE 9- STOCKHOLDERS' EQUITY
The Series A Preferred Stock provides 4% cumulative dividends, which
were $111,483 ($0.72 per share) in arrears at July 31, 2005. 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 $36,696 ($30.66 per share) in arrears at July
31, 2005. 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-16
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
NOTE 9- STOCKHOLDERS' EQUITY (CONTINUED)
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%.
On February 15, 2005 the above 200,000 warrants were exercised and the
Company received proceeds of $ 367,500.
On February 18, 2005, 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
1,369,355 shares of common stock and 958,549 warrants with an exercise
price of $1.25, which expire on August 18, 2010. The Company received
$4,245,000 in exchange for the shares and warrants.
On July 19, 2005, 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 1,200,000
shares of common stock and 1,440,000 warrants with an exercise price
of $1.6892, which expire on January 19, 2011. The Company received
$1,500,000 in exchange for the shares and warrants.
F-17
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
NOTE 9- STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's warrant activity is as follows:
Year Ended July 31, 2005
-----------------------------
Weighted
Number average
of Exercise
Warrants price
------------ ------------
Balance at July 31, 2003 -- --
Issued April 2004 470,000 $ 1.69
------------ ------------
Balance at July 31, 2004 470,000 1.69
Issued February 2005 958,549 1.25
Issued July 2005 1,440,000 1.69
Exercised September 2004 (270,000) 1.59
Exercised February 2005 (200,000) 1.84
Forfeited -- --
------------ ------------
Balance at July 31, 2005 2,398,549 $ 1.28
============ ============
NOTE 10- 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 warrants to purchase 270,000 shares
of common stock. The principal amount of the note was 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 were exercised on September 27, 2004 at an
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%.
As of July 31, 2004, $106,000 of principal was converted into 100,000
common shares. During Fiscal 2005, the remainder of $ 1,094,000 of
principal was converted into 1,032,076 common shares.
F-18
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
NOTE 11- 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
---------- -------------- --------- -------------
2005 $ 342,271 2 62.0%
2004 $ 414,684 2 49.0%
NOTE 12- 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, 2005, there had been no shares granted under the 2002
Plan.
F-19
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005 AND 2004
NOTE 13- PREPAID CONSULTING
During Fiscal Year July 31, 2005, the Company issued 117,000 shares of
common stock to various consultants for services. Of these, 37,500
shares issued were for services that extend into the future and are
amortized against invoices billed by the consultants for actual
services rendered 79,500 of the shares issued were for services
performed in fiscal year 2005 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.
NOTE 14- DISCONTINUED OPERATIONS
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 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.
F-20