<PAGE>
As filed with the Securities and Exchange Commission on October 16, 1996
Registration No. 333-_____
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
Conolog Corporation
(Name of issuer in its charter)
Delaware 3679 52-0853566
------------------------ ---------------------------- -------------------
(State or other juris- (Primary Standard Industrial (I.R.S. Employer
diction of organization) Classification Code No.) Identification No.)
5 Columbia Road
Somerville, NJ 08876
(908) 722-8081
(Address and telephone number of principal executive offices)
Robert S. Benou, President
Conolog Corporation
5 Columbia Road
Somerville, NJ 08876
(908) 722-8081
(Name, address and telephone number of agent for service)
Copies to:
Hartley T. Bernstein, Esq.
Bernstein & Wasserman, LLP
950 Third Avenue
New York, NY 10022
(212) 826-0730
(212) 371-4730 (Fax)
<PAGE>
Approximate date of proposed sale to the public: As soon as reasonably
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis, pursuant to Rule 415 under the Securities Act
of 1933, check the following box: |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================
Proposed
Proposed Maximum Amount of
Title of Each Maximum Offering Aggregate Registration
Class of Securities to be Amount to be Price per Offering Price Fee
Registered Registered Security(1)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par 1,775,000 $2.69 $4,770,313 $1,644.80
value per share
- -------------------------------------------------------------------------------------------------
Total Registration and Fee $1,644.80
=================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating registration fee pursuant to
Rule 457 under the Securities Act of 1933. The proposed maximum offering
price was calculated based upon the average of the high and low price of
the Company's Common Stock on the Nasdaq SmallCap Market for October 11,
1996.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
i
<PAGE>
CONOLOG CORPORATION
CROSS REFERENCE SHEET
Between Items in Registration
Statement on Form S-1 and the Prospectus
Item in Form S-1 Prospectus Caption
---------------- ------------------
1. Front of Registration Forepart of Registration
Statement and Outside Front Statement and Outside Front
Cover of Prospectus Cover Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back
Cover Pages of Prospectus Cover Page of Prospectus
3. Summary Information and Risk Prospectus Summary; Risk Factors
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Outside Front Cover Page of
Price Prospectus and Risk Factors
6. Dilution Not Applicable
7. Selling Securityholders Selling Securityholder and
Plan of Distribution
8. Plan of Distribution Selling Securityholder and
Plan of Distribution
9. Description of Securities Description of Securities
to be registered
10. Interests of Named Experts and Legal Matters; Experts
Counsel
11. Information with Respect to Prospectus Summary; Business;
the Registrant Management's Discussion and
Analysis of Financial Condition
and Results of Operation
12. Disclosure of Commission Certain Transactions;
Position on Indemnification Part II - Item 14
for Securities Act Liabilities
ii
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH AN OFFER, SOLICITATION OF SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
Subject to Completion, dated October 16, 1996
Prospectus
CONOLOG CORPORATION
1,775,000 Shares of Common Stock
This Prospectus relates to the sale of 1,775,000 shares of common stock,
par value $1.00 per share, of Conolog Corporation, a Delaware corporation
("Conolog" or the "Company") all of which are being registered on behalf of CNL
Holdings, Inc., which holds an option to purchase such shares (1,400,000 of
which are issuable upon conversion of a Note) from The Chase Manhattan Bank. CNL
Holdings, Inc. is hereinafter referred to as "CNL" or the "Selling
Securityholder." See "Selling Securityholders and Plan of Distribution."
The Common Stock offered by this Prospectus may be sold from time to time
by the Selling Securityholder, or by its transferees. No underwriting
arrangements have been entered into by the Selling Securityholder. The
distribution of the securities by the Selling Securityholder may be effected in
one or more transactions that may take place on the over-the-counter market
including ordinary broker's transaction, privately negotiated transactions or
through sales to one or more dealers for resale of such shares as principals at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerages fees or commissions may be paid by the
Selling Securityholder in connection with sales of such securities.
The Selling Securityholder and intermediaries through whom such securities
may be sold may be deemed "underwriters" within the meaning of the Securities
Act of 1933 as amended, with respect to the securities offered and any profits
realized or commissions received may be deemed underwriting compensation.
The Company will not receive any of the proceeds from the sale of the
securities by the Selling Securityholder. However, pursuant to an agreement
between the Company and the Selling Securityholder, the Selling Securityholder
may loan funds, in certain circumstances, to the Company. All costs incurred in
the registration of the securities of the Selling Securityholder are being borne
by the Company. See "Selling Securityholder and Plan of Distribution" and
"Business - Credit Facility -- New Terms of Credit Facility and Agreement with
the Selling Securityholder."
On __________, 1996, the closing bid and ask prices for the Common Stock
as reported on the Nasdaq SmallCap Market, were $_______ and $______,
respectively. See "Market Price for Common Stock and Class A Warrants."
<PAGE>
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. AN INVESTMENT IN THESE SECURITIES SHOULD BE CONSIDERED ONLY BY PERSONS
CAPABLE OF SUSTAINING THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
WHICH BEGIN ON PAGE ____.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is _________________, 1996
2
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed
information, financial statements and notes thereto appearing elsewhere in this
Prospectus and assumes (a) the filing on ________, 1996 of the Company's
Certificate of Amendment to its Certificate of Incorporation increasing the
total number of authorized shares to 22,000,000, of which 2,000,000 is
classified as Preferred Stock and 20,000,000 as Common Stock and (b) the
conversion of the Chase Manhattan Note into 1,400,000 shares of Common Stock by
the Selling Securityholder. See "Description of Securities," "Selling
Securityholder and Plan of Distribution" and "Business-Credit Facility."
The Company
Conolog Corporation, a Delaware corporation (the "Company" or "Conolog")
was organized in 1968 and is engaged in the design, manufacture (directly or
through subcontractors) and distribution of small electronic and electromagnetic
components and subassemblies for use in telephone, radio and microwave
transmission and reception and other communication areas that are used in both
military and commercial applications. The Company's products are used for
transceiving various quantities, data and protective relaying functions in
industrial, utility and other markets.
The Company is engaged in the design and manufacture of (i) transducers,
which are electromagnetic devices which convert electrical energy into
mechanical and other forms of physical energy, or conversely convert mechanical
and other forms of physical energy into electrical energy; (ii) digital signal
processing (DSP) systems and electromagnetic wave filters for differentiation
among discreet audio and radio frequencies; (iii) audio transmitters and
modulators, for the transmission over telephone lines, microwave circuits, or
satellite, of electrical signals obtained from transducers, data generated in
electronic code form or by computers or other similar equipment (not
manufactured by the Company); (iv) audio receivers and demodulators which are
small systems which receive and decode the signals from the audio transmitters
and convert them into digital codes for input into computers, teletypes or other
similar equipment (not manufactured by the Company) or convert such signals into
mechanical or other form of energy, such as opening or closing valves, or
starting or stopping a motor; (v) magnetic "networks" which are devices that
permit the matching or coupling of different types of communication equipment
together or many identical or similar equipment together or onto telephone or
other transmission lines so as not to cause interference; and (vi) analog
transmitters and receivers, which permit the coding/transmission and
receiving/decoding of a constantly variable data, such as the water level in a
tank, pressure in a pipe or temperature, by actually displaying the exact
information at the receiving end in digital form for storing in a computer or
other devices, or by physically displaying the information in a visual fashion
such as a numerical readout or meter.
Since the 1980's, Conolog has been an active participant in providing
electromagnetic wave filters for major military programs, such as the Patriot
Missile, Hawk Missile and Sea Sparrow
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<PAGE>
Missile. In addition to these projects, Conolog components are currently used by
the military in tanks, the Apache helicopters and the MK-50 torpedoes.
During 1987, the Company made the strategic decision to redirect the
Company's focus from military to commercial markets. Since that time, the
Company has refocused on manufacturing and marketing its products for the
commercial marketplace rather than depend on the military and defense related
markets. The effort has included the introduction of new products, the redesign
of existing products and increased advertising and marketing efforts, as
permitted by its limited financial resources. The percentage of revenues
attributed to products manufactured for use in commercial applications increased
from approximately 4% of sales in 1981 ($171,000) to approximately 70% of sales
in 1995 ($1,450,000). The decision to embark on this program entailed a major
design effort, including the coordination of outside engineering consultants to
develop a complete line of products aimed at the Company's target markets. The
emphasis was on products for electric utilities, cogeneration of power, gas and
water companies, traffic control for departments of transport (DOT) and airports
utilizing DSP (Digital Signal Processing) technology. DSP designs have long term
stability with minimum or no maintenance, allowing the Company to offer
customers a product line with a 12 year warranty - a first on the market.
Testing of the Company's first commercial product group, the
Teleprotection Series PTR- 1000, was under way in the latter part of 1992 by
Bonneville Power Administration. This detailed test permitted the Company to
"fine tune" the product for power transmission applications. In March 1994, the
PTR-1000 was approved for use by such utility and thereafter by other utilities
and municipalities. To date, the Company has sold and delivered over 450
PTR-1000 sets to 14 utilities and 3 municipalities, most of which are installed
and in service.
Following the PTR-1000, in 1993, the Company introduced its "98 Series"
Tone Products for water, gas, telephone and oil companies, waste-water, traffic
control and airports. In 1994 the Company unveiled the Power Supply Series
(allowing the various utilities to power-up the equipment from any power
source), the "40 Series" for transmission of analog variable data (i.e., water
levels, gas pressures, and temperature) and the Multiplexer Series which permits
the transmission of up to 900 separate data points, again using a telephone
line, microwave link, or satellite. In 1994 the Company also introduced the "68
Series" tone products. This series is the "98 Series" repackaged mechanically
specifically for customers with older systems wanting to upgrade to DSP
technology without the expense of a complete mechanical installation. The "68
Series" offers the entire line offered by the "98 Series". In 1995 the Company
introduced a stand alone "98 Series" transmitter and receiver for field
installations and a wide range fiber optic interface for the Iniven products.
The fiber optic interface is also available as a stand alone coupling device. In
1996 the Company launched its industrial grade 1200 Baud Modem for data
transmission/communication.
Due to the end of the cold war and the downsizing of the American
military, the Company experienced unexpected sharp reductions of military
contracts in fiscal 1993 (the Company's fiscal year end is July 31) resulting in
a 50% decline in the Company's sales for that year, down to $1,486,298 from $2,
997,308 in fiscal 1992. The sales of new products could not replace the
4
<PAGE>
decrease in military sales. The Company, however, continued to pursue sales as
aggressively as its available resources would permit. Sales in fiscal 1994
increased to $2,044,860, a 37% increase over fiscal 1993. Sales in fiscal 1995
were $2,090,933 a 2% increase over fiscal 1994. Sales for the first eleven
months ended June 30, 1996 were $1,878,669, a 10% decrease from $2,072,555 in
the first eleven months ended June 30, 1995. Revenues from the Company's
military product sales represented approximately 60%, 30% and 25% of sales of
the Company in fiscal 1994 and 1995, and in the first eleven months ended June
30, 1996, respectively, reflecting the Company's emphasis on commercial sales
and markets.
The Company's products are used in radio and other transmissions,
telephones and telephone exchanges, air and traffic control, automatic
transmission of data for utilities, teleprinting of transmitted data such as
news and stock market information and for use by electric utilities in
monitoring power transmission lines for faults and/or failures. The Company's
products may be used independently or in combination with other products to form
a system type configuration, whereby the Company's equipment is pre-assembled in
a large cabinet with other equipment in a configuration that would provide the
end user with protection as well as operational status displays.
The Company is presently engaged and focused in two basic market areas:
(1) Military sales via direct contract sales to the military, as subcontractor
to systems producers and to foreign governments; and (2) Commercial sales (under
the tradename " INIVEN" (A Division of Conolog)) via direct sales to end users,
sales to system assemblers and sales to contractors/installers. See "Business".
On August 16, 1995, the Company completed an underwritten offering
("August 1995 Offering") of its securities by selling 235,750 Units ("Units"),
each Unit consisting of two (2) shares of Common Stock and one (1) Redeemable
Class A Warrant ("Class A Warrant" or "Warrant") at a price of $10.00 per Unit.
The Company received net proceeds of $1,853,025. The offering was underwritten
by I.A. Rabinowitz & Co. (the "Public Offering Underwriter").
The Company's executive offices are located at 5 Columbia Road,
Somerville, New Jersey 08876, telephone (908) 722-8081.
5
<PAGE>
Present Capitalization
Common Stock ..................... 1,032,639 shares(1)
Series A Preferred Stock ......... 155,000 shares(2)
Series B Preferred Stock ......... 1,790 shares(3)
Shareholders of Record ........... 843(4)
The Offering
Securities Offered By the
Selling Securityholder(5) ..... 1,775,000 shares of Common Stock, $1.00
par value per share. See "Descriptions
of Securities."
Common Stock to Be Outstanding After
Completion of the Offering(6) .... 2,432,639 shares
NASDAQ SmallCap Market Symbols ... Common Stock --- CNLG;
Class A Warrants --- CNLGW
Risk Factors ..................... The securities are subject to a high
degree of risk. See "Risk Factors."
- ----------
(1) Does not include treasury stock. See "Financial Statements". Does not
assume conversion of The Chase Manhattan Note into 1,400,000 shares of
Common Stock (See Note 5 below). Does not include possible issuance of (i)
1,135,750 shares of Common stock issuable upon exercise of 1,135,750 Class
A Warrants, (ii) 41,000 shares of Common Stock issuable upon exercise of a
Unit Purchase Option issued to the Public Offering Underwriter and (iii)
20,500 shares of Common Stock issuable upon exercise of Class A Warrants
contained in such Unit Purchase Option.
(2) Each share of Series A Preferred Stock is convertible into 1 share of
Common Stock upon payment of $1,200 per share. See "Description of
Securities".
(3) The shares of Series B Preferred Stock are convertible into an aggregate
of 358 shares of Common Stock. See "Description of Securities" and
"Certain Transactions."
(4) As of October 9, 1996.
(5) The Selling Securityholder has the option to purchase 375,000 shares of
Common Stock held by The Chase Manhattan Bank and a Promissory Note held
by The Chase Manhattan Bank in the principal amount of $1,025,000 (the
"Chase Manhattan Note"). The Chase Manhattan Note is convertible, at the
option of the holder, into 1,400,000 shares of Common Stock. See "Business
- Credit Facility."
(6) Does not include treasury stock. See "Financial Statements."Assumes the
conversion of the Chase Manhattan Note by the Selling Securityholder. Does
not include possible issuance of (i) 1,135,750 shares of Common Stock
issuable upon exercise of 1,135,750 Class A Warrants, (ii) 41,000 shares
of Common Stock issuable upon exercise of a Unit Purchase Option issued to
the public Offering Underwriter and (iii) 20,500 shares of Common Stock
issuable upon exercise of Class A Warrants contained in such Unit Purchase
option. See "Description of Securities", "Selling Securityholders and Plan
of Distribution."
6
<PAGE>
Use of Proceeds ................... The Company will not receive proceeds
from the sale of the shares of Common
Stock offered hereby. However, pursuant
to an agreement between the Company and
the Selling Securityholder, the Selling
Securityholder may loan funds, in
certain circumstances, to the Company.
See "Business - Credit Facility -- New
Terms of Credit Facility and Agreement
with the Selling Securityholder."
7
<PAGE>
Summary Financial Information
The summary financial information set forth below is derived from and
should be read in conjunction with the more detailed financial statements and
notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED
JUNE 30, YEAR ENDED JULY 31
--------------------------- ----------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and other income $ 1,878,669 $ 2,072,555 $ 2,090,933 $ 2,044,860 $ 1,486,298 $ 2,997,308 $ 3,940,622
Income (loss) from continuing
operations (264,527) (750,133) (1,014,296) (1,182,988) (322,005) 72,026 36,360
Income (loss) from continuing
operations - historic (.26) (.18) (.12) (.27) (.07) .02 .01
Income (loss) from continuing
operations per share, after
giving effect (17.51) (12.01) (27.22) (7.41) 1.66 0.84
to 1-for-100 reverse stock
split in August 1995
Pro forma loss from continuing
operations per share* (.11) (.70)
Total assets 3,953,063 3,338,553 3,882,235 3,739,294 4,601,015 4,586,003 4,714,418
Long-term debt and capitalized
lease obligations 6,669 41,432 34,103 3,829,625 3,732,961 2,654,957 2,757,690
</TABLE>
* After giving effect to 1,400,000 shares of Common Stock issuable in exchange
for the unpaid amount of principal and interest due to the Bank.
8
<PAGE>
AT JUNE 30
----------
ACTUAL ADJUSTMENT AS ADJUSTED
------------- ---------- -----------
Working Capital $2,097,280(1) $1,061,353 $3,158,633
Total Assets 3,953,063 3,953,063
Long-Term Liabilities 6,669 6,669
Stockholders' Equity 2,556,609(1) 1,061,353 3,617,962
- ----------
(1) Reflects 1,400,000 shares of Common Stock issued in exchange for the
unpaid amount of principal and interest due to the Bank.
9
<PAGE>
RISK FACTORS
In making comparisons with other investments or in considering the success
of other investments, one should bear in mind that the success of any investment
depends upon many factors including opportunity, general economic conditions,
experience and competence of management. There is no representation that the
same positive factors are present in this Company which have been present in
like ventures that have been successful.
Any person who is considering the purchase of the Securities offered
herein should carefully consider the adverse factors described below. Any one or
more of these factors could have a negative effect on the Company of such impact
as to cause the value of the Company's securities to be greatly diminished.
1. Working Capital; Stockholders' Equity; Prior Periods' Losses and Profits. At
June 30, 1996, the Company had a working capital deficiency of $2,097,280 and a
stockholders' equity of $2,556,609. The Company's continued existence is
dependent upon it successfully expanding its business and attaining profitable
operations. The Company reported income of $475,849 and losses of $522,044,
$1,182,988 and $322,005 for the eleven months ended June 30, 1996, and for the
years ended July 31, 1995, 1994 and 1993, respectively. The losses reported
included inventory write-offs of $656,248, $944,970, $39,498 for years ended
July 31, 1995, 1994 and 1993, respectively. In addition, reported interest
expense for the same periods were $144,814, $253,686, $362,317 and $336,668,
respectively. See "Business-Credit Facility," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
2. Risks Attendant to Expansion. Like any business enterprise operating in a
specialized and competitive market, the Company is subject to many business
risks which include, but are not limited to, unforeseen marketing and
promotional expenses, unforeseen negative publicity and competition. Many of the
risks inherent in the Company's business may be unforeseeable or beyond the
control of management. There can be no assurance that the Company will
successfully market the Company's products or develop new products in a timely
or effective manner, which would materially adversely affect the Company's
operating results. See "Business".
3. Minimal Sales Staff. The Company employs only 2 marketing executives. In
1995, the Company elected a Vice President of Marketing and Sales who introduced
a comprehensive advertising campaign for the major product lines in water/waste
water and utility publications appearing monthly. In addition, the Company has
signed up to attend the major shows pertaining to water, waster water and power
utilities. Although the response to these efforts have shown promise, the
success of the Company's future marketing efforts will depend on the market
environment and the needs of the economy. See "Business of the Company --
Marketing and Sales" and "Employees".
4. Reliance on Component Manufacturers. The Company is dependent on outside
suppliers for all of the subcomponent parts and raw materials necessary to
manufacture the Company's products. A shortage, delay in delivery, or lack of
availability of a given part could lead to manufacturing delays, which could
reduce sales until the problem is remedied. All electrical components of the
Company's products are standard stock items for which a replacement vendor can
be readily obtained. The Company is not
10
<PAGE>
dependent upon any single supplier. The Company purchases some custom parts,
primarily printed circuit boards. The failure of a vendor of one of these
customized components could cause a lengthy delay in production, resulting in a
loss of revenues. See "Business-Raw Materials; Inventory" and "Manufacturing".
5. Dependence on Present Management. The success of the Company is dependent
upon the services of its current management, particularly Robert S. Benou, its
President and its key engineers. The Company carries no insurance on the lives
of any of its officers. None of its officers have written employment contracts.
Thus, the Company cannot force any employee to continue to remain an employee,
and there can be no assurance that the Company will not be competing with any of
such persons if they leave the employ of the Company. If it were to lose the
services of Mr. Benou or any of its other key employees, there is no assurance
that the Company would be able to locate and retain a qualified replacement. The
prolonged lack of availability of any current member of senior management,
whether as a result of death, disability or otherwise, could have an adverse
effect upon the business of the Company.
See "Management".
6. Competition: Rapid Technological Change. The market for the Company's
products is very competitive. There are several companies engaged in the
manufacture of products of the type produced by the Company, most of which are
substantially larger and have substantially greater name recognition and greater
financial resources and personnel. The principal elements of competition in the
Company's markets include product quality and reliability, price, service and
delivery. Competition is expected to continue and intensify. The market is also
characterized by rapid technological changes and advances. The Company is an
insignificant factor in the industry. There can be no assurance that the Company
will be able to develop or acquire new products to keep the Company competitive
or stay competitive in general. Lack of market acceptance for the Company's
existing or new products, the Company's failure to introduce new products in a
timely or cost effective manner or its failure to increase functionability of
existing products or remain price competitive, would materially adversely affect
the Company's operating results. There can be no assurance that the Company will
be successful in its product development efforts. See "Business-Research and
Development; New Products" and "Competition".
7. Dependence on Large Customers. Sales to the Company's major customer in
fiscal 1995 (United States Government) totaled $424,849 (20% of net sales).
During fiscal 1994, sales to the Company's only major customer (Westinghouse
Electric Corp.-Naval Systems Division) totaled $597,000 (29% of net sales).
During fiscal 1993, sales to the Company's single major customer (United States
Government - various agencies) totaled $688,146 (46% of net sales). During
fiscal 1992 sales to the Company's two major customers aggregated $2,420,117
(81% of net sales), of which $768,139 (26% of net sales ) was to Westinghouse
Electric Corp.-Naval Systems Division, and $1,651,978 (55% of net sales) was to
the United States Government (various agencies). None of such customers has or
had any material relationship other than business with the Company. See
"Business-Large Customers".
The dependence on major customers subjects the Company to significant
financial risks in the operation of its business should a major customer
terminate, for any reason, its business relationship with the Company. In such
event the financial condition of the Company may be adversely affected and the
Company may be required to obtain additional financing, of which there can be no
assurance. The
11
<PAGE>
Company has taken into account the decreasing military budget of the United
States. See "Business-History." Currently less than 50% of the Company's
revenues are derived from the military and are expected to diminish as a
percentage of sales.
8. Defense Industry Downsizing - Historical Dependence on Government Contracts.
Recent world events have resulted in a decreased demand for defense related
products causing a general downsizing of the American defense industry. These
factors, along with federal budget constraints, have caused the Company to
realize order cancellations in the amount of $650,000 since 1990 and for another
$600,000 placed on a production hold pending specific releases. The Company's
ability to continue to attract and retain orders from defense contractors, which
as a group accounted for $627,270 in fiscal 1995 or 30% of the Company's total
revenue of $2,090,933, has been affected. The Government shutdown during the
last half of 1995 and early 1996 seriously aggrevated an already deteriorating
situation impairing overall sales level growth. While the Company has changed
its strategy for growth by a conversion to primarily commercial business, there
can be no assurance that it will be completely successful in this objective.
9. Price Stability. The Company's sales to defense-related contractors and
manufacturers have historically occurred in a relatively stable price
environment. Pressure in defense spending may adversely affect prices and profit
margins in that market. While the Company believes that its planned expansion in
the commercial market will help it to better manage such a change in the defense
market, there can be no assurance that it will be completely successful in this
objective.
10. No Assurance of Public Trading Market for Common Stock; "Penny Stock"
Regulations. Prior to this offering, the Company's Common Stock has been thinly
traded in the Nasdaq Small Cap Market and there is no assurance that an active
trading market will develop, or that an active trading market, if developed,
will be sustained. If for any reason, however, an active public trading market
does not develop, purchasers of the Securities may have difficulty in selling
their Securities should they desire to do so. In any event, due to the price of
the Company's securities, many brokerage firms will not effect transactions in
the Securities and it is unlikely that any bank or financial institution will
accept such Securities as collateral, which could have an adverse effect in
developing or sustaining any market for the Company's Securities. Under the
rules of the National Association of Securities Dealers, Inc. ("NASD"), in order
to qualify for initial quotation of securities on Nasdaq, a company, among other
things, must have at least $4,000,000 in total assets, $2,000,000 in total
capital and surplus, $1,000,000 in market value of public float, a minimum bid
price of $3.00 per share and at least two (2) market makers. For continued
listing, a company, among other things, must have $2,000,000 in total assets,
$1,000,000 in total capital and surplus, $1,000,000 in market value of public
float and a minimum bid price of $1.00 per share. If the Company is unable to
satisfy the requirements for quotation on Nasdaq, trading if any, in the Units,
Common Stock and Warrants offered hereby would be conducted in the
over-the-counter market in what are commonly referred to as the "pink sheets" or
on the NASD's Electronic Bulletin Board. As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the Securities offered hereby. The above-described rules may materially
adversely affect the liquidity of the market for the Company's Securities.
Between January 1988 and the August 1995 Offering, the Company's Common Stock
traded on the OTC Bulletin Board. Prior thereto, the Common Stock was listed on
Nasdaq until it was delisted for failure to meet the Nasdaq requirements.
12
<PAGE>
The Securities and Exchange Commission (the "Commission") has adopted
regulations which generally define "penny stock" to be an equity security that
has a market price (as defined) less than $5.00 per share or an exercise price
of less than $5.00 per share, subject to certain exceptions. If the Securities
offered hereby are removed from Nasdaq, the Company's securities may become
subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and institutional accredited investors. For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a disclosure schedule prepared by the
Commission relating to the penny stock market. The broker-dealer also must
disclose the commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the
"penny stock" rules may restrict the ability of broker-dealers to sell the
Company's securities and may affect the ability of purchasers in the offering to
sell the Company's securities in the secondary market.
11. Restricted Shares of Common Stock Eligible for Future Sale. Immediately
prior to the sale of the Shares hereunder, the Company had an aggregate
1,032,639 shares of its Common Stock issued and outstanding, 538,687 of which
are "restricted securities," which may be sold only in compliance with Rule 144
under the Securities Act of 1933, as amended (375,000 of which are being
registered hereunder by the Selling Securityholder). Rule 144 provides, in
essence, that a person holding restricted securities for a period of two years
after payment therefor may sell, in brokers' transactions or to market makers,
an amount not exceeding 1% of the outstanding class of securities being sold, or
the average weekly reported volume of trading of the class of securities being
sold over a four-week period, whichever is greater, during any three-month
period. (Persons who are not affiliates of the Company and who have held their
restricted securities for at least three years are not subject to the volume or
transaction limitations.) Any such sales could have a material adverse effect on
the market price for the Common Stock, should a trading market develop.
12. No Common Stock Dividends. The Company has not paid any dividends on its
Common Stock and does not anticipate paying dividends on its Common Stock in the
foreseeable future. The future payment of dividends is directly dependent upon
future earnings of the Company, its financial requirements and other factors to
be determined by the Company's Board of Directors. For the foreseeable future,
it is anticipated that any earnings which may be generated from the Company's
operations will be used to finance the growth of the Company even if the
Company's operations are profitable. See "Dividends". In addition, under the
terms of the Company's existing bank line of credit and outstanding
indebtedness, the Company is prohibited from paying any cash dividends. See
"Business - Credit Facility".
13. Control by Management. Officers and directors and persons who may be deemed
affiliates, as a group, beneficially own and have the right to vote 82% of the
issued and outstanding Common Stock of the Company (assuming conversion of the
Chase Manhattan Note - See "Principal Shareholders"),
13
<PAGE>
assuming no exercise of any options or warrants. Inasmuch as the Company's
Certificate of Incorporation does not provide for cumulative voting, such
holders will be in a position to elect all of the directors and thereby control
the Company. The purchasers of securities in this offering will have only a
limited ability to elect any directors of the Company or to significantly affect
corporate decision making on material events such as mergers or acquisitions.
See "Principal Stockholders" and "Description of Securities."
14. Governmental Regulation. The Company's manufacturing facilities, in common
with those of the industry generally, are subject to numerous existing and
proposed Federal and state regulations designed to protect the environment,
establish occupational safety and health standards and many other matters. The
Company believes that its operations are in compliance with existing regulations
and does not believe that said compliance has had or will have any material
effect upon its capital expenditures, earnings or competitive position. See
"Business-Governmental Regulation."
15. Dependence on Qualified Personnel. Because of the technological nature of
the Company's business, the Company is dependent upon its ability to attract and
retain technologically qualified personnel. There is significant competition for
technologically qualified personnel and the Company may not be successful in
recruiting such qualified personnel. See "Management."
16. Facilities Subject to Lien. The Company owns its facilities located at 5
Columbia Road, Somerville, NJ, which is subject to a lien to secure a loan made
by Chase Manhattan Bank. Should the Company default on such loan, it may lose
its facilities, which may have a material adverse impact on the Company. The
Bank has deferred all payments of principal and interest under the Chase
Manhattan Note until April 16, 1997. If the Chase Manhattan Note is converted
into 1,400,000 shares of Common Stock, the lien on the Company's facility will
be released. See "Business - Credit Facility."
17. Additional Authorized Shares Available for Issuance May Adversely Affect the
Market. The Company is authorized to issue 20,000,000 shares of its Common
Stock, $1.00 par value. As of the date hereof there are a total of 2,432,963
shares of Common Stock (assuming conversion of the Chase Manhattan Note) issued
and outstanding (not including treasury stock, See "Financial Statements").
However, the total number of shares of Common Stock issued and outstanding does
not include the exercise of up to 1,137,750 Class A Warrants to purchase up to
1,137,750 shares of the Company's Common Stock, the Public Offering
Underwriter's option to purchase up to 41,000 shares of Common Stock and 20,500
Class A Warrants to purchase 20,500 shares of Common Stock. After reserving a
total of 1,199,250 shares of Common Stock for issuance upon the exercise of all
the Warrants, the Company will have at least 16,368,111 shares of authorized but
unissued capital stock available for issuance without further shareholder
approval (of which 155,358 has been reserved for conversion of all of the
Company's Series A and Series B Preferred Stock outstanding).
The registration statement of which this prospectus forms a part covers
the offering of 1,775,000 shares of Common Stock which are subject to an option
to purchase by CNL Holdings, Inc. from Chase Manhattan Bank. Sales of such
Common Stock in the future, however, may have an adverse effect on the market
price of the Company's Common Stock. See "Selling Securityholder and Plan of
Distribution."
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1996, and as adjusted to give effect to the exchange of the securities
for the unpaid amount of principal and interest due to the Bank. This table
should be read in conjunction with the Financial Statements and Notes thereto
appearing elsewhere in this Registration Statement.
<TABLE>
<CAPTION>
AT JUNE 30
------ ------------------------
ACTUAL ADJUSTMENTS AS ADJUSTED
------ ----------- -----------
<S> <C> <C> <C>
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.50; Series A;
4% cumulative; 162,000 shares authorized,
155,000 shares issued and outstanding $ 77,500 $ -- $ 77,500
Preferred Stock, par value $.50; Series B;
$.90 cumulative; 50,000 shares authorized;
1,790 shares issued and outstanding 895 -- 895
Preferred Stock, par value $5.00, 2,000,000
shares authorized after offering(-0- shares
before offering) -- -- --
Common Stock, par value $1.00 authorized
6,000,000 shares (20,000,000 shares after
offering); issued 1,032,639 shares
including 8,776 shares held in Treasury
before offering; after offering 2,432,639(1) 1,032,639 (1) 1,400,000 2,432,639
Additional paid in capital 4,392,198 (1) (338,647) 4,053,551
Retained earnings (deficit) (2,814,889) -- (2,814,889)
Treasury stock (131,734) -- (131,734)
----------- -----------
TOTAL STOCKHOLDERS'
EQUITY 2,556,609 -- 3,617,962
----------- -----------
TOTAL CAPITALIZATION $ 2,556,609 -- $ 3,617,962
=========== ===========
</TABLE>
- ----------
(1) Reflects 1,400,000 shares of Common Stock issued in exchange for the
unpaid amount of principal and interest due to the Bank.
15
<PAGE>
DIVIDENDS
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors of the Company. To date, the Company has
neither declared nor paid any dividends on its Common Stock nor does the Company
anticipate that such dividends will be paid in the foreseeable future. Rather,
the Company intends to apply any earnings to the expansion and development of
its business. Any payment of cash dividends on the Common Stock in the future
will be dependent upon the Company's earnings, financial condition, capital
requirements and other factors which the Board of Directors deems relevant.
Until such time as the Credit Facility is paid in full, the Company is
restricted from issuing any dividends on its capital stock. See "Risk
Factors-Dividends" and "Business-Credit Facility" and "Description of
Securities."
16
<PAGE>
Selected Financial Information
The summary financial information set forth below is derived from and
should be read in conjunction with the more detailed financial statements and
notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED
JUNE 30, YEAR ENDED JULY 31
--------------------------- ----------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and other income $ 1,878,669 $ 2,072,555 $ 2,090,933 $ 2,044,860 $ 1,486,298 $ 2,997,308 $ 3,940,622
Income (loss) from continuing
operations (264,527) (750,133) (1,014,296) (1,182,988) (322,005) 72,026 36,360
Income (loss) from continuing
operations - historic (.26) (.18) (.12) (.27) (.07) .02 .01
Income (loss) from continuing
operations per share, after
giving effect (17.51) (12.01) (27.22) (7.41) 1.66 0.84
to 1-for-100 reverse stock
split in August 1995
Pro forma loss from continuing
operations per share* (.11) (.70)
Total assets 3,953,063 3,338,553 3,882,235 3,739,294 4,601,015 4,586,003 4,714,418
Long-term debt and capitalized
lease obligations 6,669 41,432 34,103 3,829,625 3,732,961 2,654,957 2,757,690
</TABLE>
* After giving effect to 1,400,000 shares of Common Stock issuable in exchange
for the unpaid amount of principal and interest due to the Bank.
17
<PAGE>
AT JUNE 30
----------
ACTUAL ADJUSTMENT AS ADJUSTED
------------- ---------- -----------
Working Capital $2,097,280(1) $1,061,353 $3,158,633
Total Assets 3,953,063 3,953,063
Long-Term Liabilities 6,669 6,669
Stockholders' Equity 2,556,609(1) 1,061,353 3,617,962
- ----------
(1) Reflects 1,400,000 shares of Common Stock issued in exchange for the
unpaid amount of principal and interest due to the Bank.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
In order to summarize the Company's operating results for the past three
years, the following tables indicate the percentage relationships of income and
expense items in the statements of income and the percentage changes in those
items for such years.
<TABLE>
<CAPTION>
Income & Expense Items as a Percentage of Income & Percentage
Revenue from Operations Expense Items Increase/Decrease
- ----------------------------------------- ------------- -----------------
Eleven
Months Years Ended July 31, Eleven Months
Ended ----------------------------- Ended June 30, 1995
June 30, To Eleven Months 1993 to 1992 to
1996 1995 1994 1993** Ended June 30, 1996 1994 to 1995 1994 1993**
- ------- ------ ------ ------- -------------------- ------------ ------- -------
<S> <C> <C> <C> <S> <C> <C> <C> <C>
100.0% 100.0% 100.0% 100.0% Sales & other (10.30)% 2.2% 37.5% (50.4%)
- ----- ----- ----- ----- income ------ --- ---- -----
64.6 92.20* 98.40* 44.70* Cost of products (36.70) (4.20) 203.6 (50.1)
sold
41.8 44.20 41.70 54.10 Selling, general & 10.5 8.40 6.0 (31.6)
administrative
7.7 12.10 17.70 22.70 Interest (26.50) (30.0) 7.8 (4.7)
- ----- ----- ----- ----- ------ ----- ----- ----
114.1 (148.50) 157.80 121.50 Total costs & (24.10) (3.80) 78.8 (39.6)
- ----- ------ ------ ------ expenses ----- ---- ---- ----
(14.1) (48.50) (57.80) (21.50) Income (loss) (64.70) (14.30) (269.8) (339.1)
before taxes
-- (23.50) -- .20 Income taxes (96.4) (23.0)
- ----- ----- ----- ----- (credits) ------ ----- ----- ----
(14.1)% (25.0)% (57.8)% (21.7)% Income (loss) (64.70)% (14.3)% (267.4)% (340.9)%
before
extraordinary item
</TABLE>
- ----------
* Includes write-offs for obsolete or excess inventories which were
$656,248, $944,970 and $39,498 for 1995, 1994 and 1993, respectively, and
$656,248 for the eleven months ending June 30, 1995 and $-0- for the
eleven months ending June 30, 1996.
** Reclassified for comparability.
19
<PAGE>
1995 Compared to 1994
Total revenue increased $46,000, or 2.2% from $2,045,000 in 1994 to
$2,091,000 in 1995. The increase was attributable to an expansion in the
commercial sector of the Company's business, which contributed $1,422,000 or 68%
of total revenues in 1995, compared to $1,300,000 or 64% of total revenues in
1994.
Costs of sales totaled $1,271,000 for the year ended July 31, 1995 as
compared to $1,068,000 for the comparable period ended July 31, 1994,
representing 60.8% and 52.2% of net revenues, respectively. Cost of sales
increased as a result of product mix during the comparable years.
A charge of $656,000 for inventory write-off was recorded during the year.
This amount was exclusively due to certain inventories purchased for military
programs in prior periods that were phased out. There was a comparable charge of
$945,000 in fiscal 1994.
The Company determined during the first quarter of 1995 that there was not
sufficient information from the Government's Defense-Electronic Supply Center
("DESC") facility to permit the Company to make a quantitative determination for
future sales. Inventory which totaled $656,000 was written off after management
made an analysis of parts maintained for military and government orders compared
to available inventories. This amount consisted of $318,000 for raw materials,
$249,000 for work in progress and $89,000 for finished goods. There were
comparable charges of $945,000 in the twelve month period ended April 30, 1994.
This analysis consisted of a study of the forecasted requisitions of upcoming
orders of the DESC, Conolog's principle defense customer. On examination of
prospective sales, it was determined that the government has no requirements for
Conolog's military products for at least the next twelve to eighteen months.
As a result of the foregoing, gross profit margins totaled $163,914 or
7.8% of sales for the fiscal year ended July 31, 1995 as compared to $32,330 or
1.6% of sales for the same twelve month period in 1994. Exclusive of inventory
adjustments, gross profit margins would have been 39% for the year ended July
31, 1995 and 48% for the year ended July 31, 1994.
Selling, General and Administrative Expense totaled $925,000 or 44.2% of
revenues, as compared to $853,000 or 41.7% of revenues for the comparable period
last year.
As a result of the foregoing, an operating loss of $761,000 was realized
for the year ended July 31, 1995 as compared to an operating loss of $821,000
for the same period last year.
Interest expense for the twelve months totaled $254,000 compared to
$362,000 for the fiscal year ended July 31, 1994. The bank had agreed to fix the
total interest owed as of January 31, 1995 and to keep the amount unchanged
through August 16, 1995. Accordingly, no interest expense was accrued from
February 1, 1995 through July 31, 1995.
20
<PAGE>
As a result of the foregoing, the Company incurred a net loss of $522,000
for the twelve months ended July 31, 1995, compared to a net loss of $1,183,000
for the same period last year. The loss in 1995 was reduced by the income tax
benefit derived from previously incurred operating losses not deducted. The
losses, as a result of the Registration, will be deductible against forgiveness
of indebtedness income.
As of July 31, 1995 the Company's backlog totaled $1.3 million, consisting
of a mix of military and commercial telecommunication products, compared to $1.5
million at July 31, 1994. The Company anticipates its commercial shipments to
continue to grow as a percentage of total sales in the foreseeable future.
1994 Compared to 1993
Sales and other income increased $558,500, or 37.5% from 1993. The
increase was due to the concentration of marketing to non-government customers,
which began several years ago but is now beginning to materialize. Government
sales in fiscal 1994, as well as in fiscal 1993 were approximately $700,000 per
year. In fiscal 1992 and earlier, government sales exceeded $2,000,000 per year.
During the quarters ended October 31, 1993, January 31, 1994 and April 30,
1994 not all government requisitions for procurements had been posted at the
government's Defense Electronics Supply Center ("DESC") facility in Dayton,
Ohio. Until all requisitions for future procurements are listed, the Company
could not determine which items would be phased out or not procured at all.
Based upon the open requisitions by DESC, during the last quarter of the
fiscal year, it was demonstrated that a much reduced future for potential
business existed. Based on the reduced potential quantities, the Company wrote
off a commensurate percentage of its related military inventory, which amounted
to $944,970. In addition, the Company wrote off any parts that had not been
required for products for 4 years and for which no orders had been received in
the past 2 years and no orders anticipated in the coming year. On this basis,
the Company determined that the utility of these parts was zero.
It has been the experience of the Company that when no orders are received
for a product for a period of 2 years, none were received in the third or
subsequent years. The same is true for any parts that had not been called for
production for 4 years. General parts are interchangeable and unless they are
earmarked for a specific job, a 4 year life is considered normal.
Costs of products sold is a distorted figure, 98.4%, since approximately
$945,000 of old inventory was written off. Had this write-off not occurred, the
cost of sales would have been 52.2%. Although this percentage is greater than
normal, the lack of available cash has hampered management's ability to buy
product at more favorable prices. Inventory was written off in the last quarter
of the fiscal year after an analysis was made of parts in the stockroom that
were at least four years old and for which no orders had been received in the
past two years.
21
<PAGE>
Selling, general and administrative costs increased $48,000 from 1993, or
6%, due primarily to increased salaries.
Interest and expense increased by $26,000, or 7.6%, due to an increase in
rates. Approximately $483,000 of interest to the Bank has been accrued but
unpaid. Under the new restructured loan agreement, that interest will begin to
be paid off beginning July 1995. See "Business - Credit Facility."
1993 Compared to 1992
Sales and other income declined $1,511,000 or 50.4% from 1992. The
decrease was the result of a continuing government cutback in defense orders.
Government sales in fiscal 1993 were approximately $700,000, compared to
$2,400,000 in fiscal 1992.
Cost of products sold remained at 44.7% of sales, compared to 44.4% in
1992. The satisfactory gross profit of 55% was the result of using inventory
priced at lower than current costs plus an efficient use of labor.
A write-off for obsolete or excess inventories of approximately $39,500
was provided for in 1993. New designs introduced in the last quarter of 1993
rendered existing inventory applicable to these designs totally obsolete, hence
the write-offs were made in the last quarter.
Selling, general administrative costs decreased $372,500 from 1992, or
31%. The decrease is the result of the Company's effort to reduce expenses
during a period of poor cash flow.
Interest expense remained approximately the same as in 1992, $336,000.
Approximately $212,000 of interest to the Bank was accrued, but unpaid. Under
the current restructured loan agreement, that interest is due on or before
November 30, 1994.
Financial Condition, Liquidity and Capital Resources
1995 Compared to 1994
At July 31, 1995, the Company had a working capital deficit of $2,229,000
and a shareholder deficit of $1,944,000. The Company increased its liquidity on
August 24, 1995, through the sale of common stock in a public offering. The net
proceeds received from the August 1995 Offering were approximately $1,527,000,
which caused working capital to increase by that amount. In addition, the
shareholders' deficit of $1,944,000 has changed to a surplus of approximately
$3,100,000 as a result of the proceeds of the stock offering and the
restructuring of the bank loan permitted by the additional equity.
During the fiscal year, the Company decreased its inventory from
$2,990,000 to $2,600,000. The decrease in inventory was caused primarily by a
$656,000 writedown of certain of the
22
<PAGE>
Company's slow-moving military products, partially offset by increased
requirements in stocking levels for commercial parts. The Company increased its
sales and marketing efforts late in the year as part of its strategy to improve
its revenues. The increase in operating expenses resulting from these efforts
adversely affected the liquidity of the Company. The Company plans to continue
to accelerate its sales, marketing and research and development efforts at
increased levels for the foreseeable future.
The Company has no material commitments for capital expenditures as of the
date hereof. The Company anticipates, however, acquiring additional equipment
and fixtures (for example, test equipment and manufacturing equipment) and may
consider a subcontractor for increased manufacturing volume in the future, as
increased requirements may dictate. The Company has begun to evaluate a number
of make-or-buy operations in order to assure adequate resources for future
production.
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.
1994 Compared to 1993
The Company was not able to meet its commitment made under the
restructured loan agreement dated November 1993. However, the Bank has agreed to
further restructure the Credit Facility and extend the payments of principal and
interest. Interest on the loans will accrue but will not be payable until July
31, 1995. Beginning on that date, interest payments are to be made in arrears on
the last day of each month, with all unpaid interest previously accrued becoming
due and payable on November 30, 1995. All principal on the loans will become due
and payable on November 30, 1995. The additional extension was granted after the
Company prepared projections for the forthcoming year. These projections
indicate a certain amount of profitability but not enough cash flow to begin
payment of principal within the fiscal year 1995.
Working capital at July 31, 1994 was $2,086,000 compared to $3,275,000 in
1993. The drop in working capital was primarily due to a write-off of inventory
for military sales, which management feels will not materialize. The working
capital ratio at 1994 was 2.75% compared to 4.9% at 1993.
Management is encouraged by the increase in sales to its non-military
customers. Should projections be realized, the Company should begin to turn
around and produce a profit this coming fiscal year. Cash flow should be
sufficient to meet the Company's current obligations.
23
<PAGE>
1993 Compared to 1992
The Company was not able to meet its bank obligations since October 1992
and technically was in default at July 31, 1993. However, in November of 1993,
the Company and its Bank came to an agreement wherein the Bank waived certain
defaults and restructured the loan so as to give the Company an opportunity to
continue operating within a realistic cash flow program. In addition to the
above, the Bank advanced in November 1993 an additional $75,000 for working
capital needs. The revised facility was the result of the Bank's acceptance of
the Company's business plan for the period through November 30, 1994.
Working capital at July 31, 1993, was $3,275,000 compared to $2,200,000 in
1992. Accordingly, the working capital ratio was 4.9 at July 31, 1993 and 2.2 at
July 31, 1992. The increase in the ratio was due to the restructured loan
agreement.
Inventories increased by $150,000 which was primarily due to upgrading
certain products to finished goods, which goods had not been shipped as of July
31.
Management felt that with the deferral of its bank obligations, its
current and anticipated backlog and sufficient inventory to satisfy most orders,
it should be able to meet its current obligations. Furthermore, it anticipated
generating enough funds to begin repaying its debt under the new arrangement.
Results of Operations - Eleven Months Ended June 30, 1996 Compared to Eleven
Months Ended June 30, 1995
On August 16, 1995, the Company offered 235,750 Units (the "Units") at a
price of $10.00 per Unit. Each Unit consisted of two (2) shares of Common Stock,
par value $1.00 per share ("Common Stock"), and one (1) Redeemable Class A
Warrant for Common Stock ("Class A Warrant"). The Common Stock and Class A
Warrants were immediately detachable and separately tradeable. Each Class A
Warrant entitled the holder to purchase one share of the Company's Common Stock,
at an exercise price of $6.00, subject to adjustment, from August 17, 1996
through August 16, 1998. The Class A Warrants are subject to redemption by the
Company at anytime after August 17, 1996 on not less than 30 days notice at $.05
per warrant, provided the average closing price of the Common Stock for 20
consecutive trading days ending within 15 days prior to the notice exceeds $7.20
per share.
The costs of the offering were deducted from the proceeds from the sale of
stock.
On August 16, 1995, the Company effected a 1- for - 100 reverse stock
split of its Common Stock on all shares of Common Stock outstanding.
24
<PAGE>
On August 16, 1995, holders of 19,360 shares of the Company's Series B
Preferred Stock (including Robert Benou and Arpad J. Havasy, officers and
directors of the Company) converted their shares of Series B Preferred Stock
into 387,200 (3,872 post-split) shares of Common Stock.
On August 16, 1995, $381,533 of the $420,179 of accrued dividends on the
Series B Preferred Stock at December 31, 1994 were converted into 76,307 shares
of Common Stock (represents a $5.00 per share assigned value of Common Stock)
and the remaining dividends due to such holders (including Messrs. Benou and
Havasy) were waived.
On August 16, 1995, accrued salaries through April 28, 1995 of $309,109
owed by the Company to Mr. Benou were converted into 61,822 shares of Common
Stock (represents a $5.00 per share assigned value of Common Stock).
On August 16, 1995, in connection with the August 1995 Offering, the Bank
exchanged their existing loan agreement for the following:
(a) $250,000 cash
(b) $1,025,000 five-year term loan
(c) 375,000 common shares of the Company
The debt forgiveness of $1,232,728 on restructuring of the obligation less
the tax benefit thereon is accounted for as an extraordinary gain to the
Company.
A summary of income, costs and expenses for the eleven months ended June
30, 1996 and June 30, 1995 is as follows:
1996 1995
----------- -----------
Sales and Revenues $ 1,878,669 $ 2,072,555
Costs and Expenses 1,402,820 2,822,688
Net Income (Loss) After Taxes $ 475,849 $ (750,133)
Revenues for the eleven months ended June 30, 1996 decreased from $193,886
for the eleven months ended June 30, 1995. Revenues declined as a result of a
decline in sales in the military sector. The Company completed a large sale of
switches to the military in the eleven month period last year and did not have a
comparable sale for the same eleven month period this year.
Gross margins for the eleven month periods totaled $665,341 and $157,127,
respectively, representing 35.4% and 7.6% of revenues. Gross margins were higher
in 1996 due to the obsolete inventory write-off in 1995. Without the inventory
write-off the 1995 gross margin would have been 39.2%. The gross margin for 1996
was lower than 1995 without the inventory write-off due to the fact that the
higher than normal discounts were offered and taken on two major sales.
25
<PAGE>
Selling, general and administrative expenses increased $74,668 for the
eleven months of 1996 as compared to 1995. These expenses increased as a result
of an expansion of the employment base and an increase in advertising and
promotion costs.
Interest expense totaled $144,814 for the eleven months ended June 30,
1996 as compared to $196,974 in interest expense for the eleven months ended
June 30, 1995. The Company reached a debt restructuring agreement with the Bank
during 1995 that resulted in having no interest expense for the quarter ended
April 30, 1995.
As a result of the foregoing, the Company reported net income of $475,849,
or $.46 per share for the eleven months. The income for the eleven months ended
June 30, 1996 was inclusive of a debt compromise of $740,376, net of a tax
benefit of $492,352. This compares to a net loss of $750,133, or $17.51 per
share for the same period last year (after retroactive effect to a 1 for 100
reverse split on August 16, 1995 and after extraordinary item in 1996).
As of June 30, 1996 Registrant's backlog of orders stands at approximately
$3.4 million, a mix of military and commercial telecommunication products. The
Company anticipates its commercial shipments to grow as a percentage of total
sales for the foreseeable future.
Financial Condition, Liquidity and Capital Resources at June 30, 1996
Working capital at June 30, 1996 was $2,097,280 compared to a deficit of
$2,229,171 at year ended July 31, 1995. The improvement in the working capital
is the result of the August 1995 Offering, as described in more detail under
Results of Operations.
The Company is technically in default of its bank loan to the Bank due to
non-payment of principal and interest since January 1996. However, the Bank has
agreed to defer any payments at this time since they have signed an allonge
agreement with the Company in September 1996 (see below). The total debt is on
the balance sheet as current as of June 30, 1996. Interest has been accrued
through June 30, 1996.
Accounts receivable have increased from $171,541 at year-end July 31, 1995
to $496,936 at June 30, 1996. This increase has been caused by slower payment
procedures by certain Government agencies, a smaller discount policy currently
offered to customers of normal sales and sales having been made to several
customers for export with acceptance at destination, which historically extends
the collection period.
Management feels that it has leased or acquired sufficient equipment to
meet its capital expenditure needs for the next year. Obligations under capital
leases which are presently in effect are approximately $34,000 for the year and
somewhat less thereafter. Historically, the Company has always leased equipment.
Its annual lease obligations have ranged from $59,000 in 1993 to its present
figure of $34,000. The Company's liquidity and working capital have been
effected by these
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obligations and will continue to be so since the operation is dependent upon the
use of this equipment.
For the past year, the Company's marketing emphasis has been directed to
the utility industry since its Iniven line produces a variety of products used
by them. Most of the products offered must be tested for quality, endurance,
etc. for a period of time by the potential customer. Management is of the
opinion that much of the testing will be completed in the coming year and sales
will be forthcoming from the results of these tests. Accordingly, it is
anticipated that sales and profits will be higher in the next twelve months as
compared to the past twelve months.
New Terms of Credit Facility and Agreement with the Selling Securityholder
The principal amount owing to the Bank under the Company's Credit Facility
at June 30, 1996 was $1,012,500 and the unpaid accrued interest was $48,850. The
Bank and the Company have entered into the Conolog Corporation Allonge, dated as
of September 11, 1996, pursuant to which the Amended and Restated Term Note
dated as of August 2, 1995 between the Company and the Bank (the "Note") was
amended to permit the conversion by the Bank of the unpaid principal and
interest due under the Note into 1,400,000 shares of the Company's Common Stock
on or before April 16, 1997. The conversion right may be exercised by the Bank
or its assignee. The Bank has deferred all payments of principal and interest
under the Note until April 16, 1997.
The Bank and CNL Holdings, Inc. ("CNL or the "Selling Securityholder")
have entered into an Option and Purchase, Sale and Assignment Agreement dated as
of September 12, 1996 (the "Option Agreement"). Under the Option Agreement the
Bank has granted an option to CNL to purchase all of the Bank's interest in (i)
the Amended and Restated Term Loan Agreement dated as of August 2, 1995 between
the Company and the Bank, (ii) the Note and (iii) the 375,000 shares of the
Company's Common Stock owned by the Bank. CNL paid $150,000 to the Bank for the
option, which has an exercise price of $1,500,000 (a balance of $1,350,000) and
an expiration date of April 15, 1997.
The Company and CNL have entered into an agreement dated as of September
12, 1996 (the "Agreement"), whereby CNL has agreed to loan up to $2,500,000 to
the Company under certain circumstances (as described below) and the Company has
agreed to file a registration statement (the "Registration Statement") with the
Securities and Exchange Commission to register the 375,000 shares of Common
Stock owned by the Bank and the 1, 400,000 shares of Common Stock into which the
Note is convertible (collectively, the "Acquired Shares").
The proceeds of the sale of the Acquired Shares will be applied as
follows: the first $1,500,000 will be paid to CNL for the payments made to the
Bank pursuant to the Option Agreement; 50% of the balance, up to $2,500,000,
will be loaned to the Company (the "Loans") within five days of CNL's receipt of
the proceeds.
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<PAGE>
Each loan will be evidenced by a Note bearing interest at the rate of 4%
per annum and will be due 12 months from the date of such Loan. At maturity, the
Company will have the option to pay each Loan, together with all accrued
interest thereon, by issuing shares of a new Series C Preferred Stock (the
"Series C Preferred") having a value of $5.00 per share for purposes of such
repayment.
The series C Preferred will be non-voting and carry a cumulative dividend
of 8% per annum which may be payable by the issuance of shares of Common Stock
valued at $5.00 per share up to a maximum of 40,000 shares per annum. The Series
C Preferred will be convertible into common stock at the rate of one share of
common stock for each share of Series C Preferred and have a liquidating
preference of $5.00 per share.
The Agreement also provides that for the two year period commencing on the
issuance of any shares of Series C Preferred (the "Registration Period") CNL may
elect to include its Series C Preferred in any post-effective amendment to the
Registration Statement or any new registration statement under the Securities
Act of 1933, as amended. In addition, the Agreement also provides that during
the Registration Period, CNL may give notice to the Company to the effect that
it desires to register its shares under the Act for public distribution in which
case the Company will file a post-effective amendment to a then current
registration statement or a new registration statement.
Management believes that the foregoing transactions benefit the Company
and its stockholders. In the event CNL exercises its option under the Option
Agreement, exercises the conversion right under the Agreement and the offering
of the Acquired Shares is successful, the Company has the opportunity to, in
effect, exchange its debt for Preferred Stock and eliminate the Company's
default under the Credit Facility.
28
<PAGE>
MARKET PRICE FOR COMMON STOCK AND CLASS A WARRANTS
The Company's Common Stock and Warrants are thinly traded on the Nasdaq
SmallCap Market, under the symbols CNLG and CNLGW. Prior to the August 1995
Offering, the Common Stock was traded on the OTC Bulletin Board.
The following table sets forth, for the periods indicated, the high and
low bid and asked quotations of the Common Stock, based upon information
supplied by the National Quotation Bureau for the years 1993, 1994, and the
first two quarters of 1995. Such quotations represent inter-dealer prices,
without retail markups, markdowns or commissions and may not necessarily
represent actual transactions. The Company effected a 1-for-100 reverse stock
split on August 16, 1995. As of October 9, 1996, the Company's Common Stock was
held by approximately 843 shareholders of record.
Bid ASKED
----------------------- -------------------------
High Low High Low
---------- --------- ----------- ---------
1993
- ----
First Quarter .08 .05 .25 .14
Second Quarter .08 .05 .50 .14
Third Quarter .08 .04 .50 .14
Fourth Quarter .08 .04 .15 .14
1994
- ----
First Quarter .05 .04 .15 .14
Second Quarter .05 .03 .15 .125
Third Quarter .05 .001 .15 .06
Fourth Quarter .015 .001 .10 .05
1995
- ----
First Quarter .02 .01 .10 .05
Second Quarter .04 .01 .15 .05
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<PAGE>
The following table sets forth, for the periods indicated, the high and
low prices of the Company's Units (which no longer trade), Common Stock and
Warrants traded on the Nasdaq SmallCap Market for the third and fourth of 1995
and the first three quarters of 1996.:
Units Commnon Stock Warrants
----- ------------- --------
1995 High Low High Low High Low
- ---- ---- --- ---- --- ---- ---
Third
Quarter 18.5 14 8.50 5.75 4 2
Fourth 19.25 14.75 9.25 6.25 3.25 1.25
Quarter
1996
- ----
First 15 11 8.125 3.875 2 .9375
Quarter
Second 11.25 11.25 6.5625 4.25 1.5 1.0156
Quarter
Third
Quarter -- -- 6.25 2.25 1.5 .50
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<PAGE>
BUSINESS
General
Conolog Corporation, a Delaware corporation (the "Company" or "Conolog")
is engaged in the design, manufacture (directly or through subcontractors) and
distribution of small electronic and electromagnetic components and
subassemblies for use in telephone, radio and microwave transmission and
reception and other communication areas that are used in both military and
commercial applications. The Company's products are used for transceiving
various quantities, data and protective relaying functions in industrial,
utility and other markets.
History
The Company was organized in 1968 and was engaged primarily in the design
and manufacture of electronic components and systems for military applications.
The Company, in July 1971, merged with DSI Systems, Inc., then engaged in
the development and manufacture of terminal viewers for digital retrieval of
microfilm. Later that year, the name was changed from DSI Systems, Inc. to
Conolog Corporation.
By 1980 it became apparent that the military segment of the business was
growing while the terminal viewer segment was a drain on cash and other
resources. By the year end the terminal viewer business was discontinued and the
inventory relating thereto was written off, allowing the Company to concentrate
on its military business.
In 1981 the Company acquired one of its customers, INIVEN Corporation
("INIVEN"). At that time, the Company was manufacturing, on behalf of INIVEN, a
line of transmitters and receivers used for controlling and transceiving the
measurement of the flow of gases and liquids, by gas and water utilities, for
controlling the flow of waste water and sewage and measuring and controlling
traffic.
Since the 1980's, Conolog has been an active participant in providing
electromagnetic wave filters for major military programs, such as the Patriot
Missile, Hawk Missile and Sea Sparrow Missile. In addition to these projects,
Conolog components are currently used by the military in tanks, the Apache
helicopters and the MK-50 torpedoes.
During 1987, the Company made the strategic decision to redirect the
Company's focus from military to commercial markets. Since that time, the
Company has refocused on manufacturing and
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marketing its products for the commercial marketplace rather than depend on the
military and defense-related markets. The effort has included the introduction
of new products, the redesign of existing products and increased advertising and
marketing efforts, as permitted by its limited financial resources. The
percentage of revenues attributed to products manufactured for use in commercial
applications increased from approximately 4% of sales in 1981 ($171,000) to
approximately 70% of sales in 1995 ($1,450,000). The decision to embark on this
program entailed a major design effort, including the coordination of outside
engineering consultants to develop a complete line of products aimed at the
Company's target markets. The emphasis was on products for electric utilities,
cogeneration of power, gas and water companies, traffic control for departments
of transport (DOT) and airports utilizing DSP (Digital Signal Processing)
technology. DSP designs have long term stability with minimum or no maintenance,
allowing the Company to offer customers a product line with a 12 year warranty -
a first on the market.
Testing of the Company's first commercial product group, the
Teleprotection Series PTR- 1000, was under way in the latter part of 1992 by
Bonneville Power Administration. This detailed test permitted the Company to
"fine tune" the product for power transmission applications. In March 1994, the
PTR-1000 was approved for use by such utility and thereafter by other utilities
and municipalities. To date, the Company has sold and delivered over 450
PTR-1000 sets to 14 utilities and 3 municipalities, most of which are installed
and in service.
Following the PTR-1000, in 1993, the Company introduced its "98 Series"
Tone Products for water, gas, telephone and oil companies, waste water, traffic
control and airports. In 1994 the Company unveiled the Power Supply Series
(allowing the various utilities to power-up the equipment from any power
source), the "40 Series" for transmission of analog variable data (water levels,
gas pressures and temperature) and the Multiplexer Series, which permits the
transmission of up to 900 separate data points, again using a telephone line,
microwave link, or satellite. In 1994 the Company also introduced the "68
Series" tone products. This series is the "98 Series" repackaged mechanically
specifically for customers with older systems wanting to upgrade to DSP
technology without the expense of a complete mechanical installation. The "68
Series" offers the entire line offered by the "98 Series". In 1995, the Company
introduced a stand alone "98 Series" transmitter and receiver for field
installations and a wide range fiber optic interface for the Iniven products.
The fiber optic interface is also available as a stand alone coupling device. In
1996, the Company launched its industrial grade 1200 Baud Modem for data
transmission/communication.
Due to the end of the cold war and the downsizing of the American
military, the Company experienced unexpected sharp reductions of military
contracts in fiscal 1993 (the Company's fiscal year ends on July 31) resulting
in a 50% decline in the Company's sales for that year, down to $1,486,298 from
$2,997,308 in fiscal 1992. The sales of new products could not replace the
decrease in military sales. The Company, however, continued to pursue sales as
aggressively as its available resources would permit. Sales in fiscal 1994
increased to $2,044,860, a 37% increase over fiscal 1993. Sales in fiscal 1995
were $2,090,933 a 2% increase over fiscal 1994. Sales for the first eleven
months ended June 30, 1996 were $1,878,669, a 10% decrease from $2,072,555 in
the first eleven months ended June 30, 1995. Revenues from the Company's
military product sales
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<PAGE>
represented approximately 60%, 30% and 25% of sales of the Company in fiscal
1994 and 1995, and in the first eleven months ended June 30, 1996, respectively,
reflecting the Company's emphasis on commercial sales and markets.
General Description; Products
The Company is engaged in the design and manufacture of (i) transducers,
which are electromagnetic devices which convert electrical energy into
mechanical and other forms of physical energy, or conversely convert mechanical
and other forms of physical energy into electrical energy; (ii) digital signal
processing (DSP) systems and electromagnetic wave filters for differentiation
among discreet audio and radio frequencies; (iii) audio transmitters and
modulators, for the transmission over telephone lines, microwave circuits, or
satellite, of electrical signals obtained from transducers, data generated in
electronic code form or by computers or other similar equipment (not
manufactured by the Company); (iv) audio receivers and demodulators which are
small systems which receive and decode the signals from the audio transmitters
and convert them into digital codes for input into computers, teletypes or other
similar equipment (not manufactured by the Company) or convert such signals into
mechanical or other form of energy, such as opening or closing valves, or
starting or stopping a motor; (v) magnetic "networks" which are devices that
permit the matching or coupling of different types of communication equipment
together or many identical or similar equipment together or onto telephone or
other transmission lines so as not to cause interference; and (vi) analog
transmitters and receivers, which permit the coding/transmission and
receiving/decoding of a constantly variable data, such as the water level in a
tank, pressure in a pipe or temperature, by actually displaying the exact
information at the receiving end in digital form for storing in a computer or
other devices, or by physically displaying the information in a visual fashion
such as a numerical readout or meter.
Such products are used in radio and other transmissions, telephones and
telephone exchanges, air and traffic control, automatic transmission of data for
utilities, teleprinting of transmitted data such as news and stock market
information and for use by electric utilities in monitoring power transmission
lines for faults and/or failures. The Company's products are used by customers
engaged in or manufacturing equipment for the activities described. The
Company's products may be used independently or in combination with other
products to form a system type configuration, whereby the Company's equipment is
pre-assembled in a large cabinet with other equipment in a configuration that
would provide the end user with protection as well as operational status
displays.
Present Status/Business Product Description
The Company is presently engaged and focused in two basic market areas:
(A) Military Sales - Direct contract sales to the military
- As subcontractor to systems producers
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<PAGE>
- Foreign governments
(B) Commercial Sales (Under the tradename " INIVEN" (a Division of
Conolog))
- Direct sales to end users
- Sales to system assemblers
- Sales to contractors/installers
(C) Commercial Sales - As Manufacturing Subcontractor to Systems
Producers.
(A) Military Sales
Since 1992 the Company's engineering staff is dedicated to "INIVEN"
commercial designs and does not engage in any new designs for military
applications. The Company actively participates in bids only for parts the
Company has designed since inception in 1968. Presently there are approximately
400 designs that are applicable to these repeat residual sales.
These residual sales are primarily for the Company's electromagnetic wave
filters used in military radios, vehicles (cars, trucks or tanks), portable
(backpack), special signaling equipment and exchanges (as in field command
posts), weapon/missile guidance and control (patriot missile, tomahawk,
pave-paws), torpedo active signal recognition and differentiation mounted in the
nose cone of the torpedo (MK-30, Captor, MK-50 torpedoes), ship to ship teletype
signaling filters used in deployment of ships (UCC-1 and UCC-4 systems) as well
as many other signaling applications where accurate electromagnetic frequency
control is required.
The Company markets the above military sales directly and through
independent manufacturing sales representatives on a commission basis.
(B) Commercial "INIVEN" Sales and Products
"INIVEN" equipment is designed around four (4) core product groups:
(1) PTR-1000 Teleprotection Series
(Protective Tone Relaying Communications Terminal)
(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
34
<PAGE>
(4) Communication Link Multihead Fiber Optic Couplers and
Industrial Grade 1200 Baud Modems.
(1) PTR-1000 Teleprotection Series
This product is designed for use exclusively by electric power generators
(electric utilities and cogenerators) in order to protect their transmission and
distribution lines. The PTR-1000, by monitoring the output signal of the
transmission equipment in less than one hundred of a second protects the
transmission and distribution lines.
The PTR-1000 are installed in pairs, one unit at each end of the line.
Each unit is connected and in constant communication with the other, as they
continuously monitor the line for faults. In the event of a fault occurring
(such as a downed line or a short circuit) at either end and when confirmed by
the receiving PTR-1000 unit, the line is immediately isolated for shut down,
averting costly damage and downtime.
The PTR-1000 system is composed of a transmitter, dual receivers, a logic
card (brain center and controller of the system), relay module, line interface
module and power supply module. The transmitters at each end are independent and
transmit (continuously) the status (information being monitored) at their end of
the line.
In the event of a fault, the information is transmitted to the PTR-1000 at
the other end of the line and once confirmed by both its receivers (this duality
is designed such that both receivers must agree before any action is taken), it
will, when programmed to do so, isolate that end of the line. Generation and
distribution of electric power entails expensive equipment at both ends of the
line. Faults causing interruption of transmission can cause costly replacement
of failed equipment and loss of revenue caused by downtime for repairs.
The PTR-1000 is designed for global use by electric utilities and any
entity generating power for its own consumption with resale of surplus power to
an electric utility, such as cities, municipalities, cooperatives and large
corporations that find it more economical to generate their own electricity.
The PTR-1000 target market is worldwide, as follows:
o New installations; i.e., new transmission lines, new distribution
segments, for utilities and cogenerators.
o Existing installations not properly protected, improving efficiency and
down time.
o Existing installations for upgrading to PTR-1000 technology, again
improving efficiency and down time.
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<PAGE>
Sales efforts for the PTR-1000 are presently being conducted by the
Company's marketing executives, through independent manufacturers'
representatives and through distributors. Sales are targeted primarily to the
largest utilities and co-generators.
According to McGraw-Hill, Inc. Electrical World (Electric Utilities of the
United States), in the United States alone, there are over 500 large entities
generating electricity. They are:
o Investor-owned
o Municipal Systems
o Cooperative Systems
o Federal, State and District systems.
To date, the Company has sold and delivered over 450 PTR-1000 sets to 14
utilities and 3 municipalities, most of which are installed and in service.
(2) Audio Tone and Telemetry Equipment
For many years there has been a need for a modularly independent system
that would permit a user, from a distance, to control functions such as opening
a valve, starting a motor, shutting down a compressor, changing a traffic
signal, control landing lights at an airport, activate a hazard warning on a
highway, and in return allow the user to receive information, such as the liquid
level in a tank, the pressure in a pipe, the rate of flow out of a compressor,
the flow of traffic, the status of a traffic light, airport lights, or
confirmation that a command was performed. Such information is transmitted and
received and the control functions are performed from a distance utilizing
telephone lines, microwave link or direct wire.
These applications, by their nature, can be accomplished with slow speed
signaling systems composed of a transmitter on one end and a receiver on the
other to carry out the necessary instructions provided by the transmitter. Each
set (transmitter/receiver combination) is called a channel. Because of the slow
speed, up to 30 channels could be made to transmit and receive signals, in
either direction on a single telephone line, microwave link or direct wired line
at the same time. This parallel transmission permits each transmitter/receiver
pair to be independent of all the others.
This product segment includes the first generation equipment, known as
GEN-1, followed by later generations which include technological improvements
and programmable capabilities to include:
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<PAGE>
o GEN-1 Series - First generation with electromagnetic modules and first
generation programmable modules without electromagnetic modules.
o "98" and "68" Series - The latest generation applies DSP and
microprocessor technology with full programmability, in the field or at
the factory.
o "40" Series - Designed to function with the "98" or "68" series; transmits
and receives variable analog data.
GEN-1 and GEN-1 Programmable Series
The diversity of applications for this equipment makes it available for a
wide range of users who are not restricted to a single industry. Typical
industrial uses include: the measurement of water and gas, waste water,
gasoline, oil, traffic, and electricity. Typical users include: utilities,
co-generators, airports, navy yards, telephone companies, paper and pulp
processors and wherever remote control and data acquisition is required.
Because of the ease of use and installation, there is much GEN-1 type
equipment installed and used in the United States by a wide spectrum of diverse
users. Since the Company's line has a distinct mechanical configuration, the
Company designed its GEN-1 Programmable units and other improvements as
replacements for existing units. These account for approximately 20% of the
Company's commercial sales. The Company's line of GEN-1 equipment is extensive
and provides the user with the ability to perform multiple control functions,
status monitoring as well as continuous variable data monitoring, such as a
level in a tank or pressure gauge.
Sales for this line are primarily for the replacement of existing
installations and for expansion of these installations where it would not be
economical to install the latest technology, which would not be mechanically
compatible.
Sales to this market are made in the same manner as the PTR-1000 market
except that manufacturers' representatives specialize in selling to this diverse
market.
"98," "68" and "40" Series
These series represent the Company's latest designs in the audio tone
equipment utilizing the more advanced DSP technology, which provides high
accuracy and long term stability. These features have allowed the Company to
greatly improve the scope, density and number of functions that can be performed
on a single phone line, microwave link or direct line.
Given this technology and the high-reliability and quality standards of
the Company's products, the Company has recently (first quarter 1994) started to
offer a 12 year warranty for all of its commercial products. This warranty has
been favorably received by customers. Based upon its
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<PAGE>
past experience, the Company does not believe that its extended warranty will
result in any material repair or replacement expenses.
Sales of these products are made by the same persons who sell the
Company's GEN-1 products, but are also directed to encompass more sophisticated
users with larger amounts of data and control points. The mechanical
configuration of the "98" series is more compact, permitting more equipment in a
given space, while performing many more functions when it is connected to the
"40" Series. The "68" Series is the "98" Series repackaged mechanically
specifically for customers with older systems permitting them to upgrade their
systems to DSP technology. The "40" Series, when connected to the "98" or "68"
in the same chassis, permits the continuous monitoring of variable data. Typical
applications for these products include transmission of the variable data (such
as volume, temperature, pressure and moisture) for water, gas, industrial gases,
oil , gasoline, transportation equipment and telephone exchanges, and for use at
airports, tunnels and bridges and for security and electricity systems.
(3) Multiplex Supervisory (IM) Control System
This product is a response to the cost and scarcity of dedicated phone
lines (connections whereby the phone link is dedicated to one subscriber), and
enables customers with high volumes of supervisory data (where many functions
are monitored from a single site) to transmit data on fewer phone lines (i.e.,
with more data per channel, up to a maximum of 30 channels per line).
Using the "98" DSP Series as its communications link, the Company designed
the Multiplexer Supervisory Control System to handle 8 times the normal capacity
per channel. The microprocessor based system allows a single telephone line to
handle up to 900 data inputs.
This product line, because of its data density capability, may be utilized
for a very broad range of applications. This product has only recently been
introduced and the Company sales efforts for it are being conducted through its
existing independent manufacturers sales representatives.
(4) Fiber Optic Link and Data Modem
The expansion of fiber lines by the Company's customers and their need to
switch equipment from phone lines to fiber prompted the Company to design and
introduce a fiber-optic-coupler line to interface with the many different fiber
heads. In addition to complete data interface couplers the Company launched a
series of 1200 Baud Modems (Industrial Grade) for operation under the same
environmental specifications in line with the Company's products.
(C) Commercial Subcontract Manufacturing to Systems Producers
Since the downsizing of the American Military, the Company has actively
sought manufacturing subcontract orders to fill the production void created by
the severe drop in military production. In June 1996 the Company negotiated and
entered into a renewable annual agreement
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with the General Electric Company, GE Electrical Distribution and Control and
its participating affiliated companies for the manufacture of sub-systems, board
assemblies and magnetic filters and other products consistent with the Company's
expertise. The success of this agreement has prompted the Company to pursue
other system producers to more fully utilize the Company's manufacturing
capacity.
Competition
The market for the Company's products is very competitive. There are
several companies engaged in the manufacture of products of the type produced by
the Company, most of which are substantially larger and have substantially
greater name recognition or greater financial resources and personnel. The major
competitive factors include product quality and reliability, price, service and
delivery. Competition is expected to continue and intensify. The market is also
characterized by rapid technological changes and advances. The Company would be
adversely affected if its competitors introduced technologically superior
products or offered these products at significantly lower prices than the
Company's products. See "Risk Factors - Competition; Rapid Technological
Change."
Marketing and Sales
In general, the Company's products are marketed by means of telemarketing
and customer contacts by the Company's direct sales force and through
independent manufacturing sales representatives and distributors.
Military - The Company markets its military sales directly and through
independent manufacturers sales representatives.
Commercial - The Company markets the PTR-1000 by means of Company sales
personnel, through independent manufacturers representatives, and through
distributors, focusing mainly on the largest utilities and co-generators.
In the United States alone there are over 500 large entities generating
electricity which are identified as investor-owned, municipal systems,
cooperative systems and federal, state and district systems. The Company
utilized a portion of the proceeds of the August 1995 Offering to expand
its sales efforts (including application engineering) and expand sales to
international markets. The Company markets it Gen-1 and Gen-1 Programmable
Series, as well as its "98" Series, "68" Series and "40" Series, in the
same way as the PTR-1000 except that the manufacturers representatives
used by the Company specialize in selling to the diverse markets that
utilize such products. The Company utilized a portion of the net proceeds
of the August 1995 Offering for international sales.
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Largest Customers
Sales to the Company's major customer in fiscal 1995 (United States
Government) totaled $424,849 (20% of net sales). During fiscal 1994, sales to
the Company's only major customer (Westinghouse Electric Corp.-Naval Systems
Division) totaled $597,000 (29% of net sales). During fiscal 1993, sales to the
Company's single major customer (United States Government - various agencies)
totaled $688,146 (46% of net sales). During fiscal 1992 sales to the Company's
two major customers aggregated $2,420,117 (81% of net sales), of which $768,139
(26% of net sales ) was to Westinghouse Electric Corp.-Naval Systems Division,
and $1,651,978 (55% of net sales) was to the United States Government (various
agencies). None of such customers has or had any material relationship other
than business with the Company. See "Risk Factors - Dependance on Large
Customers."
Raw Materials; Inventory
The Company believes that it has adequate sources of raw materials
available for use in its business. The Company's products are assembled from a
variety of standard electronic components, such as integrated circuits,
transformers, transistors, passive components (ie., resistors, capacitors and
inductors), diodes and assorted hardware such as printed circuit boards,
connectors and faceplates. The Company is not dependent upon any single
supplier. The Company also purchases a number of other electronic components and
sub-assemblies from various suppliers. There has been no material increase in
the cost of most raw materials and the Company has no reason to anticipate any
significant shortage of raw materials in the future. The Company generally is
required to maintain adequate amounts of raw material and parts inventories to
meet delivery requirements of customers and to assure itself of a continuous
availability of these items. See "Risk Factors-Reliance on Component
Manufacturers."
In the past the Company manufactured and held in its inventory finished
products pursuant to the military's specifications and based upon the military's
forecast for future quantities and delivery schedules. When those military
procurements were discontinued as a result of the end of the cold war and the
downsizing of the military establishment, the Company wrote off large portions
of its military inventory. The Company no longer manufactures inventory to meet
forecasts but only to fill specific orders. Therefore, the Company does not
anticipate any future large inventory buildups or write-downs from military
products.
Manufacturing
Of the Company's 15,700 square feet that it occupies at 5 Columbia Road in
Somerville, NJ, approximately 10,000 square feet are dedicated to manufacturing.
The Company assembles, under normal workload conditions, all the products it
sells. To accommodate the peak demands that occur from time to time the Company
has developed a number of subcontractors to assemble boards to the Company's
specifications. All assemblies, however, are inspected and fully tested by the
Company's quality, engineering and testing departments. The Company maintains
test equipment
40
<PAGE>
and every product is burned-in (i.e., each product is run at full power for 48
hours) and tested prior to shipment. This control, together with design
reliability, has permitted the Company to offer a 12- year warranty on all its
commercial products.
Research and Development; New Products
Amounts expended by the Company in the last three fiscal years for
research and development activities have not been material although the Company
is currently engaged in product design and development. The Company utilized a
portion of the net proceeds of the August 1995 Offering to design a fiber optic
digitizer and a 1200 baud modem which can be sold as a separate product or
jointly with the Company's products which will enable all the Company's INIVEN
products to transmit directly onto fiber optic cables, and thus open a new
market for the Company's products. The Company is also using a portion of the
August 1995 Offering proceeds to add designs that will extend its product
capability to handle new data inputs not presently available. There can be no
assurance that the Company will be able to successfully develop and add designs
to its products.
Patents and Trademarks
The Company does not have any patents covering any of its present
products. The Company uses the trademark INIVEN for its commercial products. The
Company believes that such trademark is recognized in the Company's industry.
The Company believes that its prospects are dependent primarily upon its ability
to offer its customers high quality, reliable products at competitive prices
rather than on its ability to obtain and defend patents and trademarks. The
Company does not believe that its INIVEN trademark is of material importance to
the Company's business.
Backlog
As of July 31, 1995 and 1994, the Company had a backlog of approximately
$1,300,000 and $1,500,000, respectively. As of June 30, 1996, the Company had a
backlog of $3,400,000. It is anticipated that this backlog as well as any orders
received by July 31, 1996 will be filled during the balance of fiscal 1997 and
the 1998 fiscal year ending July 31, 1998. Approximately 75% of the Company's
backlog relates to government contracts and may be subject to cancellation under
the terms of such contracts.
Foreign Operations
During fiscal 1994 and for the first eleven months ended June 30, 1996 the
Company had no foreign sales. In fiscal 1995 the Company had foreign sales of
$140,000 to the Government of Israel.
41
<PAGE>
Governmental Regulation
The Company's manufacturing facilities, in common with those of industry
generally, are subject to numerous existing and proposed Federal and state
regulations designed to protect the environment, establish occupational safety
and health standards and cover other matters. The Company believes that its
operations are in compliance with existing regulations and does not believe that
such compliance has had or will have any material effect upon its capital
expenditures, earnings or competitive position. With respect to military sales,
the Company is not subject to any special regulations. The products manufactured
are done so in accordance with accepted commercial practices.
Employees
As of June 30, 1996, the Company employed 42 persons, including 2 in
management, 3 in sales, 2 in clerical, 1 in accounting, 1 in purchasing, 3 in
engineering and 30 in production. The Company has enjoyed good labor relations
and has suffered no work stoppage.
Properties
The Company owned facilities, which management considers adequate for the
Company's present requirements, are located at 5 Columbia Road, Somerville, NJ.
The facilities, which are used for manufacturing, sales and its executive
offices, comprise 15,700 square feet.
The facility is encumbered by a lien, along with the Company's other
assets, securing indebtedness incurred in connection with the Credit Facility.
The Bank has deferred all payments of principal and interest under the Chase
Manhattan Note until April 16, 1997. If the Chase Manhattan Note is converted
into 1,400,000 shares of Common Stock, the lien on the Company facility will be
released. See "Business Credit Facility" below.
Credit Facility
Background
In October 25, 1994, the Company and Chase Manhattan Bank (as successor by
mergers with Manufacturers Hanover Trust Company and Chemical Bank) (the "Bank")
restructured the Company's credit facility ("Credit Facility") between the
Company and the Bank that had been in effect since April 5, 1989.
Under the restructured terms the Credit Facility had been extended as
follows:
(i) Interest on the Credit Facility will accrue but not be payable
until July 31, 1995. Beginning on that date, interest payments
are to be made in arrears on the last day
42
<PAGE>
of each month, with all unpaid interest previously accrued
becoming due and payable on November 30, 1995.
(ii) All principal on the Credit Facility and other amounts owing
to the Bank will become due and payable November 30, 1995.
The principal amount owing to the Bank at January 31, 1995 was $3,789,000
and the unpaid accrued interest was $584,728. The interest rate on the Credit
Facility is 3/4% above the Bank's publicly announced reference rate, which was
9.75% at January 31, 1995.
To secure payment under the Credit Facility, the Company granted the Bank
a first priority lien on all accounts receivable, inventory, equipment and
general intangibles of the Company and a lien on the Company's real property
located at 5 Columbia Road, Somerville, New Jersey 08876.
Payment of liabilities of the Company to the Bank under the Credit
Facility was guaranteed by Robert S. Benou, President of Company, to the extent
of $965,000 and Arpad J. Havasy, Executive Vice President of the Company, to the
extent of $492,500, and each had pledged all of his Common Stock and Series B
Preferred Stock to the Bank to secure their respective guarantees.
The Credit Facility contains various negative covenants, including (a)
limitations on indebtedness, (b) limitations on liens, (c) limitations on
contingent obligations, (d) limitations on capital expenditures, (e) prohibition
against mergers, consolidations, liquidation or dissolution, sale or lease of
all or a substantial part of its property, business or assets, (f) limitations
on dividends and stock acquisitions, (g) limitations on investments, loans and
advances, (h) prohibition of certain prepayments, (i) limitations on leases, (j)
prohibition of sale and leaseback arrangements and (k) prohibition against
subordinated debts.
Terms in Connection with August 1995 Offering
In connection with the August 1995 Offering, the Bank and the Company
agreed to restructure the Credit Facility as follows:
In connection with the August 1995 Offering, the Bank received from the
proceeds of such offering a cash payment of $250,000 (the "Cash Amount"). The
remaining debt, after giving effect to the payment to the Cash Amount was
restructured as follows: (1) $1,025,000 was structured as a five-year term loan
(the "Term Loan") bearing interest at the Bank's Reference Rate plus 125 basis
points, to be amortized over 10 years; $50,000 per year for the first two years,
$100,000 per year in the third and fourth years and $112,500 in the fifth year.
After the fifth year, the balance of the payments will be renegotiated at the
Bank's option; and secured by the existing collateral; and (2) All debt owing to
the Bank in excess of the Cash Amount and the Term Loan was converted into
375,000 shares of Common Stock of the Company (the "Bank Shares").
43
<PAGE>
The Bank Shares have full voting rights and carry certain antidilution
protection with respect to any reduction in the exercise price of the Class A
Warrants. The Bank Shares carry piggyback registration rights which provide that
upon any subsequent offering of new registered shares (a "Subsequent Offering"),
the Company must include in such registration a portion of Bank Shares equaling
the lesser of 100% and the New Share Percentage. The New Share Percentage shall
be a fraction, the numerator of which is the total number of new registered
shares to be offered (excluding any of the Bank Shares to be registered
thereunder) and the denominator of which is the total number of common shares of
the Company issued and outstanding (including the Bank Shares) immediately prior
to the Subsequent Offering. The Bank may at any time sell all or a portion of
the Bank Shares in one or more private transactions, and may in addition, demand
up to two registrations of any or all of the Bank Shares at any time after July
31, 1997.
In addition, the Bank agreed to release the existing guarantees of Messrs.
Benou and Havasy on the effective date of the August 1995 Public Offering.
Finally, pursuant to the restructured Credit Facility the Bank was granted the
right to appoint a member to the Company's Board of Directors.
See "Management."
New Terms of Credit Facility and Agreement with the Selling Securityholder
The principal amount owing to the Bank under the Company's Credit Facility
at June 30, 1996 was $1,012,500 and the unpaid accrued interest was $48,850. The
Bank and the Company have entered into the Conolog Corporation Allonge, dated as
of September 11, 1996, pursuant to which the Amended and Restated Term Note
dated as of August 2, 1995 between the Company and the Bank (the "Note") was
amended to permit the conversion by the Bank of the unpaid principal and
interest due under the Note into 1,400,000 shares of the Company's Common Stock.
The conversion right may be exercised by the Bank or its assignee. The Bank has
deferred all payments of principal and interest under the Note until April 16,
1997.
The Bank and CNL Holdings, Inc. ("CNL or the "Selling Securityholder")
have entered into an Option and Purchase, Sale and Assignment Agreement dated as
of September 12, 1996 (the "Option Agreement"). Under the Option Agreement the
Bank has granted an option to CNL to purchase all of the Bank's interest in (i)
the Amended and Restated Term Loan Agreement dated as of August 2, 1995 between
the Company and the Bank, (ii) the Note and (iii) the 375,000 shares of the
Company's Common Stock owned by the Bank. CNL paid $150,000 to the Bank for the
option, which has an exercise price of $1,500,000 (a balance of $1,350,000) and
an expiration date of April 15, 1997.
The Company and CNL have entered into an agreement dated as of September
12, 1996 (the "Agreement"), whereby CNL has agreed to loan up to $2,500,000 to
the Company under certain circumstances (as described below) and the Company has
agreed to file a registration statement (the "Registration Statement") with the
Securities and Exchange Commission to register the 375,000 shares of Common
Stock owned by the Bank and the 1, 400,000 shares of Common Stock into which the
Note is convertible (collectively, the "Acquired Shares").
44
<PAGE>
The proceeds of the sale of the Acquired Shares will be applied as
follows: the first $1,500,000 will be paid to CNL for the payments made to the
Bank pursuant to the Option Agreement; 50% of the balance, up to $2,500,000,
will be loaned to the Company (the "Loans") within five days of CNL's receipt of
the proceeds.
Each loan will be evidenced by a Note bearing interest at the rate of 4%
per annum and will be due 12 months from the date of such Loan. At maturity, the
Company will have the option to pay each Loan, together with all accrued
interest thereon, by issuing shares of a new Series C Preferred Stock (the
"Series C Preferred") having a value of $5.00 per share for purposes of such
repayment.
The series C Preferred will be non-voting and carry a cumulative dividend
of 8% per annum which may be payable by the issuance of shares of Common Stock
valued at $5.00 per share up to a maximum of 40,000 shares per annum. The Series
C Preferred will be convertible into common stock at the rate of one share of
common stock for each share of Series C Preferred and have a liquidating
preference of $5.00 per share.
The Agreement also provides that for the two year period commencing on the
issuance of any shares of Series C Preferred (the "Registration Period") CNL may
elect to include its Series C Preferred in any post-effective amendment to the
Registration Statement or any new registration statement under the Securities
Act of 1933, as amended. In addition, the Agreement also provides that during
the Registration Period, CNL may give notice to the Company to the effect that
it desires to register its shares under the Act for public distribution in which
case the Company will file a post-effective amendment to a then current
registration statement or a new registration statement.
Management believes that the foregoing transactions benefit the Company
and its stockholders. In the event CNL exercises its option under the Option
Agreement, exercises the conversion right under the Agreement and the offering
of the Acquired Shares is successful, the Company has the opportunity to, in
effect, exchange its debt for Preferred Stock and eliminate the Company's
default under the Credit Facility.
45
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the officers
and directors of the Company as of the Effective Date.
NAME AGE POSITION
- ---- --- --------
Robert S. Benou 62 President and Director
Arpad J. Havasy 60 Executive Vice President, Secretary, Treasurer
and Director
Louis S. Massad 59 Director
Marc R. Benou 29 Vice President, Assistant Secretary and
Director
Thomas Fogg 61 Vice President-Engineering
Al Vnencak 49 Vice President-Sales and Marketing
The term of each director expires at the time of the next annual meeting
of stockholders. Each officer holds office at the pleasure of the Board of
Directors. The Company has no "significant" employees other than the executive
officers. There are no arrangements or understandings pursuant to which either
of the directors or officers was selected as such.
Robert S. Benou has served as President and a Director of the Company
since 1968. Mr. Benou is responsible for military products, new product
development and supervision of sales and marketing. Mr. Benou is a graduate of
Victoria College and holds a BS degree from Kingston College, England and a BSEE
from Newark College of Engineering, in addition to industrial management courses
at Newark College of Engineering. Robert S. Benou is the father of Marc R.
Benou.
Arpad J. Havasy has served as the Company's Executive Vice President and
Director since 1968. Mr. Havasy is a graduate of Electromos E's Gepeszeti
Technikum (Hungary) and the University of Budapest. In addition, Mr. Havasy has
attended courses at both Rutgers University and the American Management
Association. Mr. Havasy is on total disability.
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<PAGE>
Louis S. Massad has been a Director of the Company since April 1995. Mr.
Massad has been Vice President, Chief Financial Officer and Director of Computer
Power Inc. since 1986. Mr. Massad holds a BS and MS degree from Cairo University
(Egypt) and an MBA from Long Island University, New York.
Marc R. Benou joined the Company in 1991 and is responsible for material,
purchasing and inventory control. In March 1995, he was elected Vice President,
Assistant Secretary and a Director. Mr. Benou attended Lehigh and High Point
University and holds a BS degree in Psychology and a BS in Business
Administration and Management. Marc R. Benou is the son of Robert S. Benou, the
Company's President.
Thomas R. Fogg joined the Company in 1976 as Chief Engineer responsible
for analog and guidance projects. Since 1986, when he became Vice
President-Engineering, he led the design team in the development of the
Company's commercial products. Mr. Fogg holds a BSEE degree from Lafayette
College and a MSEE degree from Rutgers University. Mr. Fogg is a fellow of the
Institute of Electrical and Electronic Engineers and has published articles on
delay equalization and the use of crystal resonators.
Al Vnencak joined the Company in 1991 and is responsible for Iniven
product sales and marketing. In October 1995 he was elected Vice President of
Sales and Marketing. Mr. Vnencak received his electronics training while in the
US Navy with the 7th Fleet and was awarded a meritorious service medal for his
activities. Prior to joining the Company Mr. Vnencak was system engineering
manager and director of international sales for 21 years with RFL Industries,
Inc.
47
<PAGE>
Executive Compensation
The following table sets forth the cash compensation (consisting entirely
of salary) paid (or accrued for) by the Company to its President, the only
executive officer whose aggregate remuneration exceeded $100,000 in each of two
of the three Company's fiscal years ended July 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
==========================================================================================
Summary Compensation Table
- ------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- ------------------------------------------------------------------------------------------
Other
Name and Fiscal Annual
Principal Year- Comp-
Position End Salary Bonus ensation Awards Payouts
- ------------------------------------------------------------------------------------------
Restr-
icted Options LTIP All Other
Stock /SARS Payouts Compensation
Awards
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Robert Benou, 1995 $150,000
President (1)
- ------------------------------------------------------------------------------------------
1994 $170,000
- ------------------------------------------------------------------------------------------
1993 $42,500
==========================================================================================
</TABLE>
- ----------
(1) See "Certain Transactions".
The Company did not grant any stock options or stock appreciation rights
during the fiscal year ended July 31, 1995 to any of its officers, directors or
employees. As of July 31, 1996 none of them had any outstanding stock options or
stock appreciation rights. Furthermore, none of them received awards under
long-term incentive plans that are stock based during the three fiscal years
referred to above. However, these and other benefits may be adopted in the
future if they are authorized by the Board of Directors.
Stock Option Plan
On May 15, 1995, the Board of Directors of the Company adopted and on
August 14, 1995, the shareholders approved the Conolog Corporation 1995/1996
Stock Option Plan (the "Option Plan"). The Option Plan is designed to permit the
Company to grant either incentive stock options under Section 422A of the
Internal Revenue Code (the "Code") or nonqualified stock options. Under
48
<PAGE>
the Option Plan, a Stock Option Committee (the "Option Committee") of the Board
is authorized to grant options to purchase up to 200,000 shares of stock to key
employees, officers, directors and consultants of the Company. The Option
Committee administers the Option Plan and designates the optionees, the type of
options to be granted (i.e., nonqualified or incentive stock options), the
number of shares subject to the options, and the terms and conditions of each
option. The terms and conditions include the exercise price, date of grant, and
date of exercise of each option. An employee may, at the discretion of the
Option Committee, be permitted to exercise an option and make payment by giving
a personal note.
Incentive stock options may only be granted to employees of the Company
and not to directors or consultants who are not so employed. The exercise price
for incentive stock options must be at least one hundred percent (100%) of the
fair market value of the Common Stock as determined by the Option Committee on
the date of grant. All incentive stock options under the Option Plan must be
granted within ten (10) years from the date of adoption of the Option Plan and
each option must be exercised, if at all, within ten (10) years of the date of
grant. In no event may any employee be given incentive stock options whereby
more than $100,000 of options become exercisable for the first time in a single
calendar year. All incentive stock options must be exercised by an optionee
within three (3) months after termination of the optionee's employment, unless
such termination is as a result of death, disability or retirement. In the event
an optionee's employment is terminated as a result of death or disability, such
optionee or his designated beneficiary shall be entitled to exercise any and all
options for a period of twelve (12) months after such termination. If an
optionee's employment is terminated as a result of retirement, the optionee
shall be entitled to exercise his options for a period of twenty four (24)
months following such termination.
Nonqualified stock options under the Option Plan are generally subject to
the same rules as discussed above. Nonqualified stock options may, however, also
be granted to directors and consultants, whether or not such individuals are
employees of the Company. The exercise price for nonqualified stock options may
not be granted at less than eighty-five percent (85%) of the fair market value
of the shares on the date of grant.
No incentive stock options or nonqualified options have been granted.
Employment Agreements
The Company does not have employment agreements with any of its executive
officers. See "Risk Factors - Dependence on Management."
49
<PAGE>
Chase Manhattan Bank's Right to Appoint Director
Under the terms of the Credit Facility, the Bank has the right, for a
period of three years through August 16, 1998, to nominate one person to serve
on the Company's Board of Directors, and upon such nomination the Board shall
take the action necessary to cause the Bank's nominee to be elected to the
Board. If the Bank does not exercise this right, it may appoint an advisor, who
will be entitled to attend all meeting of the Board of Directors. To date, the
Bank has not exercised either right. See "Business - Credit Facility".
50
<PAGE>
CERTAIN TRANSACTIONS
On August 16, 1995, the Company effected a 1-for-100 reverse stock split
of its Common Stock on all shares of Common Stock outstanding as of that date.
On August 16, 1995, holders of 19,360 shares of the Company's Series B
Preferred Stock (Robert Benou and Arpad J. Havasy, officers and directors of the
Company) converted their shares of Series B Preferred Stock into 387,200 shares
of Common Stock (3,872 post-split shares).
On August 16, 1995, $381,533 of the $420,179 of accrued dividends on the
Series B Preferred Stock at December 31, 1994 were converted into 76,306 shares
of Common Stock and the remaining dividends due to such holders (Messrs. Benou
and Havasy) were waived.
As of April 30, 1995, Messrs. Benou and Havasy have advanced $139,196 to
the Company for working capital purposes. No formal repayment plan or interest
charges have been established at this time. In addition, the officers have not
been paid their salaries since August 1, 1992.
On August 16, 1995, accrued salaries of $309,109 owed by the Company to
Mr. Benou were converted into 61,822 shares of Common Stock
Payment of the Company's liabilities to the Bank under the Credit Facility
were guaranteed by Mr. Benou to the extent of $965,000 and Mr. Havasy to the
extent of $492,000. Their respective guarantees were secured by a pledge to the
Bank of all Common Stock and Series B Preferred Stock owned by each of them. As
a result of the August 1995 Offering, the Bank released the guarantees.
Article Eighth of the Company's Certificate of Incorporation provides that
the Company shall, to the full extent permitted by Section 145 of the Delaware
General Corporation Law, as amended from time to time, indemnify all persons
whom it may indemnify pursuant thereto.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation to provide indemnification to a director, officer,
employee or agent of the corporation, including attorneys' fees, judgments,
fines and amounts paid in settlement, actually and reasonably incurred by him in
connection with such action, suit or proceeding, if such party acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful as
determined in accordance with the statute, and except that with respect to any
action which results in a judgment against the person and in favor of the
corporation the corporation may not indemnify unless a court determines that the
person is fairly and reasonably entitled to the indemnification.
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<PAGE>
Section 145 further provides that indemnification shall be provided if the
party in question is successful on the merits.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person in connection with the securities
being registered) the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Company has adopted a policy that transactions with affiliated
entities or persons will be on terms no less favorable than could be obtained
from unrelated parties and that all transactions between the Company and its
officers, directors, principal shareholders and affiliates will be approved by a
majority of the Company's Board of Directors.
52
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of outstanding
shares of Common Stock of the Company as of the date hereof by any person who,
to the knowledge of the Company, owns beneficially more than 5% of the
outstanding Common Stock, by all directors of the Company, and by the directors
and officers of the Company as a group.
<TABLE>
<CAPTION>
Name and Amount and
Address of Nature of Percentage of Outstanding Shares
Beneficial Owner Beneficial Ownership Before Offering After Offering (6)
---------------- -------------------- --------------- ------------------
<S> <C> <C> <C>
Robert S. Benou (2) 1,904,614(2) 78.3%(3) 5.3%
3.Arpad J. Havasy (2) 33,397 3.2% 1.4%
Chase Manhattan Bank (4) 1,775,000 72.9% _____
270 Park Avenue
New York, NY 10017
CNL Holdings, Inc. (5) 1,775,000 72.9% _____
750 Lexington Ave
New York, NY 10022
Marc R. Benou(2) ______ ______ ______
Louis S. Massad(2) -- -- --
Thomas Fogg(2) 200 ..* *
All Directors and Officers
as a Group (5 persons) 1,938,211(3) 81.5%(3) 6.7%
</TABLE>
- ----------
(1) Does not include treasury stock. See "Financial Statements". Does not
include possible issuance of (i) 1,135,750 shares of Common stock issuable
upon exercise of 1,135,750 Class A Warrants, (ii) 41,000 shares of Common
Stock issuable upon exercise of a Unit Purchase Option issued to the
Public Offering Underwriter and (iii) 20,500 shares of Common Stock
issuable upon exercise of Class A Warrants contained in such Unit Purchase
Option.
(2) The address for these individuals is c/o Conolog Corporation, 5 Columbia
Road, Somerville, New Jersey 08876.
(3) This amount includes 1,775,000 shares which CNL Holdings, Inc. (the
"Selling Securityholder") has the option to purchase from the Chase
Manhattan Bank (the "Bank") of which 375,000 sharesshares esently owned by
the Bank and 1,400,000 may be acquired by conversion of the Chase
Manhattan Note. Mr. Benou has the sole power to vote in the event the
Selling Securityholder exercises its option to purchase the shares of
Common Stock and execises the conversion rights of the Chase Manhattan
Note. See "Business - Credit Facility - New Terms of Credit Facility and
Agreement with the Selling Securityholder."
(4) See "Business - Credit Facility." This amount includes conversion of the
Chase Manhattan Note into 1,400,000 shares of Common Stock.
(5) Includes 375,000 shares presently owned by Chase Manhattan Bank and
1,400,000 shares of Common Stock issuable upon conversion of the Chase
Manhattan Note, all of which are subject to an option to purchase by CNL
Holdings, Inc., the Selling Securityholder. See "Business - Credit
Facility" and "Selling Securityholder and Plan of Distribution."
(6) Assumes the sale of 1,775,000 shares of Common Stock by the Selling
Securityholder.
* Less than 1%
53
<PAGE>
DESCRIPTION OF SECURITIES
Capitalization
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock and 2,000,000 shares of Preferred Stock. On the date of this
Prospectus, the Company had 1,032,639 shares (2,432,639 assuming conversion of
the Chase Manhattan Note) of Common Stock outstanding (not including treasury
stock), 155,000 shares of Series A Preferred Stock outstanding (162,000
authorized) and 1,790 shares of Series B Preferred Stock outstanding (50,000
authorized).
Common Stock
The Company has 1,032,639 shares (2,432,639 assuming conversion of the
Chase Manhattan Note) of Common Stock outstanding (not including treasury
stock).
Holders of the Common Stock are entitled to one vote for each share in the
election of directors and in all other matters to be voted on by the
stockholders. There is no cumulative voting in the election of directors. The
By-laws of the Company require that only a majority of the issued and
outstanding shares of Common Stock must be represented to constitute a quorum
and to transact business at a stockholders meeting.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors with respect to the Common
Stock out of funds legally available therefor and, in the event of liquidation,
dissolution or winding up of the Company, to share ratably in all assets
remaining after payment of liabilities and payments to holders of Preferred
Stock. (See "Preferred Stock" below.) There are presently no plans to pay
dividends with respect to the shares of Common Stock. See "Dividends". The
holders of 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 the Common Stock. The Common Stock currently
outstanding is, and the Common Stock issuable upon exercise of the Warrants
(described below) and payment of the $6.00 per share exercise price will, when
issued, be validly issued, fully paid and nonassessable.
Preferred Stock
The Company is authorized to issue 2,000,000 shares of Preferred Stock,
issuable in series, of which there are outstanding 155,000 shares of Series A
Preferred Stock, $.50 par value (162,000 authorized) and 1,790 shares of Series
B Preferred Stock, $.50 par value (50,000 authorized).
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<PAGE>
Holders of Series A Preferred Stock are entitled to receive, out of funds
legally available therefor, dividends at the rate of 4% per annum ($.02 per
share) of the par value thereof. The Series A Preferred Stock has no voting
rights. Series A Preferred Stock ranks senior to all other capital stock of the
Company and upon dissolution, holders of such shares are entitled to receive
100% of the par value thereof and all accrued and unpaid dividends prior to any
payment to any holder of capital stock of the Company. In addition, each share
of Series A Preferred Stock may be exchanged for one (1) share of Common Stock
upon surrender of the Series A Preferred Stock and payment of $1,200 per share.
The Company may redeem the Series A Preferred Stock at $.50 per share plus
accrued and unpaid dividends. As of June 30, 1996, there was $83,422 in 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. Series B Preferred stock ranks senior to
all capital stock of the Company but junior to the Series A Preferred Stock, and
upon dissolution, holders of such shares are entitled to receive 100% of the par
value thereof and all accrued and unpaid dividends prior to any payment to any
holder of capital stock of the Company but after payment to the holders of
Series A Preferred Stock. In addition, each share of Series B Preferred Stock is
convertible into .20 shares of Common Stock. As a result of the 1-for- 100
reverse split on the Effective Date, the total number of shares of Common Stock
that may be issued upon conversion of the Series B Preferred Stock is 358. The
Company may redeem the Series B Preferred Stock at $15.00 per share plus accrued
and unpaid dividends. As of June 30, 1996, there was $38,467 in accrued and
unpaid dividends.
In connection with the agreement between the Company and CNL, CNL has
agreed to loan up to $2,500,000 to the Company under certain circumstances. Each
loan will be evidenced by a Note bearing interest at the rate of 4% per annum
and will be due 12 months from the date of such Loan. At maturity, the Company
will have the option to pay each Loan, together with all accrued interest
thereon, by issuing shares of a new Series C Preferred Stock (the "Series C
Preferred") having a value of $5.00 per share for purposes of such repayment.
The series C Preferred will be non-voting and carry a cumulative dividend
of 8% per annum which may be payable by the issuance of shares of Common Stock
valued at $5.00 per share up to a maximum of 40,000 shares per annum. The Series
C Preferred will be convertible into common stock at the rate of one share of
common stock for each share of Series C Preferred and have a liquidating
preference of $5.00 per share.
The Board of Directors has the authority to issue Preferred Stock in one
or more series and to fix the rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the stockholders. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders
55
<PAGE>
and may adversely affect the voting and other rights of the holders of Common
Stock. At present, the Company has no other plans to issue any additional shares
of Preferred Stock.
Warrants
In connection with the August 1995 Offering and with bridge financing that
preceded such offering, the Company issued 1,135,750 Class A Warrants. Each
Redeemable Class A Warrant entitles the holder thereof to purchase one share of
Common Stock at an exercise price of $6.00 from August 17, 1996 until August 16,
1998, subject to certain adjustments. The redeemable Warrants may be exercised
in whole or in part.
The redeemable Warrants were issued under a warrant agreement dated as of
August 16, 1995 (the "Warrant Agreement") between the Company and Continental
Stock Transfer & Trust Company (the "Warrant Agent"). The following is a general
summary of certain provisions contained in the Warrant Agreement and is
qualified in its entirety by reference to the Warrant Agreement, a copy of which
has been filed as an exhibit to the Registration Statement, of which this
Prospectus is a part.
The Board of Directors of the Company has the right to amend the terms of
the Warrant Agreement at its discretion to, among other things, reduce the
exercise price or extend the exercise period of the Warrants; provided however,
that no amendment adversely affecting the rights of the holders of Warrants may
be made without the approval of the holders of a majority of the affected
Warrants.
At any time during the exercise period the Company has the right to redeem
all the Class A Warrants at a price of $.05 per Warrant upon not less than 30
days' prior written notice; provided that before any redemption of Class A
Warrants can take place, the average closing price of the Company's Common Stock
as reported on Nasdaq shall have been $7.20 per share for 20 consecutive trading
days ending within 15 days prior to the date on which notice of redemption is
sent.
In order for a holder to exercise his or her redeemable Warrants, and as
required in the Warrant Agreement, there must be a current registration
statement on file with the Securities and Exchange Commission and various state
securities commissions to continue registration of the shares of Common Stock
underlying such warrants. The Company will be required to file post-effective
amendments when events require such amendments. There can be no assurance that
the registration statement can be kept current. If it is not kept current for
any reason, the redeemable Warrants will not be exercisable and will be deprived
of any value. The Company has agreed to use its best efforts to maintain a
current registration statement to permit the issuance of the Common Stock upon
exercise of the redeemable Warrants.
Holders of the redeemable Warrants will be protected against dilution of
the interest represented by the underlying shares of Common Stock upon the
occurrence of certain events, including, but not limited to, stock dividends,
stock-splits, reclassifications and mergers. In the event of the complete
liquidation and dissolution of the Company, the redeemable Warrants terminate.
56
<PAGE>
Holders of the redeemable Warrants will not have voting power and will not be
entitled to dividends. In the event of liquidation, dissolution or winding up of
the Company, holders of the redeemable Warrants will not be entitled to
participate in the Company's assets.
Pursuant to the Underwriting Agreement in the August 1995 Offering, the
Company has agreed to pay to the Public Offering Underwriter and/or any
registered broker-dealer which is a member of the National Association of
Securities Dealers, Inc. ("NASD") a commission equal to four percent of the
exercise price of each redeemable Warrant exercised provided: (1) at least one
year has elapsed from August 16, 1995, (2) the market price for the Common Stock
is greater than the exercise price of the redeemable Warrants; (3) the Public
Offering Underwriter or such other NASD broker-dealer member has solicited the
holder to exercise the redeemable Warrant with such solicitation being confirmed
in writing by each holder; and (4) the compensation arrangements were disclosed
to the holder at the time of exercise, such disclosure being confirmed in
writing by said holder. The commission is further conditioned upon the Company's
Warrant Agent being furnished by the Public Offering Underwriter or NASD
broker-dealer member with a certificate stating that:
(i) the redeemable Warrants exercised were not held in a discretionary
account;
(ii) the Public Offering Underwriter or the NASD member did not, within 10
business days immediately preceding the solicitation of the exercise of
the redeemable Warrant or the date of such exercise, bid for or purchase
the Common Stock of the Company or any securities of the Company
immediately convertible into or exchangeable for the Common Stock
(including the redeemable Warrants and the Preferred Stock) or otherwise
engage in any activity that would be prohibited by Rule 10b-6 under the
Securities Exchange Act of 1934, as amended, to one engaged in a
distribution of the Company's securities; and
(iii) in connection with the solicitation, the Public Offering Underwriter
and/or the NASD member disclosed to the person exercising the redeemable
Warrant the compensation it would receive upon exercise of the redeemable
Warrant.
Transfer Agent/Warrant Agent
The Company's transfer agent for the Common Stock and the Warrants is
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004. Continental Stock Transfer & Trust Company also serves as the Warrant
Agent for the Warrants.
SHARES AVAILABLE FOR FUTURE SALE
Immediately prior to the sale of the Common Stock hereunder, the Company
had an aggregate of 1,032,639 shares of its Common Stock issued and outstanding,
538,687 of which are "restricted securities," which may be sold only in
compliance with Rule 144 under the Securities Act of 1933, as amended. 375,000
of the 538,687 shares are being registered hereunder. Rule 144 provides, in
57
<PAGE>
essence, that a person holding restricted securities for a period of two years
after payment therefor may sell, in brokers' transactions or to market makers,
an amount not exceeding 1% of the outstanding class of securities being sold, or
the average weekly reported volume of trading of the class of securities being
sold over a four-week period, whichever is greater, during any three-month
period. (Persons who are not affiliates of the Company and who had held their
restricted securities for at least three years are not subject to the volume or
transaction limitations.) Any such sales could have a material adverse effect on
the market price for the Common Stock, should a trading market develop.
58
<PAGE>
SELLING SECURITYHOLDER AND PLAN OF DISTRIBUTION
The Registration Statement of which this Prospectus is a part relates to
the offer and sale of 1,775,000 shares of Common Stock by CNL Holdings, Inc.
(hereinafter referred to as "CNL" or the "Selling Securityholder"). For a
description of the transaction relating to the shares of Common Stock held by
CNL see "Business -Credit Facility - New Terms of Credit Facility and Agreement
with the Selling Securitiyholder." Sales of the shares of Common Stock under
this Prospectus by CNL or even the potential of such sales may have an adverse
effect on the market price of the Company's securities. The Company will not
receive any of the proceeds from the sale of the shares of Common Stock by CNL.
However, pursuant to an agreement between the Company and the Selling
Securityholder, the Selling Securityholder may loan funds, in certain
circumstances, to the Company. See "Business - Credit Facility-- New Terms of
Credit Facility and Agreement with the Selling Securityholder." The resale of
the Securities of the Selling Securityholder is subject to prospectus delivery
and other requirements of the Securities Act of 1933, as amended (the "Act").
The securities offered thereby may be sold from time to time directly by
the Selling Securityholder. Alternatively, the Selling Securityholder may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholder may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such securities as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholder in connection with such sales of securities. The Selling
Securityholder and intermediaries through whom such securities are sold may be
deemed "underwriters" within the meaning of the Act with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a prospectus will be distributed
which will set forth the number of securities being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for securities purchased from
the Selling Securityholder and any discounts, commissions or concessions allowed
or reallowed or paid to dealers, and the proposed selling price to the public.
Under the Exchange Act, and the regulations thereto, any person engaged in
a distribution of the securities of the Company offered by the Selling
Securityholder may not simultaneously engage in market-making activities with
respect to such securities of the Company during the applicable "cooling off"
period (9 days) prior to the commencement of such distribution. In addition, and
without limiting the foregoing, the Selling Securityholder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, Rule 10b-6
59
<PAGE>
and 10b-7, in connection with transactions in such securities, which provisions
may limit the timing of purchase and sales of such securities by the Selling
Securityholder.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for the
Company by Bernstein & Wasserman, LLP, 950 Third Avenue, New York, New York
10022.
EXPERTS
The financial statements of Conolog Corporation have been included herein
and in the Registration Statement in reliance upon the report of Rosenberg Rich
Baker Berman & Company, independent certified public accounts, appearing
elsewhere herein and upon the authority of said firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and other information filed by the
Company can be inspected and copied (at prescribed rates) at the Commission's
Public Reference Section, 450 Fifth Street, NW, Washington, D.C., as well as the
New York Regional Office, Seven World Trade Center, New York, New York, and the
Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois.
The Company has filed with the Commission a registration statement on Form
S-1 (herein together with all amendments and exhibits referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), of which this Prospectus forms a part. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. For further information, reference is made to the
Registration Statement.
60
<PAGE>
Index to the Financial Statements
Page
Independent Auditor's Report ........................................ F-1
Balance Sheets - June 30, 1996 (unaudited) and
July 31, 1995 and 1994 ........................................... F-2-3
Statements of Income - Eleven Months Ended
June 30, 1996 and 1995 (unaudited) and Years
Ended July 31, 1995, 1994 and 1993 ............................... F-4
Statement of Stockholders' Equity (Deficiency) -
Eleven Months Ended June 30, 1996 (unaudited)
and Years Ended July 31, 1995, 1994 and 1993 ..................... F-5
Statements of Cash Flows - Eleven Months Ended
June 30, 1996 and 1995 (audited) and Years
Ended July 31, 1995, 1994 and 1993 ............................... F-6
Notes to the Financial Statements ................................... F-7-13
<PAGE>
Independent Auditors' Report
To the Board of Directors
Conolog Corporation
We have audited the accompanying balance sheets of Conolog Corporation as of
July 31, 1995 and 1994, and the related statements of income, stockholders'
equity (deficiency) and cash flows for each of the three years in the period
ended July 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Conolog Corporation at July 31,
1995 and 1994, and the results of its operations and its cash flows for each of
the three years in the period ended July 31, 1995 in conformity with generally
accepted accounting principles.
Bridgewater, New Jersey
October 11, 1995
F-1
<PAGE>
Conolog Corporation
Balance Sheets
June 30, July 31,
---------- -----------------------
1996 1995 1994
---------- ---------- ----------
(unaudited)
Assets
Current Assets
Cash $ 95,079 $ 27,577 $ 15,403
Accounts receivable - less allowances
of $10,000 in 1996, 1995 and 1994 496,936 171,541 246,070
Inventories 2,854,608 2,598,127 2,990,185
Other current assets 40,442 25,683 22,289
Deferred tax asset -- 492,352 --
Deferred offering costs -- 86,154 --
---------- ---------- ----------
Total Current Assets 3,487,065 3,401,434 3,273,947
Property, Plant and Equipment, Net 454,392 468,895 453,116
Other assets 11,606 11,906 12,231
---------- ---------- ----------
Total Assets $3,953,063 $3,882,235 $3,739,294
========== ========== ==========
Liabilities
Current Liabilities
Note payable - bank $1,012,500 $3,798,000 $ --
Accounts payable 200,213 287,630 275,300
Accrued expenses 142,972 1,290,315 872,831
Bridge loan -- 200,000 --
Current maturities of capitalized lease
obligations 34,100 54,660 39,269
---------- ---------- ----------
Total Current Liabilities 1,389,785 5,630,605 1,187,400
---------- ---------- ----------
Other Liabilities
Long-term debt, less current maturities -- -- 3,798,000
Capitalized lease obligations,
less current maturities 6,669 34,103 31,625
Due to officers -- 161,705 144,403
---------- ---------- ----------
6,669 195,808 3,974,028
---------- ---------- ----------
See notes to the financial statements.
F-2
<PAGE>
Conolog Corporation
Balance Sheets
<TABLE>
<CAPTION>
June 30, July 31,
----------- --------------------------
1996 1995 1994
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Stockholders' Equity (Deficiency)
Series A Preferred Stock, 4% cumulative; par
value $.50; Authorized 500,000 shares; issued
and outstanding 155,000 shares $ 77,500 $ 77,500 $ 77,500
Series B Preferred Stock, $.90 cumulative;
par value $.50; Authorized 500,000
shares; issued and outstanding 21,321
shares (1,790 at June 30, 1996) 895 10,661 10,661
Common Stock, par value $.01 per share;
Authorized 6,000,000 shares; issued
5,223,870 shares (including 877,596
shares held in Treasury at July 31,
1995 and 1994) (par value $1.00,
post-reverse-spilt; 1,032,639 shares
outstanding at June 30, 1996) 1,032,639 52,239 52,239
Additional paid-in capital 4,392,198 952,994 952,994
Retained earnings (deficit) (2,814,889) (2,905,838) (2,383,794)
Treasury shares at cost (131,734) (131,734) (131,734)
----------- ----------- -----------
Total Stockholders' Equity (Deficiency) 2,556,609 (1,944,178) (1,422,134)
----------- ----------- -----------
Total Liabilities and Stockholders'
Equity (Deficiency) $ 3,953,063 $ 3,882,235 $ 3,739,294
=========== =========== ===========
</TABLE>
See notes to the financial statements.
F-3
<PAGE>
Conolog Corporation
Statements of Income
<TABLE>
<CAPTION>
Eleven Months Ended
June 30, Year Ended July 31,
----------------------------- -----------------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Sales and other income $ 1,878,669 $ 2,072,555 $ 2,090,933 $ 2,044,860 $ 1,486,298
----------- ----------- ----------- ----------- -----------
Costs and Expenses
Cost of products sold 1,213,328 1,259,180 1,270,771 1,067,560 625,284
Selling, general and
administrative 784,954 710,286 924,524 852,951 804,661
Interest 144,814 196,974 253,686 362,317 336,668
Write-off of obsolete or
excess inventories -- 656,248 656,248 944,970 39,498
----------- ----------- ----------- ----------- -----------
2,143,096 2,822,688 3,105,229 3,227,798 1,806,111
----------- ----------- ----------- ----------- -----------
Loss Before Income Taxes (264,427) (750,133) (1,014,296) (1,182,938) (319,813)
Income Taxes (Benefit) 100 -- (492,252) 50 2,192
----------- ----------- ----------- ----------- -----------
Loss before extraordinary item (264,527) (750,133) (522,044) (1,182,988) (322,005)
Extraordinary item (net of tax
benefit of $492,352) 740,376 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net Income (Loss) $ 475,849 $ (750,133) $ (522,044) $(1,182,988) $ (322,005)
=========== =========== =========== =========== ===========
Loss per share of Common
Stock, before extraordinary
item $ (.25) $ (17.51) $ (12.01) $ (27.22) $ (7.41)
=========== =========== =========== =========== ===========
Income (loss) per share of
Common Stock, after extra-
ordinary item $ .46 $ (17.51) $ (12.01) $ 27.22 $ 7.41
=========== =========== =========== =========== ===========
</TABLE>
See notes to the financial statements.
F-4
<PAGE>
Conolog Corporation
Statement of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Total
Series A Series B Additional Retained Stockholders'
Preferred Preferred Common Paid-in Earnings Treasury Equity
Stock Stock Stock Capital (Deficit) Stock (Deficiency)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1993 $ 77,500 $ 10,661 $ 52,239 $ 952,994 $(1,200,806) $ (131,734) $ (239,146)
Net loss for the year -- -- -- -- (1,182,988) -- (1,182,988)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at July 31, 1994 77,500 10,661 52,239 952,994 (2,383,794) (131,734) (1,422,134)
Net loss for the year -- -- -- -- (522,044) -- (522,044)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at July 31, 1995 77,500 10,661 52,239 952,994 (2,905,838) (131,734) (1,944,178)
Stock offering August 24, 1995 -- (9,766) 980,400 3,439,204 (384,900) -- 4,024,938
Net income for the eleven
months -- -- -- -- 475,849 -- 475,849
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1996
(unaudited) $ 77,500 $ 895 $ 1,032,639 $ 4,392,198 $(2,814,889) $ (131,734) $ 2,556,609
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to the financial statements.
F-5
<PAGE>
Conolog Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Eleven Months Ended
June 30, Year Ended July 31,
-------------------------- -----------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net Income (Loss) $ 475,849 $ (750,133) $ (522,044) $(1,182,988) $ (322,005)
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities
Deferred income taxes -- -- (492,352) -- --
Depreciation and amortization 56,643 65,978 60,396 57,529 73,670
Provision for losses on accounts
receivables -- -- -- (28,561) --
(Increase) Decrease in Operating Assets
Accounts receivable (325,395) 8,127 74,529 (58,051) 10,361
Inventories (256,481) 445,461 392,058 874,989 (129,623)
Other current assets (12,633) (7,018) (3,394) 22,555 10,292
Increase (Decrease) in Operating Liabilities
Accounts payable (87,418) (19,020) 12,330 38,459 (72,689)
Accrued expenses and other liabilities (568,533) 164,184 417,484 398,239 224,761
----------- ----------- ----------- ----------- -----------
Net Cash Provided (Used) by Operating
Activities (717,968) (92,421) (60,993) 122,171 (205,233)
----------- ----------- ----------- ----------- -----------
Cash Flows From Investing Activities
Purchase of property, plant and equipment (42,144) (81,342) (19,625) (44,675) (3,360)
----------- ----------- ----------- ----------- -----------
Cash Flows From Financing Activities
Proceeds from public stock offering 4,353,049 -- -- -- --
Deferred offering costs -- -- (86,154) -- --
Proceeds from short-term borrowings -- 180,000 -- -- --
Proceeds from long-term borrowings 6,669 12,101 -- 75,000 --
Proceeds from bridge loan -- -- 200,000 -- --
Repayment of bridge loan (200,000) -- -- -- --
Repayments of long-term borrowings (2,785,500) -- (38,681) (53,098) (45,192)
(Increase) reductions in other assets -- -- 325 20,672 (1,182)
Dividends paid (384,899) -- -- -- --
Increase (decrease) in due to officers (161,705) (25,784) 17,302 (137,333) 230,137
----------- ----------- ----------- ----------- -----------
Net Cash Provided (Used) by Financing
Activities 827,614 166,317 92,792 (94,759) 183,763
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash 67,502 (7,446) 12,174 (17,263) (24,830)
Cash at Beginning of Period 27,577 15,446 15,403 32,666 57,495
----------- ----------- ----------- ----------- -----------
Cash at End of Period $ 95,079 $ 8,000 $ 27,577 $ 15,403 $ 32,665
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest paid $ 9,564 $ 7,663 $ 102,816 $ 90,917 $ 135,598
Taxes paid $ -- $ 50 $ 50 $ 50 $ 2,217
SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Capitalized lease obligations incurred
for use of equipment $ -- $ -- $ 56,550 $ -- $ --
</TABLE>
See notes to the financial statements.
F-6
<PAGE>
Conolog Corporation
Notes to the Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The principal business activity of Conolog Corporation (the
"Company") is the design, manufacturing and distribution of small
electronic and electromagnetic components and subassemblies for use
in telephone, radio and microwave transmission and reception and
other communication areas. The Company's products are used for
transceiving various quantities, data and protective relaying
functions in industrial, utility and other markets. The Company's
customers include primarily industrial customers, which include
power companies and various branches of the military.
Revenue Recognition
Sales are generally recognized when the products are shipped. Sales
under certain fixed-price-type contracts, where progress payments
are received, are recognized when work is performed.
Inventories
Inventories are stated principally at average cost which is not in
excess of market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less allowances
for depreciation and amortization. Depreciation and amortization are
computed by the straight-line method over the estimated useful lives
of the assets.
Income (Loss) Per Share of Common Stock
Income (loss) per share of common stock is computed by dividing net
income (loss) (after dividends on preferred shares) by the weighted
average number of shares of Common Stock outstanding during the
year. 43,463 in 1995, 1994 and 1993 and 1,032,639 in 1996. The
effect of assuming the exchange of the Series A Preferred Stock and
Series B Preferred Stock in 1995 would be anti-dilutive.
Income Taxes
Deferred income taxes have been provided for in accordance with
Statement No. 109 of the Financial Accounting Standards Board.
Deferred income taxes arise from timing differences resulting from
income and expense items reported for financial accounting and tax
purposes in difference periods. Deferred taxes are classified as
current or noncurrent, depending on the classification of the assets
and liabilities to which they related. Deferred taxes arising from
timing differences that are not related to an asset or liability are
classified as current or noncurrent depending on the periods in
which the timing differences are expected to reverse.
NOTE PAYABLE - BANK
On October 25, 1994, the Company and the bank reached an agreement on
extending the terms of the loan. Accordingly, the financial statements at
July 31, 1994 and 1995 reflect this agreement.
Under this agreement, the loan had been extended as follows:
F-7
<PAGE>
Conolog Corporation
Notes to the Financial Statements
NOTE PAYABLE - BANK (CONTINUED)
(i) Interest on the loans will accrue but not be payable until July 31,
1995. Beginning on that date, interest payments are to be made in
arrears on the last day of each month with all unpaid interest
previously accrued becoming due and payable on November 30, 1995.
(ii) All principal on the loans and other amounts owing to the bank will
become due and payable on November 30, 1995.
The principal amount owing at July 31, 1995 is $3,798,000 and the unpaid
accrued interest is $584,728.
The interest rate on both notes is 3/4% over the prime rate of the bank.
The interest may be increased to 2% over the previous rate in the event of
a default under the terms and conditions described in the note.
Both notes are secured by substantially all accounts receivable,
inventory, equipment, general intangibles, deposits and a mortgage on the
Company's real estate property. The loans are guaranteed by the Company's
president and vice president to the extent of $965,000 and $492,500,
respectively. In addition, these officers have pledged all of their Common
and Preferred Class B shares to the bank to secure their respective
guarantees.
The loan agreement contains various covenants that limit the amounts of
indebtedness, liens, contingent obligations, capital expenditures,
dividends, stock acquisitions, investments, loans and advances, and
leases. The covenants also prohibit mergers, consolidations, liquidation
or dissolution, sale or lease of all or a substantial part of its
property, business or assets, certain prepayments, sale and lease-back
arrangements and subordinated debt.
On August 16, 1995, in connection with the Company's offering, the bank
exchanged the above loan agreement for the following:
(a) $250,000 cash.
(b) $1,025,000 five year term loan
(c) 375,000 common shares of the Company
The debt forgiveness of $1,232,728 on restructuring of the obligation is
accounted for as an extraordinary gain to the Company.
(See Subsequent Event note.)
SUBSEQUENT EVENT (UNAUDITED)
On September 11, 1996, the Company entered into an allonge agreement with
the bank whereby the bank may at any time before April 15, 1997 convert
the then unpaid amount of principal and interest due under the Amended and
Restated Term Note dated as of August 2, 1995 in the original principal
amount of $1,025,000 into 1,400,000 shares of the Company's Common Stock
(the "Note Shares"). The outstanding balance of the note and unpaid
interest as of August 26, 1996 was $1,077,988.
F-8
<PAGE>
Conolog Corporation
Notes to the Financial Statements
SUBSEQUENT EVENT (UNAUDITED) (CONTINUED):
On September 12, 1996 the bank entered into an option and purchase, sale
and assignment agreement (the "Option Agreement") with CNL Holdings, Inc.
(CNL) whereby the bank would sell the Note Shares referred to above, along
with the 375,000 common shares of the Company it currently owns (the "Bank
Shares") for $1,500,000 to CNL.
On September 12, 1996 CNL entered into an agreement with the Company
whereby the Company would use its best efforts to file a Registration
Statement with the Securities and Exchange Commission covering the 375,000
Bank Shares and the 1,400,000 Note Shares (collectively the "Acquired
Shares"). Such Registration Statement shall be declared effective as soon
as possible after the filing thereof, and kept current and effective for a
period of two years or until such time as all shares registered pursuant
therewith have been sold or otherwise transferred. The proceeds of the
sale of the Acquired Shares shall be applied as follows: The first
$1,500,000 shall be paid to reimburse CNL for payments made to the bank
pursuant to the Option Agreement. Fifty percent of the balance of the
proceeds, not to exceed $2,500,000, shall be loaned to the Company by CNL.
The balance of the proceeds belong to CNL. The amounts loaned by CNL to
the Company shall be evidenced by notes which shall be due twelve months
after making such loan and shall bear interest at the rate of 4% per
annum. At maturity of the loans, the Company will have the option to repay
the loan balance and accrued interest by issuing a new Series C Preferred
Stock (the "Preferred Stock") valued at $5.00 per share. The Preferred
Stock will be non-voting and will carry a cumulative dividend of 8% per
annum, which may be payable by the issuance of shares of common stock
valued at $5.00 per share up to a maximum of 40,000 shares per annum.
BRIDGE LOAN
During May 1995, the Company obtained bridge financing in the amount of
$200,000. In exchange for the $200,000, the Company executed in favor of
the lenders promissory notes, accruing interest at 8%. These notes became
due and were paid at the closing date of the offering.
DUE TO OFFICERS
The two principal officers have made advances to the Company to help
alleviate cash flow problems. No formal repayment plan for these advances
has been established. Effective July 31, 1995 interest has been accrued
from inception on these advances at the cumulative rate of 12% of the
outstanding balances. Total accrued interest on these advances, included
in accrued interest in the accompanying financial statements, is $65,889
at July 31, 1995 and $18,558 at June 30, 1996. As of June 30, 1996 the
principal of these loans has been repaid.
F-9
<PAGE>
Conolog Corporation
Notes to the Financial Statements
CAPITAL STOCK
The Series A Preferred Stock provides 4% ($.02 per share) cumulative
dividends, which were $80,600 in arrears at July 31, 1995. 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 $12 per
share. The Company has reserved 155,000 shares of its Common Stock for
such exchange. The Company may redeem the Series A Preferred Stock at $.50
per share plus accrued and unpaid dividends.
The Series B Preferred Stock provides cumulative dividends of $.90 per
share which were $420,179 in arrears at July 31, 1995. In addition, each
share of Series B Preferred Stock is convertible into 20 shares of Common
Stock. The Company has reserved 426,420 shares of its Common Stock for
such conversion. The Company may redeem the Series B Preferred Stock at
$15 per share plus accrued and unpaid dividends.
On August 16, 1995, the Company offered 205,000 Units (the "Units") at a
price of $10.00 per Unit. Each Unit consists of two (2) shares of Common
Stock, par value $1.00 per share ("Common Stock"), and one (1) Redeemable
Class A Warrant for Common Stock ("Class A Warrant"). The Common Stock and
Class A Warrants are detachable and may trade separately immediately upon
issuance. Each Class A Warrant entitles the holder to purchase one share
of the Company's Common Stock, at an exercise price of $6.00, subject to
adjustment, from August 17, 1996 through August 16, 1998. The Class A
Warrants (the "Warrants") are subject to redemption by the Company at any
time after August 17, 1996 on not less than 30 days' notice at $.05 per
Warrant, provided the average closing price of the Common Stock for 20
consecutive trading days ending within 15 days prior to the notice exceeds
$7.20 per share.
At July 31, 1995, all costs associated with this Offering were deferred.
These costs were deducted from the proceeds from the sale of stock.
On August 16, 1995, the Company effected a 1-to-100 reverse stock split of
its Common Stock on all shares of Common Stock outstanding.
On August 16, 1995, holders of 19,360 shares of the Company's Series B
Preferred Stock (including Robert Benou and Arpad J. Havasy, officers and
directors of the Company) converted their shares of Series B Preferred
Stock into 387,200 (3,872 post-split) shares of Common Stock.
On August 16, 1995, $381,533 of the $420,179 of accrued dividends on the
Series B Preferred Stock at December 31, 1994 were converted into 76,307
shares of Common Stock (represents a $5.00 per share assigned value of
Common Stock) and the remaining dividends due to such holders (including
Messrs. Benou and Havasy) were waived.
On August 16, 1995, accrued salaries through April 28, 1995 of $309,109
owed by the Company to Mr. Benou were converted into 61,822 shares of
Common Stock (represents a $5.00 per share assigned value of Common
Stock).
F-10
<PAGE>
Conolog Corporation
Notes to the Financial Statements
WRITE-OFF OF OBSOLETE OR EXCESS INVENTORIES
During 1995, the Company recorded a write-off of obsolete or excess
inventories of $656,248. During 1994 and 1993, the Company recorded a
write-off of obsolete or excess inventories of $944,970 and $39,498,
respectively.
The inventory written off was military related. In management's opinion
these items will not be reordered in the foreseeable future.
INCOME TAXES
On August 16, 1995, the Company's bank debt was restructured resulting in
debt forgiveness of $1,232,728. This created a deferred tax asset at July
31, 1995 of $492,352. The Company expects to use its operating losses and
tax credits to absorb this taxable income in fiscal 1996. No deferred tax
asset due to net operating losses and tax credit carryforwards has been
reflected beyond the amount resulting from the debt forgiveness income.
Income taxes are comprised of the following:
June 30, July 31,
------------------- --------------------------------
1996 1995 1995 1994 1993
-------- -------- --------- -------- --------
Deferred Income Taxes
(Benefit) $ -- $ -- $(492,352) $ -- $ --
Current Income Taxes
Federal -- -- -- -- 2,142
State 100 -- 100 50 50
-------- -------- --------- -------- --------
$ 100 $ -- $(492,252) $ 50 $ 2,192
======== ======== ========= ======== ========
The reasons for the difference between the total income taxes and the
amount computed by applying the statutory Federal income tax rate in 1993
is due to the alternative minimum tax adjustment.
Taxable income differs from financial statement income due to the effect of
non-deductible permanent tax differences. These permanent tax differences
include officer's life insurance premiums and non-deductible entertainment
expenses.
F-11
<PAGE>
Conolog Corporation
Notes to the Financial Statements
INCOME TAXES (CONTINUED)
At July 31, 1995, the Company has a net operating loss carryforward of
approximately $2,740,000 for financial reporting purposes and
approximately $2,334,400 for tax purposes which is available to offset
future Federal taxable income. For Federal purposes, $1,129,300 of the
carryforward expires in 2002, $1,205,100 expires in 2009. For state
purposes the carryforward is approximately $1,555,500; $350,600 expires in
1998 and $1,205,000 expires in 2000. Also, at July 31, 1995 the Company
has unused tax credits available of approximately $103,300 of which
$12,100 expires in 2000, $26,300 in 2001 and $64,900 in 2002.
LEASES
The Company leases automobiles, machinery and equipment, and furniture and
fixtures under leases which expire over the next three years. The rental
payments are based on minimum rentals and charges for mileage in excess of
specified amounts for the automobiles. The leases for machinery and
equipment and furniture and fixtures contain a bargain purchase option
exercisable after the initial lease term.
Property, plant and equipment include the following amounts for leases
that have been capitalized:
July 31,
-------------------------
1995 1994
-------- --------
Machinery and equipment $322,239 $265,689
Less allowance for amortization 248,013 232,531
-------- --------
$ 74,226 $ 33,158
======== ========
Lease amortization is included in depreciation expense.
Future minimum payments, by year and in the aggregate, under capital
leases consisted of the following as of July 31, 1995:
1996 $ 56,039
1997 26,511
1998 8,339
--------
Total minimum lease payments 90,889
Less amounts representing interest (2,126)
--------
Present value of net minimum lease payments 88,763
Less, current maturities of capitalized lease obligations 54,660
--------
Long-term capitalized lease obligations $ 34,103
========
F-12
<PAGE>
Conolog Corporation
Notes to the Financial Statements
LEASES (CONTINUED):
The Company leases various equipment under noncancellable operating leases
expiring through July 2000. Future minimum rental payments under the above
leases are follows:
Year Ended July 31,
-------------------
1996 $11,744
1997 7,659
1998 4,808
-------
$24,211
=======
Total rental expense for all operating leases of the Company amounted to
approximately $11,444, $16,850 and $16,708 during the years ended July 31,
1995, 1994 and 1993, respectively.
MAJOR CUSTOMERS AND EXPORT SALES
The following summarizes sales to major customers (each 10% or more of net
sales) by the Company:
Sales to
Major Number of Percentage
Year Ended Customers Customers of Total
--------- --------- ----------
1995 $424,849 1 20
1994 597,000 1 29
1993 688,147 1 46
During 1995, 1994 and 1993 the Company did not have any export sales.
F-13
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or any Underwriter. Neither the delivery
of this Prospectus nor any sale made hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Company since the date hereof. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to make such offer or solicitation in such
jurisdiction.
--------------
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................................
The Offering..............................................................
Summary Financial
Information.............................................................
Risk Factors..............................................................
Capitalization............................................................
Dividends.................................................................
Selected Financial Information............................................
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations...............................................................
Market Price for Common Stock.............................................
Business..................................................................
Management................................................................
Certain Transactions......................................................
Principal Shareholders....................................................
Description of
Securities...............................................................
Shares Available for
Future Sales.............................................................
Selling Securityholder and Plan of Distribution...........................
Legal Proceedings.........................................................
Legal Matters.............................................................
Experts...................................................................
Financial Statements......................................................
--------------
Until _____, 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
1,775,000 SHARES OF COMMON STOCK
CONOLOG CORPORATION
--------------
PROSPECTUS
--------------
_______ __, 1996
--------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with this offering are as follows:
SEC filing fee...................... $ 1,644.80
Printing and engraving*............. $ 5,000
Legal fees and expenses*............ $50,000
Accounting fees and expenses*....... $20,000
Miscellaneous expenses*............. $13,355.20
Total......................... $90,000
- ----------
* Indicates expenses that have been estimated for the purpose of filing.
Item 14. Indemnification of Directors and Officers.
Indemnification is provided for in Article Eighth of the Company's
Certificate of Incorporation and such provisions are incorporated herein by
reference.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation to provide indemnification to a director, officer,
employee or agent of the corporation, including attorneys' fees, judgments,
fines and amounts paid in settlement, actually and reasonably incurred by him in
connection with such action, suit or proceeding, if such party acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful as
determined in accordance with the statute, and except that with respect to any
action which results in a judgment against the person and in favor of the
corporation the corporation may not indemnify unless a court determines that the
person is fairly and reasonably entitled to the indemnification.
Section 145 further provides that indemnification shall be provided if the
party in question is successful on the merits.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. If a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person in connection
Alt-1
<PAGE>
with the securities being registered) the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities.
There were no underwriting discounts and commissions paid in connection
with the issuance of any shares of Common Stock within the last three (3) years
prior to the date of this Registration Statement other than those paid to I.A.
Rabinowitz & Co., the Underwriter of the August 1995 Offering.
On August 16,1995, the Company effected a 1-for-100 reverse stock split of
its Common Stock on all shares of Common Stock outstanding as of such date.
On August 16, 1995, holders of 19,360 shares of the Company's Series B
Preferred Stock (Robert Benou and Arpad J. Havasy, officers and directors of the
Company) converted their shares of Series B Preferred Stock into 387,200 shares
of Common Stock (3,872 post-split shares).
On August 16, 1995, $381,533 of the $420,179 of accrued dividends on the
Series B Preferred Stock at December 31, 1994 were converted into 76,306 shares
of Common Stock and the remaining dividends due to such holders (Messrs. Benou
and Havasy) were waived.
On August 16, 1995, accrued salaries of $309,109 owed by the Company to
Mr. Benou were converted into 61,822 shares of Common Stock
On August 16, 1995, Chase Manhattan Bank converted approximately
$3,000,000 of debt into 375,000 shares of Common Stock.
Item 16. Exhibits.
Exhibit No. Description of Exhibit
- ----------- ----------------------
1(a)* Form of Underwriting Agreement
1(b)* Form of Selected Dealer Agreement
1(c)* Form of Agreement Among Underwriters
3(a) Certificate of Incorporation - incorporated by reference to the
Registrant's Exhibit 3.01 to Registration Statement on Form S-1
(File No. 2-31302).
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<PAGE>
(b) Certificate of Amendment of Certificate of Incorporation -
incorporated by reference to Exhibit 3.02 to the Registrant's
Registration Statement on Form S-1 (File No. 2- 31302).
(c) Certificate of Amendment of Certificate of Incorporation
incorporated by reference to Exhibit 4 to the Registrant's
Current Report on Form 8-K for July 1971.
(d) Certificate of Ownership and Merger with respect to the merger of
Data Sciences (Maryland) into the Registrant and the change of
Registrant's name from "Data Sciences Incorporated" to "DSI
Systems, Inc." - incorporated by reference to Exhibit 3.03(a) to
the Registrant's Registration Statement on Form S-1 (File No.
2-31302).
(e) Certificate of the Designation, Preferences and Relative,
Participating, Option or Other Special Rights and
Qualifications, Limitations or Restrictions thereof of the
Series A Preferred Stock (par value $.50) of DSI Systems, Inc. -
incorporated by reference to Exhibit 3.04 to the Registrant's
Registration Statement on Form S-1 (File No. 2-31302).
(f) Certificate of the Designation, Preferences and Relative,
Participating, Option or Other Special Rights and Qualifications,
Limitations or Restrictions thereof of the Series B Preferred
Stock (par value $.50) of DSI Systems, Inc. - incorporated by
reference to Exhibit 1 to the Registrant's Current Report on Form
8-K for November 1972.
(g) Certificate of Ownership and Merger respecting merger of Conolog
Corporation into the Registrant and the changing of the
Registrant's name from "DSI Systems, Inc." to "Conolog
Corporation" - incorporated by reference to Exhibit 3 to the
Registrant's Current Report on Form 8-K for June 1975.
(h) Amended By-Laws - incorporated by reference to Exhibit 3(h) to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended July 31, 1981.
4(a)* Specimen Certificate for shares of Common Stock
(b)* Specimen Certificate for Class A Warrant
(c)* Form of Warrant Agreement
(d)* Form of Representative's Unit Purchase Option
(e)* Form of Financial Consulting Agreement
5 ** Opinion of Bernstein & Wasserman on legality of securities being
registered.
Alt-3
<PAGE>
10.1 Credit Facility documents between Manufacturers Hanover Trust
Company and the Registrant pursuant to which Registrant obtained
a Credit Facility for $4,000,000 - incorporated by reference to
Exhibit 6A-D to the Registrant's Current Report on Form 8-K
dated April 5, 1989.
10.2 * Conolog Corporation 1995/1996 Stock Option Plan.
10.3 *** Option and Purchase, Sale and Assignment Agreement, dated as
of September 12, 1996 by and between The Chase Manhattan Bank and
CNL Holdings, Inc.
10.4 *** Irrevocably Proxy dated as of September 12, 1996 by and between
CNL Holdings, Inc. and Conolog Corporation.
10.5 *** Agreement dated September 12, 1996 by and between CNL Holdings,
Inc. and Conolog Corporation.
23.1 ** Consent of Bernstein & Wasserman (included in Exhibit No. 5)
23.2 *** Consent of Rosenberg Rich Baker Berman & Company, Independent
Certified Public Accountants.
- ----------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (33-92424).
** To be filed by Amendment.
*** Filed herewith.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes to provide to the
Representative at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Representative to permit prompt delivery to each purchaser.
(b) Rule 415 Offering
The undersigned registrant will:
1. File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
Alt-4
<PAGE>
(ii) Reflect in the prospectus any facts or events arising after the
effective date of this registration statement (or the most recent post-effective
amendment thereto), which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
(iii) Include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or any
material change to such information in this registration statement.
2. For determining liability under the Securities Act, treat each such
post-effective amendment as a new registration statement relating to the
securities offered, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering.
3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(c) Filings Incorporating Subsequent Exchange Act Documents by Reference.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing with a employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
herein and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) Indemnification
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
Registrant pursuant to the provisions referred to in Item 24 of this
Registration Statement or otherwise, the Registrant has 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. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant 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, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(e) Rule 430A
The undersigned Registrant hereby undertakes that:
Alt-5
<PAGE>
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of a
prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act as part of this Registration Statement as of the time the
Commission declared it effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement for the securities offered in the
Registration Statement, and that the offering of the securities at that time as
the initial bona fide offering of those securities.
(f) Request of Acceleration of Effective Date
The Registrant may elect to request acceleration of the Registration
Statement under Rule 461 of the 1933 Act.
Alt-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 16th day of October, 1996.
CONOLOG CORPORATION
/s/ Robert S. Benou
-----------------------------------------
By: Robert S. Benou
President, Director, Chief
Executive Officer, Chief
Financial Officer and Comptroller
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/Robert S. Benou President, Director, Chief October 16, 1996
- ------------------------- Executive Officer, Chief
Robert S. Benou Financial Officer and Comptroller
/s/Arpad J. Havasy Executive Vice President, October 16, 1996
- ------------------------- Secretary, Treasurer and
Arpad J. Havasy Director
/s/ Marc R. Benou Vice President, October 16, 1996
- ------------------------- Assistant Secretary and
Marc R. Benou Director
/s/ Louis S. Massad Director October 16, 1996
- -------------------------
Louis S. Massad
Alt-7
<PAGE>
================================================================================
OPTION AND PURCHASE, SALE AND ASSIGNMENT AGREEMENT
Dated as of September 12, 1996
Among
THE CHASE MANHATTAN BANK,
formerly known as Chemical Bank,
and
CNL HOLDINGS, INC.
as Buyer,
relating to the obligations of
Conolog Corporation
to
The Chase Manhattan Bank,
formerly known as Chemical Bank
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
RECITALS ................................................................. 1
SECTION 1. Definitions ................................................ 1
SECTION 2. Sale; Payment of Purchase Price ............................ 3
SECTION 3. Representations and Warranties of the Bank ................. 5
SECTION 4. Representations and Warranties of the Buyer ................ 8
SECTION 5. Limitations of Damages; Reimbursement Rights ............... 9
SECTION 5.1. Bank's Covenants ........................................... 10
SECTION 6. Bank's and Seller's Obligations ............................ 10
SECTION 6.1. Procedure for Reimbursement and Indemnification ............ 11
SECTION 7. Buyer's Obligations ........................................ 12
SECTION 8. Further Transfers .......................................... 12
SECTION 9. Miscellaneous .............................................. 12
<PAGE>
OPTION AND PURCHASE, SALE AND ASSIGNMENT AGREEMENT
AGREEMENT, dated as of September 12, 1996 (the "Agreement"), between The
Chase Manhattan Bank, a New York banking corporation (the "Bank"), formerly
known as Chemical Bank, and CNL HOLDINGS, INC., a Delaware corporation (the
"Buyer").
RECITALS
A. Conolog Corporation (the "Borrower") is a party to that certain
Amended and Restated Term Loan Agreement dated as of August 2, 1995 between the
Borrower and the Bank (the "Loan Agreement"), and that certain Amended and
Restated Term Note from the Borrower to the Bank dated August 24, 1995 in the
original principal amount of $1,025,000 (the "Original Note").
B. On September 11, 1996, the Original Note was modified pursuant to the
terms of an Allonge making the Original Note convertible into 1,400,000 shares
of the Borrower's common stock (the "Note Shares") (the Original Note, as
amended by the Allonge, the "Note").
C. As of the date hereof, the Bank is the sole legal and beneficial owner
of claims against the Borrower in the principal amount of $1,012,500.00,
together with interest and fees in the approximate amount of $65,488.45 as of
August 26, 1996, relating to the Note and the Loan Agreement. The Bank is also
the sole legal and beneficial owner of three hundred seventy-five thousand
(375,000) shares of the Borrower's common stock (the "Bank Shares"; and together
with the Note Shares, the "Shares"). Such claims and equity interest are
hereinafter referred to, together, as the "Claims".
D. The Buyer wishes to purchase all of the Bank's interest in the Loan
Agreement, the Note and the Claims from the Bank upon the occurrence of certain
events.
E. The Bank wishes to sell and assign all of the Bank's interest in the
Loan Agreement, the Note and the Claims to the Buyer.
AGREEMENT
In consideration of the mutual covenants and agreements contained
herein, the Bank and the Buyer hereby agree as follows:
SECTION 1. Certain Definitions.
<PAGE>
The following terms shall have the following meanings when used herein:
Affiliate: As defined in Section 101(2) of the United States Bankruptcy
Code.
Assigned Rights: Defined in Section 2(B).
Assignment Closing Date: Defined in Section 2(B).
Assignment Purchase Price: Defined in Section 2(C).
Assumed Obligations: Defined in Section 2(C).
Bank: Defined in the preamble to this Agreement.
Bank Shares: Defined in Recital C.
Borrower: Defined in Recital A.
Business Day: A day other than a Saturday, Sunday or other day on which
commercial banks in New York City are authorized or required by law to close.
Buyer: Defined in the preamble to this Agreement.
Buyer Indemnitees: Defined in Section 6(A).
Buyer's Excluded Information: Defined in Section 3(L).
Buyer's Principal Claim Amount: $1,012,500.00
Call Money Rate: A rate per annum, calculated daily, equal to the average
of the percentages designated under the caption "call money", as published in
the "Money Rates" column of The Wall Street Journal.
Claims: Defined in Recital C.
Confidential Terms: Defined in Section 9(J).
Disallowed Amount: Defined in Section 5(B).
Final Order: An order, judgment or decree, rendered by a court of competent
jurisdiction that has not been reversed, stayed, modified or amended and as to
which (A) any appeal, petition for certiorari, or motion for rehearing or
reconsideration that has been filed has been dismissed or finally determined and
no appeal, petition for certiorari or motion for rehearing or reconsideration
has been granted; or (B) the time to appeal, seek certiorari or move for
rehearing or reconsideration has expired and no appeal, petition for certiorari
or motion for
2
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reconsideration or rehearing has been timely filed.
Governmental Authority: A Federal, state or other governmental agency,
authority, administrative or regulatory body, arbitrator, court or other
tribunal, foreign or domestic.
Liabilities: Defined in Section 6.1 of this Agreement.
Lien: Any security interest, mortgage, deed of trust, pledge, lien, adverse
claim, charge or other encumbrance of any kind.
Loan Agreement: Defined in Recital A.
Note: Defined in Recital B.
Note Shares: Defined in Recital B.
Option: Defined in Section 2(A).
Option Closing Date: Defined in Section 2(A).
Original Note: Defined in Recital A.
Reduction: Defined in Section 6.1.
Reduction Amount: Defined in Section 5(B).
Retained Interests: Defined in Section 2(B).
Retained Obligations: Defined in Section 2(C).
Seller: Defined in the preamble to this Agreement.
Seller's Excluded Information: Defined in Section 4(F).
Seller Indemnitees: Defined in Section 7(A).
Shares: Defined in Recital C.
SECTION 2. Sale; Payment of Purchase Price.
(A) On the date of execution and delivery of this Agreement by the Buyer
and the Bank (the "Option Closing Date"), the Bank shall grant to the Buyer an
option (the "Option") to purchase the Claims under the terms and conditions set
forth herein. On the Option Closing
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Date, the Buyer shall make payment of an nonrefunadable fee for the Option to
the Bank at the Bank's New York, New York office in the amount of One Hundred
Fifty Thousand Dollars ($150,000.00) by wire transfer of immediately available
funds in the lawful currency of the United States of America in accordance with
the following wire instructions:
The Chase Manhattan Bank
ABA #021000021
For Credit to:
A/c #144-0-02419
i/n/o Special Loan Clearing Account
Reference: Conolog Corporation
Attention: Mark Rechan
The closing of the transaction contemplated herein shall occur by delivery
by each party to the other of a duly completed and executed counterpart of this
Agreement, together with payment from the Buyer to the Bank for the Option.
(B) On the date the Shares may be registered under the Securities Act, or
such other date as the parties may agree (the "Assignment Closing Date"), the
Buyer shall exercise the Option, and the Bank shall sell, assign, transfer and
set over to the Buyer, without recourse, representation, or warranty (in each
case except as expressly provided herein), and the Buyer shall purchase, subject
to the terms and conditions hereof, an undivided one hundred percent (100%)
interest in (i) all right, title and interest of the Bank in and to the Claims;
(ii) all right, title and interest of the Bank in and to the Loan Agreement;
(iii) any property which may be exchanged for or distributed or collected in
respect of any of the foregoing; and (iv) any and all causes of action or claims
of the Bank (whether known or unknown) against any person or entity which are in
any way based upon, arise out of, or are related to any of the foregoing (the
items described in clauses (i), (ii), (iii), and (iv) being collectively
referred to herein as the "Assigned Rights"), excluding, however, any and all
claims which may arise out of services rendered by the Bank to the Borrower
other than under, and wholly unrelated to, the Loan Agreement (the "Retained
Interests"). If the Assignment Closing Date has not occurred before April 15,
1997, the Buyer may exercise the Option and purchase the Assigned Rights on that
date on the terms and conditions set forth herein. If the Buyer does not
purchase the Assigned Rights on or before that date, the purchase, sale and
assignment portion of this Agreement shall become null and void and be of no
further force or effect unless extended in writing by the Bank and the Buyer.
On the Assignment Closing Date, the Bank shall deliver or cause to be
delivered to the Buyer: (a) the originally executed Note, duly endorsed to the
Buyer or, at the Buyer's request, to the Buyer's nominee, (b) Borrower's stock
certificate number U 9156 representing the Bank Shares, together with an
executed stock power with signature guaranteed, and (c) such other instruments
and documents as the Buyer may reasonably request to evidence the Buyer's
ownership of the Assigned Rights.
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(C) Also on the Assignment Closing Date, the Buyer shall (i) pay to the
Bank at the Bank's New York, New York office the sum of One Million Five Hundred
Thousand Dollars ($1,500,000.00)(the "Assignment Purchase Price") by wire
transfer of immediately available funds in the lawful currency of the United
States of America in accordance with the wire instructions set forth in Section
2(A) hereof; and (ii) assume the Bank's obligations under the Loan Agreement in
respect of the Assigned Rights, which arise, accrue and are chargeable to the
period after the Assignment Closing Date, other than the Retained Obligations
(defined below) (collectively, the "Assumed Obligations"). The Bank (and not the
Investors) shall pay and duly perform all obligations or liabilities (a) arising
from the breach by the Bank of its representations, warranties, covenants,
agreements or indemnities made by the Bank in the Loan Documents; (b) for which
the Investors are indemnified under Section 6 hereof, or (c) arising from the
Bank's gross negligence or willful misconduct (collectively, the "Retained
Obligations"). The Assignment Purchase Price shall be reduced by the amount paid
to the Bank for the Option.
(D) (i) The obligations of the Buyer to acquire the Assigned Rights, and
to assume the Assumed Obligations on the Assignment Closing Date shall be
subject to the conditions that (x) the representations and warranties of the
Bank contained in this Agreement shall have been true and correct in all
respects when made and as of the Assignment Closing Date (it being agreed that
such representations and warranties shall be deemed to have been confirmed by
the Bank as of the Assignment Closing Date, without the need for further written
certification, unless the Bank shall have otherwise notified the Buyer in
writing to the contrary, in which event the Buyer may, but shall not be
obligated to, acquire the Assigned Rights); and (y) the Bank shall have complied
in all respects with all covenants required by this Agreement to be complied
with by it on or prior to the Assignment Closing Date, including but not limited
to the Bank's obligations under Section 2(B).
(ii) The obligations of the Bank to assign, sell and convey the
Assigned Rights on the Assignment Closing Date shall be subject to the
conditions that (w) the representations and warranties of the Buyer contained in
this Agreement shall have been true and correct in all respects when made and as
of the Assignment Closing Date (it being agreed that such representations and
warranties shall be deemed to have been confirmed by the Buyer as of the
Assignment Closing Date, without the need for further written certification,
unless the Buyer shall otherwise notify the Bank in writing to the contrary);
(x) the Buyer shall have complied in all respects with all covenants required by
this Agreement to be complied with by it on or prior to the Assignment Closing
Date, including but not limited to the Buyer's obligations under Section 2(C);
and (y) the Buyer shall have paid to the Bank the Assignment Purchase Price.
SECTION 3. Representations and Warranties of the Bank.
The Bank hereby represents and warrants to the Buyer that:
(A) The Bank is a New York banking corporation duly organized, validly
existing and
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<PAGE>
in good standing under the laws of the State of New York. The execution,
delivery and performance by the Bank of this Agreement and the Loan Agreement to
which it is a party are within its powers, have been duly authorized by all
necessary action and do not contravene, or result in a default under, any of its
charter documents or any law, agreement or other obligation to which it is
subject.
(B) This Agreement and the Loan Agreement to which the Bank is a party have
been duly and validly authorized, executed and delivered by the Bank, and are
the legal, valid and binding obligations of the Bank, enforceable against the
Bank in accordance with their respective terms. No registration with, or consent
or approval of, or any other action by, any Governmental Authority or other
person is now or was required in connection with the execution, delivery and
performance of this Agreement or the Loan Agreement by the Bank. The Bank has
not made any offers to sell, or solicitations of offers to buy, any portion of
the Assigned Rights in violation of any applicable securities laws.
(C) The Bank is the sole legal and beneficial owner and holder of the
Assigned Rights and has good title to, and on the Assignment Closing Date will
convey to the Buyer legal and beneficial ownership of and good title to, the
Assigned Rights. Such conveyance of ownership and title will be free and clear
of any Lien whatsoever.
(D) No proceedings are pending, or to the best of the Bank's knowledge,
threatened in writing against or affecting the Bank or the Assigned Rights
before any Governmental Authority, nor has any other person or entity asserted
any challenge to the validity or enforceability of the Assigned Rights. To the
best of the Bank's knowledge, no basis for any such challenge to the Assigned
Rights exists. No judgment has been entered on the Note.
(E) The Bank is not (i) a director or officer of the Borrower, (ii) a
partnership in which the Borrower is a general partner, (iii) a general partner
of the Borrower, or (iv) a managing agent of the Borrower.
(F) The Bank has not engaged in any acts, conduct or omissions with respect
to the Assigned Rights or the Retained Interests that could result in the holder
of the Assigned Rights receiving, in the aggregate, a proportionately smaller
repayment in respect thereof than the repayment required under the terms of the
Loan Agreement.
(G) The Bank is not aware of the existence of and is not a party to any
agreements, pleadings or other information that could reasonably be expected to
materially and adversely affect the Assigned Rights, other than such agreements,
pleadings and information as have been made available to the Buyer and which
have previously been furnished to the Buyer, or any information disseminated
publicly through electronic or print media or filed or referred to in filings by
the Borrower with the Securities and Exchange Commission, or information that
constitutes Buyer's Excluded Information.
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<PAGE>
(H) The Bank has no obligation to acquire additional notes or to make
additional loans or extensions of credit under the Loan Agreement or in respect
of the Assigned Rights.
(I) Recitals A, B, C, and E in this Agreement are each true and correct.
(K) The Bank is a sophisticated seller with respect to the Assigned Rights,
has adequate information concerning the business and financial condition of the
Borrower to make an informed decision regarding the sale of the Assigned Rights
and has independently and without reliance upon the Buyer, and based upon such
information as the Bank has deemed appropriate, made its own analysis and
decision to enter into this Agreement, except that the Bank has relied upon the
representations, warranties, covenants, agreements and indemnities of the Buyer
contained in this Agreement. The Bank acknowledges that the Buyer has not made
and does not make any representation or warranty, whether express or implied,
except as expressly set forth in this Agreement. The Bank acknowledges that the
sale of the Assigned Rights by the Bank to the Buyer is irrevocable, and that
the Bank shall have no recourse to the Assigned Rights or the Buyer, except with
respect to breaches of representations, warranties, covenants and agreements
expressly set forth in this Agreement, and pursuant to indemnities contained
herein. The Bank acknowledges that the consideration received pursuant hereto
for the sale of the Assigned Rights may differ both in kind and in amount from
any payments or distributions which may ultimately be received with respect
thereto. The Bank is not an agent for the Buyer in this transaction.
(L) The Bank acknowledges that the Buyer currently may possess and
hereafter may come into possession of certain information concerning the Loan
Agreement, the Assigned Rights, and the Borrower which is not known to the Bank
and which may be material to a decision to sell the Assigned Rights, including,
without limitation, information received by the Buyer on a confidential basis
from the Borrower or on a privileged basis from the Buyer's counsel or advisors
(the "Buyer's Excluded Information"), that it has determined to sell the
Assigned Rights notwithstanding its lack of knowledge of any Buyer's Excluded
Information, and that the Buyer shall have no liability to it and the Bank
hereby waives and releases any claims which it might have against the Buyer or
any Buyer Indemnitee (as hereinafter defined), whether pursuant to applicable
securities laws or otherwise, with respect to the non-disclosure of any Buyer's
Excluded Information; and no broker, finder or other person acting pursuant to
the authority of the Bank is entitled to maintain a claim against the Buyer for
a broker's or other type of commission in connection with the transactions
contemplated hereby.
(M) None of the Seller's Excluded Information (as defined below) is
inconsistent with any of the representations and warranties of the Bank
contained herein.
(N) The Bank has complied with, and is not in breach of, its
representations, warranties, covenants and agreements under the Loan Agreement.
(O) The Assigned Rights are not subject to any defense, right of set-off,
recoupment,
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<PAGE>
or counterclaim, or subject to avoidance, disallowance, expungement, reduction
or subordination, in whole or in part.
SECTION 4. Representations and Warranties of the Buyer.
The Buyer hereby represents and warrants to the Bank that:
(A) The Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. The execution, delivery and
performance by the Buyer of this Agreement are within its powers, have been duly
authorized by all necessary action and do not contravene, or result in a default
under, any of its charter documents or any law, agreement or other obligation to
which it is subject.
(B) This Agreement has been duly and validly authorized, executed and
delivered by the Buyer, and is the legal, valid and binding obligation of the
Buyer, enforceable against the Buyer in accordance with its terms. No
registration with, or consent or approval of, or any other action by, any
Governmental Authority or other person is required in connection with the
execution, delivery and performance of this Agreement by the Buyer.
(C) To the best of the Buyer's knowledge, no proceedings are pending or
threatened against or affecting the Buyer before any Governmental Authority
which, in the aggregate, could reasonably be expected to materially and
adversely affect any action taken or to be taken by the Buyer under this
Agreement.
(D) The Buyer is a sophisticated investor (as such term is used under the
rules promulgated under the Securities Act of 1933, as amended) with respect to
the Assigned Rights, has adequate information concerning the business and
financial condition of the Borrower to make an informed decision regarding the
purchase of the Assigned Rights and has independently and without reliance upon
the Bank, and based upon such information as the Buyer has deemed appropriate,
made its own analysis and decision to enter into this Agreement, except that the
Buyer has relied upon the representations, warranties, covenants, agreements and
indemnities of the Bank contained in this Agreement. The Buyer acknowledges that
the Bank has not made and does not make any representation or warranty, whether
express or implied, except as expressly set forth in this Agreement. The Buyer
acknowledges that the sale of the Assigned Rights by the Bank to the Buyer is
irrevocable, and that the Buyer shall have no recourse to the Bank, except with
respect to breaches of representations, warranties, covenants and agreements
expressly set forth in this Agreement and pursuant to indemnities contained
herein. The Buyer acknowledges that the consideration paid pursuant hereto for
the purchase of the Assigned Rights may differ both in kind and amount from any
payments or distributions which may ultimately be received with respect thereto.
The Buyer (i) will continue to make its own analysis and decisions with respect
to the Assigned Rights without any reliance upon the Bank (except as previously
stated), and (ii) will not rely upon the Bank to furnish any documents or
information, except as otherwise required by this Agreement, regarding the
credit, officers, financial
8
<PAGE>
condition or business of, or any other matter concerning, the Borrower
(including without limitation documents and information received from the
Borrower under the Loan Agreement or otherwise). The Buyer acknowledges that it
is assuming the risk of full or partial loss which is inherent in the credit,
and all collateral and collectability risks associated therewith. The Buyer is
not an agent for the Bank in this transaction.
(E) Without implying characterization of the Assigned Rights as a security
within the meaning of applicable security laws, the Buyer is not purchasing the
Assigned Rights with a view to resale or distribution in a manner that would
violate applicable securities laws and has no present intention of making any
distribution of the Assigned Rights in any manner that would violate applicable
security laws.
(F) The Buyer acknowledges that the Bank currently may possess and
hereafter may come into possession of certain information concerning the Loan
Agreement, the Assigned Rights, and the Borrower which is not known to the Buyer
and which may be material to a decision to acquire the Assigned Rights,
including, without limitation, information received by the Bank on a
confidential basis from the Borrower or on a privileged basis from the Bank's
counsel and advisors (the "Seller's Excluded Information"), that it has
determined to acquire the Assigned Rights notwithstanding its lack of knowledge
of the Seller's Excluded Information, and that the Bank shall have no liability
to it and the Buyer hereby waives and releases any claims which it might have
against the Bank, whether pursuant to applicable securities laws or otherwise,
with respect to the non-disclosure of the Seller's Excluded Information; and no
broker, finder or other person or entity acting pursuant to the authority of the
Buyer is entitled to a broker's or other type of commission in connection with
the transactions contemplated hereby other than commissions exclusively for the
account of the Buyer.
SECTION 5. Limitation of Damages; Reimbursement Rights.
(A) In the event of a breach of any of the representations and warranties
of the Bank set forth in Section 3 of this Agreement which results in (i) the
Claims or any portion thereof being disallowed, reduced, offset, expunged, or
subordinated pursuant to a Final Order while the Claims are held by the Buyer or
its successors, assignees or transferees, or (ii) the Buyer's rights to
distributions in respect of the Claims being denied, offset, reduced or
otherwise disallowed in whole or in part pursuant to a Final Order, the Buyer's
damages against the Bank in respect of such breach shall not exceed, in the
aggregate, a sum equal to the Reduction Amount (as hereinafter defined) plus
interest at a rate per annum, calculated daily, equal to the Call Money Rate
from, and including, the date on which the Purchase Price is paid to the Bank,
to, but excluding the date on which the Reduction Amount is paid (so long as
such payment is received before noon on a business day ("Business Day");
otherwise, the Business Day next following the date of payment).
(B) For purposes of this Section 5, the "Reduction Amount" shall mean with
respect to the Claims, an amount equal to the product obtained by multiplying
(X), a fraction, the
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<PAGE>
numerator of which shall be the amount by which the Claims have been reduced,
disallowed, offset, expunged, denied or subordinated as described in paragraph
(A) above (the "Disallowed Amount") and the denominator of which shall be the
Buyer's Principal Claim Amount by (Y) the Purchase Price.
(C) If the Buyer exercises its remedies under this Section 5 and recovers
the Reduction Amount from the Bank, the Buyer shall reassign to the Bank,
without recourse, all of the Buyer's right, title and interest in that portion
of the Assigned Rights representing the Disallowed Amount, including but not
limited to all of the Buyer's rights to receive distributions on such portion of
the Assigned Rights.
SECTION 5.1 Bank's Covenants.
(A) Until the Buyer is substituted as the record holder of the Assigned
Rights, the Bank shall deliver to the Buyer all information or materials
received by the Bank after the Assignment Closing Date relating to the Assigned
Rights unless the Bank is bound to keep the same confidential by applicable law
or by an agreement executed prior to the date hereof except where the Buyer
agrees in writing to be bound by the terms and conditions of such agreement
which govern the confidential nature of the information furnished thereunder as
if it were a signatory thereto.
(B) In the event that the Bank receives any Assigned Proceeds after the
Assignment Closing Date, (i) the Bank shall accept the same as agent on behalf
of and for the sole benefit of the Buyer, and pay or deliver the same forthwith
to the Buyer (free of any withholding, set-off or deduction of any kind) in the
same form received, with the endorsement of the Bank, when necessary and
appropriate; and (ii) the Bank shall have no legal, beneficial or equitable
interest in such Assigned Proceeds.
SECTION 6. Bank's Obligations.
(A) The Bank hereby agrees to indemnify, defend and hold the Buyer and its
agents, affiliates, controlling persons, officers, directors and employees
(collectively, the "Buyer Indemnities") harmless from and against any and all
expenses, losses, claims, damages or liabilities which are incurred by the Buyer
Indemnities or any of them, including but not limited to reasonable attorneys'
fees and expenses, caused by, resulting from or relating to (i) any obligation
of the Buyer to disgorge, in whole or in part, or otherwise reimburse the
Borrower or any third party for payments received by the Bank prior to the
Assignment Closing Date in respect of the Assigned Rights; (ii) any default by
the Bank in the performance prior to the Assignment Closing Date of any of its
obligations under the Loan Agreement; or (iii) the Bank's breach of any of its
representations, warranties, covenants or agreements set forth in this
Agreement, subject to the limitations set forth in Section 5 of this Agreement.
(B) The Bank shall pay and be liable for the payment of all costs and
expenses of the
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Bank (including, without limitation, attorneys' fees and expenses) incurred or
chargeable to the period up to and including the Assignment Closing Date.
(C) Notwithstanding any other provision of this Agreement, the Bank shall
not be obligated to take any action which will require the Bank to incur any
monetary obligation or advance any funds to the Borrower for any funding
obligations under the Loan Agreement which arise or accrue on or after the
Assignment Closing Date.
(D) Notwithstanding any other provision of this Agreement, the Buyer
understands and agrees that the Bank shall not be required to take any action
which contravenes the Loan Agreement.
SECTION 6.1 Procedure for Reimbursement and Indemnification.
If there is asserted any claim, liability or obligation that in the
judgment of the party indemnified pursuant to Sections 5 or 6 hereof may give
rise to any liabilities (the "Liabilities") or the Claims being reduced,
disallowed, offset, expunged, denied or subordinated as described in paragraph A
of Section 6 hereof (any of the foregoing, a "Reduction") or if the indemnified
party determines the existence of the foregoing, whether or not the same shall
have been asserted, such indemnified party shall give the indemnifying party
notice within thirty (30) business days after the assertion of any claim,
liability or obligation, or promptly, but in no event later than five (5)
business days after receipt of notice of the filing of any lawsuit based upon
such assertion, or, with respect to a claim not yet asserted against the
indemnified party, promptly upon the determination by an officer of the
indemnified party of the existence of the same, and shall give the indemnifying
party a reasonable opportunity to assume the defense of such claim, liability or
obligation, using counsel of the indemnifying party's choosing; provided,
however, that notwithstanding the foregoing the indemnified party shall have the
right to participate in such defense and retain separate counsel at its own cost
and expense. Failure by the indemnified party to give timely notice pursuant to
this Section 6.1 shall not relieve the indemnifying party of its obligations,
except to the extent that the indemnifying party is actually prejudiced by such
failure to give timely notice. No settlement or adjustment shall be made without
the indemnified party's prior written consent, which consent will not be
unreasonably withheld. If, in any case, the indemnifying party fails to contest
in good faith any such claim, liability or obligation, the indemnified party
shall have the right to defend, settle or pay the same and pursue its remedies
against the indemnifying party hereunder. The indemnified party shall cooperate
with the indemnifying party in any such defense which the indemnifying party
elects to assume in the event the indemnifying party makes such request to the
indemnified party and such request is reasonable, provided the indemnifying
party will hold the indemnified party harmless from all of its out-of-pocket
expenses, including reasonable attorneys' fees, incurred in connection with the
indemnified party's cooperation. In the event of a disagreement among the
parties as to whether any claim, liability or obligation may give rise to any
Liability or Reduction, then the indemnified party shall have the right to
defend, settle or pay the same, and pursue its remedies against the indemnifying
party hereunder.
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SECTION 7. Buyer's Obligations.
(A) The Buyer hereby agrees to indemnify, defend and hold the Bank and its
agents, including but not limited to the Seller, affiliates, controlling
persons, officers, directors and employees (collectively the "Seller
Indemnities") harmless from and against any and all claims, liabilities or
obligations which are incurred by the Seller Indemnities or any of them,
including but not limited to reasonable attorneys' fees and expenses, caused by,
resulting from or relating to the Buyer's breach of any of the representations,
warranties, covenants or agreements of the Buyer set forth in this Agreement.
(B) The Buyer shall pay and be liable for the payment of all costs and
expenses of the Buyer insofar as they relate to the Assigned Rights (including,
without limitation, attorney's fees and expenses) incurred or chargeable to any
period after the Option Closing Date.
(C) The Buyer and the Bank intend and agree that, except as otherwise
expressly set forth herein, the Bank shall assign the Assigned Rights and the
Buyer shall assume the Assumed Obligations on the Assignment Closing Date. Until
such assignment and assumption occur, the Bank will retain all of its rights and
obligations with respect to the Assigned Rights and the Assumed Obligations.
SECTION 8. Further Transfers.
The Buyer may sell, assign, grant a participation in, or otherwise transfer
the Assigned Rights and its rights hereunder, or any portion thereof or any
interest therein, without the consent of the Bank; provided, however, that (i)
such sale, assignment, participation or transfer complies with any applicable
requirements set forth in the Loan Agreement and does not violate any applicable
laws including laws governing the sale of securities, as applicable, and (ii)
notwithstanding any such sale, assignment, participation or transfer, the
obligations of the Buyer, and the Bank hereunder shall remain in full force and
effect until fully paid, performed and satisfied, but only to the extent such
obligations are not assumed by the Buyer's successors or assigns.
SECTION 9. Miscellaneous.
(A) Survival. All representations, warranties, covenants and other
provisions made by the parties hereto shall be considered to have been relied
upon by the parties hereto and shall survive the execution, delivery and
performance of this Agreement and all other documents contemplated herein.
(B) Successors and Assigns. This Agreement, including, without limitation,
the representations, warranties, covenants and agreements contained herein, (i)
shall inure to the benefit of and be enforceable by the respective parties
hereto, and the Buyer's and the Bank's successors and assigns, and (ii) shall be
binding upon and enforceable against the respective
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parties hereto, and their successors and assigns.
(C) Further Assurances. Each of the parties hereto agrees to execute and
deliver, or to cause to be executed and delivered, all such instruments, and to
take all such action, as the other party may reasonably request in order to
effectuate the intent and purposes of this Agreement, all at the sole expense of
the requesting party.
(D) Costs and Expenses. Except as otherwise expressly provided herein, each
party to this Agreement shall bear its own costs and expenses, including but not
limited to attorneys' fees and expenses, in connection with the transactions
contemplated hereby. Each of the Buyer and the Bank represents that it has not
retained any broker or other intermediary to act on its behalf in connection
with this transaction.
(E) Counterpart Execution; Telecopies. This Agreement may be executed in
any number of counterparts, each of which, when so executed and delivered, shall
be an original, but all of which together shall constitute one agreement binding
upon all of the parties hereto. Transmission by telecopier of an executed
counterpart of this Agreement shall be deemed to constitute due and sufficient
delivery of such counterpart, provided that the party so delivering such
counterpart shall, promptly after such delivery, deliver the original of such
counterpart of this Agreement to the other party hereto.
(F) Amendments; Waivers. (i) No amendment of any provision of this
Agreement shall be effective unless it is in writing and signed by the Bank and
the Buyer, and no waiver of any provision of this Agreement, nor consent to any
departure therefrom by the Bank or the Buyer shall be effective unless it is in
writing and signed by the party affected thereby, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
(ii) No failure on the part of any party to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof by such party,
nor shall any single or partial exercise of any right hereunder preclude any
other or further exercise thereof or the exercise of any other right. The rights
and remedies of each party provided herein (x) are cumulative and are in
addition to, and not exclusive of, any rights or remedies provided by law
(except as otherwise expressly set forth herein) and (y) are not conditional or
contingent on any attempt by such party to exercise any of its rights under any
other related document against the other party or any other entity.
(G) GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND THE OBLIGATIONS OF
THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK (WITHOUT REGARD TO ANY CONFLICT OF LAWS PROVISIONS THEREOF).
(H) Notices. All demands, notices, requests, consents and communications
hereunder
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shall be in writing and shall be deemed to have been duly given if personally
delivered by courier service, messenger, or telecopy (with a confirmed
answerback) at, or when duly deposited in the mails, by certified or registered
mail (postage prepaid -- return receipt requested), to the following addresses,
or such addresses as may be furnished hereafter by notice in writing, to the
following parties:
in the case of the Buyer:
CNL Holdings, Inc.
750 Lexington Avenue, 27th Floor
New York, New York 10022
Attention: President
Telephone: 212-980-3344
Telecopier: 212-980-6653
with a copy to:
Bernstein & Wasserman LLP
950 Third Avenue
New York, New York 10022
Attention: Stuart Neuhauser, Esquire
Telephone: 212-826-0730
Telecopier: 212-371-4730
in the case of the Bank:
The Chase Manhattan Bank
270 Park Avenue, 30th Floor
New York, New York 10017
Attention: Mark Rechan
Vice President
Telephone: 212-270-1937
Telecopier: 212-270-5748
with a copy to:
The Chase Manhattan Bank
270 Park Avenue, 39th Floor
New York, New York 10017
Attention: E. Lee Smith
Vice President & Assistant General Counsel
Telephone: 212-270-5293
14
<PAGE>
Telecopier: 212-270-6509
(I) Integration. This Agreement constitutes the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersede all prior agreements, understandings or representations
pertaining to the subject matter hereof, whether oral or written. There are no
warranties, representations or other agreements between the parties in
connection with the subject matter hereof except as specifically set forth or
incorporated herein or therein.
(J) Captions and Headings. The section captions and headings in this
Agreement are for convenience only and are not intended to be full or accurate
descriptions of the contents hereof. They shall not be deemed to be part of this
Agreement and in no way define, limit, extend or describe the scope or intent of
any provision hereof.
(K) Severability. The invalidity, illegality or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, all of which shall remain in full force
and effect.
(L) Relations of the Parties. The relationship between the Bank and the
Buyer shall be that of seller and purchaser. This Agreement shall not be
construed to create a partnership, joint venture or creditor-debtor relationship
between the parties hereto.
(M) Reservation of Rights. The Bank and the Buyer reserve all rights and
remedies under this Agreement and under applicable law in respect of the Bank or
the Buyer's material breach of any of the representations, warranties, covenants
or agreements contained herein.
(N) To the extent that there are any inconsistencies between this Agreement
and any other document executed in connection herewith, the Bank and the Buyer
intend that (as between themselves) the terms and conditions of this Agreement
shall control and be enforceable over any such other document.
15
<PAGE>
IN WITNESS WHEREOF, the Bank and the Buyer have executed this Agreement by
their duly authorized officers as of the date first set forth above.
THE CHASE MANHATTAN BANK
By: /s/Michael Rechan
-----------------------------
Name: Michael Rechan
Title:Vice President
CNL HOLDINGS, INC.
By: _____________________________
Name:
Title:
16
<PAGE>
IN WITNESS WHEREOF, the Bank and the Buyer have executed this Agreement by
their duly authorized officers as of the date first set forth above.
THE CHASE MANHATTAN BANK
By: _____________________________
Name:
Title:
CNL HOLDINGS, INC.
By: /s/R.K. Pace
-----------------------------
Name: R.K. Pace
Title: President
16
<PAGE>
Dated: September 12, 1996
IRREVOCABLE PROXY
The undersigned, CNL Holding, Inc., a Delaware corporation, does hereby
constitute and appoint Conolog Corporation, a Delaware corporation ("Conolog"),
acting solely through its President, Robert S. Benou ("Benou"), as the
undersigned's true and lawful substitute attorney and proxy, with full power to
act for and in the name, place and stead of the undersigned to vote according to
the number of votes which the undersigned would be entitled to cast and with all
powers which the undersigned would be entitled to exercise if personally present
at any meeting of the stockholders of Conolog or any adjournment thereof, upon
any matter coming before such meeting or adjournment or to otherwise consent or
withhold consent from any action of stockholders of Conolog; provided, however,
that if Benou shall die while this Irrevocable Proxy remains in effect, any
successor to Benou as President of Conolog shall succeed to Benou as the person
through whom Conolog shall exercise its rights under this Irrevocable Proxy.
The undersigned does hereby revoke all other proxies given by the
undersigned to any other person or entity prior to the date hereof with respect
to the aforesaid matters.
This proxy is irrevocable and shall not expire until the earlier of the
tenth anniversary hereof and the date on which the undersigned no longer owns
any of the capital stock of Conolog.
IN WITNESS WHEREOF, the undersigned has executed this proxy as of the date
first set forth hereinabove.
CNL HOLDING, INC.
By /s/ Roberrt Benou President
-----------------------------------
(Title)
<PAGE>
AGREEMENT made this 12th day of September, 1996 between CNL HOLDING, INC.,
a Delaware corporation (the "Investor") and CONOLOG CORPORATION, a Delaware
corporation (the "Company").
WHEREAS, the Company is indebted to The Chase Manhattan Bank, formerly
known as Chemical Bank (the "Bank"), in the principal amount of $1,025,000 plus
interest and fees thereon as evidenced by that certain Amended and Restated Term
Note from the Company to the Bank, dated August 24, 1995, as modified by an
Allonge dated September 11, 1996 (as so modified, the "Note");
WHEREAS, the Note is convertible into 1,400,000 shares of the Company's
common stock;
WHEREAS, the Bank is also the holder of 375,000 shares of the Company's
common stock (the "Bank Shares");
WHEREAS, the Investor has agreed to enter into an Option Agreement with the
Bank, dated the date hereof (the "Option Agreement"), pursuant to which, under
certain circum stances, the Investor has the right to purchase the entire
indebtedness of the Company to the Bank and all of the Bank Shares;
WHEREAS, the Investor has agreed to lend up to $2,500,000 to the Company,
subject to the terms and conditions hereinafter set forth.
NOW, THEREFORE, it is agreed as follows:
1. Registration of Shares Being Acquired. The Company will use its best
efforts to file a registration statement with the Securities and Exchange
Commission (the "Commission")
<PAGE>
covering the 375,000 Bank Shares and the 1,400,000 shares of common stock into
which the Note is convertible (collectively, the "Acquired Shares"), all of
which are subject to the Option Agreement. The Company will use its best efforts
to have such registration statement declared effective as soon as possible after
the filing thereof, and to keep such registration statement current and
effective for a period of two years or until such earlier date as all of the
Shares registered pursuant to such registration statement shall have been sold
or otherwise transferred.
2. Use of Proceeds. All proceeds of the sale of the Acquired Shares shall
be applied as follows: The first $1,500,000 shall be paid to reimburse the
Investor for the payments made to the Bank pursuant to the Option Agreement.
Fifty percent (50%) of the balance of the proceeds shall be loaned by the
Investor to the Company within five days of the Investor's receipt of such
proceeds, provided, however, that the Investor shall not be required to lend the
Company more than $2,500,000. Such loans are hereinafter collectively called the
"Loans". The balance of the proceeds shall belong to the Investor.
3. Terms of Loans. Each Loan shall be evidenced by a note which shall be
due 12 months after the making of each such Loan. Each Loan shall bear interest
at the rate of 4% per annum commencing with the date the Loan is made. Interest
will accrue prior to maturity. At maturity, the Company will have the option to
repay each of the Loans, together with all accrued interest
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<PAGE>
thereon, by issuing a new Series C Preferred Stock (the "Preferred Stock"). For
purposes of such repayment, the shares of Preferred Stock shall be valued at
$5.00 per share.
4. The Preferred Stock. As more particularly described in Exhibit A hereto,
the Preferred Stock will be non-voting and will carry a cumulative dividend of
8% per annum, which may be payable by the issuance of shares of common stock
valued at $5.00 per share up to a maximum of 40,000 shares per annum. The
Preferred Stock will be convertible into common stock at the rate of one share
of common stock for each share of Preferred Stock. The Preferred Stock will
carry a liquidating preference of $5.00 per share.
5. Registration Rights. (a) During the period commencing on the issuance of
any shares of Preferred Stock to the Investor and ending on the second
anniversary thereof (the "Registration Period"), the Company shall advise the
Investor by written notice at least 30 days prior to the filing of any
post-effective amendment to the Registration Statement or of any new
registration statement or post-effective amendment thereto under the Securities
Act of 1933, as amended (the "Act") covering any securities of the Company, for
its own account or for the account of others (other than a registration
statement on Form S-4 or S-8 or any successor forms thereto), and will include
in any such post-effective amendment or registration statement, such informa
tion as may be required to permit a public offering of the shares of Preferred
Stock and all or any of the common stock then issu able under the terms of the
then outstanding shares of Preferred
- 3 -
<PAGE>
Stock (the "Registrable Securities"). The Company shall supply prospectuses and
such other documents as the Investor may request in order to facilitate the
public sale or other disposition of the Registrable Securities, use its best
efforts to register and qualify any of the Registrable Securities for sale in
such states as the Investor designates provided that the Company shall not be
required to qualify as a foreign corporation or a dealer in securities or
execute a general consent to service of process in any jurisdiction in any
action and do any and all other acts and things which may be reasonably
necessary or desirable to enable the Investor to consummate the public sale or
other disposition of the Registrable Securities, and furnish indemnification in
the manner provided in Section 6 hereof. The Investor shall furnish information
and indemnification as set forth in Section 6. The Company shall use its best
efforts to cause the managing under writer or underwriters of a proposed
underwritten offering to permit the Registrable Securities requested to be
included in the registration to include such securities in such underwritten
offering on the same terms and conditions as any similar securities of the
Company included therein. Notwithstanding the foregoing, if the managing
underwriter or underwriters of such offering advises the Investor that the total
amount of securities which it intends to include in such offering is such as to
materially and adversely affect the success of such offering, then the amount of
securities to be offered for the account of the Investor shall be eliminated,
reduced, or limited to the extent necessary to reduce the total amount of
securities to be
- 4 -
<PAGE>
included in such offering to the amount, if any, recommended by such managing
underwriter or underwriters. The Investor will pay its own legal fees and
expenses and any underwriting discounts and commissions on the securities sold
by the Investor but shall not be responsible for any other expenses of such
registration.
(b) If the Investor shall give notice to the Company at any time during the
Registration Period to the effect that the Investor desires to register under
the Act its shares of Preferred Stock or any of the common stock then issuable
under the terms of the then outstanding shares of Preferred Stock under such
circumstances that a public distribution (within the meaning of the Act) of any
such securities will be involved, then the Company will promptly, but no later
than 60 days after receipt of such notice, file a post-effective amendment to a
then current Registration Statement or a new registration statement pursuant to
the Act, to the end that such shares of Preferred Stock and such shares of
common stock may be publicly sold under the Act as promptly as practicable
thereafter and the Company will use its best efforts to cause such registration
to become and remain effective for a period of 120 days (including the taking of
such steps as are reasonably necessary to obtain the removal of any stop order);
provided that the Investor shall furnish the Company with appropriate
information in connection therewith as the Company may reasonably request in
writing. The Investor may, at its option, request the filing of a post-effective
amendment to a then current Registration Statement or a new registration
statement under the Act with respect to the Registrable
- 5 -
<PAGE>
Securities on only two occasions during the Registration Period. All costs and
expenses of such post-effective amendment or new registration statement shall be
borne by the Company, except that the Investor shall bear the fees of its own
counsel and any underwriting discounts or commissions applicable to any of the
securities sold by it.
The Company shall be entitled to postpone the filing of any registration
statement pursuant to this subsection (b) other wise required to be prepared and
filed by it if (i) the Company is engaged in a material acquisition,
reorganization, or divestiture, (ii) the Company is currently engaged in a self
tender or exchange offer and the filing of a registration statement would cause
a violation of Rule 10b-6 or any other Rule under the Securities Exchange Act of
1934, (iii) the Company is engaged in an underwritten offering and the managing
underwriter has advised the Company in writing that such a registration
statement would have a material adverse effect on the consummation of such
offering or (iv) the Company is subject to an underwriter's lockup as a result
of an underwritten public offering and such underwriter has refused in writing,
the Company's request to waive such lock-up. In the event of such postponement,
the Company shall be required to file the registration statement pursuant to
this subsection (b), within 60 days of the consummation of the event requiring
such postponement.
The Company will use its best efforts to maintain such registration
statement or post-effective amendment current under
- 6 -
<PAGE>
the Act for a period of at least six months (and for up to an additional three
months if requested by the Investor) from the effective date thereof. The
Company shall supply prospectuses, and such other documents as the Investor may
reasonably request in order to facilitate the public sale or other disposition
of the Registrable Securities, use its best efforts to register and qualify any
of the Registrable Securities for sale in such states as such holder designates,
provided that the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or execute a general consent to service of
process in any jurisdiction in any action.
6. Indemnification. (a) Whenever pursuant to Section 5 a registration
statement relating to the Preferred Stock or any shares issued or issuable
pursuant to the terms of any Preferred Stock, is filed under the Act, amended or
supplemented, the Company will indemnify and hold harmless the Investor (herein
after called the "Distributing Holder"), and each person, if any, who controls
(within the meaning of the Act) the Distributing Holder, and each underwriter
(within the meaning of the Act) of such securities and each person, if any, who
controls (within the meaning of the Act) any such underwriter, against any
losses, claims, damages, or liabilities, joint or several, to which the
Distributing Holder, any such controlling person or any such underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
- 7 -
<PAGE>
contained in any such registration statement or any preliminary prospectus or
final prospectus constituting a part thereof or any amendment or supplement
thereto, or arise out of or are based upon the omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and will reimburse the Distributing Holder and each such
controlling person and underwriter for any legal or other expenses reasonably
incurred by the Distributing Holder or such controlling person or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage, or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in said registration statement, said
preliminary prospectus, said final prospectus, or said amendment or supplement
in reliance upon and in conformity with written information furnished by such
Distributing Holder, for use in the preparation thereof.
(b) The Distributing Holder will indemnify and hold harmless the Company,
each of its directors, each of its officers who have signed said registration
statement and such amendments and supplements thereto, each person, if any, who
controls the Company (within the meaning of the Act) against any losses, claims,
damages, or liabilities, joint and several, to which the Company or any such
director, officer, or controlling person may become subject, under the Act or
otherwise, insofar as
- 8 -
<PAGE>
such losses, claims, damages, or liabilities arise out of or are based upon any
untrue or alleged untrue statement of any material fact contained in said
registration statement, said preliminary prospectus, said final prospectus, or
said amendment or supplement, or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent that such untrue statement or alleged
untrue statement or omission or alleged omission was made in said registration
statement, said preliminary prospectus, said final prospectus, or said amendment
or supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder for use in the preparation thereof; and
will reimburse the Company or any such director, officer, or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability, or action.
(c) Promptly after receipt by an indemnified party under this Section 6 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party, give the
indemnifying party notice of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under this Section 6.
- 9 -
<PAGE>
(d) In case any such action is brought against any indemnified party, and
it notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section 6 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof.
7. Company's Representations and Warranties. The Company covenants and
agrees that the Preferred Stock and all shares of common stock which may be
issued pursuant to the terms of the Preferred Stock will, upon issuance, be duly
and validly issued, fully paid and nonassessable. The Company further covenants
and agrees that so long as any shares of Preferred Stock are outstanding, the
Company will at all times have authorized and reserved a sufficient number of
shares of its Common Stock to provide for the conversion of the Preferred Stock
and that it will have authorized and reserved a sufficient number of shares of
Common Stock for issuance upon conversion of the Preferred Stock.
8. Representations and Warranties of the Investor. The Investor hereby
represents and warrants to the Company as follows:
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<PAGE>
(a) The Investor has the full right, power and authority to enter into
this Agreement and to carry out and consummate the transactions contemplated
herein. This Agreement constitutes the legal, valid and binding obligation of
the Investor.
(b) The Investor acknowledges that it and each of its shareholders has
received and reviewed all publicly filed documents concerning the Company and
has had an opportunity to meet with and ask questions of the management of the
Company.
(c) The Investor and each of its shareholders is an accredited
investor within the meaning of Rule 501 of the Commission under the Securities
Act, has the financial ability to bear the economic risk of its or his
investment, can afford to sustain a complete loss of such investment and has
adequate means of providing for its or his current needs and personal contingen
cies, and has no need for liquidity in its or his investment in the Company; and
the amount invested in the Company by the Investor does not constitute a
substantial portion of its or his net worth.
(d) The Investor is acquiring the Shares being purchased by it for
investment and not with a view to the sale or distribution thereof, for its own
account and not on behalf of others and has not granted any other person any
right or option or any participation or beneficial interest in any of the
securities. The Investor acknowledges its understanding that the Acquired Shares
constitute restricted securities within the
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<PAGE>
meaning of Rule 144 of the Commission under the Act, and that none of such
securities may be sold except pursuant to an effective registration statement
under the Act or in a trans action exempt from registration under the Act, and
acknowledges that it understands the meaning and effect of such restriction. The
Investor has sufficient knowledge and experience in financial and business
matters so that it is capable of evaluating the risks and merits of the purchase
of the Acquired Shares. The Investor is aware that no Federal or state
regulatory agency or authority has passed upon the sale of the Acquired Shares
or any of the terms of the Preferred Stock or the terms of the sale or the
accuracy or adequacy of any material provided to the Investor and that the price
of the Acquired Shares was negotiated between the Investor and the Bank and does
not necessarily bear any relationship to the underlying assets or value of the
Company and that the terms of the Preferred Stock was negotiated between the
Investor and the Company and does not necessarily bear any relationship to the
underlying assets or value of the Company. THE INVESTOR UNDERSTANDS THAT AN
INVESTMENT IN THE SHARES BEING PURCHASED BY IT INVOLVES A HIGH DEGREE OF RISK.
(e) THE INVESTOR UNDERSTANDS THAT IN CONNECTION WITH ITS EVALUATION OF
THE COMPANY, THE INVESTOR HAS BEEN OR MAY HAVE BEEN PROVIDED WITH ACCESS TO
CERTAIN INFORMATION CONCERNING THE COMPANY WHICH HAS NOT BEEN PUBLICLY
DISCLOSED. THE INVESTOR FURTHER UNDERSTANDS THAT ANY TRADING BY IT IN SECURITIES
OF THE COMPANY USING NON-PUBLIC INFORMATION COULD CONSTITUTE A VIOLATION OF
FEDERAL AND STATE SECURITIES LAWS AND/OR OTHER LAWS AND MAY
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<PAGE>
SUBJECT IT TO CRIMINAL AND/OR CIVIL PENALTIES AND LIABILITY. In view of the
foregoing, the Investor agrees not to (i) purchase or sell, including a short
sale, any of the Company's securities or rights to purchase or sell such
securities as long as the Investor is in possession of material non-public
information or (ii) disclose any non-public information to any other person.
(f) There is no finder's fee or brokerage commission payable with
respect to the purchase by the Investor of the Acquired Shares or the
consummation of the transactions contemplated by this Agreement and the Investor
agrees to indemnify and hold harmless the Company from and against any and all
cost, damage, liability or expense (including fees and expenses of counsel)
arising out of or relating to claims for such fees or commissions, except to the
extent that any such fees or commissions have been directly incurred by the
Company.
9. Further Agreements of the Investor.
(a) The Investor hereby agrees that all sales, transfers and
dispositions of the Acquired Shares, any shares of Preferred Stock and any
shares of common stock issuable pursuant to the terms of the Preferred Stock
shall be made exclusively to bona fide third party purchasers pursuant to a
registered public offering or Rule 144 under the Act, if applicable.
(b) While the Investor holds any shares of common stock, it agrees to
vote such shares as recommended by Robert S. Benou. In furtherance of the
foregoing, the Investor is delivering to Robert S. Benou an Irrevocable Proxy in
substantially the form of Exhibit B attached hereto.
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<PAGE>
10. Termination of Underwriting Agreement. Concurrently with the execution
hereof, the Company and I.A. Rabinowitz & Co. are executing and delivering an
agreement terminating certain provisions of the Underwriting Agreement between
them dated August 16, 1995 and providing that with respect to the terminated
provisions, neither the Company nor I.A. Rabinowitz & Co. will have any further
rights or obligations pursuant thereto.
11. Further Assurances. From and after the date of this Agreement and the
date of Closing, each party hereto shall from time to time, at the request of
the other party and without further consideration, do, execute and deliver, or
cause to be done, executed and delivered, all such further acts, things and
instruments as may be reasonably requested or required more effectively to
evidence and give effect to the transactions provided for in this Agreement.
12. Expenses. Each party shall bear and pay all legal, accounting and other
fees and expenses incurred by it in connection with, and with the transactions
provided for in, this Agreement and the performance of all its obligations and
agreements hereunder.
13. Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given if personally delivered against receipt or if
mailed by first class registered or certified mail return receipt requested,
addressed
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<PAGE>
to the parties at their respective addresses set forth on the first page of this
Agreement, with copies to their respective counsel, Milberg Weiss Bershad Hynes
& Lerach LLP, Att: Arnold N. Bressler, Esq., One Pennsylvania Plaza, New York,
New York 10119, in the case of the Company, and Bernstein & Wasserman LLP, Att:
Stuart Neuhauser, Esq., 950 Third Avenue, New York, New York 10022, in the case
of the Investor, or to such other person or address as may be designated by like
notice hereunder.
14. Parties in Interest. This Agreement shall be binding upon, and shall
inure to the benefit of and be enforceable by, the parties hereto and their
respective legal representatives, successors and assigns, but no other person
shall acquire or have any rights under this Agreement.
15. Entire Agreement; Modification; Waiver. This Agreement (as below
defined) contains the entire agreement and understanding among the parties
hereto with respect to the subject matter hereof and supersedes all prior
negotiations and understandings, if any, and there are no agreements, representa
tions or warranties other than those set forth, provided for or referred to
herein. All exhibits and schedules to this Agreement are expressly made a part
of this Agreement as fully as though completely set forth herein, and all
references to this Agreement herein, in any of such writings or elsewhere shall
be deemed to refer to and include all such writings. Neither this Agreement nor
any provisions hereof may be modified, amended, waived, discharged or
terminated, in whole or in part, except in writing
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<PAGE>
signed by the party to be charged. Any party may extend the time for or waive
performance of any obligation of any other party or waive any inaccuracies in
the representations or warranties of any other party or compliance by any other
party with any of the provisions of this Agreement. No waiver of any such
provisions or of any breach of or default under this Agreement shall be deemed
or shall constitute a waiver of any other provisions, breach or default, nor
shall any such waiver constitute a continuing waiver.
16. Interpretation.
16.(a) This Agreement shall be governed and construed and enforced in
accordance with the laws of the State of New York applicable to contracts made
and to be performed exclusively in that State without giving effect to the
principles of conflict of laws.
16.(b) All pronouns and words used in this Agreement shall be read in the
appropriate number and gender, the masculine, feminine and neuter shall be
interpreted interchangeably and the singular shall include the plural and vice
versa, as the circumstances may require.
17. Headings; Counterparts. The article and section headings in this
Agreement are for reference purposes only and shall not define, limit or affect
the meaning or interpretation of this Agreement. This Agreement maybe executed
in two or more counterparts, each of which shall be deemed an original but all
of which shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date and year first above written.
CNL HOLDING, INC.
By /s/ R.K. Pace, Pres.
---------------------------------
(Title)
CONOLOG CORPORATION
By /s/ Robert S. Benou
---------------------------------
Robert S. Benou, President
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<PAGE>
EXHIBIT A
<PAGE>
CERTIFICATE OF THE DESIGNATION, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL OR
OTHER SPECIAL RIGHTS AND QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS THEREOF
of the
SERIES C PREFERRED STOCK (par value $.50)
of
CONOLOG CORPORATION
---------------------------
Pursuant to Section 151(g) of the General
Corporation Law of the State of Delaware
---------------------------
We, the undersigned, being the President and the Secretary, respectively,
of CONOLOG CORPORATION, a corporation organized and existing under the laws of
the State of Delaware (hereinafter called the "Corporation"), do hereby certify
pursuant to the provisions of Section 151(g) of the General Corporation Law of
the State of Delaware, as amended, that at a meeting of the Board of Directors
of the Corporation duly convened and held on ______ __, 199_, the following
resolutions were duly adopted:
RESOLVED that pursuant to the authority expressly granted to and vested in
the Board of Directors of the Corporation (hereinafter called the "Board of
Directors" or the "Board") by the provisions of Article FIFTH of the Certificate
of Incorporation, as amended, of the Corporation, this Board of Directors hereby
creates a series of Preferred Stock, par value $.50 per share, of the
Corporation to consist of 600,000 shares, which number may be increased or
decreased (but not below the number of shares thereof then outstanding) by
further resolution or resolutions of the Board of
<PAGE>
Directors, and this Board of Directors hereby fixes the designations, rights,
voting powers, preferences, and the relative, participating, optional or other
special rights, and the qualifications, limitations or restrictions thereof, of
the shares of such series as follows:
I. Designation. The designation of said series of Preferred Stock shall be
"Series C Preferred Stock" (hereinafter called "this Series" or the "Series C
Preferred Stock").
II. Dividends. The holders of outstanding shares of the Series C Preferred
Stock shall be entitled to receive, out of any funds legally available therefor,
dividends at the rate of eight percent (8%) per annum, and no more, payable
annually in cash or shares of the Common Stock of the corporation on the
________ day of ____________________ in each year, commencing ________________,
199_, to registered holders thereof on said payment date. Such dividends shall
be cumulative and shall accrue (whether or not in any annual period there shall
be net profits or surplus of the Corporation legally available therefor) from
the annual dividend payment date next preceding the date of their issue.
If for any annual dividend period or periods after _______________, 199_,
full dividends upon the outstanding Series C Preferred Stock at the aforesaid
rate shall not have been paid, or declared and set apart for payment, the amount
of the deficiency shall be paid (but without interest), or declared and set
apart for payment, before any sum or sums shall be set aside for or applied to
the purchase or redemption of Preferred Stock of any series or the purchase,
redemption or other acquisition for value of shares of any junior stock) shall
be paid or
2
<PAGE>
declared, or any other distribution shall be ordered or made, upon shares of any
junior stock. The term "junior stock" as used in this resolution with respect to
the Series C Preferred Stock means the Common Stock, as well as any other class
of stock of the Corporation ranking junior to the Series C Preferred Stock as to
dividends or assets.
III. Voting. Except as otherwise required by law or this Resolution, the
holders of Series C Preferred Stock shall have no voting rights and shall not be
entitled to notice of any stockholders' meetings or to vote upon the election of
directors or upon any question affecting the management or affairs of this
Corporation.
IV. Liquidation. In the event of a liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of Series C
Preferred Stock shall be entitled to receive out of the assets of this
Corporation, whether such assets are capital or surplus of any nature, an amount
equal to five dollars ($5) per share and, in addition to such amount, a further
amount equal to the dividends unpaid and accumulated thereon, as provided in
paragraph II of this Resolution, to the date that payment is made to the holders
of Series C Preferred Stock, whether earned or declared or not, and no more,
before any payment shall be made or any assets distributed to the holders of
junior stock. If upon such liquidation, dissolution, or winding up, whether
voluntary or involuntary, the assets thus distributable among the holders of the
Series C Preferred Stock shall be insufficient to permit the payment to such
stockholders of the full preferential amounts
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aforesaid, then the entire assets of this Corporation to be distributed shall be
distributed ratably among the holders of Series C Preferred Stock. In the event
of any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, subject to all of the preferential rights of the
holders of Series C Preferred Stock on distribution or otherwise, the holders of
junior stock shall be entitled to receive, ratably, all remaining assets of this
Corporation. A consolidation or merger of the Corporation with or into any other
corporation or corporations, or a sale of all or substantially all of the assets
of the Corporation, shall not be deemed to be liquidation, dissolution or
winding up, within the meaning of this paragraph.
V. Redemption. The Corporation, at its election, expressed by resolution of
the Board of Directors, may at any time or from time to time on or after
____________, 199_ (but not prior thereto) redeem the whole or any part of the
outstanding shares of Series C Preferred Stock by paying in cash therefor five
dollars ($5) per share and, in addition to the foregoing amount, an amount in
cash equal to all dividends on shares of Series C Preferred Stock unpaid and
accumulated as provided in paragraph II of this Resolution, whether earned or
declared or not, to and including the date fixed for redemption, such sum being
hereinafter sometimes referred to as the "Redemption Price." In case of the
redemption of a part of only of the outstanding shares of Series C Preferred
Stock, the Corporation shall designate by lot, in such manner as the Board of
Directors may determine, the shares to be redeemed, or shall effect such
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redemption pro rata. Less than all of the shares of Series C Preferred Stock at
any time outstanding may not be redeemed until all dividends accrued and in
arrears upon all shares of Series C Preferred Stock outstanding shall have been
paid for all past dividend periods, and until full dividends for the then
current dividend period on all shares of Series C Preferred Stock then
outstanding, other than the shares to be redeemed, shall have been paid or
declared and the full amount thereof set apart for payment. At least ninety (90)
days' prior notice by first class mail, postage prepaid, shall be given to the
holders of record of shares of Series C Preferred Stock to be redeemed, such
notice to be addressed to each such stockholder at his post office address as
shown by the records of the Corporation, but failure of any holder of Series C
Preferred Stock to receive any such notice, if given, shall not affect the
validity of the proceedings for such redemption. On or after the date fixed for
redemption and stated in such notice, each holder of shares of Series C
Preferred Stock called for redemption shall surrender his certificate(s)
evidencing such shares to the Corporation at the place designated in such notice
and shall thereupon be entitled to receive payment of the Redemption Price. In
case less than all the shares represented by any such surrendered certificate(s)
are redeemed, a new certificate shall be issued representing the unredeemed
shares. If such notice of redemption shall have been duly given, and if on the
date fixed for redemption funds necessary for the redemption shall be available
therefor, then notwithstanding that the certificates evidencing any shares of
Series C Preferred Stock so called for redemption shall not have been
surrendered,
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all dividends with respect to the shares so called for redemption shall cease to
accrue after the date fixed for redemption and all rights with respect to the
shares so called for redemption shall forthwith after such date cease and
terminate, except only the right of the holders to receive the Redemption Price
without interest upon surrender of their certificates therefor.
If, on or prior to any date fixed for redemption of shares of Series C
Preferred Stock, the Corporation deposits, with any bank or trust company in the
City of New York, State of New York, as a trust fund, a sum sufficient to
redeem, on the date fixed for redemption thereof, the shares called for
redemption, with irrevocable instructions and authority to the bank or trust
company to give the notice of redemption thereof if such notice shall not
previously have been given by the Corporation, or to complete the giving of such
notice if theretofore commenced, and to pay, on or after the date fixed for
redemption or prior thereto, the Redemption Price of the shares to their
respective holders upon the surrender of their share certificate(s), then from
and after the date of the deposit (although prior to the date fixed for
redemption), the shares so called shall (except as hereinafter provided) be
deemed to be redeemed and dividends on those shares shall cease to accrue after
the date fixed for redemption. The deposit shall be deemed to constitute full
payment of the shares to their holders and from and after the date of the
deposit the shares shall be deemed to be no longer outstanding, and the holders
thereof shall cease to be stockholders with respect to such shares, and shall
have no rights with respect thereto except the right to receive from the
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bank or trust company payment of the Redemption Price of the shares, without
interest, upon the surrender of their certificates therefor, and the right to
surrender said shares and receive Common Stock as provided in paragraph IV of
this Resolution at any time up to but not after the close of business on the
fifth day prior to the date fixed for redemption of such shares. Any moneys so
deposited on account of the Redemption Price of shares of Series C Preferred
Stock converted subsequent to the making of such deposit shall be repaid to the
Corporation forthwith upon the conversion of such shares. Any moneys so
deposited which remain unclaimed by the holders of shares of Series C Preferred
Stock after the expiration of six years from the redemption date, together with
any interest thereon allowed by the bank or trust company with which the deposit
shall have been made, shall be paid to the Corporation.
VI. Right to Convert into Common Stock. Holders of shares of Series C
Preferred Stock shall have the right to convert their shares of Series C
Preferred Stock into shares of the Common Stock of the Corporation upon the
following terms and conditions:
1. At any time between _____________, 199_ and the fifth day prior to
such date, if any, as may have been fixed for the redemption of shares of Series
C Preferred Stock in any notice of redemption given as provided in paragraph V
hereof, holders of shares of Series C Preferred Stock may, at their option,
receive for each share of Series C Preferred Stock held one (1) fully paid and
non-assessable share of the Common Stock of the Corporation upon surrender of
the certificate for such
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shares of the Series C Preferred Stock to the Corporation at the office of the
Corporation or the transfer agent for the Series C Preferred Stock. The
conversion ratio of one share of Series C Preferred Stock for each share of
common stock as aforesaid at any time and as adjusted from time to time is
hereinafter sometimes referred to as the "Conversion Ratio." The Conversion
Ratio shall be subject to adjustment from time to time in certain instances as
hereinafter provided. The Corporation shall make no payment or adjustment on
account of any dividends accrued on shares of Series C Preferred Stock
surrendered for conversion. In case of the call for redemption of any shares of
Series C Preferred Stock, such right to convert into shares of Common Stock
shall terminate as to the shares of Series C Preferred Stock designated for
redemption at the close of business on the fifth day preceding the day fixed for
redemption, unless default is made by the Corporation in the payment of the
redemption price.
2. Before any holder of shares of Series C Preferred Stock shall be
entitled to receive shares of Common Stock, he shall surrender the certificate
or certificates for shares of Series C Preferred Stock, with the Conversion Form
annexed thereto or other form as prescribed by the Board of Directors duly
executed, at the office of the Corporation or of any transfer agent for the
Series C Preferred Stock and shall state in writing therein the name and names
in which he wishes the certificates for Common Stock to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of shares of Series C Preferred Stock,
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<PAGE>
or to his nominee or nominees, certificates for the number of full shares of
Common Stock to which he shall be entitled, as aforesaid, together with cash in
lieu of any fraction of a share as hereinafter provided. Conversion shall be
deemed to have been made as of the date of such surrender of the shares of
Series C Preferred Stock, and the person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such Common Stock on said date.
3. In case the Corporation shall at any time subdivide the outstanding
shares of Common Stock, or shall issue as a dividend on Common Stock such number
of shares of Common Stock as shall equal five percent (5%) or more of the number
of shares of Common Stock outstanding immediately prior to the issuance of such
dividend, then in either of such cases, the Conversion Ratio per share of Common
Stock in effect immediately prior to such subdivision or the issuance of such
dividend shall be proportionately decreased and the number of shares of Common
Stock issuable hereunder shall be proportionately increased, and conversely, in
case the Corporation shall at any time combine the outstanding shares of Common
Stock, the Conversion Ratio in effect immediately prior to such combination
shall be proportionately adjusted, and the number of shares of Common Stock
issuable hereunder shall be proportionately reduced, in each case effective at
the close of business on the date of such subdivision, dividend or combination,
as the case may be. For the purposes of this subparagraph 3, the date of
issuance of any such dividend shall be the record date fixed by the Board of
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Directors of the Corporation. In the absence of a record date so fixed, the
first business day during which the stock transfer books of the Corporation
shall be closed for the purpose of such determination shall be deemed to be the
record date.
4. No fractional shares of Common Stock or scrip representing
fractional shares shall be issued upon the conversion of Series C Preferred
Stock into Common Stock hereunder. If any fractional interest in a share of
Common Stock would, except for the provisions of this subparagraph 4, be
deliverable, the Corporation shall, in lieu of delivering the fractional share
therefor, pay to the holder of such surrendered shares of Series C Preferred
Stock an amount in cash equal (computed to the nearest cent) to the current
market value of such fractional interest, which current market value shall be
determined in such reasonable manner as may be prescribed by the Board of
Directors.
5. Whenever the Conversion Ratio is adjusted, as herein provided, the
Corporation shall forthwith maintain at its office and file with the transfer
agents for shares of Series C Preferred Stock a statement, signed by the
Chairman of the Board, the President or a Vice President of the Corporation and
by its Treasurer or an Assistant Treasurer, showing in detail the facts
requiring such adjustment and the Conversion Ratio after such adjustment. Such
transfer agent shall be under no duty or responsibility with respect to any such
statement except to exhibit the same from time to time to any holder of shares
of Series C Preferred Stock desiring an inspection thereof.
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6. In case of any capital reorganization or any reclassification of
the capital stock of the Corporation or in case of the consolidation or merger
of the Corporation with or into another corporation (other than a merger with a
subsidiary in which the Corporation is the continuing corporation and which does
not result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock) or the conveyance of all or substantially
all of the assets of the Corporation to another corporation, each share of
Series C Preferred Stock shall thereafter be entitled, upon surrender thereof,
to receive the number and kind of shares of stock or other securities or
property to which a holder of the number of shares of Common Stock of the
Corporation issuable upon surrender of such share of Series C Preferred Stock
would have been entitled upon such reorganization, reclassification,
consolidation, merger or conveyance; and, in any such case, appropriate
adjustment (ad determined by the Board of Directors) shall be made in the
application of the provisions herein set forth with respect to the rights and
interests thereafter of the holders of shares of Series C Preferred Stock, to
the end that the provisions set forth herein (including provisions with respect
to changes in and other adjustments of the Conversion Ratio) shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other property thereafter deliverable upon such surrender of shares of Series
C Preferred Stock.
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7. In case:
(1) the Corporation shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend, or any
other distribution, payable otherwise than in cash; or
(2) the Corporation shall take a record of the holders of its
Common Stock for the purpose of entitling them to subscribe for or purchase any
shares of stock of any class or to receive any other rights; or
(3) of any capital reorganization of the Corporation,
reclassification of the capital stock of the Corporation (other than a
subdivision or combination of its outstanding shares of Common Stock),
consolidation or merger of the Corporation with or into another corporation, or
conveyance of all or substantially all of the assets of the Corporations to
another corporation; or
(4) of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation; then, and in any such case, the Corporation shall
cause to be mailed to the transfer agent for the Series C Preferred Stock, and
to the holders of record of the outstanding Series C Preferred Stock, at least
thirty (30) days' prior to the date hereinafter specified, a notice stating the
date on which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up is to
take place and the date, if any is to be fixed, as of which holders of Common
Stock of record shall be entitled to exchange their shares
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of Common Stock for securities or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
8. The Corporation shall at all times reserve and keep available, out
of its authorized but unissued Common Stock, solely for the purpose of effecting
conversions upon surrender of Series C Preferred Stock, the full number of
shares of Common Stock issuable upon the surrender of all shares of Series C
Preferred Stock, from time to time outstanding. The Corporation shall from time
to time (subject to obtaining necessary director and stockholder approval), in
accordance with the laws of the State of Delaware, increase the authorized
amount of its Common Stock if at anytime the authorized number of shares of
Common Stock remaining unissued shall not be sufficient to permit the conversion
of all of the shares of Series C Preferred Stock at the time outstanding. If
shares of Common Stock of the Corporation are listed on any securities exchange
and the listing thereon of the shares of such Common Stock to be reserved as
aforesaid is required by the rules of said exchange as a condition precedent to
the issue thereof upon conversion, the Corporation shall make application for
such listing, on notice of issuance, of said shares and shall use its best
efforts to effect such listing. Also, if any shares of Common Stock so to be
reserved shall require registration or qualification with or approval of any
governmental authority or under any Federal or State law as a condition to the
issue thereof upon conversion, the Corporation shall use its best efforts to
cause such shares to be duly registered, qualified or approved, as the case may
be.
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9. The Corporation shall be any and all issue and other taxes that may
be payable in respect of any issue or delivery of shares of Common Stock
pursuant hereto. The Corporation shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that in which the shares
of Series C Preferred Stock so surrendered were registered, and no such issue or
delivery shall be made unless and until the person requesting such issue has
paid to the Corporation the amount of any such tax, or has established, to the
satisfaction of the Corporation, that such tax has been paid.
10. Whenever reference is made in these provisions to the issue or
sale of shares of Common Stock, the term "Common Stock" shall include any stock
of any class of the Corporation other than preferred stock with a fixed limit on
dividends and a fixed amount payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation.
11. All certificates for shares of Series C Preferred Stock
surrendered shall be appropriately cancelled on the books of the Corporation,
and the shares so surrendered represented by such certificates shall be restored
to the status of authorized but unissued shares of Preferred Stock of the
Corporation.
RESOLVED FURTHER, that the President or any Vice-President and the
Secretary or any Assistant Secretary of this Corporation, be and they hereby are
authorized and directed to prepare and file a certificate setting forth a copy
of these
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resolutions in accordance with the provisions of the General Law of the State of
Delaware.
IN WITNESS WHEREOF, the undersigned do hereby declare, certify and
affirm, under penalties of perjury, that the facts herein stated are true, and
accordingly have hereunto executed this Certificate and affixed the seal of the
Corporation, this ____ day of ________________, 199_.
-----------------------------
Robert S. Benou, President
-----------------------------
Arpad Havasy, Secretary
[SEAL]
- 15 -
<PAGE>
EXHIBIT B
<PAGE>
Dated: , 1996
IRREVOCABLE PROXY
The undersigned, CNL Holding, Inc., a Delaware corporation, does
hereby constitute and appoint Conolog Corporation, a Delaware corporation
("Conolog"), acting solely through its President, Robert S. Benou ("Benou"), as
the undersigned's true and lawful substitute attorney and proxy, with full power
to act for and in the name, place and stead of the undersigned to vote according
to the number of votes which the undersigned would be entitled to cast and with
all powers which the undersigned would be entitled to exercise if personally
present at any meeting of the stockholders of Conolog or any adjournment
thereof, upon any matter coming before such meeting or adjournment or to
otherwise consent or withhold consent from any action of stockholders of
Conolog; provided, however, that if Benou shall die while this Irrevocable Proxy
remains in effect, any successor to Benou as President of Conolog shall succeed
to Benou as the person through whom Conolog shall exercise its rights under this
Irrevocable Proxy.
The undersigned does hereby revoke all other proxies given by the
undersigned to any other person or entity prior to the date hereof with respect
to the aforesaid matters.
This proxy is irrevocable and shall not expire until the earlier of
the tenth anniversary hereof and the date on which the undersigned no longer
owns any of the capital stock of Conolog.
IN WITNESS WHEREOF, the undersigned has executed this proxy as of the
date first set forth hereinabove.
CNL HOLDING, INC.
By
-------------------------
(Title)
<PAGE>
[Lettterhead of Rosenberg Rich Baker Berman & Company]
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors of
Conolog Corporation
We consent to the use in this Registration Statement of Conolog Corporation on
Form S-1 of our report dated October 11, 1995.
We also consent to the reference to us under the caption "Experts" in such
Registration Statement.
/s/ Rosenberg Rich Baker Berman & Company
Maplewood, New Jersey
October 15, 1996
