<PAGE>
As filed with the Securities and Exchange Commission on November 6, 1997
Registration No. 333-35489
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
AMENDMENT NO. 1 TO
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:
Stuart Neuhauser, Esq. Steven A. Morse, Esq.
Bernstein & Wasserman, LLP Lester Morse, P.C.
950 Third Avenue 111 Great Neck Road
New York, NY 10022 Great Neck, NY 11021
(212) 826-0730 (516) 487-1446
(212) 371-4730 (Fax) (516) 487-1452 (Fax)
Approximate date of proposed sale to the public: As soon as reasonably
practicable after the effective date of this Registration Statement.
- --------------------------------------------------------------------------------
<PAGE>
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. [X] 33-92424
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
Title of Each Maximum Offering Maximum Amount of
Class of Securities to be Amount to be Price per Aggregate Registration
Registered Registered Security(1) Offering Price Fee
<S> <C> <C> <C> <C>
Units, each consisting of 805,000 $5.00 $4,025,000 $1,219.58
one (1) Share of Common
Stock, $1.00 par value per
Share and four (4) Class A
Warrants(2)
Common Stock, $1.00 par 805,000 ------- ------- -------
value
Class A Warrants 3,220,000 ------- ------- -------
Common Stock, $1.00 par 3,220,000 $6.00 $19,320,000 $5,853.96
value underlying Class A
Warrants
Representative's Unit 70,000 $6.00 $420,000 $127.26
Purchase Option
Common Stock, $1.00 par 70,000 ------- ------ -------
value in Representative's
Unit Purchase Option
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Proposed Proposed
Title of Each Maximum Offering Maximum Amount of
Class of Securities to be Amount to be Price per Aggregate Registration
Registered Registered Security(1) Offering Price Fee
<S> <C> <C> <C> <C>
Class A Warrants in 280,000 ------- ------- -------
Representative's Unit
Purchase Option
Common Stock, $1.00 par 280,000 $6.00 $1,680,000 $509.04
value underlying
Class A Warrants in
Representative's Unit
Purchase Option
Class A Warrants of 1,200,000 $.10 $120,000 $41.38
Selling Securityholders
Common Stock, $1.00 par 1,200,000 $6.00 $7,200,000 $2,181.60
value underlying Class A
Warrants of Selling
Securityholders
Total Registration and Fee $32,765,000 $9,932.82
- ---------------
</TABLE>
(1) Estimated solely for purposes of calculating registration fee pursuant to
Rule 457 under the Securities Act of 1933, as amended (the "Act"). Pursuant
to Rule 416 under the Act, this Registration Statement covers such
additional indeterminate number of shares of Common Stock as may be issued
by reason of adjustments in the number of shares of Common Stock pursuant
to anti-dilution provisions contained in the Warrant Agreement governing
the Class A Warrants and the Representative's Unit Purchase Option. Because
such additional shares of Common Stock will, if issued, be issued for no
additional consideration, no registration fee is required.
(2) Includes 105,000 Units included in the Representatives Over-Allotment
Option.
Pursuant to Rule 429 of the Act, this Form incorporates by reference
and updates all of the information contained in the Registration Statement on
Form S-1; File No. 33-92424. The securities being carried forward from such
Registration Statement are: 235,750 shares of Common Stock underlying Class A
Warrants offered to the public ($487.72 filing fee previously paid); 20,500
underwriter's options to purchase 41,000 shares of Common Stock and 20,500 Class
A Warrants ($84.82 filing fee previously paid); 20,500 shares of Common Stock
underlying Class A Warrants in such underwriter's options ($42.41 filing fee
previously paid); and 900,000 shares of Common Stock underlying Class A Warrants
previously offered by certain shareholders ($1,861.92 filing fee previously
paid).
iii
<PAGE>
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.
iv
<PAGE>
EXPLANATORY NOTE
This registration statement covers the primary offering of securities
of Conolog Corporation (the "Company") and the offering of other securities by
certain selling securityholders (the "Selling Securityholders"). The Company is
registering, under the primary prospectus (the "Primary Prospectus"), 805,000
Units, each Unit consisting of one (1) share of Common Stock and four (4) Class
A Warrants. The Selling Securityholders are registering, under an alternate
prospectus (the "Alternate Prospectus"), 1,200,000 Class A Warrants. The
Alternate Prospectus pages which follow the Primary Prospectus, contain certain
sections which are to be combined with all of the sections contained in the
Primary Prospectus, with the following exceptions: the front and back cover
pages, and the sections entitled "The Offering" and "Selling Securityholders."
In addition, the section entitled "Concurrent Sales" from the Alternate
Prospectus pages will be added to the Alternate Prospectus. Furthermore, all
references contained in the Alternate Prospectus to "the Offering" or "this
Offering" shall refer to the Company's offering under the Primary Prospectus.
v
<PAGE>
CONOLOG CORPORATION
CROSS REFERENCE SHEET
Between Items in Registration
Statement on Form S-1 and the Prospectus
<TABLE>
<CAPTION>
Item in Form S-1 Prospectus Caption
<S> <C>
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; Risk Factors and Underwriting
6. Dilution Risk Factors
7. Selling Securityholders Selling Securityholders
8. Plan of Distribution Underwriting
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; Part II - Item 14
Position on Indemnification
for Securities Act Liabilities
</TABLE>
vi
<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 November 6, 1997
Prospectus
CONOLOG CORPORATION
700,000 Units
Conolog Corporation, a Delaware corporation ("Conolog" or the
"Company") is offering (the "Offering") 700,000 units (the "Units") at a price
of $5.00 per Unit. Each Unit consists of one (1) share of Common Stock, par
value $1.00 per share ("Common Stock") and four (4) Redeemable Class A Common
Stock Purchase Warrants ("Class A Warrants"). The Common Stock and Class A
Warrants are detachable and may trade separately immediately upon issuance. The
Units will not trade after issuance. Each Class A Warrant entitles the holder to
purchase one (1) share of Common Stock, at an exercise price of $6.00, subject
to adjustment, at any time through August 16, 1998. The Class A Warrants are
subject to redemption by the Company at any time on not less than thirty (30)
days notice at $.05 per Warrant, provided the average closing price of the
Common Stock exceeds $7.20 per share for twenty (20) consecutive trading days
ending within fifteen (15) days prior to the notice.
See "Description of Securities."
The registration statement of which this prospectus forms a part also
covers the offering of 1,200,000 Class A Warrants owned by certain selling
securityholders (the "Selling Securityholders"), the resale of the Common Stock
underlying the Class A Warrants by the Selling Securityholders and the exercise
of the Class A Warrants by the transferees of the Selling Securityholders. The
securities held by the Selling Securityholders may be sold concurrently with or
after this Offering. These Class A Warrants are identical to the Class A
Warrants being offered by the Company. Sales of such securities or even the
potential of such sales at any time may have an adverse effect on the market
prices of the securities offered hereby. See "Selling Securityholders."
The registration statement of which this prospectus forms a part covers
the 3,220,000 shares of Common Stock issuable upon exercise of the Class A
Warrants offered by the Company (which includes the Class A Warrants included in
the over-allotment option), and the 280,000 shares of Common Stock issuable upon
exercise of the Class A Warrants included in the Representative's Unit Purchase
Option. See "Description of Securities."
The Company's Common Stock and Class A Warrants are currently trading
on the Nasdaq SmallCap Market ("Nasdaq"). On _________, 1997, the closing price
for the Common Stock and Class A Warrants were $_______ and $______,
respectively.
vii
<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 ___ AND
"DILUTION".
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.
<TABLE>
<CAPTION>
Price to Public Discounts and Proceeds to the
Commissions(1) Company(2)
<S> <C> <C><C>
Per Unit................... $5.00 $.50 $4.50
Total (3).................... $3,500,000 $350,000 $3,150,000
</TABLE>
- ---------------
(1) Does not include additional underwriting compensation to be paid by the
Company IAR Securities Corp. (the "Representative") in the form of (a) warrants
to purchase up to 70,000 Units, each Unit consisting of one (1) share of Common
Stock and four (4) Class A Warrants exercisable over a four year period
commencing one year from the date of this Prospectus at an exercise price of
$6.00 per Unit (the "Representative's Unit Purchase Option"), (b) a
non-accountable expense allowance (the "Non-Accountable Expense Allowance")
equal to three percent (3%) of the aggregate public offering price of the Units,
namely $105,000 (or $120,750 assuming exercise in full of the Over-Allotment
Option, as defined below), and (c) consulting fees of $70,000 payable to the
Representative in full at the closing of the public offering. The Company and
the Representative have agreed to indemnify one another against certain
liabilities arising under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of this offering payable by the Company estimated
to be $400,000, including the Representative's Non-Accountable Expense Allowance
of $105,000 and the $70,000 financial consulting fee referred to above. After
deducting such expenses, the net proceeds to the Company will be approximately
$2,750,000. See "Use of Proceeds."
1
<PAGE>
(3) The Company has granted the Representative an option to purchase up to
105,000 Units at any time before 45 days from the date hereof solely for
covering over-allotments (the "Over-Allotment Option"). If the Over-Allotment
Option is exercised in full the total price to the public will be $4,025,000,
the total discounts and commissions will be $402,500 and the estimated expenses
of the Offering will be $415,750. The net proceeds to the Company after
deducting the expenses of the Offering would then be $3,206,750. See "Use of
Proceeds."
IAR SECURITIES CORP.
The date of this Prospectus is ____________, 1997.
2
<PAGE>
[Picture]
3
<PAGE>
[Picture]
4
<PAGE>
The Securities are being offered subject to prior sale, when, as and if
delivered to and accepted by the Representative, and subject to certain other
conditions. The Representative reserves the right to withdraw, cancel or modify
such offer without notice and to reject orders in whole or in part. It is
expected that delivery of the Securities will be made on or about ___________,
1997.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH THIS PROSPECTUS RELATES OR AN OFFER TO OR SOLICITATION OF
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK AND/OR CLASS A WARRANTS, INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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, N.W., 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 Commission maintains a Web site on the
Internet (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission through the Electronic Data Gathering, Analysis, and Retrieval
System (EDGAR).
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.
5
<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. In addition, unless otherwise indicated to the contrary, all
information appearing herein does not give effect to the exercise of (i) the
Over-Allotment Option; (ii) the Class A Warrants (including Class A Warrants
included in the Over-Allotment Option and those owned by the Selling
Securityholders); (iii) the outstanding Class A Warrants prior to the Effective
Date; (iv) the Representative's Unit Purchase Option; or (v) the unit purchase
option issued in connection with the August 1995 Offering. See "Description of
Securities," "Bridge Financing," and "Underwriting."
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
6
<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 85% of sales
in 1997 ($900,000). 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 800
PTR-1000 sets to 18 utilities and 5 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 of fiber optic interfaces for INIVEN products.
The fiber optic interface is also available as a stand alone coupling device.
The Company launched its industrial grade 1200 Baud Modem for data
transmission/communication, and completed the PTR-1000 System options. Through
1997, the Company designed and is in the process of completing and building the
PTR-1500 Quad System, Protection Equipment, exclusively for the General Electric
Company ("GE"), to be labeled GE-NS50 Series, for worldwide sales as detailed in
the agreement between GE and Conolog dated April 1, 1997.
7
<PAGE>
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
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 in fiscal 1996 were
$1,924,466 an 8% decrease from fiscal 1995. Sales in fiscal 1997 were $1,123,390
a 42% decrease from fiscal 1996. Revenues from the Company's military product
sales represented approximately 60%, 30%, 23% and 10% of sales of the Company in
fiscal 1994, 1995, 1996 and 1997, 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) Class A
Warrant at a price of $10.00 per Unit. The Company received net proceeds of
$1,853,025.
The Company's executive offices are located at 5 Columbia Road,
Somerville, New Jersey 08876, telephone (908) 722-8081.
8
<PAGE>
<TABLE>
<S> <C>
Present Capitalization
Common Stock. . . . . . . . . . . . . . 2,815,738 (1)
Class A Warrants. . . . . . . . . . . . 1,135,750
Series A Preferred Stock. . . . . . . 155,000 (2)
Series B Preferred Stock. . . . . . . 1,197 (3)
Shareholders of Record. . . . . . . . _____(4)
The Offering
Securities Offered By the
Company . . . . . . . . . . . . . . 700,000 Units, each Unit consisting of one (1) share
of Common Stock, par value $1.00, and four (4) Class
A Warrants. The Common Stock and Class A
Warrants are detachable and may trade separately
immediately upon issuance. The Units will not trade
after issuance. See "Descriptions of Securities."
Common Stock to be
Outstanding After Completion
of the Offering . . . . . . . . . . . 3,515,738
Class A Warrants to be Outstanding
After Completion of the Offering . . . . . . 5,135,750 (including 1,200,000 being offered by the
Selling Securityholders)
Terms of Class A Warrants. . . . . . Each Class A Warrant entitles the holder to purchase one share of the Company's
Common Stock at a price of $6.00, subject to adjustment, at any time through
August 16, 1998. The Class A Warrants are subject to redemption by the Company
at any time on not less
</TABLE>
- --------
(1) Does not include treasury stock. See "Financial Statements".
(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 239 shares of Common Stock. See "Description of
Securities" and "Certain Transactions."
(4) As of _________, 1997.
9
<PAGE>
<TABLE>
<S> <C>
than 30 days' notice at $.05 per Warrant, provided the average closing price of
the Common Stock exceeds $7.20 per share for 20 consecutive trading days ending
within 15 days prior to the notice.
Nasdaq SmallCap Market Symbols . . Common Stock --- CNLG; Class A Warrants --- CNLGW
Risk Factors. . . . . . . . . . . . The securities are subject to a high degree of risk and substantial dilution.
See "Risk Factors" and "Dilution."
Use of Proceeds. . . . . . . . . . . The net proceeds of this Offering, estimated at $2,750,000, will be used to
repay certain bridge financing, to complete the design, development and
implementation of the PTR-1500 quad system and its related option modules,
repayment of other indebtedness and for working capital purposes. See "Use of
Proceeds."
Representative's Compensation. . . . IAR Securities Corp. (the "Representative") will receive as compensation for
its services in this Offering a ten percent (10%) discount on the purchase
price of the Units, a three percent (3%) non-accountable expense allowance and
an option to purchase Units equal to ten percent (10%) of the Units sold in
this Offering. As part of the underwriting arrangements, the
Company will enter into an agreement retaining the Representative as a
financial consultant to the Company for a two (2) year period commencing as of
the close of the sale of the Units offered hereby at an annual fee of $35,000,
for a total of $70,000 payable in full at the Closing of the Offering, and will
pay an investment banking fee with respect to any transaction introduced by the
Representative and consummated and a 4% warrant solicitation fee. See
"Underwriting."
</TABLE>
10
<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>
YEAR ENDED JULY 31
1997 1996 1995 1994 1993
-------------- ------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Net sales and other income $ 1,123,390 $ 1,924,466 $ 2,090,933 $ 2,044,860 $ 1,486,298
Net loss before extraordinary items $ (672,080) (446,824) (522,044) (1,182,988) (322,005)
Extraordinary item (1) -- 740,376 -- -- --
Income (loss) from continuing operations (672,080) 293,552 (522,044) (1,182,988) (322,005)
Net income (loss) (672,080) 293,552 (522,044) (1,182,988) (322,005)
Income (loss) from continuing operations per
share - primary (.42) .28 (12.01) (27.22) (7.41)
Income (loss) from continuing operations per
share - fully diluted (.42) .20 (12.01) (27.22) (7.41)
Net income (loss) per share - primary (.42) .28 (12.01) (27.22) (7.41)
Net income (loss) per share - fully diluted (.42) .20 (12.01) (27.22) (7.41)
Pro forma income from continuing operations
per share (2) .12
Total assets 4,339,752 3,927,834 3,882,235 3,739,294 4,601,015
Long-term debt and capitalized lease obligations 4,973 34,103 3,829,625 3,732,961
</TABLE>
(1) On August 16, 1995 the Company's bank debt was restructured resulting in
debt foregiveness of $1,232,728. This created a deferred tax asset at July
31, 1995 of $492,352. When the debt foregiveness occurred, the Company
wrote off its deferred tax asset against the forgiveness of debt, resulting
in extraordinary income of $740,376.
(2) 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.
11
<PAGE>
<TABLE>
<CAPTION>
AT JULY 31, 1997
---------------------------------------------------------------------------
ACTUAL ADJUSTMENT AS ADJUSTED
------ ---------- -----------
<S><C> <C> <C>
Working Capital $ 2,456,122 $ 2,750,000 (1) $ 5,206,122
Total Assets 4,339,752 2,750,000 (1) 7,089,752
Long-Term Liabilities -0- -0- -0-
Stockholders' Equity 2,851,396 2,750,000 (1) 5,601,396
</TABLE>
(1) Reflects 700,000 shares of Common Stock included in the Units being
offered herewith; net proceeds to the Company are estimated to be
$2,750,000 as follows:
<TABLE>
<S> <C>
Gross proceeds from offering $ 3,500,000
Discounts, commissions 350,000
Estimated offering expenses 225,000
Consulting agreement 70,000
Non-accountable expenses (Underwriter) 105,000
-------------
Net additions to cash $ 2,750,000
=============
</TABLE>
12
<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
July 31 1997, the Company had working capital of $2,456,122 and stockholders'
equity of $2,851,396. The Company's continued existence is dependent upon it
successfully expanding its business and attaining profitable operations. The
Company reported losses of $672,080, income of $293,552 and losses of $522,044
for the years ended July 31, 1997, 1996 and 1995, respectively. The profit in
1996 was only due to the debt extinguishment of $1,232,728, which after the
deferred tax asset of $492,352 resulted in extraordinary income of $740,376. The
profits (losses) reported included inventory write-offs of $28,101, $50,281 and
$656,248 for the same periods, respectively. In addition, reported interest
expense for the same periods were $81,025, $131,854 and $253,686, respectively.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
2. Working Capital; Cash Flow; Backlog. At July 31, 1997, the Company had
working capital of $2,456,122. For the period ended July 31, 1997 cash flow used
in operations amounted to $654,214. The Company has no material cash commitments
for the current period other than consistent with supporting existing orders,
new orders and contracts. Funds to support said commitments will be provided for
from cash on hand, new receivables and, if necessary, borrowings. As of July 31,
1997 the Company had a backlog of $2,900,000. Of such backlog, $2,800,000 relate
to the Company's PTR-1000 series of products which are subject to the terms of
the blanket-contracts with certain of its largest customers. See "Risk
Factors-Dependence on Large Customers" and "Business-Largest Customers." The
terms of such contracts are not binding and only represent potential purchases,
whereby the Company sets certain prices for its products for the duration of the
contract.
3. Risks Attendant to Expansion. The Company intends to utilize a portion of the
net proceeds of this Offering to hire employees, complete the PTR-1500 designing
and testing of mainframe, design, build and test of the option modules and event
recorders, complete the radio interface for the Company's tone and multiplex
products and market the Company's products. The Company anticipates using
approximately $600,000 to complete this task and have marketable products by
March 1998. Like any business enterprise operating in a specialized and
competitive
13
<PAGE>
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 "Use of Proceeds" and
"Business".
4. Potential Need for Additional Financing. The Company believes that the funds
to be raised in this offering, together with the projected revenues of the
Company, will be sufficient to enable the Company to pursue both its present and
its proposed business activities for the ensuing twelve months. There can be no
assurance that such funds will, in fact, be sufficient or that conditions and
circumstances described herein may not result in subsequent cash requirements by
the Company. In the event of such developments, attaining additional financing
under such conditions may not be possible, or even if additional capital may be
otherwise available, the terms on which such capital may be available may not be
commercially feasible or advantageous. See "Use of Proceeds".
5. 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."
6. Management's Broad Discretion in Application of Proceeds. Approximately
$1,077,565, or 39.18%, of the estimated $2,750,000 of the net proceeds will be
applied to working capital and general corporate purposes. Accordingly, the
Company will have broad discretion as to the application of such proceeds
without prior shareholder approval. In addition, the management of the Company
has broad discretion to adjust the application and allocation of the net
proceeds of this offering, including funds received upon exercise of outstanding
warrants, in order to address changed circumstances and opportunities. As a
result of the foregoing, the success of the Company will be substantially
dependent upon the discretion and judgment of the management of the Company with
respect to the application and allocation of the net proceeds hereof. See "Use
of Proceeds."
7. 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".
14
<PAGE>
8. 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 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".
9. 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 has entered into an employment
agreement with Mr. Benou. However, if the employment by the Company of Mr. Benou
terminates, or he is unable to perform his duties, the Company may be
substantially affected. The Company intends on obtaining prior to the offering,
key man insurance on the life of Mr. Benou in the amount of $1,000,000, to be
payable to the Company. If the Company were to lose the services of 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".
10. 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".
11. Dependence on Large Customers. Sales to the Company's two major customers
during fiscal 1997 (General Electric and Bonneville Power Administration)
totaled $255,500 and $200,000, respectively (22% and 18%, respectively of all
sales). Sales to the Company's major customer in fiscal 1996 (B.C.
Hydro-Canada) totaled $401,000 (20% of all sales). Sales to the Company's
major customer in fiscal 1995 (United States Government) totaled $424,849 (20%
of net sales). During fiscal 1994, sales to the Company's major customer
(Westinghouse Electric Corp. - Naval
15
<PAGE>
Systems Division) totaled $597,000 (29% of net sales). The Company has three (3)
ongoing contracts, in addition to existing open orders. These may continue to
produce revenue past the date of this prospectus, namely from the General
Electric Company and Bonneville Power Administration. However, these contracts
are blanket contracts, are not binding and only represent potential purchases,
whereby the Company sets certain prices for its products for the duration of the
contract. Thus, investors in this offering are advised that there are no
guaranteed future purchases under such contracts. The loss of General Electric
and Bonneville Power Administration would have a material adverse effect upon
the Company. 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 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.
12. 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 $150,000 in fiscal 1997 or 13% of the Company's total
revenue of $1,123,390, has been affected. The Government shutdown during the
last half of 1995 and early 1996 seriously aggravated 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.
13. Lack of 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.
14. Dilution. Investors in this Offering will suffer immediate substantial
dilution of their investments, to the extent that the net tangible book value
per share of Common Stock upon completion of this Offering will be $1.55,
representing a dilution of $3.45 per share (69%) from the $5.00 offering price
of the Units (attributing no value to the Warrants contained therein). See
"Dilution."
16
<PAGE>
15. Determination of Offering Price. The public offering price of the Units and
the exercise price of the Class A Warrants do not bear any relationship to the
assets, book value or net worth of the Company or any other recognized criteria
of value. Neither the offering price of the Units nor the exercise price of the
Class A Warrants should be regarded as an indication of the present or future
value of the Company. See "Underwriting".
16. Redemption of Redeemable Warrants. The Class A Warrants are subject to
redemption by the Company at any time at a price of $.05 per Warrant if the
closing bid price for the Common Stock equals or exceeds $7.20 per share for any
20 trading days ending no earlier than the fifteenth trading day prior to the
date of the notice of redemption. In the event that the Warrants are called for
redemption by the Company, Warrantholders will have thirty (30) days during
which they may exercise their rights to purchase shares of Common Stock. If
holders of the Warrants elect not to exercise them upon notice of redemption
thereof, and the Warrants are subsequently redeemed prior to exercise, the
holders thereof would lose the benefit of the difference between the market
price of the underlying Common Stock as of such date and the exercise price of
such Warrants, as well as any possible future price appreciation in the Common
Stock. As a result of an exercise of the Warrants, existing Stockholders may be
diluted and the market price of the Common Stock may be adversely affected. If a
Warrantholder fails to exercise his rights under the Warrants prior to the date
set for redemption, then the Warrantholder will be entitled to receive only the
redemption price of $.05 per Warrant. Redemption of the Warrants could force the
holders to exercise the Warrants at a time when it may be disadvantageous to do
so or sell the Warrants at the then market value of the Warrants at the time of
redemption. If a current prospectus is not in effect, it is unlikely that the
Company would call the warrants for redemption. See "Risk Factors -- Current
Prospectus and State Blue Sky Registration Required to Exercise Class A
Warrants" and "Description of Securities --Class A Warrants".
17. Current Prospectus and State Blue Sky Registration Required to Exercise
Class A Warrants. Purchasers of Class A Warrants will have the right to exercise
the Class A Warrants only if a current prospectus relating to the shares
underlying the Class A Warrants is then in effect and only if such shares are
qualified for sale under applicable state securities laws of the states in which
the various holders of the Class A Warrants reside. There is no assurance that
the Company will be able to keep this Prospectus covering such shares current.
Moreover, the Company may decide not to seek or may not be able to obtain
qualification of the issuance of its Common Stock in all of the states in which
the ultimate purchasers of Class A Warrants may reside. The Class A Warrants may
be deprived of any value if a current prospectus covering the shares issuable
upon exercise thereof is not kept effective or if such shares are not registered
in the states in which holders of the Class A Warrants reside. See "Description
of Securities -- Class A Warrants".
18. Restrictions on Marketmaking Activities During Warrant Solicitation. To the
extent that the Representative solicits the exercise of Class A Warrants, the
Representative may be prohibited pursuant to the requirements of Regulation M
under the Exchange Act from engaging in marketmaking activities during such
solicitation and for a period of up to five days preceding such solicitation. As
a result, the Representative may be unable to continue to provide a market for
the
17
<PAGE>
Company's securities during certain periods while the Class A Warrants are
exercisable. The Representative is not obligated to act as a marketmaker. See
"Underwriting".
19. Nasdaq Listing and Continued Listing Requirements. The Company's Common
Stock and Class A Warrants are currently listed on the Nasdaq SmallCap Market,
Inc. ("Nasdaq"). For continued listing on Nasdaq, a company, among other things,
must have $2,000,000 in net tangible assets, 500,000 shares in the public float,
$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 continued
quotation on Nasdaq, trading, if any, in the 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 OTC 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.
20. "Penny Stock" Regulations; Risk of Low-Priced Securities. 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 in the regulations) of less than $5.00 per share, subject to certain
exceptions. On the Effective Date, the Securities will initially be exempt from
the definition of "penny stock". If, however, the Securities offered hereby are
removed from Nasdaq, the Company's Securities may be subject to rules of the
Commission that impose additional sales practice requirements on broker-dealers
effecting transactions in penny stocks. In most instances, unless the purchaser
is either (i) an institutional accredited investor, (ii) the issuer, (iii) a
director, officer, general partner or beneficial owner of more than 5% of any
class of equity security of the issuer of the penny stock that is the subject of
the transaction, or (iv) an established customer of the broker-dealer, the
broker-dealer must make a special suitability determination for the purchaser of
such securities and have received the purchaser's prior written consent to the
transaction. Additionally, for any transaction involving a penny stock, the
rules of the Commission require, among other things, the delivery, prior to the
transaction, of a disclosure schedule prepared by the Commission relating to the
penny stock market and the risks associated therewith. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and its
registered representative and current quotations for the securities. Finally,
among other requirements, monthly statements must be sent to the purchaser of
the penny stock disclosing recent price information for the penny stock held in
the purchaser's 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 Common Stock or Class A Warrants and may affect the ability of
purchasers in this Offering to sell the Common Stock in the secondary market.
21. Restricted Shares of Common Stock Eligible for Future Sale. Immediately
prior to the sale of the Shares hereunder, the Company had an aggregate
2,815,738 shares of its Common Stock issued and outstanding, 315,356 of which
are "restricted securities," which may be sold only in compliance with Rule 144
under the Securities Act of 1933, as amended. Rule 144 provides, in essence,
that a person holding restricted securities for a period of one year after
payment therefor
18
<PAGE>
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 two 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. All of the
Company's officers and directors have agreed not to sell or transfer any shares
of Common Stock prior to __________, 1999 (eighteen (18) months from the date of
this Prospectus), without the prior written consent of the Representative. See
"Underwriting."
22. Representative's Unit Purchase Option. In connection with this Offering, the
Company will sell to the Representative, for nominal consideration, a warrant to
purchase an aggregate of 70,000 Units each Unit consisting of one (1) share of
the Company's Common Stock and four (4) Class A Warrants (the "Representative's
Unit Purchase Option"). The Representative's Unit Purchase Option will be
exercisable commencing one year after the Effective Date and ending four years
after such date, at a price of $6.00 per unit, subject to certain adjustments.
The holders of the Representative's Unit Purchase Option will have the
opportunity to profit from a rise in the market price of the Company's
securities, without assuming the risk of ownership. The Company may find it more
difficult to raise additional capital if it should be needed for the business of
the Company while the Representative's Unit Purchase Option is outstanding. At
any time when the holders thereof might be expected to exercise them, the
Company would probably be able to obtain additional capital on terms more
favorable than those provided by the Representative's Unit Purchase Option. See
"Underwriting."
23. 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."
24. 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. After the sale of the Units offered hereby, there will
be a total of 3,515,738 shares of Common Stock 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 1,135,750 Class A Warrants to purchase up to 1,135,750 shares of the
Company's Common Stock issued in 1995, the 1995 Unit Purchase 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, the exercise of up to 2,800,000 Class A Warrants
included in the Units offered to investors in this Offering to purchase
2,800,000 shares of Common Stock, the Representative's option to purchase up to
70,000 shares of Common Stock and 280,000 Class A Warrants to purchase 280,000
shares of Common Stock, the Representative's Over-Allotment Option of 105,000
Units consisting of 105,000 shares of Common Stock and 420,000 Class A Warrants
to purchase 420,000 shares of Common Stock and the 1,200,000 shares of Common
Stock issuable upon exercise of the 1,200,000 Class A Warrants being
19
<PAGE>
offered by the Selling Securityholders (assuming the Selling Securityholders
exercise their right to convert the Convertible Bridge Notes (see "Bridge
Financing"). After reserving a total of 6,072,250 shares of Common Stock for
issuance upon the exercise of all the warrants to purchase Common Stock, the
Company will have at least 10,428,014 shares of authorized but unissued capital
stock available for issuance without further shareholder approval (of which
155,239 has been reserved for conversion of all of the Company's Series A and
Series B Preferred Stock outstanding). In addition, the Company is authorized to
issue 2,000,000 shares of Preferred Stock (of which 156,197 is outstanding prior
to this Offering). See "Description of Securities." Pursuant to the terms of the
Underwriting Agreement, the Company's officers, directors, and principal
stockholders have agreed not to sell any of their shares of capital stock for a
period of eighteen (18) months following the date of this Prospectus without the
prior written consent of the Representative. Also, the Company has agreed not to
issue any additional securities for a period of twenty-four (24) months
following the date of this Prospectus without the prior written consent of the
Representative other than in certain circumstances (see "Underwriting"). The
sale of a significant number of these shares in the public market may adversely
affect prevailing market prices of the Company's securities following this
offering. See "Underwriting."
25. 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".
26. Lack of Patent Protection or Proprietary Rights. Other than as set forth
below, the Company currently does not have any patent or trademark applications
pending. However, the Company may file patent or trademark applications relating
to certain of the Company's products. If patents or trademarks were to issue,
there can be no assurance as to the extent of the protection that will be
granted to the Company as a result of having such patents or trademarks or that
the Company will be able to afford the expenses of any complex litigation which
may be necessary to enforce their proprietary rights. Except as may be required
by the filing of patent or trademark applications, the Company will attempt to
keep all other proprietary information secret and to take such actions as may be
necessary to insure the results of its development activities are not disclosed
and are protected under the common law concerning trade secrets. Such steps will
include the execution of nondisclosure agreements by key Company personnel and
may also include the imposition of restrictive agreements on purchasers of the
Company's products and services. There is no assurance that the execution of
such agreements will be effective to protect the Company, that the Company will
be able to enforce the provisions of such nondisclosure agreements or that
technology and other information acquired by the Company pursuant to its
development activities will be deemed to constitute trade secrets by any court
of competent jurisdiction.
20
<PAGE>
The Company uses the trademark INIVEN for its commercial products. 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. See Business-Patents and Trademarks."
21
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Units being offered hereby, after the deduction of the underwriting discounts
and the expenses of this offering, are estimated at $2,750,000 ($3,206,750 if
the Representative's Over-Allotment Option is exercised). The Company will not
receive any proceeds from the sale of securities by the Selling Securityholders.
The Company intends to allocate the net proceeds of this offering in
the approximate amounts set forth below:
<TABLE>
<CAPTION> Approximate Percentage
Approximate Amount of Net Proceeds
------------------ -----------------------
<S> <C> <C>
Repayment of Bridge Debt(1) $156,200 5.68%
Design, Research and Development(2) $600,000 21.82%
Repayment of Other Debt(3) $916,235 33.32%
Working Capital(4) $1,077,565 39.18%
---------- ------
Total $2,750,000 100%
</TABLE>
- --------
(1) Represents payment of bridge financing consisting of promissory notes
bearing interest at 8% per annum which are payable on the earlier of (a)
December 31, 1997 or (b) the date on which this Offering closes. The
Company used the proceeds of the bridge financing to pay certain expenses
in connection with this offering and for working capital purposes. See
"Bridge Financing", and "Selling Securityholders". This amount assumes the
conversion of the Convertible Bridge Notes. See "Bridge Financing." This
amount includes approximately $6,200 in accrued interest on the Bridge
Notes.
(2) Represents funds used to complete the design, development and
implementation of the PTR-1500 quad system and its related option modules.
(3) Represents payment of debt obligation due to CNL Holdings, Inc. bearing
interest at the rate of 4% per annum. $ 916,235 was loaned to the Company
between March and June 1997, which are repayable upon the earlier of (i)
the closing of this offering or (ii) one year from the date of each of such
loans. The Company used the proceeds of such loans for the design and
development of the PTR-1500 and for working capital purposes.
(4) Working Capital will be used for general corporate purposes such as
salaries and purchase of inventory, marketing expansion, research and
product development. Assumes conversion of the Convertible Bridge
Notes. See "Bridge Financing."
22
<PAGE>
The amounts set forth above are estimates. The actual amount expended
to finance any category of expenses may be increased or decreased by the
Company's Board of Directors, at its sole discretion, if a reapportionment or
redirection of funds is deemed to be in the best interests of the Company, such
as in the event the Company's marketing program with General Electric were to be
terminated the Company will redirect its resources and use a portion of the
proceeds to market and sell its own PTR 1500 product line.
Any additional proceeds received from the purchase of additional Units
by the Underwriters to cover over-allotments or from the exercise of the Class A
Warrants will be added to the Company's working capital.
Pending use as set forth above, the Company will invest the net
proceeds of the offering in short-term interest bearing investment grade
securities.
23
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
July 31, 1997 as adjusted to give effect to the shares of Common Stock offered
in this Registration. This table should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere in this Registration
Statement.
<TABLE>
<CAPTION>
AT JULY 31, 1997
STOCKHOLDERS' EQUITY: ACTUAL ADJUSTMENTS AS ADJUSTED
------ ---------------- -----------
<S> <C> <C> <C>
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;
1,197 shares issued and outstanding 597 --- 597
Preferred Stock, par value $5.00, 2,000,000
shares authorized after offering
(-0- shares before offering)
Common Stock, par value $1.00 authorized
20,000,000 shares; issued 2,803,473
shares including 8,776 shares held in Treasury
before offering; after offering 3,503,473(1)
2,803,473 (1) 700,000 3,503,473
Additional paid in capital 3,782,513 (1) 2,050,000 5,832,513
Retained earnings (deficit) (3,680,953) ---- (3,680,953)
Treasury stock (131,734) ---- (131,734)
------------ ------------
TOTAL STOCKHOLDERS'
EQUITY 2,851,396 ---- 5,601,396
------------ ------------
TOTAL CAPITALIZATION $ 2,851,396 ---- $ 5,601,396
============ ============
</TABLE>
- --------------
(1) Reflects 700,000 shares of Common Stock included in the Units being
offered herewith; net proceeds to the Company are estimated at
$2,750,000 after giving effect to Underwriters discounts and expenses
of the Offering.
24
<PAGE>
Bridge Financing
In December 1996 and January 1997, the Company obtained bridge
financing from six (6) lenders in the amount of $200,000. These lenders are the
individuals identified in this Prospectus as "Selling Securityholders." In
exchange for making the loans to the Company, each Selling Securityholder
received two (2) promissory notes (the "Bridge Notes"). Certain Bridge Notes are
in the aggregate principal amount of $150,000 (the "Principal Bridge Notes") and
the other Bridge Notes are in the aggregate principal amount of $50,000 (the
"Convertible Bridge Notes"). Each of the Bridge Notes bears interest at the rate
of eight percent (8%) per annum. The Bridge Notes are due and payable upon the
earlier of (i) January 31, 1999 or (ii) the date on which this offering closes.
The Company intends to use a portion of the net proceeds of the offering to
repay the Bridge Notes. See "Use of Proceeds." The Convertible Bridge Notes are
convertible into a total of 1,200,000 Class A Warrants. The proceeds of the
bridge financing were used by the Company to pay certain expenses in connection
with this offering and to increase working capital. Each Class A Warrant
contained in the Convertible Bridge Notes is identical to the Class A Warrants
offered hereby.
The registration statement, of which this Prospectus is a part, also
covers the resale of the Class A Warrants that may be acquired by the Selling
Securityholders in the bridge financing, as well as the Common Stock issuable
upon exercise of the Class A Warrants by the Selling Securityholders or their
transferees.
The Company's agreement with the Selling Securityholders provided that
the Company would include in its registration statement a prospectus covering
the Class A Warrants owned by the Selling Securityholders and the underlying
Common Stock. See "Selling Securityholders."
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. See
"Risk Factors- No Common Stock Dividends" and "Description of Securities."
25
<PAGE>
DILUTION
Prior to this offering, there were 2,815,738 shares of the Company's
Common Stock outstanding. As of July 31, 1997, the net tangible book value of
the Company was $2,693,498. The net tangible book value per share of the
Company, immediately prior to this offering is, therefore, $.95. Net tangible
book value per share represents the amount of the Company's tangible assets
(total assets less total liabilities and intangible assets) divided by the
number of shares of Common Stock outstanding.
After giving effect to the sale of the Units (attributing no value to
the Warrants contained therein) offered hereby and after receipt of the
estimated net proceeds therefrom, without giving any effect to the exercise of
the Representative's Over-Allotment Option, and assuming the conversion of
$50,000 in Convertible Bridge Notes (See "Bridge Financing"), the pro forma net
tangible book value of the Company would be $1.55 per share. Investors in this
Offering, therefore, will sustain an immediate dilution to the extent of $3.45
per share of Common Stock purchased. Dilution represents the difference between
the offering price of the shares and the net tangible book value per share
immediately after completion of the offering. The following table illustrates
this dilution:
<TABLE>
<S><C>
Offering price per share.................................................$ 5.00
Net tangible book value per share before Offering........................$ .95
Increase per share attributable to the Offering..........................$ .60
Net tangible book value per share after Offering.........................$ 1.55
Dilution per share to new investors......................................$ 3.45
</TABLE>
The following table sets forth the percentage of equity to be purchased
by investors in this Offering compared to the percentage of equity to be owned
by the current shareholders, and the comparative amounts paid for the shares of
Common Stock by the investors in this Offering as compared to the total
consideration paid by the present stockholders. The table assumes the conversion
of $50,000 in Convertible Bridge Notes. This does not take into effect the
exercise of Class A Warrants or the Representative's over-allotment option.
<TABLE>
<CAPTION>
Percentage of
Shares Percentage of Total Total
Purchased Total Shares Consideration Consideration
--------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
New Investors 700,000 20% $ 3,500,000 34.7%
Present Stockholders 2,815,738 80% $ 6,585,986 65.3%
--------- ---- ------------ -----
Total 3,515,738 100% $ 10,085,986 100%
</TABLE>
26
<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>
YEAR ENDED JULY 31
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales and other income $ 1,123,390 $ 1,924,466 $ 2,090,933 $ 2,044,860 $ 1,486,298
Net loss before extraordinary items $ (672,080) (446,824) (522,044) (1,182,988) (322,005)
Extraordinary item (1) -- 740,376 -- -- --
Income (loss) from continuing operations (672,080) 293,552 (522,044) (1,182,988) (322,005)
Net income (loss) (672,080) 293,552 (522,044) (1,182,988) (322,005)
Income (loss) from continuing operations per
share - primary (.42) .28 (12.01) (27.22) (7.41)
Income (loss) from continuing operations per
share - fully diluted (.42) .20 (12.01) (27.22) (7.41)
Net income (loss) per share - primary (.42) .28 (12.01) (27.22) (7.41)
Net income (loss) per share - fully diluted (.42) .20 (12.01) (27.22) (7.41)
Pro forma income from continuing operations
per share (2) .12
Total assets 4,339,752 3,927,834 3,882,235 3,739,294 4,601,015
Long-term debt and capitalized lease obligations 4,973 34,103 3,829,625 3,732,961
</TABLE>
(1) On August 16, 1995 the Company's bank debt was restructured resulting
in debt foregiveness of $1,232,728. This created a deferred tax asset
at July 31, 1995 of $492,352. When the debt foregiveness occurred, the
Company wrote off its deferred tax asset against the forgiveness of
debt, resulting in extraordinary income of $740,376.
(2) 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.
27
<PAGE>
<TABLE>
<CAPTION>
AT JULY 31, 1997
---------------------------------------------------------------------
ACTUAL ADJUSTMENT AS ADJUSTED
------ ---------- -----------
<S><C> <C> <C>
Working Capital $ 2,456,122 $ 2,750,000 (1) $ 5,206,122
Total Assets 4,339,752 2,750,000 (1) 7,089,752
Long-Term Liabilities -0- -0- -0-
Stockholders' Equity 2,851,396 2,750,000 (1) 5,601,396
</TABLE>
(1) Reflects 700,000 shares of Common Stock included in the Units being
offered herewith; net proceeds to the Company are estimated to be
$2,750,000 as follows:
<TABLE>
<S> <C>
Gross proceeds from offering $ 3,500,000
Discounts, commissions 350,000
Estimated offering expenses 225,000
Consulting agreement 70,000
Non-accountable expenses (Underwriter) 105,000
-------------
Net additions to cash $ 2,750,000
=============
</TABLE>
28
<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 Revenue from
Operations For the Income & Expense Percentage
Years Ended July 31, Items Increase/Decrease
----------------------------------- ----------------------------------------------- -------------------------------------
1996 1995 1994
to to to
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
100.00% 100.00% 100.00% Sales & other income (41.63)% (8.00)% 2.2%
- ------ ------ ------
84.16 67.20* 92.20* Cost of products sold (27.92) (32.90) (4.20)
67.55 49.20 44.20 Selling, general & administrative (19.86) 2.40 8.40
7.21 6.80 12.10 Interest (38.55) (48.00) (30.0)
- ------ ------ ------ ------ ------
158.92 123.20 (148.50) Total costs & expenses (24.70) (23.60) (3.80)
- ------ ------ ------ ------ ------
(52.92) (23.20) (48.50) Income (loss) before taxes 48.22 (56.00) (14.30)
.90 --- (23.50) Income taxes (credits) 494.20 (100.00)
- ------ ------ ------ ------ ------
(59.82) (23.20)% (25.0)% Income (loss) before extraordinary 50.41% (14.40)% (14.30)%
item
</TABLE>
- --------------
* Includes write-offs for obsolete or excess inventories which were
$28,101, $50,281 and $656,248 for 1997, 1996 and 1995, respectively.
The inventory write-offs were military related and in management's
opinion these items will not be reordered in the foreseeable future.
The Company believes that material adjustments will not recur in future
periods.
29
<PAGE>
Year ended July 31, 1997 Compared to 1996.
A summary of income, costs and expenses for the year ended July 31,
1997 and corresponding period of the previous year follows:
<TABLE>
<CAPTION>
For the Year ended July 31,
---------------------------
1997 1996
---- ----
<S> <C><C>
Revenue 1,123,390 1,924,466
Costs and expenses 1,795,470 2,371,290
Net-Income (Loss) after
taxes, before extraordinary
item (672,080) (446,824)
</TABLE>
Total revenue decreased $801,076 or 42% from $1,924,466 to $1,123,391
in 1997. This decrease was attributable to delays in the release of tone
protection orders from the Bonneville Power Administration and other customers.
The Company attributes these delays to the budget constraints for various
utilities and to the pending release of the new advanced tone protection device,
the PTR-1500. The Company essentially completed the prototypes during the first
fiscal quarter of 1998 and plans to ship prototypes to GE during November 1997.
Gross Margins for the year totaled $177,910 and $632,185 respectively,
representing 15.8% and 32.9% of revenues. Gross margins for 1997 were lower than
1996 due to the low utilization of the factory in fiscal 1997 over 1996.
The Company was able to partially offset some of these losses by
shifting its internal resources to new product development. Prior to this
quarter the Company engaged outside contractors almost exclusively to complete
its product development. During the current quarter the Company used to a
greater extent its captive resources including design, engineering and
production. Historically, the Company has used part time, temporary factory
personnel and outside contractors to adjust its workforce for large changes in
production demands.
The backlog of orders for the Company's PTR-1000 series of products
consists of multi-year blanket - contracts at fixed prices for the duration of
the contracts. There is no obligation or penalty if the contracts expire prior
to additional orders being placed for the total value of the contracts. The
contracts do not provide for any guaranteed purchases. See "Risk Factors -
Dependence on Large Customers" and "Business - Largest Customers."
As of July 31, 1997, the Company's backlog of orders was approximately
$2,900,000 compared to $3,400,000 as of July 31, 1996.
30
<PAGE>
Selling, General and Administrative expenses, which are a fixed costs
to the Company (not variable), decreased from $946,954 in 1996 to $758,880 in
1997 representing a decrease of 19.9%. This decrease is the result of cost
cutting initiatives in the form of manpower reductions and reduced expenditures
for sales and marketing expenses. These initiatives were taken by management
during the year to help offset the drop in sales during fiscal 1997.
Cost of sales decreased from $1,242,001 in 1996 to $917,379 in 1997,
representing a 26% decrease reflecting the reduction in material costs.
Interest expense totaled $81,026 for the year ended July 31, 1997
compared to $134,854 for the year ended July 31, 1996. This decrease was a
result of lower amounts of borrowings due to the paydown of the credit facility
during the year.
As a result of the foregoing, the Company reported a net loss of
$672,080 or $0.42 per share. This compares to a net income of $293,552 or $.28
per share for the same period last year.
1996 Compared to 1995
On August 16, 1995, the Company offered 235,750 Units (the "Units") at
a price of $10.00 per Unit. Each Unit consisted of two (2) shares of Common
Stock, par value $1.00 per share ("Common Stock"), and one (1) Redeemable Class
A Warrant for Common Stock ("Class A Warrant"). The Common Stock and Class A
Warrants were immediately detachable and separately tradeable. Each Class A
Warrant entitled the holder to purchase one share of the Company's Common Stock,
at an exercise price of $6.00, subject to adjustment, from August 17, 1996
through August 16, 1998. The Class A Warrants are subject to redemption by the
Company at anytime after August 17, 1996 on not less than 30 days notice at $.05
per warrant, provided the average closing price of the Common Stock for 20
consecutive trading days ending within 15 days prior to the notice exceeds $7.20
per share.
The costs of the offering were deducted from the proceeds from the sale
of stock.
On August 16, 1995, the Company effected a 1- for - 100 reverse stock
split of its Common Stock on all shares of Common Stock outstanding.
On August 16, 1995, holders of 19,360 shares of the Company's Series B
Preferred Stock (including Robert Benou and Arpad J. Havasy, officers and
directors of the Company) converted their shares of Series B Preferred Stock
into 387,200 (3,872 post-split) shares of Common Stock.
On August 16, 1995, $381,533 of the $420,179 of accrued dividends on
the Series B Preferred Stock at December 31, 1994 were converted into 76,307
shares of Common Stock (represents a $5.00 per share assigned value of Common
Stock) and the remaining dividends due to such holders (including Messrs. Benou
and Havasy) were waived.
31
<PAGE>
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 (which as of such date had
outstanding debt of $4,382,728 which included accrued interest of $584,728) for
the following:
(a) $250,000 cash
(b) $1,025,000 five-year term loan
(c) 375,000 common shares of the Company (valued at $5.00 per
share)
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.
Revenues for the year ended July 31, 1996 decreased to $1,924,416 from
$2,090,933 for the year ended July 31, 1995 representing a decrease of 8%.
Revenues declined as a result of a decline in sales in the military sector. The
Company completed a large sale of switches to the military in fiscal 1996 and
did not have a comparable sale for fiscal 1995.
Gross margins for the year totaled $632,1841 and $163,194,
respectively, representing 32.9% and 7.8% of revenues. Gross margins were higher
in 1996 due to the obsolete inventory write-off in 1995. Without the inventory
write-off the 1996 and 1995 gross margin would have been 35.5% and 39.3%
respectively. The gross margin for 1996 was lower than 1995 without the
inventory write-off due to the fact that the higher than normal discounts were
offered and taken on two major sales.
Selling, general and administrative expenses increased from $924,524 in
1995 to $946,954 in 1996, representing an increase of 2.4%. These expenses
increased as a result of an expansion of the employment base and an increase in
advertising and promotion costs.
Interest expense totaled $134,854 for the year ended July 31, 1996 as
compared to $253,686 in interest expense for the year ended July 31, 1995. The
Company reached a debt restructuring agreement with the Bank during 1995 that
resulted in having no interest expense for the quarter ended April 30, 1995.
As a result of the foregoing, the Company reported a net profit of
$293,552 or $.28 per share. The 1996 net profit was inclusive of a debt
compromise of $740,376 net of a tax benefit of $492,352. This compares to a net
loss of $522,044, or $.12 per share for the same period last year (after
retroactive effect to a 1 for 100 reverse split on August 16, 1995 and after
extraordinary item in 1996).
Without the debt compromise and the related tax benefit in 1996 there
would have been a loss of $446,824 or $.43 per share.
32
<PAGE>
As of July 31, 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.
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
33
<PAGE>
and to keep the amount unchanged through August 16, 1995. Accordingly, no
interest expense was accrued from February 1, 1995 through July 31, 1995.
As a result of the foregoing, the Company incurred a net loss of
$522,000 for the twelve months ended July 31, 1995, compared to a net loss of
$1,183,000 for the same period last year. The loss in 1995 was reduced by the
income tax benefit derived from previously incurred operating losses not
deducted. The losses, as a result of the Registration, will be deductible
against forgiveness of indebtedness income.
As of July 31, 1995 the Company's backlog totaled $1.3 million,
consisting of a mix of military and commercial 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.
Financial Condition, Liquidity and Capital Resources
Financial Condition, Liquidity and Capital Resources at July 31, 1997
Working capital at July 31, 1997 was $2,456,122 compared to $1,914,981
at year ended July 31, 1996. The improvement in the working capital is the
result of a planned inventory increase of $236,012. This is primarily attributed
to the building of the PTR-1500 tone protection device. The Company will be
delivering to the General Electric Company prototype units during November 1997.
Production units are expected to be delivered during the second fiscal quarter
of fiscal 1998.
Accounts receivable have decreased from $304,020 at year-end July 31,
1996 to $109,571 at July 31, 1997. This decrease of $194,449 is the result of
lower average sales for fiscal 1997 versus 1996.
The Company received $200,000 in net proceeds from a bridge financing.
The bridge financing was evidenced by two promissory notes executed by each
investor that aggregated $150,000 ("Principal Bridge Notes") and $50,000
("Convertible Bridge Notes"), respectively. The Principal Bridge Notes are
payable on the earlier of December 31, 1997 or upon closing of the next public
offering. The Convertible Bridge Notes contain the same terms as with respect to
the Principal Bridge Notes, except that same is convertible into 1,200,000 Class
A Warrants. See "Bridge Financing." The funds received from the bridge financing
were used to reduce overdue payables and resume the product development of the
PTR-1500 Series Project.
During the year ended July 31, 1997 the Company received $916,235 in
loans from CNL Holdings, Inc.
The Company plans to meet is operating cash requirements for the next
twelve (12) months, through existing cash balances, cash generated from
operations and loans secured in private-
34
<PAGE>
transactions. The Company is using significant amounts of cash in operations and
plans to raise the necessary required cash as described above.
1996 Compared to 1995
Working capital at July 31, 1996 was $1,914,981 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 was technically in default of its bank loan to the Bank due
to non-payment of principal and interest since January 1996. However, the Bank
agreed to defer any payments at this time since they signed an allonge agreement
with the Company in September 1996 (see "Credit Facility and Agreement with CNL
Holdings, Inc." below). The total debt is on the balance sheet as current as of
July 31, 1996. Interest has been accrued through July 31, 1996.
Accounts receivable increased from $171,541 at year-end July 31, 1995
to $304,020 at July 31, 1996. This increase was 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 felt that it had leased or acquired sufficient equipment to
meet its capital expenditure needs for the next year. Obligations under capital
leases which were in effect were 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 1996 figure of
$34,000. The Company's liquidity and working capital have been effected by these
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.
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 changed to a
surplus of approximately $3,100,000 as a result
35
<PAGE>
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 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.
Credit Facility and Agreement with CNL Holdings, Inc.
The principal amount owing to the Bank under the Company's Credit
Facility at July 31, 1996 was $1,012,500 and the unpaid accrued interest was
$57,196. The Bank and the Company entered into the Conolog Corporation Allonge,
dated as of September 11, 1996, pursuant to which the Amended and Restated Term
Note dated as of August 2, 1995 between the Company and the Bank (the "Note")
was amended to permit the conversion by the Bank of the unpaid principal and
interest due under the Note into 1,400,000 shares of the Company's Common Stock
on or before April 16, 1997. The conversion right was exercisable by the Bank or
its assignee. The Bank had deferred all payments of principal and interest under
the Note until April 16, 1997.
The Bank and CNL Holdings, Inc. ("CNL") entered into an Option and
Purchase, Sale and Assignment Agreement (which was amended as described below)
dated as of September 12, 1996 (the "Option Agreement"). Under the original
Option Agreement the Bank granted an option to CNL to purchase all of the Bank's
interest in (i) the Amended and Restated Term Loan Agreement dated as of August
2, 1995 between the Company and the Bank, (ii) the Note and (iii) the 375,000
shares of the Company's Common Stock owned by the Bank. CNL paid $150,000 to the
Bank for the option, which had an exercise price of $1,500,000 and an expiration
date of April 15, 1997.
36
<PAGE>
The Company and CNL entered into an agreement (which was amended as
described below) dated as of September 12, 1996 (the "CNL Agreement"), whereby
CNL agreed to loan up to $2,500,000 to the Company under certain circumstances
(as described below).
Pursuant to the original CNL Agreement the proceeds of the sale of the
Acquired Shares were to be applied as follows: the first $1,500,000 was to 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 was to be evidenced by a Note bearing interest at the rate of
4% per annum to 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.
On January 31, 1997, the Bank and the Company entered into Amendment
No. 1 to the Conolog Corporation Allonge dated September 11, 1996 (the
"Allonge") (which previously amended the Amended and Restated Term Note dated as
of August 2, 1995 between the Company and the Bank(previously defined as
the"Note")). The original Allonge provided that the Bank may convert the entire
unpaid principal and interest due under the Note ("Debt Claim") into 1,400,000
shares of Common Stock of the Company at any time on or before April 15, 1997.
The amended Allonge provided the Bank the right to convert all or, if it so
desires, only a portion of the Debt Claim. The number of shares issuable upon
conversion of a portion of the Debt Claim was to be calculated on the basis of 1
share for each $3.00 of the Debt Claim being converted with the balance of the
1,400,000 shares to be issued when all of the Debt Claim has been converted.
On January 31, 1997, the Bank and CNL entered into Amendment No. 1 to
the Option Agreement. The amended Option Agreement required CNL, on or before
February 5, 1997, to purchase from the Bank for an aggregate purchase price of
$600,000, no less than (i) 133,333 shares of Common Stock for $399,999 and (ii)
$200,001 of the Debt Claim represented by the Note. CNL purchased such Common
Stock and portion of the Debt Claim on February 5, 1997. CNL had the right to
exercise the remainder of the option on or before April 15, 1997. CNL had the
right to purchase from the Bank additional shares of Common Stock owned by the
Bank at the price of $3.00 per share and portions of the Debt Claim from time to
time. CNL purchased such Common Stock and portion of the Debt Claim on February
5, 1997.
On January 31, 1997, the Company and CNL entered into an Amendment to
the CNL Agreement. The amended CNL Agreement provided that in the event not all
of the Debt Claim was
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<PAGE>
converted into shares of Common Stock by the Bank prior to CNL's acquisition of
the Note, CNL would promptly convert the remaining portion of the Debt Claim
into shares of Common Stock in accordance with the Note. In addition, the
proceeds of the sale of the Acquired Shares were to be applied as follows: First
to reimburse CNL for payments made to the Bank pursuant to Option Agreement; 50%
of the balance, up to $2,500,000, to be loaned to the Company within five days
of CNL's receipt of the proceeds.
The balance under the option (as of March 15, 1997) was
$750,000(evidencing an option to purchase 241,667 shares of Common Stock and the
Note, convertible into 1,333,333 shares of Common Stock). On March 26, 1997, CNL
exercised a portion of its option to purchase shares of Common Stock, by
purchasing a portion of the principal amount of the Note ($720,000) and
converted such portion of the Note into 240,000 shares of Common Stock at $3.00
per share, leaving a balance due under the option at $30,000. On March 27, 1997,
CNL exercised the remaining portion of the option in consideration of $30,000.
On such date, the remaining portion of the Note was converted into 1,093,333
shares of Common Stock, the Bank transferred 241,667 shares of Common Stock to
CNL and the Debt Claim was extinguished.
Management believes that the foregoing transactions benefited the
Company and its stockholders. The exercise by CNL of its option under the Option
Agreement converted the remaining Debt Claim, the Company had the opportunity
to, in effect, exchange its debt for equity and eliminated the Company's default
under the Credit Facility. To date, $916,235 has been loaned to the Company by
CNL. See "Use of Proceeds."
The Company plans to meet is operating cash requirements for the next
twelve (12) months, through existing cash balances, cash generated from
operations and loans secured in private-transactions. The Company is using
significant amounts of cash in operations and plans to raise the necessary
required cash as described above.
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<PAGE>
MARKET PRICE FOR SECURITIES
The Company's Common Stock and Class A Warrants are 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 prices of the Company's Units (which no longer trade), Common Stock and
Class A Warrants traded on the Nasdaq SmallCap Market for the third and fourth
quarters of 1995, all of 1996 and first three quarters of 1997. Such quotations
represent inter-dealer prices, without retail markups, markdowns or commissions
and may not necessarily represent actual transactions. As of _________, 1997,
the Company's Common Stock was held by approximately ___ shareholders of record.
<TABLE>
<CAPTION>
Units Common Stock Class A Warrant
1995 High Low High Low High Low
- ---- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Third Quarter 18.5 14 8.50 5.75 4 2
Fourth Quarter 19.25 14.75 9.25 6.25 3.25 1.25
1996
First Quarter 15 11 8.125 3.875 2 .9375
Second Quarter 11.25 11.25 6.5625 4.25 1.5 1.0156
Third Quarter 6.25 2.25 1.5 .5625
-------- --------
Fourth Quarter 3.875 2.375 1.25 .50
-------- --------
1997
First Quarter 5.875 3 .9375 .625
-------- --------
Second Quarter 6.125 2.375 1 .375
-------- --------
Third Quarter 5.625 2.25 .875 .25
-------- --------
</TABLE>
39
<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 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 85% of sales
in 1997 ($900,000). The decision to embark on this program entailed a major
design effort, including the
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<PAGE>
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. The 12 year warranty has been part of
the Company's marketing of its products since 1988. The Company does not believe
this is customary in the industry. The terms of the warranty covers parts, labor
and operation of units. All the Company's products are functionally tested
before shipment. Experience has demonstrated the reliability of the designs. All
returns were for non warranty causes and for the most part, were chargeable to
the customer. The Company does not provide the right of merchandise return.
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 800
PTR-1000 sets to 18 utilities and 5 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 of fiber optic interfaces for INIVEN products.
The fiber optic interface is also available as a stand alone coupling device.
The Company launched its industrial grade 1200 Baud Modem for data
transmission/communication, and completed the PTR-1000 System options. Through
1997, the Company designed and is in the process of completing and building the
PTR-1500 Quad System, Protection Equipment, exclusively for the General Electric
Company ("GE"), to be labeled GE-NS50 Series, for worldwide sales as detailed in
the agreement between GE and Conolog dated April 1, 1997.
Due to the end of the cold war and the downsizing of the American
military, the Company experienced unexpected sharp reductions of military
contracts in fiscal 1993 (the Company's fiscal year 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 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 in fiscal 1996 were
$1,924,466 an 8%
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<PAGE>
decrease from fiscal 1995. Sales in fiscal 1997 were $1,123,390 a 42% decrease
from fiscal 1996. Revenues from the Company's military product sales represented
approximately 60%, 30%, 23% and 10% of sales of the Company in fiscal 1994,
1995, 1996 and 1997, respectively, reflecting the Company's emphasis on
commercial sales and markets.
General Description; Products
The Company is engaged in the design and manufacture of (i)
transducers, which are 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 Teleprotection Series
(Protective Tone Relaying Communications Terminal,
which includes the PTR- 1000 and the PTR-1500
designed exclusively for GE).
(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
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<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-1500, designed exclusively for GE in accordance with a seven
year agreement, is a quad system and performs as 2 duals or 4 singles with many
unique features such as multiple line operation, event recording with date stamp
with optional analog or digital transmission modes including optic fiber
interface.
The PTR Teleprotection Series is designed for global use by electric
utilities and any entity generating power for its own consumption with resale of
surplus power to an electric utility, such as cities, municipalities,
cooperatives and large corporations that find it more economical to generate
their own electricity.
The PTR Teleprotection Series target market is worldwide, as follows:
o New installations; i.e., new transmission lines, new distribution
segments, for utilities and cogenerators.
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<PAGE>
o Existing installations not properly protected, improving efficiency
and down time.
o Existing installations for upgrading to PTR technology, again
improving efficiency and down time.
Sales efforts for the PTR-1000 are presently being conducted by the
Company's marketing executives, through independent manufacturers'
representatives and through distributors. Sales are targeted primarily to the
largest utilities and co-generators.
According to McGraw-Hill, Inc. Electrical World (Electric Utilities of
the United States), in the United States alone, there are over 500 large
entities generating electricity. They are:
o Investor-owned
o Municipal Systems
o Cooperative Systems
o Federal, State and District systems.
The Company intends to utilize a portion of the net proceeds of this
Offering to provide it with capital which it can use to expand its sales
efforts, expand sales to international markets and complete the design,
engineering and testing of the PTR-1500 option modules and the PTR-1000
enhancements. To date, the Company has sold and delivered over 800 PTR-1000 sets
to 18 utilities and 5 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.
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<PAGE>
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:
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.
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<PAGE>
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 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.
The Company intends to utilize a portion of the net proceeds of this
offering to expand this line of products to include radio as a transmission
line, and design, produce and sell a line of fiber optic interface equipment and
to expand sales for new applications and new installations, including foreign
sales.
(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.
A portion of the net proceeds of this offering will be used by the
Company to complete the next design phase to couple the multiplexer directly
onto fiber optic cable and 8 line applications and add radio as a communication
link.
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<PAGE>
(4) Fiber Optic Link and Data Modem
The expansion of fiber lines by the Company's customers and their need
to switch equipment from phone lines to fiber prompted the Company to design and
introduce a fiber-optic-coupler line to interface with the many different fiber
heads. In addition to complete data interface couplers the Company launched a
series of 1200 Baud Modems (Industrial Grade) for operation under the same
environmental specifications in line with the Company's products.
(C) Commercial Subcontract Manufacturing to Systems Producers
Since the downsizing of the American Military, the Company has actively
sought manufacturing subcontract orders to fill the production void created by
the severe drop in military production. In June 1996 the Company negotiated and
entered into a renewable annual agreement with the General Electric Company, GE
Electrical Distribution and Control and its participating affiliated companies
for the manufacture of sub-systems, board assemblies and magnetic filters and
other products consistent with the Company's expertise. The success of this
agreement has prompted the Company to pursue other system producers to more
fully utilize the Company's manufacturing capacity.
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. The Company has at least 20 competitors world wide and
believes it has no significant market share. 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. The
Company employs only 2 marketing executives.
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,
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<PAGE>
cooperative systems and federal, state and district systems. The
Company intends to utilize a portion of the proceeds of this Offering
to expand its sales efforts 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 intends to utilize a portion of the net proceeds
of this Offering for international sales.
Largest Customers
Sales to the Company's two major customers during fiscal 1997 (General
Electric and Bonneville Power Administration) totaled $255,500 and $200,000,
respectively (22% and 18%, respectively of all sales). Sales to the Company's
major customer in fiscal 1996 (B.C. Hydro-Canada ) totaled $401,000 (20% of all
sales). Sales to the Company's major customer in fiscal 1995 (United States
Government) totaled $424,849 (20% of net sales). During fiscal 1994, sales to
the Company's major customer (Westinghouse Electric Corp. - Naval Systems
Division) totaled $597,000 (29% of net sales). The Company has three (3) ongoing
contracts, in addition to existing open orders. This may continue to produce
revenue past the date of this prospectus, namely from the General Electric
Company and Bonneville Power Administration. The loss of General Electric and
Bonneville Power Administration would have a material adverse effect upon the
Company. None of such customers has or had any material relationship other than
business with the Company. See "Risk Factors - Dependence on Large Customers."
The terms of the blanket-contracts the Company has with General Electric,
Bonneville Power Administration and its Canadian distributors are not binding
and only represent potential purchases, whereby the Company set certain prices
for its products for the duration of the contract. The contracts are subject to
cancellation under the terms of such contracts. See "Risk Factors - Dependence
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
49
<PAGE>
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 build-ups or write-downs from military
products.
Manufacturing
Of the 15,700 square feet that the Company occupies at 5 Columbia Road
in Somerville, NJ, approximately 10,000 square feet are dedicated to
manufacturing. The Company assembles, under normal workload conditions, all the
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 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. In addition, the Company completed the
PTR-1000 series option modules and the standard modules of the PTR-1500 Quad
Series to be sold exclusively worldwide by GE as its Model NS50. The Company
also intends to utilize a portion of this 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.
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<PAGE>
Backlog
As of July 31, 1997 and 1996, the Company had a backlog of
approximately $2,900,000 and $3,400,000, respectively. It is anticipated that
this backlog will be filled during the balance of the 1998 fiscal year ending
July 31, 1998.
Foreign Operations
In fiscal 1996 and 1995 the Company had foreign sales of $401,000 to
B.C. Hydron-Canada and $140,000 to the Government of Israel, respectively. In
the year ended July 31, 1997, the Company had no foreign sales.
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 July 31, 1997, the Company employed 31 persons, including 2 in
management, 2 in sales, 2 in clerical, 1 in accounting, 1 in purchasing, 3 in
engineering and 20 in production. The Company has enjoyed good labor relations
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.
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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
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.
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.
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<PAGE>
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.
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<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
the three Company's fiscal years ended July 31, 1997, 1996 and, 1995:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Other
Name and Fiscal Year- Annual
Principal End Comp-
Position Salary Bonus ensation Awards Payouts
Restricted
Stock Options/SA LTIP All Other
Awards SARS Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Benou, 1997 $150,000 ----- ----- ----- -----
President (1)
1996 $150,000 ----- ----- ----- -----
1995 $150,000 ----- ----- ----- -----
</TABLE>
- -----------------
(1) See "Certain Relationships and Related Transactions".
The Company did not grant any stock options or stock appreciation
rights during the fiscal year ended July 31, 1997 to any of its officers,
directors or employees. As of July 31, 1997 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 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
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<PAGE>
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 has entered into 5-year employment agreement commencing
June 1, 1997 and ending May 31, 2002, with Robert Benou. Under his employment
agreement, Mr. Benou will receive an annual base salary of $150,000 for the
first year of employment with an increase of $20,000 in November 1997 and
$20,000 per annum each year thereafter, if the Company is profitable (defined as
"income before income tax provision.") In addition, Mr. Benou is entitled to an
annual bonus equal to 6% of the Company's annual "income before income tax
provision". The employment agreement also entitles him to the use of an
automobile and to employee benefit plans, such as life, health, pension, profit
sharing and other plans. Under the employment agreement, employment terminates
upon death or disability of the employee and employee may be terminated by the
Company for cause. The Company intends to maintain a $1 million life insurance
policy on the life of Robert Benou. Reference is hereby made to the Employment
Agreement which has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part.
55
<PAGE>
The Company has entered into 5-year employment agreement commencing
June 1, 1997 and ending May 31, 2002, with Marc Benou. Under his employment
agreement, Mr. Benou will receive an annual base salary of $55,000 for the first
year of employment with an increase of $6,000 per annum each year thereafter. In
addition, Mr. Benou is entitled to an annual bonus equal to 3% of the Company's
annual "income before income tax provision" as stated in its annual Form 10-K.
The employment agreement also entitles him to the use of an automobile and to
employee benefit plans, such as life, health, pension, profit sharing and other
plans. Under the employment agreement, employment terminates upon death or
disability of the employee and employee may be terminated by the Company for
cause. Reference is hereby made to the Employment Agreement which has been filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part.
Representative's Right to Appoint Director
The Underwriting Agreement between the Company and the Representative
provides that for three years after the completion of this Offering, the
Representative will have the right 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 Representative's nominee to be elected to the
Board. If the Representative 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 Representative has not advised the Company as to whether it intends
to exercise either right. See "Underwriting".
CERTAIN RELATIONSHIPS AND RELATED 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.
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<PAGE>
Payment of the Company's liabilities to the Bank under the Credit
Facility were guaranteed by Mr. Benou to the extent of $965,000 and Mr. Havasy
to the extent of $492,000. Their respective guarantees were secured by a pledge
to the Bank of all Common Stock and Series B Preferred Stock owned by each of
them. As a result of the August 1995 Offering, the Bank released the guarantees.
Article Eighth of the Company's Certificate of Incorporation provides
that the Company shall, to the full extent permitted by Section 145 of the
Delaware General Corporation Law, as amended from time to time, indemnify all
persons whom it may indemnify pursuant thereto.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation to provide indemnification to a director, officer,
employee or agent of the corporation, including attorneys' fees, judgments,
fines and amounts paid in settlement, actually and reasonably incurred by him in
connection with such action, suit or proceeding, if such party acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful as
determined in accordance with the statute, and except that with respect to any
action which results in a judgment against the person and in favor of the
corporation the corporation may not indemnify unless a court determines that the
person is fairly and reasonably entitled to the indemnification.
Section 145 further provides that indemnification shall be provided if
the party in question is successful on the merits.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person in connection with the securities
being registered) the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Company has adopted a policy that transactions with affiliated
entities or persons will be on terms no less favorable than could be obtained
from unrelated parties and that all transactions between the Company and its
officers, directors, principal shareholders and affiliates will be approved by a
majority of the Company's Board of Directors.
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<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(1) After
Beneficial Owner Beneficial Ownership Before Offering Offering
---------------- -------------------- --------------- --------
<S> <C> <C> <C>
Robert S. Benou (2) 200,039 7.1% 5.69%
Arpad J. Havasy (2) 50,117 1.78% 1.43%
Marc R. Benou (2) 40,000 1.42% 1.14%
Louis S. Massad (2) 5,000 .18% .142%
Thomas Fogg (2) 20,200 .72% .57%
All Directors and Officers as
A Group (5 persons) 315,356 11.20% 8.97%
</TABLE>
- ------------
(1) Does not include treasury stock. See "Financial Statements".
(2) The address for these individuals is c/o Conolog Corporation, 5
Columbia Road, Somerville, New Jersey 08876.
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<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. Prior to this
Offering, the Company had 2,815,738 shares of Common Stock outstanding (not
including treasury stock), 155,000 shares of Series A Preferred Stock
outstanding (162,000 authorized) and 1,197 shares of Series B Preferred Stock
outstanding (50,000 authorized).
Common Stock
The Company had 2,815,738 shares of Common Stock outstanding prior to
the Offering (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 Class A
Warrants and Class B Warrants (described below) after payment of the applicable
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 1,197 shares of Series
B Preferred Stock, $.50 par value (50,000 authorized).
Series A Preferred Stock
Holders of Series A Preferred Stock are entitled to receive, out of
funds legally available therefor, dividends at the rate of 4% per annum ($.02
per share) of the par value thereof.
The Series A Preferred
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<PAGE>
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 July 31, 1997, there was
$86,800 in accrued and unpaid dividends.
Series B Preferred Stock
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 239. The Company may redeem the Series B Preferred Stock at $15.00 per share
plus accrued and unpaid dividends. As of July 31, 1997, there was $27,937 in
accrued and unpaid dividends.
General
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 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.
Class A 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
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 Class A Warrants may be exercised in whole
or in part. In connection with this Offering, the Company will issue 2,800,000
additional Class A Warrants.
The Class A Warrants were issued under a warrant agreement dated as of
August 16, 1995 (as amended on , 1997, the "Warrant Agreement") between the
Company and Continental Stock Transfer & Trust Company (the "Warrant Agent").
The following is a general summary of certain provisions
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<PAGE>
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 Class A Warrants; provided
however, that no amendment adversely affecting the rights of the holders of
Class A Warrants may be made without the approval of the holders of a majority
of the affected Class A 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 Class A 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 Class A 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 Class A 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 Class A Warrants.
Holders of the Class A 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 Class A Warrants terminate.
Holders of the Class A 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 Class A Warrants will not be entitled to participate
in the Company's assets.
Pursuant to the Underwriting Agreement, the Company has agreed to pay
to the Representative 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 Class A Warrant exercised
provided: (1) at least one year has elapsed from the date of this Prospectus,
(2) the market price for the Common Stock is greater than the exercise price of
the Class A Warrants; (3) the Representative or such other NASD broker-dealer
member has solicited the holder to exercise the Class A 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
Representative or NASD broker-dealer member with a certificate stating that:
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<PAGE>
(i) the Class A Warrants exercised were not held in a discretionary
account;
(ii) the Representative or the NASD member did not, within 10 business
days immediately preceding the solicitation of the exercise of the
Class A 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 Class A Warrants) or otherwise engage in any activity
that would be prohibited by Regulation M 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 Representative and/or
the NASD member disclosed to the person exercising the Class A Warrant
the compensation it would receive upon exercise of the Class A Warrant.
In connection with the August 1995 Offering, the Company agreed to pay
a similar solicitation fee to the underwriter of the August 1995 Offering and/or
a NASD broker-dealer who solicited the exercise of a Class A Warrant issued in
connection with the August 1995 Offering.
Transfer Agent/Warrant Agent
The Company's transfer agent for the Common Stock and, Class A 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 Class A Warrants.
SHARES AVAILABLE FOR FUTURE SALE
Immediately prior to the sale of the Common Stock hereunder, the
Company had an aggregate of 2,815,738 shares of its Common Stock issued and
outstanding, 315,356 of which are "restricted securities," which may be sold
only in compliance with Rule 144 under the Securities Act of 1933, as amended.
Rule 144 provides, in essence, that a person holding restricted securities for a
period of one year 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 two 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.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement by and between the Company and the Representative ("Underwriting
Agreement"), the Company has agreed to sell to the Underwriters, as set forth
below, for whom IAR Securities Corp. is the Representative, on a firm commitment
basis, a total of 700,000 Units, each unit consisting of one (1) share of Common
Stock and four (4) Class A Warrants.
Underwriters Number of Units
------------ ---------------
IAR Securities Corp. ............................. __________
________________.................................. __________
Total.................................... 700,000
The Company has agreed to sell the Units to the Representative at a
discount of ten percent of the public offering price thereof. The Company has
also agreed to pay the Representative a nonaccountable expense allowance in the
amount of 3% of the offering price of the Units, including the Units purchased
pursuant to the Over-Allotment Option. In addition, the Company has agreed to
pay all costs of issuance of the Units, including blue sky fees and related
counsel fees, but not including fees and expenses of the Representative's
counsel. The Company estimates that it will incur costs of $225,000 in
connection with this Offering, not including the Representative's 3%
non-accountable expense allowance and the $70,000 financial consulting fee
payable to the Representative. As part of the underwriting arrangements, the
Company will enter into a contract to retain the Representative as a financial
consultant to the Company for a two-year period commencing as of the close of
the sale of the Securities offered hereby at an annual fee of $35,000, for a
total of $70,000, payable in full at the closing of this offering. The Company
has agreed to pay the Representative an investment banking fee for future
consummated transactions of the Company, if any, introduced by the
Representative, including mergers, acquisitions and joint ventures, during the
five years following the completion of the Offering equal to 5% of the first
$4,000,000 of consideration involved in the transaction, 4% of the next
$1,000,000, 3% of the next $1,000,000, and 2% of the excess, if any, over
$6,000,000.
The Company has agreed to indemnify the Representative against certain
liabilities which may be incurred in connection with this offering, including
certain civil liabilities under the Securities Act of 1933, as amended, and
where such indemnification is not available, to contribute to the payments the
Representative may be required to make in respect of such liabilities.
The Underwriting Agreement further provides that for three years after
the completion of this Offering, the Representative will have the right 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
Representative's nominee to be elected to the Board. If the Representative does
not exercise this right, it may appoint an advisor, who will be entitled to
attend all meetings of the Board of Directors.
63
<PAGE>
The Company and its officer or directors have agreed not to issue,
sell, offer to sell or otherwise dispose of any shares of the Company's Common
Stock, or securities convertible into Common Stock, owned by them, for a period
of eighteen (18) months (twenty-four (24) months in case of the Company) from
the date of this Prospectus, without the prior written consent of the
Representative (other than (with respect to issuances by the Company) in certain
circumstances such as issuance of Common Stock by the Company in connection with
the exercise of outstanding warrants and up to 50,000 restricted shares to
employees and in connection with mergers and acquisitions, so long as such newly
issued shares (other than in connection with the exercise of outstanding
warrants) are not sold prior to the date which is twenty-four months from the
date of this Prospectus).
The Company has granted the Representative an Over-Allotment Option,
which is exercisable for 45 days from the date hereof, to purchase up to an
aggregate of 105,000 additional Units, all at the offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. The
Representative may exercise the Over-Allotment Option solely for the purpose of
covering over-allotments incurred in the sale of shares Units offered hereby.
The Representative has advised the Company that sales to certain
dealers may be made at a public offering price less a concession not in excess
of _%. The Representative does not intend to confirm sales of more than one
percent of the Units offered hereto to any accounts over which it exercises
discretionary authority.
The public offering price of the Units do not bear any relationship to
the assets or book value, net worth or other criteria of value of or applicable
to the Company.
The Underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Exchange Act of 1934, as amended.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specific maximum. Syndicate covering transactions involve purchases of the
Company's securities in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
Underwriter to reclaim a selling concession from a syndicate member when the
securities originally sold by such syndicate member are purchased in a syndicate
covering transaction to cover syndicate short positions. Such stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the securities to be higher than they would otherwise be in the absence
of such transactions.
The Company has agreed, upon completion of this offering, to sell to
the Representative or its nominee, for $.001 per option, the Representative's
Unit Purchase Option to purchase 70,000 Units each Unit consisting of one (1)
share of Common Stock and four (4) Class A Warrants. The Representative's Unit
Purchase Option will be exercisable for a four-year term, commencing one year
after the date of this Prospectus, at an exercise price of $6.00 per Unit, 120%
of the public offering price of the Units. The Representative's Unit Purchase
Option will be restricted from exercise, sale, transfer, assignment or
hypothecation (except to officers of the Representative or of any other
broker-dealer which participates
64
<PAGE>
in this Offering) for a period of one year from the date of this Prospectus. The
Representative's Unit Purchase Option also provides that on two occasions, upon
the request of the Representative or holders of a majority interest in the
Representative's Unit Purchase Option or the underlying securities, at any time
during the four-year period commencing one year after the Effective Date, the
Company will prepare and file a post-effective amendment or new registration
statement permitting the sale of the Representative's Unit Purchase Option
and/or the underlying securities and use its best efforts to keep the
registration statement effective for a nine-month period following the effective
date of such post-effective amendment or new registration statement. The Company
will bear the cost of the first such registration statement, but the holders
will bear all costs incident to the second such registration statement. If the
Company files a registration statement relating to an equity offering under the
provisions of the Securities Act at any time during the five-year period
commencing on the date of this Prospectus, the holders of the Representative's
Unit Purchase Option or underlying securities will have the right, subject to
certain conditions, to include in such registration statement, at the Company's
expense, all or part of the underlying securities at the request of the holders.
The number of Units covered by the Representative's Unit Purchase Option and the
exercise price are subject to adjustment upon certain events to prevent
dilution.
For the life of the Representative's Unit Purchase Option, the holders
thereof will have the opportunity to profit from a rise in the market price of
the Securities with a resulting dilution in the interests of other stockholders.
The Representative's registration rights may result in substantial expense to
the Company at a time when it may not be able to afford such expense and may
impede future financing. The Company may find that the terms on which it could
obtain additional capital may be adversely affected while the Representative's
Unit Purchase Option is outstanding.
The Company has also agreed to pay the Representative a warrant
solicitation fee equal to 4% of the Class A Warrant exercise price for any of
the publicly held Class A Warrants, when exercised, at any time commencing one
year after the date of this Prospectus, provided that the Representative or any
NASD member firm has solicited such exercise, as evidenced in writing signed by
the warrant holder, and that (a) the market price of the Common Stock on the
date that any such Class A Warrant is exercised is greater than the exercise
price of the Class A Warrant; (b) prior specific written approval for exercise
is received from the customer if the Class A Warrant is held in a discretionary
account; (c) disclosure of this compensation arrangement is made prior to or
upon the exercise of such Class A Warrant; (d) solicitation of the exercise is
not in violation of Regulation M of the Exchange Act; and (e) solicitation of
the exercise is in compliance with NASD Notice to Members 81-38. In addition,
unless granted an exemption by the Commission from Regulation M under the
Exchange Act, the Representative will be prohibited from engaging in any market
making activities or solicited brokerage activities with respect to the
Company's Securities for the period up to five business days prior to any
solicitation of the exercise of any Class A Warrant until the later of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right the Representative may have to receive a fee for the
exercise of the Class A Warrants following such solicitation. As a result, the
Representative may be unable to continue to provide a market for the Company's
Securities during certain periods while the Warrants are exercisable.
65
<PAGE>
SELLING SECURITYHOLDERS
The Registration Statement of which this Prospectus is a part also
relates to the offer and sale of 1,200,000 Class A Warrants issuable upon
exercise of the Convertible Bridge Notes and the shares of Common Stock
underlying such Class A Warrants (the "Selling Securityholder's Securities") by
the Selling Securityholders or their transferees. See "Bridge Financing." All of
such Class A Warrants are expected to become tradeable on or about the date of
this Prospectus. Sales of the Class A Warrants being offered by Selling
Securityholders or the Common Stock underlying the Class A Warrants, or even the
potential of such sales, would likely have an adverse effect on the market
prices of the Securities being offered for sale by the Company.
The following table sets forth the beneficial ownership of the
securities of the Company held by each person who is a Selling Securityholder
and by all Selling Securityholders as a group prior to this Offering and after
this Offering, assuming all of the Class A Warrants owned by the Selling
Securityholders are sold.
<TABLE>
<CAPTION>
Class A Percent of Class A
Warrants Owned Warrants Owned
-------------- ------------------
Prior to After Prior to After
Name of Beneficial Owner Offering Offering Offering Offering
- ------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Ekistics, Inc. (1).............................. 300,000 0 12.84% 0%
Blue Star Group Investment, Ltd................. 696,000 0 29.80% 0%
James Solakian.................................. 120,000 0 5.14% 0%
Bruce Ungerleider............................... 30,000 0 1.28% 0%
Harold Yordy.................................... 27,000 0 1.16% 0%
Michael Yordy................................... 27,000 0 1.16% 0%
Total.................................. 1,200,000 0 51.37% 0%
</TABLE>
- --------------
(1) The beneficial owners of such entity are Gregory Roberts and Noel
Roberts.
None of the Selling Securityholders are affiliated with the Company in
any capacity, has had any business relationship with the Company at any time nor
owned any of the Company's Common Stock beneficially or of record prior to this
Offering (other than Mr. Solakian who is the owner of 107,250 shares of Common
Stock).
The securities offered thereby may be sold from time to time directly
by the Selling Securityholders. Alternatively, the Selling Securityholders may
from time to time offer such securities through underwriters, dealers or agents.
The distribution of securities by the Selling Securityholders 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-
66
<PAGE>
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 Securityholders in connection with
such sales of securities. The Selling Securityholders 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
Securityholders may not simultaneously engage in market-making activities with
respect to such securities of the Company during the applicable "cooling off"
period (up to 5 days) prior to the commencement of such distribution. In
addition, and without limiting the foregoing, the Selling Securityholders will
be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation, Regulation M, in
connection with transactions in such securities, which provisions may limit the
timing of purchase and sales of such securities by the Selling Securityholders.
LEGAL PROCEEDINGS
The Company is not a party to any material 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. Bernstein & Wasserman, LLP has served, and continues to serve, as counsel
to the Representative on matters unrelated to this Offering. Certain legal
matters in connection with this offering will be passed upon for the
Representative by Lester Morse, P.C., 111 Great Neck Road, Great Neck, NY 11021.
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.
67
<PAGE>
Index to the Financial Statements
Conolog Corporation
July 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Reort ..................................... F-1
Balance Sheets - July 31, 1997 and 1996 ......................... F-2
Statements of Operations - Years Ended July 31, 1997,
1996 and 1995 ................................................. F-3
Statements of Stockholders' Equity (Deficiency) - Years
Ended July 31, 1997, 1996 and 1995 ............................ F-4
Statements of Cash Flows - Years Ended
July 31, 1997, 1996 and 1995 .................................. F-5
Notes to Financial Statements ................................... F-6-11
</TABLE>
<PAGE>
[LETTERHEAD OF ROSENBERG RICH BAKER BERMAN & COMPANY]
Independent Auditors' Report
Board of Directors
Conolog Corporation
We have audited the accompanying balance sheets of Conolog Corporation at July
31, 1997 and 1996 and the related statements of operations, stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended July
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Conolog Corporation at July 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended July 31, 1997 in conformity with generally
accepted accounting principles. Furthermore, it is our opinion that the
schedules referred to above present fairly the information set forth therein in
compliance with the applicable accounting regulation of the Securities and
Exchange Commission.
Maplewood, New Jersey
October 13, 1997
F-1
<PAGE>
Conolog Corporation
Balance Sheets
<TABLE>
<CAPTION>
July 31,
-----------------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
Assets
Current Assets
Cash $ 503,217 $ 178,213
--------------- --------------
Accounts receivable - less allowances of $6,000
and $14,000 in 1997 and 1996, respectively 109,571 304,020
--------------- --------------
Inventories
Finished goods 1,705,782 1,494,289
Work-in-process 498,070 129,675
Materials and supplies 969,940 1,313,816
--------------- --------------
3,173,792 2,937,780
Other current assets 44,085 43,517
Deferred offering costs 113,813 -
--------------- --------------
3,944,478 3,463,530
--------------- --------------
Property, Plant and Equipment
Land and improvements 34,524 34,524
Building and improvements 663,630 659,477
Machinery and equipment 1,291,838 1,289,578
Furniture and fixtures 336,001 330,735
--------------- --------------
2,325,993 2,314,314
Less allowance for depreciation and amortization 1,938,188 1,880,408
--------------- --------------
387,805 433,906
--------------- --------------
Other assets 7,469 30,398
--------------- --------------
Total Assets $ 4,339,752 $ 3,927,834
=============== ==============
</TABLE>
See notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
July 31,
-----------------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
Liabilities
Current Liabilities
Note payable - bank $ - $ 1,012,500
Notes payable - other 916,235 -
Accounts payable 188,510 280,629
Accrued payroll 15,644 41,716
Accrued interest 17,374 64,699
Bridge loan 200,000 -
Other accrued expenses 146,791 115,723
Current maturities of capitalized lease obligations 3,802 33,282
--------------- --------------
Total Current Liabilities 1,488,356 1,548,549
--------------- --------------
Other Liabilities
Capitalized lease obligations, less current maturities - 4,973
--------------- --------------
Stockholders' Equity
Preferred Stock, par value $.50; Series A; 4% cumulative;
162,000 shares authorized; 155,000 shares issued and
outstanding 77,500 77,500
Preferred Stock, par value $.50; Series B; $.90 cumulative;
50,000 shares authorized; issued and outstanding 1,197
shares in 1997 and 1,167 in 1996 597 597
Common Stock, par value $1.00; 20,000,000 shares
authorized; issued 2,803,473 shares in 1997 and
1,035,186 in 1996, including 8,776 shares held in Treasury 2,803,473 1,035,186
Additional Paid-In Capital 3,782,513 4,401,636
Retained Earnings (Deficit) (3,680,953) (3,008,873)
Treasury Shares at Cost (131,734) (131,734)
--------------- --------------
Total Stockholders' Equity 2,851,396 2,374,312
--------------- --------------
Total Liabilities and Stockholders' Equity $ 4,339,752 $ 3,927,834
=============== ==============
</TABLE>
F-2
<PAGE>
Conolog Corporation
Statements of Operations
<TABLE>
<CAPTION>
Year Ended July 31,
---------------------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Sales and other income $ 1,123,390 $ 1,924,466 $ 2,090,933
--------------- --------------- ---------------
Costs and Expenses:
Cost of products sold 917,379 1,242,001 1,270,771
Selling, general and administrative 758,880 946,954 924,524
Interest 81,026 131,854 253,686
Write-off of obsolete or excess inventories 28,101 50,281 656,248
--------------- --------------- ---------------
1,785,386 2,371,090 3,105,229
--------------- --------------- ---------------
Loss Before Income Taxes and Extraordinary Items (661,996) (446,624) (1,014,296)
Income taxes (benefit) 10,084 200 (492,252)
--------------- --------------- ---------------
Net Loss Before Extraordinary Items (672,080) (446,824) (522,044)
Extraordinary Item - 740,376 -
--------------- --------------- ---------------
Net Income (Loss) $ (672,080) $ 293,552 $ (522,044)
=============== =============== ===============
(Loss) from Continuing Operations Per Share $ (.42) $ (.43) $ (12.01)
=============== =============== ===============
Net Income (Loss) Per Share - Primary $ (.42) $ .28 $ (12.01)
=============== =============== ===============
- Fully Diluted $ (.42) $ .20 $ (12.01)
=============== =============== ===============
</TABLE>
See notes to the financial statements.
F-3
<PAGE>
Conolog Corporation
Statement of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Series A Series B Additional
Preferred Preferred Common Paid-in
Stock Stock Stock Capital
--------------- --------------- -------------- ---------------
<S> <C><C> <C> <C>
Balance at July 31, 1994 $ 77,500 $ 10,661 $ 52,239 $ 952,994
Net loss for the year - - - -
--------------- --------------- -------------- ---------------
Balance at July 31, 1995 77,500 10,661 52,239 952,994
Public stock offering - (10,064) 982,947 3,448,642
Net income for the year - - - -
--------------- --------------- -------------- ---------------
Balance at July 31, 1996 77,500 597 1,035,186 4,401,636
Debt to equity conversion - - 1,408,787 (277,623)
Additional shares issued to
employees - - 359,500 (341,500)
Net loss for the year - - - -
--------------- --------------- -------------- ---------------
Balance at July 31, 1997 $ 77,500 $ 597 $ 2,803,473 $ 3,782,513
=============== =============== ============== ===============
<CAPTION>
Total
Stockholders
Retained '
Earnings Treasury Equity
(Deficit) Stock (Deficiency)
-------------- --------------- ---------------
<S> <C> <C> <C>
Balance at July 31, 1994 $ (2,383,794) $ (131,734) $ (1,422,134)
Net loss for the year (522,044) - (522,044)
-------------- --------------- ---------------
Balance at July 31, 1995 (2,905,838) (131,734) (1,944,178)
Public stock offering (396,587) - 4,024,938
Net income for the year 293,552 - 293,552
-------------- --------------- ---------------
Balance at July 31, 1996 (3,008,873) (131,734) 2,374,312
Debt to equity conversion - - 1,131,164
Additional shares issued to
employees - - 18,000
Net loss for the year (672,080) - (672,080)
-------------- --------------- ---------------
Balance at July 31, 1997 $ (3,680,953) $ (131,734) $ 2,851,396
============== =============== ===============
</TABLE>
See notes to the financial statements.
F-4
<PAGE>
Conolog Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended July 31,
---------------------------------------------------------
1997 1996 1995
-------------- ------------- -------------
<S><C> <C> <C>
Cash Flows From Operating Activities
Net Income (Loss) $ (672,080) $ 293,552 $ (522,044)
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operating Activities
Common stock base compensation 18,000 - -
Deferred income taxes - 492,352 (492,352)
Depreciation and amortization 57,781 64,994 60,396
Gain on disposition of equipment - (3,420) -
Provision for losses on accounts receivables (8,000) 9,000 -
(Increase) Decrease in Operating Assets
Accounts receivable 202,449 (141,479) 74,529
Inventories (236,012) (339,653) 392,058
Other current assets (568) (17,834) (3,394)
Increase (Decrease) in Operating Liabilities
Accounts payable (92,119) (7,001) 12,330
Accrued expenses and other liabilities 76,335 (1,068,177) 417,484
-------------- ------------- -------------
Net Cash (Used) by Operating Activities (654,214) (717,666) (60,993)
-------------- ------------- -------------
Cash Flows From Investing Activities
Purchase of property, plant and equipment (11,680) (43,163) (19,625)
Proceeds from sale of equipment - 18,666 -
-------------- ------------- -------------
Net Cash Used in Investing Activities (11,680) (24,497) (19,625)
-------------- ------------- -------------
Cash Flows From Financing Activities
Deferred offering costs (113,813) 86,154 (86,154)
Increase from public stock offering - 4,421,525 -
Proceeds from borrowings 916,235 - -
Increase (Decrease) in bridge loan 200,000 (200,000) 200,000
Repayments of long-term borrowings (34,453) (2,836,008) (38,681)
(Increase) reductions in other assets 22,929 (20,580) 325
Dividends paid - (396,587) -
Increase (decrease) in due to officers - (161,705) 17,302
-------------- ------------- -------------
Net Cash Provided by Financing
Activities 990,898 892,799 92,792
-------------- ------------- -------------
Net Increase in Cash 325,004 150,636 12,174
Cash at Beginning of Period 178,213 27,577 15,403
-------------- ------------- -------------
Cash at End of Period $ 503,217 $ 178,213 $ 27,577
============== ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest paid $ 77,349 $ 772,773 $ 102,816
Taxes paid $ 10,084 $ 125 $ 50
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Capitalized lease obligations incurred for use of
equipment $ - $ - $ 56,550
Additional common stock was issued upon conversion of
$1,131,164 of long-term debt and accrued interest payable.
</TABLE>
See notes to the financial statements.
F-5
<PAGE>
Conolog Corporation
Notes to the Financial Statements
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The principal business activity of Conolog Corporation (the "Company")
is the design, manufacturing and distribution of small electronic and
electromagnetic components and subassemblies for use in telephone,
radio and microwave transmission and reception and other communication
areas. The Company's products are used for transceiving various
quantities, data and protective relaying functions in industrial,
utility and other markets. The Company's customers include primarily
industrial customers, which include power companies and various
branches of the military.
Revenue Recognition
Sales are recognized when the products are shipped. Sales under certain
fixed-price-type contracts, where progress payments are received, are
recognized when work is performed, under the percentage-of-completion
method, in accordance with Statement of Position 81-1, Accounting for
Performance of Construction Type and Certain Production-Type contracts.
Inventories
Inventories are stated principally at average cost which is not in
excess of market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less allowances for
depreciation and amortization. Depreciation and amortization are
computed by the straight-line method over the estimated useful lives of
the assets.
Income (Loss) Per Share of Common Stock
Income (loss) per share of common stock is computed by dividing net
earnings (loss) (after dividends on preferred shares) by the weighted
average number of shares of Common Stock outstanding during the year.
The effect of assuming the exchange of the Series A Preferred Stock and
Series B Preferred Stock in 1997 and 1995 would be anti-dilutive.
Income Taxes
Deferred income taxes have been provided for in accordance with
Statement No. 109 of the Financial Accounting Standards Board. Deferred
income taxes arise from timing differences resulting from income and
expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or
noncurrent, depending on the classification of the assets and
liabilities to which they related. Deferred taxes arising from timing
differences that are not related to an asset or liability are
classified as current or noncurrent depending on the periods in which
the timing differences are expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-6
<PAGE>
Conolog Corporation
Notes to the Financial Statements
NOTE 2 - WRITE-OFF OF OBSOLETE OR EXCESS INVENTORIES
During 1997, the Company recorded a write-off of obsolete or excess
inventories of $28,101. During 1996 and 1995, the Company recorded a
write-off of obsolete or excess inventories of $50,281 and $656,248,
respectively.
The inventory written off was military related. In management's opinion
these items will not be reordered in the foreseeable future.
NOTE 3 - NOTES PAYABLE - BANK
On September 11, 1996, the Company entered into an allonge agreement with
the bank whereby the bank may at any time before April 15, 1997 convert the
then unpaid amount of principal and interest due under the Amended and
Restated Term 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 "Notes Shares").
On September 12, 1996 the bank entered into an option and purchase, sale
and assignment agreement (the "Option Agreement") with CNL Holdings, Inc.
(CNL) whereby the bank would sell the Note Shares referred to above, along
with the 375,000 common shares of the Company it currently owns (the "Bank
Shares") for $1,500,000 to CNL.
On September 12, 1996 CNL entered into an agreement with the Company
whereby the Company would use its best efforts to file a Registration
Statement with the Securities and Exchange Commission covering the 375,000
Bank Shares and the 1,400,000 Note Shares (collectively the "Acquired
Shares"). Such Registration Statement shall be declared effective as soon
as possible after the filing thereof, and kept current and effective for a
period of two years or until such time as all shares registered pursuant
therewith have been sold or otherwise transferred. The proceeds of the sale
of the Acquired Shares shall be applied as follows: The first $1,500,000
shall be paid to reimburse CNL for payments made to the bank pursuant to
the Option Agreement. Fifty percent of the balance of the proceeds, not to
exceed $2,500,000, shall be loaned to the Company by CNL. The balance of
the proceeds belong to CNL. The amounts loaned by CNL to the Company shall
be evidenced by notes which shall be due twelve months after making such
loan and shall bear interest at the rate of 4% per annum. At maturity of
the loans, the Company will have the option to repay the loan balance and
accrued interest by issuing a new Series C Preferred Stock (the "Preferred
Stock") valued at $5.00 per share. The Preferred Stock will be non-voting
and will carry a cumulative dividend of 8% per annum, which may be payable
by the issuance of shares of common stock valued at $5.00 per share up to a
maximum of 40,000 shares per annum.
On January 31, 1997, the Bank and Conolog entered into Amendment No. 1 to
the Option and Purchase, Sale and Assignment Agreement dated September 12,
1996. The amended Option Agreement now provides that on or before February
5, 1997, CNL will purchase from the Bank for an aggregate purchase price of
$600,000, no less than (i) 133,333 shares of Common Stock for $399,999,
subject to the approval of IAR Securities Corp. and (ii) $200,001 of the
Debt Claim represented by the note. CNL thereafter may exercise the
remainder of the option on or before April 15, 1997. In addition, CNL may
purchase from the Bank additional shares of Common Stock owned by the Bank
at the price of $3.00 per share and portions of the Debt Claim from time to
time. On February 3, 1997, CNL paid the Bank $600,000 consummating the
purchase of the above 200,000 shares. On January 31, 1997, $200,001 of the
Debt to the Bank was adjusted resulting in all accrued interest in the
amount of $106,298 being reduced and the remaining being applied to
principal.
F-7
<PAGE>
Conolog Corporation
Notes to the Financial Statements
NOTE 3 - NOTES PAYABLE - BANK (Continued)
On March 26, 1997, CNL completed the exercise of the "Option Agreement"
with the Bank effectively eliminating all debts and liens with the Bank.
NOTE 4 - NOTES PAYABLE - OTHER
CNL Holdings, Inc. loaned the Company $916,235. The notes will be due
during the fiscal year July 31, 1998 and shall bear interest at the rate of
4% per annum. The loans are payable in cash or Series C Preferred Stock, at
the Company's option at $5.00 per share. Interest is payable in Common
Stock up to a maximum of 40,000 shares per annum.
There is no relationship between CNL Holdings and the Company except as
specifically detailed above.
NOTE 5 - BRIDGE LOAN
The Company received $200,000 in net proceeds from several investors in a
private placement. Each investor received two (2) Promissory Notes.
Promissory Notes (the "Final Note") totaling $150,000 are due and payable
on the earlier of January 31, 1999 or the closing of the Company's next
public offering. The Second Convertible Note (the "Second Note"), totaling
$50,000 plus accrued interest is payable on the earlier of January 31, 1999
or the closing of the Company's next public offering, or convertible at the
time the next Registration Statement is declared effective by the
Securities and Exchange Commission and at the option of the selling
security holders into a total of 1.2 million Class A Warrants. Each Class A
Warrant contained in the Second Note is identical to the Company's
currently outstanding Class A Warrants.
The Company has granted the lenders a security interest in its property
located at 5 Columbia Road, Somerville, NJ (collateral).
NOTE 6 - 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:
<TABLE>
<CAPTION>
July 31,
------------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Machinery and equipment $ 303,574 $ 303,574
Less allowance for amortization 273,538 263,832
--------------- ---------------
$ 30,036 $ 39,742
=============== ===============
</TABLE>
F-8
<PAGE>
Conolog Corporation
Notes to the Financial Statements
NOTE 6 - LEASES (Continued)
Lease amortization is included in depreciation expense.
Future minimum payments, by year and in the aggregate, under capital leases
consisted of the following as of July 31, 1997:
<TABLE>
<CAPTION>
1998
<S> <C>
Total minimum lease payments $ 4,208
Less amounts representing interest 406
--------------
Present value of net minimum lease payments 3,802
Less, current maturities of capitalized lease obligations 3,802
--------------
Long-term capitalized lease obligations $ 0
==============
</TABLE>
The Company leases various equipment under noncancellable operating leases
expiring through July 2000. Future minimum rental payments under the above
leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ended July 31,
1998 $ 4,808
1999 4,808
2000 4,808
--------------
$ 14,424
==============
</TABLE>
Total rental expense for all operating leases of the Company amounted to
approximately $7,659, $10,353 and $11,447 during the years ended July 31,
1997, 1996 and 1995, respectively.
NOTE 7 - CAPITAL STOCK
The Series A Preferred Stock provides 4% ($.02 per share) cumulative
dividends, which were $86,800 in arrears at July 31, 1997. In addition,
each share of Series A Preferred Stock may be exchanged for one share of
Common Stock upon surrender of the Preferred Stock and payment of $1,200
per share. The Company may redeem the Series A Preferred Stock at $.50 per
share plus accrued and unpaid dividends.
The Series B Preferred Stock provides cumulative dividends of $.90 per
share which were $27,937 in arrears at July 31, 1997. In addition, each
five shares of Series B Preferred Stock is convertible into 1 share of
Common Stock. The Company may redeem the Series B Preferred Stock at $15
per share plus accrued and unpaid dividends.
The Company has reserved 155,392 shares of Common Stock for Series A and B
Preferred Stock.
F-9
<PAGE>
Conolog Corporation
Notes to the Financial Statements
NOTE 8 - EXTRAORDINARY ITEM
On August 16, 1995 the Company's Bank debt was restructured resulting in
debt forgiveness of $1,232,728. This created a deferred tax asset at July
31, 1995 of $492,352. When the debt forgiveness occurred, the Company wrote
off its deferred tax asset against the forgiveness of debt, resulting in
extraordinary income of $740,376.
NOTE 9 - INCOME TAXES
Income taxes are comprised of the following:
<TABLE>
<CAPTION>
July 31,
----------------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S><C> <C> <C>
Deferred Income Taxes (Benefit) $ - $ - $ (492,352)
Current Income Taxes
Federal 9,884 - -
State 200 200 100
-------------- -------------- --------------
$ 10,084 $ 200 $ (492,252)
============== ============== ==============
</TABLE>
Taxable income differs from financial statement income due to the effect of
non-deductible permanent tax differences. These permanent tax differences
include officer's life insurance premiums and non-deductible entertainment
expenses.
At July 31, 1997 the Company has a net operating loss carryforward of
approximately $2,671,000 for financial reporting purposes and approximately
$2,443,000 for tax purposes which is available to offset future Federal
taxable income. For Federal purposes, $253,000 of the carryforward expires
in 2008, $1,232,000 expires in 2009 and $957,000 expires in 2010. For state
purposes the carryforward is approximately $1,604,000; $706,000 expires in
in 2001 and $898,000 expires in 2002. Also, at July 31, 1997 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.
The above net operating loss created deferred tax asset that has been fully
reserved. The amount is $1,329,286.
NOTE 10 - MAJOR CUSTOMERS AND EXPORT SALES
The following summarizes sales to major customers (each 10% or more of net
sales) by the Company:
<TABLE>
<CAPTION>
Sales to
Major Number of Percentage
Year Ended Customers Customers of Total
-------------- --------------- ---------------
<S> <C> <C> <C>
1997 $ 625,134 3 57
1996 401,840 1 21
1995 424,849 1 20
</TABLE>
During 1997 the Company had no export sales. During 1996 the Company
had export sales of $401,840 and none in 1995.
F-10
<PAGE>
Conolog Corporation
Notes to the Financial Statements
NOTE 11 - SUBSEQUENT EVENTS
On September 12, 1997 the Company filed a Registration Statement (S-1) with
the Securities and Exchange Commission. This Statement covers the primary
offering of securities by the Company and the offering of other securities
by certain selling security holders. The Company is registering, under the
primary prospectus 805,000 Units, each unit consisting of one (1) share of
Common Stock and four (4) Class A Warrants. The selling security holders
are registering under an alternate prospectus 1,200,000 Class A Warrants.
At July 31, 1997 all costs associated with this offering were deferred.
These costs will be deducted from the proceeds from the sale of stock.
F-11
<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......................................................
Use Of Proceeds...................................................
Capitalization....................................................
Bridge Financing..................................................
Dividends.........................................................
Selected Financial Information....................................
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.......................................................
Market Price for Securities ......................................
Business..........................................................
Management........................................................
Certain Relationships
and Related Transactions.........................................
Principal Shareholders............................................
Description of
Securities.......................................................
Shares Available for
Future Sales.....................................................
Underwriting......................................................
Selling Securityholders...........................................
Legal Proceedings.................................................
Legal Matters.....................................................
Experts...........................................................
Financial Statements..............................................
----------
Until ________________,1997 (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.
700,000 UNITS
CONOLOG CORPORATION
--------------
PROSPECTUS
--------------
IAR Securities Corp.
______ __, 1997
--------------
<PAGE>
Subject to Completion, dated _____ __, 1997
Alternate Prospectus
CONOLOG CORPORATION
1,200,000 Class A Common Stock Purchase Warrants
The securities offered hereby consist of 1,200,000 Class A Common Stock
Purchase Warrants ("Class A Warrants"), of Conolog Corporation, a Delaware
corporation ("Conolog" or the "Company") which have been issued to certain
non-affiliated persons (the "Selling Securityholders"). 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, at any time through August 16,
1998. The Class A Warrants are subject to redemption by the Company at any time
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. See "Description of
Securities".
The Class A Warrants offered by this Prospectus may be sold from time
to time by the Selling Securityholders or their transferees. No underwriting
arrangements have been entered into by the Selling Securityholders. The
distribution of the securities by the Selling Securityholders 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 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
specially negotiated brokerage fees may be paid by the Selling Securityholders
in connection with sales of such securities.
On the date hereof the Company commenced a public offering of 700,000
Units, each Unit consisting of one (1) share of Common Stock and four (4) Class
A Warrants. See "Concurrent Sales."
The Company will not receive any of the proceeds for the sale of
securities by the Selling Securityholders. All costs incurred in the
registration of the securities of the Selling Securityholders are being borne by
the Company. See "Selling Securityholders."
The Company's Common Stock and Class A Warrants are currently trading
on the Nasdaq SmallCap Market ("Nasdaq"). On _________, 1997, the closing price
for the Common Stock and Class A Warrants were $_______ and $______,
respectively.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. AN INVESTMENT IN THESE SECURITIES SHOULD BE
CONSIDERED ONLY BY THOSE PERSONS CAPABLE OF SUSTAINING THE LOSS OF
THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" WHICH BEGIN ON PAGE _____
AND "DILUTION."
A-1
<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 _____________________, 1997
A-2
<PAGE>
CONCURRENT SALES
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering (the "Offering")
of securities by the Company was declared effective by the Securities and
Exchange Commission ("SEC"), and the Company commenced the sale of the
securities offered thereby. The securities consist of 700,000 Units, each unit
consisting of one (1) share of Common Stock and (4) Class A Warrants (without
giving effect to the Over- Allotment Option granted to the Representative of the
Offering). Sales of securities under this Prospectus by the Selling
Securityholders or even the potential of such sales may have an adverse effect
on the market price of the Company's securities.
SELLING SECURITYHOLDERS
This registration statement, of which this Prospectus forms a part,
also covers the registration of 1,200,000 Class A Warrants. All of such
securities are expected to become tradeable on or about the date of this
Prospectus. Sales of the Class A Warrants being offered by the Selling
Securityholders hereby or the Common Stock underlying the Class A Warrants or
even the potential of such sales, would likely have an adverse effect on the
market prices of the securities being offered for sale by the Company.
The following table sets forth the beneficial ownership of the
securities of the Company held by each person who is a Selling Securityholder
and by all Selling Securityholders as a group prior to this Offering and after
this Offering, assuming all of the Class A Warrants owned by the Selling
Securityholders are sold.
<TABLE>
<CAPTION>
Class A Percent of Class A
Warrants Owned Warrants Owned
-------------- --------------
Prior to After Prior to After
Name of Beneficial Owner Offering Offering Offering Offering
- ------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Ekistics, Inc. (1).............................. 300,000 0 12.84% 0%
Blue Star Group Investment, Ltd................. 696,000 0 29.80% 0%
James Solakian.................................. 120,000 0 5.14% 0%
Bruce Ungerleider............................... 30,000 0 1.28% 0%
Harold Yordy.................................... 27,000 0 1.16% 0%
Michael Yordy................................... 27,000 0 1.16% 0%
Total.................................. 1,200,000 0 51.37% 0%
</TABLE>
(1) The beneficial owners of such entity are Gregory Roberts and Noel
Roberts.
A-3
<PAGE>
None of the Selling Securityholders are affiliated with the Company in
any capacity, has had any business relationship with the Company at any time nor
owned any of the Company's Common Stock beneficially or of record prior to this
Offering (other than Mr. Solakian who is the owner of 107,250 hares of Common
Stock).
The securities offered thereby may be sold from time to time directly
by the Selling Securityholders. Alternatively, the Selling Securityholders may
from time to time offer such securities through underwriters, dealers or agents.
The distribution of securities by the Selling Securityholders 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
Securityholders in connection with such sales of securities. The Selling
Securityholders 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
Securityholders may not simultaneously engage in market-making activities with
respect to such securities of the Company during the applicable "cooling off"
period (up to 5 days) prior to the commencement of such distribution. In
addition, and without limiting the foregoing, the Selling Securityholders will
be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation, Regulation M, in
connection with transactions in such securities, which provisions may limit the
timing of purchase and sales of such securities by the Selling Securityholders.
PLAN OF DISTRIBUTION
The securities offered hereby may be sold from time to time directly by
the Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions, privately-negotiated transactions or through sales to one
or more broker-dealers for resale of such shares as principals, including the
Representative, 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
A-4
<PAGE>
the Selling Securityholders in connection with such sales of securities. The
Selling Securityholders and intermediaries through whom such securities are sold
may be deemed "underwriters" within the meaning of the Securities Act with
respect to the securities offered, and any profits realized or commissions
received may be deemed underwriting compensation.
At the time of 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 shares 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 shares
purchased from the Selling Securityholder and the discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
A-5
<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................................................
Use of Proceeds of Company Offering.........................
Capitalization..............................................
Bridge Financing............................................
Dividends...................................................
Selected Financial Information..............................
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................................................
Market Price for Securities.................................
Business....................................................
Management..................................................
Certain Relationships
and Related Transactions...................................
Principal Shareholders......................................
Description of
Securities.................................................
Shares Available for
Future Sales...............................................
Concurrent Sales............................................
Selling Securityholders.....................................
Plan of Distribution........................................
Legal Proceedings...........................................
Legal Matters...............................................
Experts.....................................................
Financial Statements........................................
-----
Until _____ , 1997 (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.
1,200,000 CLASS A WARRANTS
CONOLOG CORPORATION
------------
PROSPECTUS
------------
_______ __, 1997
--------------------
<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:
<TABLE>
<S> <C>
SEC filing fee....................................... $9,932.82
Nasdaq filing fee.................................... $7,500.00
NASD filing fee...................................... $3,776.50
Printing and engraving*.............................. $40,000.00
Transfer Agent Fees*................................. $2,500.00
Legal fees and expenses*............................. $90,000.00
Accounting fees and expenses*........................ $25,000.00
Blue Sky fees and expenses*......................... $30,000.00
Miscellaneous expenses*.............................. $16,290.68
----------
Total....................................... $225,000.00
</TABLE>
- ------------------------------------
* 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
II-1
<PAGE>
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 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, 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, officers and directors of the Company) were waived.
On August 16, 1995, accrued salaries of $309,109 owed by the Company to
Mr. Benou (President and Director) 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.
Each of the foregoing transactions was exempt from registration under
Section 4(2) of the Act as transactions by an issuer not involving a public
offering (as such sales were made to officers, directors or lenders of the
Company).
In December 1996 and January 1997, the Company obtained bridge
financing from six (6) lenders (Ekistics, Inc. - $50,000; James Solakian -
$20,000; Bruce Ungerleider - $5,000; Harold Yordy - $4,500; Michael Yordy -
$4,500; and Blue Star Group Investment, Ltd. - $116,000), in the amount of
$200,000. These lenders are the individuals identified in this Prospectus as
"Selling Securityholders." In exchange for making the loans to the Company, each
Selling Securityholders received two (2) promissory notes (the "Bridge Notes").
Certain Bridge Notes are in the aggregate principal amount of $150,000 (the
"Principal Bridge Notes") and the other Bridge Notes are in the aggregate
principal amount of $50,000 (the "Convertible Bridge Notes"). Each of the Bridge
Notes bears interest at the rate of eight percent (8%) per annum. The Bridge
Notes are due and payable upon the earlier of (i) January 31, 1999 or (ii) the
date on which this offering closes. The Convertible Bridge Notes are convertible
into a total of 1,200,000 Class A Warrants. Each Class A Warrant contained in
the Convertible Bridge Notes is identical to the Class A Warrants offered
hereby. See "Bridge Financing. "The foregoing transaction was exempt from
registration under Section 4(2) of the Act as a transaction by an issuer not
involving a public offering.
II-2
<PAGE>
In September 1997, the Company issued 360,000 shares of Common Stock to
eight individuals, all of whom are employees of the Company, as follows: Robert
Benou (200,000), Arpad Havasy (50,000), Marc Benou (50,000) Thomas Fogg
(25,000), Dina Stellwagen (20,000), Louis Massad (10,000), Mary Ann Edwards
(2,500) and Albert S. Lenhardt (2,000). The foregoing transaction was exempt
from registration under Section 4(2) of the Act as a transaction by an issuer
not involving a public offering. The foregoing transaction was exempt from
registration under Section 4(2) of the Act as a transaction by an issuer not
involving a public offering.
II-3
<PAGE>
Item 16. Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
<S> <C>
1(aa)+ Form of Underwriting Agreement
1(b)(b)+ Form of Selected Dealer Agreement.
3(a) Certificate of Incorporation - incorporated by reference to the Registrant's Exhibit 3.01 to
Registration Statement on Form S-1 (File No. 2-31302).
(b) Certificate of Amendment of Certificate of Incorporation - incorporated by reference to
Exhibit 3.02 to the Registrant's Registration Statement on Form S-1 (File No. 2-31302).
(c) Certificate of Amendment of Certificate of Incorporation incorporated by reference to Exhibit 4 to the
Registrant's Current Report on Form 8-K for July 1971.
(d) Certificate of Ownership and Merger with respect to the merger of Data Sciences (Maryland) into the Registrant
and the change of Registrant's name from "Data Sciences Incorporated" to "DSI Systems, Inc." - incorporated by
reference to Exhibit 3.03(a) to the Registrant's Registration Statement on Form S-1 (File No. 2-31302).
(e) Certificate of the Designation, Preferences and Relative, Participating, Option or Other Special
Rights and Qualifications, Limitations or Restrictions thereof of the Series A Preferred Stock
(par value $.50) of DSI Systems, Inc. - incorporated by reference to Exhibit 3.04 to the
Registrant's Registration Statement on Form S-1 (File No. 2-31302).
(f) Certificate of the Designation, Preferences and Relative, Participating, Option or Other Special Rights and
Qualifications, Limitations or Restrictions thereof of the Series B Preferred Stock (par value $.50) ofDSI
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.
(i)* Certificate of Amendment of Certificate of Incorporation filed August 17, 1995.
(j)* Certificate of Amendment of Certificate of Incorporation filed November 19, 1997.
4(a)** Specimen Certificate for shares of Common Stock
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
(b)** Specimen Certificate for Class A Warrant
(c)** Warrant Agreement between Conolog Corporation and Continental Stock Transfer & Transfer
Co.
(cc)**** Amendment No. 1 to Warrant Agreement
(dd)+ Form of Representative's Unit Purchase Option
(ee)+ Form of Financial Consulting Agreement
5.1**** Opinion of Bernstein & Wasserman on legality of securities being registered.
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.
10.3(A)***** Amendment No. 1 dated January 3, 1997 to Option and Purchase, Sale and Assignment
Agreement (dated as of September 12, 1996), by and between The Chase Manhattan Bank and
CNL Holdings, Inc.
10.4 *** Irrevocably Proxy dated as of September 12, 1996 by and between CNL Holdings, Inc. and
Conolog Corporation.
10.5 *** Agreement dated September 12, 1996 by and between CNL Holdings, Inc. and Conolog
Corporation.
10.5(A)** Amendment No. 1 dated January 31, 1997 to Conolog Corporation Allonge.
10.6+ Employment Agreement dated June 1, 1997 between Robert Benou and Conolog Corporation.
10.7+ Employment Agreement dated June 1, 1997 between Marc Benou and Conolog Corporation.
10.8* Form of December 1996/January 1997 Bridge Loan Agreement.
10.9* Form of Amendment to December 1996/January 1997 Bridge Loan Agreement
11* Statement Re: Computation of Per Share Earnings.
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
23.1 **** Consent of Bernstein & Wasserman (included in Exhibit No. 5)
23.2 * Consent of Rosenberg Rich Baker Berman & Company, Independent Certified Public
Accountants.
</TABLE>
- ------------------------------------
* Filed herewith.
** Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (33-92424).
*** Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (333-14247).
**** To be filed by amendment.
***** Incorporated by reference to Registrant's Form 8-K filed February 4,
1997.
+ Incorporated by reference to Registrant's Registration Statement on
Form S-1 (333-35489) filed on September 12, 1997.
II-6
<PAGE>
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;
(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) 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.
II-7
<PAGE>
(d) Rule 430A
The undersigned Registrant hereby undertakes that:
(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.
II-8
<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 6th day of November, 1997.
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Robert S. Benou President, Director, Chief November 6, 1997
- ---------------------------------------
Robert S. Benou Executive Officer, Chief
Financial Officer and Comptroller
/s/Arpad J. Havasy Executive Vice President, November 6, 1997
- ---------------------------------------
Arpad J. Havasy Secretary, Treasurer and
Director
/s/ Marc R. Benou Vice President, November 6, 1997
- ---------------------------------------
Marc R. Benou Assistant Secretary and
Director
/s/ Louis S. Massad Director November 6, 1997
- ---------------------------------------
Louis S. Massad
</TABLE>
II-9
<PAGE>
Certificate of Amendment
of
Certificate of Incorporation
of
Conolog Corporation
-----------------------------------------------------------------
Under Section 242 of the
Delaware General Corporation Law
-----------------------------------------------------------------
Conolog Corporation, a corporation organized and existing under the
laws of the State of Delaware (the "Corporation") hereby certifies as follows:
1. The Certificate of Incorporation of the Corporation is hereby
amended by changing the article thereof numbered fourth so that, as amended,
said Article FOURTH shall be and read as follows:
"FOURTH: The total number of shares of all classes of stock which the
Corporation is authorized to issue is six million five hundred thousand
(6,500,000) shares of which five hundred thousand (500,000) shares having a par
value of $.50 per share are to be classified as Preferred Stock and six million
(6,000,000) shares, having a par value of $1.00 per share are to be classified
as Common Stock.
Each one hundred (100) shares of the Corporation's Common Stock, par
value $.01 per share, issued and outstanding as of the close of business on the
date this Certificate of Amendment is filed shall be converted and reclassified
into one (1) share of the Corporation's Common Stock par value $1.00 per share,
so that each share of the Corporation's Common Stock issued and outstanding is
hereby converted and reclassified. No fractional interests resulting from such
conversion shall be issued, but in lieu thereof, the Corporation will pay cash
for each currently issued and outstanding share of Common Stock, par value $.01
per share, representing such fractional interest at a price equal to the average
of the closing bid and ask prices of the Corporation's Common Stock as reported
on the OTC Bulletin Board on the day prior to the effectiveness of this
Certificate of Amendment."
2. The foregoing amendment has been duly adopted in accordance with the
provisions of Section 242 of the General Corporation law of the State of
Delaware by the vote of a majority of each class of outstanding stock of the
Corporation entitled to vote thereon.
<PAGE>
IN WITNESS WHEREOF, we have signed this Certificate this 15th day of
April, 1995.
/S/
----------------------------------
Robert S. Benou, President
ATTEST:
/S/
- ----------------------------------------
Arpad J. Havasy, Secretary
2
<PAGE>
Certificate of Amendment
of
Certificate of Incorporation
of
Conolog Corporation
-----------------------------------------------------------------
Under Section 242 of the
Delaware General Corporation Law
-----------------------------------------------------------------
Conolog Corporation, a corporation organized and existing under the
laws of the State of Delaware (the "Corporation") hereby certifies as follows:
1. The Certificate of Incorporation of the Corporation is hereby
amended by changing the article thereof numbered fourth so that, as amended,
said Article FOURTH shall be and read as follows:
"FOURTH: The total number of shares of all classes of stock which the
Corporation is authorized to issue is twenty-two million (22,000,000) shares of
which two million (2,000,000) shares having a par value of $.50 per share are to
be classified as Preferred Stock and twenty million (20,000,000) shares, having
a par value of $1.00 per share are to be classified as Common Stock.
Each one hundred (100) shares of the Corporation's Common Stock, par
value $.01 per share, issued and outstanding as of the close of business on
August 17, 1995 shall be converted and reclassified into one (1) share of the
Corporation's Common Stock par value $1.00 per share, so that each share of the
Corporation's Common Stock, $.01 par value, issued and outstanding is hereby
converted and reclassified. No fractional interests resulting from such
conversion shall be issued, but in lieu thereof, the Corporation will pay cash
for each currently issued and outstanding share of Common Stock, par value $.01
per share, representing such fractional interest at a price equal to the average
of the closing bid and ask prices of the Corporation's Common Stock as reported
on the OTC Bulletin Board on August 16, 1995."
2. The foregoing amendment has been duly adopted in accordance with the
provisions of Section 242 of the General Corporation law of the State of
Delaware by the vote of a majority of each class of outstanding stock of the
Corporation entitled to vote thereon.
<PAGE>
IN WITNESS WHEREOF, we have signed this Certificate this 18th day of
November, 1996.
/S/
-----------------------------------------
Robert S. Benou, President
ATTEST:
/S/
- -----------------------------------
Arpad J. Havasy, Secretary
2
<PAGE>
_________________________, 1997
Mr. Robert S. Benou
President
Conolog Corporation
5 Columbia Road
Somerville, NJ 08876
Re: Bridge Loan
Dear Mr. Benou:
This letter summarizes our agreement as follows:
1. Bridge Loan. Upon the execution of this letter, the undersigned
("Lender") shall loan (the "Loan") _________________ ($_____________) to Conolog
Corporation, a Delaware corporation (the "Company"), pursuant to the terms of
(i) a certain promissory note in the amount of $______________ payable on the
earlier of December 31, 1997 or the closing of the Company's next public
offering (the "First Note") and (ii) a promissory note in the amount of
$____________ payable on the earlier of December 31, 1997 or the closing of the
Company's next public offering, or convertible, at the option of the holder,
into ________________ (________________) Preferred Stock Purchase Warrants to
purchase ________________ shares of Series D Preferred Stock of the Company
which is contemplated to be issued in the next public offering (the
"Bridgeholder's Warrants") of the Company (the "Second Note"). Each Warrant
entitles the holder thereof to purchase one (1) share of Series D Preferred
Stock, at an exercise price of $5.25, for a period of three (3) years commencing
one (1) year from the effective date of the next public offering. The forms of
the First Note and Second Note are attached hereto as Exhibits A and B,
respectively (collectively, the "Notes"). Concurrently, with the execution of
this letter, the Company shall execute and deliver the Notes to Lender.
2. Issuance of Bridgeholder's Warrants. Upon conversion of the Second
Note, the Company shall issue to Lender the Bridgeholder's Warrants. At any time
following the date on which the next registration statement (the "Registration
Statement") filed by the Company with
<PAGE>
Mr. Robert S. Benou
______________________, 1997
Page 2
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Securities Act") is declared effective by the
Commission, Lender may exercise its option to convert the Second Note into the
Bridgeholder's Warrants and the Company will deliver to Lender certificates
representing each of the Bridgeholder's Warrants.
3. Registration Rights. The Company agrees to include the
Bridgeholder's Warrants and the shares of the Preferred Stock issuable upon
exercise of the Bridgeholder's Warrants (collectively, the "Registrable
Securities"), in the Registration Statement at no cost or expense to Lender.
Anything in this Section 3 to the contrary notwithstanding, in the
event that the managing underwriter of the Public Offering informs the Company
in writing that the inclusion of the Registrable Securities in the Public
Offering will result in the inability to effect the Public Offering or qualify
the Public Offering in one or more states which such managing underwriter, in
its sole discretion, deems necessary for the Public Offering to proceed, Lender
shall agree to withhold some or all of the Registrable Securities from
registration in accordance with the instructions of such managing underwriter.
In such event, upon Lender's request, the Company shall file a registration
statement with the Commission for the purpose of registering the Registrable
Securities as soon as practicable after the closing date of such Public Offering
at no cost or expense to Lender.
4. Security Interest. As security for the performance by the Company of
its obligations under this Agreement, the Company shall file all appropriate
mortgage documents (collectively, the "Security Documents") with the necessary
governmental authorities in the State of New Jersey granting the Lender a
security interest in the Company's real property located at 5 Columbia Road,
Somerville, NJ 08876 (the "Collateral"), such interest to be subordinate to the
lien held by The Chase Manhattan Bank. Lender acknowledges that the Company is
currently obtaining additional financing from other lenders which, together with
the Loan, represents indebtedness in the aggregate amount of $200,000 (the
"Indebtedness"). Lender acknowledges that all the Indebtedness shall rank pari
passu with the Loan, and that the Security Documents will be filed on behalf of
the Lender and such other lenders within ten (10) days from the date the Company
has raised the entire Indebtedness. The Company hereby confirms to file the
Security Documents within such time period. Lender further acknowledges that it
will execute any and all documents requested by The Chase Manhattan Bank in
connection with the filing of the Security Documents to secure such bank's
priority interest in the Collateral.
<PAGE>
Mr. Robert S. Benou
______________________, 1997
Page 3
5. Representations of Lender. Lender represents that in the event he
converts the Second Note, he will be acquiring the Bridgeholder's Warrants for
investment purposes only and not with a view to any resale or public
distribution thereof. Lender has had full access to the books and records of the
Company and has had the opportunity to question the officers, counsel and
independent accountants of the Company. Lender is an "accredited investor" as
defined in section 2(15) of the Securities Act and Regulation D promulgated by
the Commission.
6. Governing Law; Jurisdiction and Venue. Regardless of the place of
execution or performance, this letter and the Notes shall be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to such State's conflicts of laws provisions. Each of the parties hereto
irrevocably consents to the jurisdiction and venue of the federal and state
courts located in the State of New York, County of New York.
Please acknowledge your consent to the foregoing terms by
countersigning the enclosed duplicate copy of this letter and returning it to us
together with the Notes.
Very truly yours,
---------------------------------
[Name of Investor]
AGREED TO AND ACKNOWLEDGED:
CONOLOG CORPORATION
By:
------------------------------------
Robert S. Benou, President
<PAGE>
PROMISSORY NOTE
$ , 1997
----------- -----------------------------
New York, New York
FOR VALUE RECEIVED, CONOLOG CORPORATION, a Delaware corporation
("Maker"), promises to pay to ______________________________ ("Holder") at such
place as Holder may designate in writing, the entire principal sum of
_______________________________ Dollars ($____________), together with interest
at the rate of eight percent (8%) per annum, (i) on the earlier of December 31,
1997 or (ii) the closing date of the next underwritten public offering of
Maker's securities, at which time all principal and interest shall be due and
owing.
All payments of principal and interest hereunder shall be payable in
lawful money of the United States.
Maker shall be in default hereunder, at the option of Holder, upon the
occurrence of any of the following events: (i) the failure by Maker to make any
payment of principal or interest when due hereunder, and such failure shall have
continued for a period of more than ten (10) days after notice and a reasonable
opportunity to cure; (ii) the entering into of a decree or order by a court of
competent jurisdiction adjudicating Maker a bankrupt or the appointing of a
receiver or trustee of Maker upon the application of any creditor in an
insolvency or bankruptcy proceeding or other creditor's suit; (iii) a court of
competent jurisdiction approving as properly filed, a petition for
reorganization or arrangement filed against Maker under the Federal bankruptcy
laws and such decree or order not being vacated within thirty (30) days; (iv)
the pendency of any bankruptcy proceeding or other creditors' suit against
Maker; (v) a petition or answer seeking reorganization or arrangement under the
Federal bankruptcy laws with respect to Maker; (vi) an assignment for the
benefit of creditors by Maker; (vii) Maker consents to the appointment of a
receiver or trustee in an insolvency or bankruptcy proceeding or other
creditors' suit; or (viii) the existence of any judgment against, or any
attachment of property of Maker.
Upon the occurrence of any event or condition of default hereunder, or
at any time thereafter, Holder at his option may accelerate the maturity of this
Note and declare all of the indebtedness or any portions thereof to be
immediately due and payable, together with accrued interest thereon, and payment
thereof may be enforced by suit or other process of law.
If this Note is not paid when due, whether at maturity or by
acceleration, Maker agrees to pay all reasonable costs of collection and such
costs shall include without limitation all costs, attorneys' fees and expenses
incurred by Holder hereof in connection with any insolvency, bankruptcy,
reorganization, arrangement or similar proceedings involving Holder, or
involving
<PAGE>
any endorser or guarantor hereof, which in any way affects the exercise by
Holder hereof of its rights and remedies under this Note.
This Note is part of a bridge financing made in favor of Maker in the
aggregate amount of $200,000. This Note, together with such other portion of the
bridge financing will be secured by a mortgage instrument in favor of the
lenders of such bridge financing on a parri passu basis and will be subordinated
to the interest of The Chase Manhattan Bank.
Presentment, demand, protest, notices of protest, dishonor and
non-payment of this Note and all notices of every kind are hereby waived.
The terms "Maker" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
assigns.
Regardless of the place of execution or performance, this letter and
the Note shall be governed by, and construed in accordance with, the laws of the
State of New York without giving effect to such state's conflicts of laws
provisions. Each of the parties hereto irrevocably consents to the jurisdiction
and venue of the federal and state courts located in the State of New York,
County of New York.
CONOLOG CORPORATION
By:
-----------------------------------------
Robert S. Benou
President
<PAGE>
PROMISSORY NOTE
$ , 1997
----------- -----------------------
New York, New York
FOR VALUE RECEIVED, CONOLOG CORPORATION, a Delaware corporation
"Maker"), promises to pay to _________________________________ ("Holder") at
such place as Holder may designate in writing, the entire principal sum of
__________________________ Dollars ($____________), together with interest at
the rate of eight percent (8%) per annum, (i) on the earlier of December 31,
1996 or (ii) the closing date of the next underwritten public offering of
Maker's securities (the "Public Offering"), at which time all principal and
interest shall be due and owing.
At any time after the Effective Date of the Public Offering and before
the closing of the Public Offering, the Holder may, at its option, upon written
notice to Maker, convert this Note into ___________ Preferred Stock Purchase
Warrants, the terms of which are outlined in the Bridge Loan Agreement dated the
date hereof.
All payments of principal and interest hereunder shall be payable in
lawful money of the United States.
Maker shall be in default hereunder, at the option of Holder, upon the
occurrence of any of the following events: (i) the failure by Maker to make any
payment of principal or interest when due hereunder, and such failure shall have
continued for a period of more than ten (10) days after notice and a reasonable
opportunity to cure; (ii) the entering into of a decree or order by a court of
competent jurisdiction adjudicating Maker a bankrupt or the appointing of a
receiver or trustee of Maker upon the application of any creditor in an
insolvency or bankruptcy proceeding or other creditor's suit; (iii) a court of
competent jurisdiction approving as properly filed, a petition for
reorganization or arrangement filed against Maker under the Federal bankruptcy
laws and such decree or order not being vacated within thirty (30) days; (iv)
the pendency of any bankruptcy proceeding or other creditors' suit against
Maker; (v) a petition or answer seeking reorganization or arrangement under the
Federal bankruptcy laws with respect to Maker; (vi) an assignment for the
benefit of creditors by Maker; (vii) Maker consents to the appointment of a
receiver or trustee in an insolvency or bankruptcy proceeding or other
creditors' suit; or (viii) the existence of any judgment against, or any
attachment of property of Maker.
Upon the occurrence of any event or condition of default hereunder, or
at any time thereafter, Holder at his option may accelerate the maturity of this
Note and declare all of the indebtedness or any portions thereof to be
immediately due and payable, together with accrued interest thereon, and payment
thereof may be enforced by suit or other process of law.
<PAGE>
If this Note is not paid when due, whether at maturity or by
acceleration, Maker agrees to pay all reasonable costs of collection and such
costs shall include without limitation all costs, attorneys' fees and expenses
incurred by Holder hereof in connection with any insolvency, bankruptcy,
reorganization, arrangement or similar proceedings involving Holder, or
involving any endorser or guarantor hereof, which in any way affects the
exercise by Holder hereof of its rights and remedies under this Note.
This Note is part of a bridge financing made in favor of Maker in the
aggregate amount of $200,000. This Note, together with such other portion of the
bridge financing will be secured by a mortgage instrument in favor of the
lenders of such bridge financing on a parri passu basis and will be subordinated
to the interest of The Chase Manhattan Bank.
Presentment, demand, protest, notices of protest, dishonor and
non-payment of this Note and all notices of every kind are hereby waived.
The terms "Maker" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
assigns.
Regardless of the place of execution or performance, this letter and
the Note shall be governed by, and construed in accordance with, the laws of the
State of New York without giving effect to such state's conflicts of laws
provisions. Each of the parties hereto irrevocably consents to the jurisdiction
and venue of the federal and state courts located in the State of New York,
County of New York.
CONOLOG CORPORATION
By:
--------------------------------
Robert S. Benou
President
<PAGE>
Mr. Robert S. Benou
Conolog Corporation
5 Columbia Road
Somerville, NJ 08876
Re: Conolog Corporation Bridge Loan
Dear Mr. Benou:
Reference is made to that certain letter agreement ("Letter Agreement")
dated ______________________, 1997, by and between the undersigned and Conolog
Corporation (the "Company"), pursuant to which the undersigned made a loan of
$___________________ to the Company and as consideration therefor, was entitled
to convert a promissory note reflecting $__________________ of such loan (the
"Second Note") into ___________________ Preferred Stock Purchase Warrants to
purchase _______________________ shares of Series D Preferred Stock of the
Company at an exercise price of $5.25 per share, for a period of three (3) years
commencing one (1) year from the effective date of the next public offering.
Notwithstanding anything contained in the Letter Agreement to the contrary, it
is agreed that:
(1) Section 1 of such Letter Agreement shall be amended to reflect
that, instead of being convertible into __________________ Preferred Stock
Purchase Warrants, the Second Note shall be convertible into an identical number
of Class A Warrants, and that such Class A Warrants will be identical to the
Class A Warrants being offered by the Company to the public;
(2) Section 4 of such Letter Agreement entitled "Security Agreement"
shall be deleted in its entirety;
(3) The Second Note shall be deemed amended to reflect that instead of
being convertible into __________________ Preferred Stock Purchase Warrants, the
Second Note shall be convertible into an identical number of Class A Warrants,
and that such Class A Warrants will be identical to the Class A Warrants being
offered by the Company to the public; and
(4) The First and Second Notes shall be due and payable on the earlier
of (i) January 31, 1999, or (ii) the closing of the Company's next public
offering.
As herein amended, the Letter Agreement is confirmed and shall be in
full force and effect.
Dated: ________________________, 1997
CONOLOG CORPORATION
By:
---------------------------- --------------------------
Robert S. Benou [Name of Investor]
Title: President
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------------
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
Primary
Average Shares outstanding 1,583,859 1,035,186 43,463(1)
----------- ---------- ---------
Net income (loss) $ (672,080) $ 293,552 $(522,044)
=========== ========== =========
Per share - amount $ (.42) $ .28 $ (12.01)
=========== ========== =========
Fully diluted
Average shares outstanding 1,583,859 1,035,186 43,463(1)
Assumed conversion of 4% Series A Preferred Stock (2) 155,000 (2)
Assumed conversion of $90 Series B Preferred Stock (2) 48 (2)
----------- ---------- ---------
Total 1,583,859 1,190,234 43,463
=========== ========== =========
Net income (loss) $ (672,080) $ 293,552 $(522,044)
=========== ========== =========
Per share-amount $ (.42) $ .28 $ (12.01)
=========== ========== =========
</TABLE>
(1) After giving retroactive effect to 1-for-100 reverse stock split in
August 1995.
(2) Coversion of the Series A and Series B Preferred Stock is not assumed in the
computation of fully diluted per share net loss because its effect is
anti-dilutive.
<PAGE>
[LETTERHEAD OF ROSENBERG RICH BAKER BERMAN & COMPANY]
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Amendment to the Registration Statement on
Form S-1 of our report dated October 13, 1997, relating to the financial
statements of Conolog Corporation, and to the reference to our Firm under the
caption "Experts" in the Prospectus.
/s/ Rosenberg Rich Baker Berman & Co.
Maplewood, New Jersey
November 6, 1997
