<PAGE>
As filed with the Securities and Exchange Commission on September 12, 1997
Registration No. 333-______
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
Conolog Corporation
(Name of issuer in its charter)
Delaware 3679 52-0853566
(State or other juris- (Primary Standard Industrial (I.R.S. Employer
diction of organization) Classification Code No.) Identification No.)
5 Columbia Road
Somerville, NJ 08876
(908) 722-8081
(Address and telephone number of principal executive offices)
Robert S. Benou, President
Conolog Corporation
5 Columbia Road
Somerville, NJ 08876
(908) 722-8081
(Name, address and telephone number of agent for service)
Copies to:
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. [ ]
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
- -------------------------------------------------------------------------------------------------
Class A Warrants in 280,000 -- -- --
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>
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 $5.00 $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.
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.
iii
<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.
iv
<PAGE>
CONOLOG CORPORATION
CROSS REFERENCE SHEET
Between Items in Registration
Statement on Form S-1 and the Prospectus
Item in Form S-1 Prospectus Caption
---------------- ------------------
1. Front of Registration Forepart of Registration
Statement and Outside Front Statement and Outside Front
Cover of Prospectus Cover Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back
Cover Pages of Prospectus Cover Page of Prospectus
3. Summary Information and Risk Prospectus Summary; Risk Factors
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Outside Front Cover Page of
Price Prospectus; 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
v
<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 September 12, 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. 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.
vi
<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.
- --------------------------------------------------------------------------------
Price to Public Discounts and Proceeds to the
Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Unit .......... $5.00 $.50 $4.50
- --------------------------------------------------------------------------------
Total (3) ......... $3,500,000 $350,000 $3,150,000
- --------------------------------------------------------------------------------
(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 UNITS, 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 1995 Unit Purchase Option. 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 77% of sales
in 1996 ($1,480,000). 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 for the first nine months ended April 30,
1997 totaled $978,979, a 35% decrease from $1,519,975 for the same period in
1996. Revenues from the Company's military product sales represented
approximately 60%, 30%, 23% and 18% of sales of the Company in fiscal 1994,
1995, 1996, and in the first nine months ended April 30, 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>
Present Capitalization
Common Stock .......................... 2,799,736(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. See "Descriptions of
Securities."
Common Stock to be
Outstanding After Completion
of the Offering ....................... 3,499,736
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 than 30 days'
notice at $.05 per Warrant,
provided the average closing price
of the Common Stock exceeds
- ----------
(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>
$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."
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>
NINE MONTHS ENDED APRIL 30 YEAR ENDED JULY 31
-------------------------- ---------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and other income $ 978,979 $ 1,519,975 $ 1,924,466 $ 2,090,933 $ 2,044,860 $ 1,486,298 $ 2,997,308
Income (loss) from
continuing operations (137,662) (209,402) 293,552 (1,014,296) (1,182,988) (322,005) 72,026
Income (loss) from
continuing operations historic (.12) (.20) .28 (.12) (.27) (.07) .02
Income (loss) from continuing
operations per share, after
giving effect to 1-for-100
reverse stock split in August 1995 (12.01) (27.22) (7.41) 1.66
Pro forma income from continuing
operations per share* .12
Total assets 3,979,136 4,026,335 3,927,834 3,882,235 3,739,294 4,601,015 4,586,003
Long-term debt and capitalized
lease obligations 0 949,853 4,973 34,103 3,829,625 3,732,961 2,654,957
</TABLE>
* After giving effect to 1,400,000 shares of Common Stock issuable in
exchange for the unpaid amount of principal and interest due to the Bank.
11
<PAGE>
AT APRIL 30, 1997
-------------------------------------------
ACTUAL ADJUSTMENT AS ADJUSTED
----------- ----------- -----------
Working Capital $ 2,928,784 (1) $ 2,750,000 $ 5,678,784
Total Assets 3,979,136 (1) 2,403,354 6,382,490
Long-Term Liabilities - 0- -0- -0-
Stockholders' Equity 3,357,930 (1) 2,750,000 6,107,930
- ----------
(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 after
giving effect to Underwriter discounts and expenses of this offering.
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
April 30, 1997, the Company had working capital of $2,928,784 and stockholders'
equity of $3,357,930. The Company's continued existence is dependent upon it
successfully expanding its business and attaining profitable operations. The
Company reported losses of $137,662 and income of $293,552 and losses of
1,014,296 and $1,182,988 for the nine months ended April 30, 1997 and for the
years ended July 31,1996, 1995, 1994, respectively. The profits (losses)
reported included inventory write-offs of $0, $50,281, $656,248, and $944,970,
for the same periods, respectively. In addition, reported interest expense for
the same periods were $69,199, $131,854, $253,686, and $362,317, respectively.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
2. 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. Like any business enterprise
operating in a specialized and competitive market, the Company is subject to
many business risks which include, but are not limited to, unforeseen marketing
and promotional expenses, unforeseen negative publicity and competition. Many of
the risks inherent in the Company's business may be unforeseeable or beyond the
control of management. There can be no assurance that the Company will
successfully market the Company's products or develop new products in a timely
or effective manner, which would materially adversely affect the Company's
operating results. See "Use of Proceeds" and "Business".
3. Minimal Sales Staff. The Company employs only 2 marketing executives. In
1995, the Company elected a Vice President of Marketing and Sales who introduced
a comprehensive advertising campaign for the major product lines in water/waste
water and utility publications appearing monthly. In addition, the Company has
signed up to attend the major shows pertaining to water, waster water and power
utilities. Although the response to these efforts have shown promise, the
success of the Company's future marketing efforts will depend on the market
environment and
13
<PAGE>
the needs of the economy. See "Business of the Company -- Marketing and Sales"
and "Employees".
4. Reliance on Component Manufacturers. The Company is dependent on outside
suppliers for all of the subcomponent parts and raw materials necessary to
manufacture the Company's products. A shortage, delay in delivery, or lack of
availability of a given part could lead to manufacturing delays, which could
reduce sales until the problem is remedied. All electrical components of the
Company's products are standard stock items for which a replacement vendor can
be readily obtained. The Company is not dependent upon any single supplier. The
Company purchases some custom parts, primarily printed circuit boards. The
failure of a vendor of one of these customized components could cause a lengthy
delay in production, resulting in a loss of revenues. See "Business-Raw
Materials; Inventory" and "Manufacturing".
5. Dependence on Present Management. The success of the Company is dependent
upon the services of its current management, particularly Robert S. Benou, its
President and its key engineers. The Company 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".
6. Competition: Rapid Technological Change. The market for the Company's
products is very competitive. There are several companies engaged in the
manufacture of products of the type produced by the Company, most of which are
substantially larger and have substantially greater name recognition and greater
financial resources and personnel. The principal elements of competition in the
Company's markets include product quality and reliability, price, service and
delivery. Competition is expected to continue and intensify. The market is also
characterized by rapid technological changes and advances. The Company is an
insignificant factor in the industry. There can be no assurance that the Company
will be able to develop or acquire new products to keep the Company competitive
or stay competitive in general. Lack of market acceptance for the Company's
existing or new products, the Company's failure to introduce new products in a
timely or cost effective manner or its failure to increase functionability of
existing products or remain price competitive, would materially adversely affect
the Company's operating results. There can be no assurance that the Company will
be successful in its product development efforts. See "Business-Research and
Development; New Products" and "Competition".
7. Dependence on Large Customers. Sales to the Company's two major customers
during the nine month period ended April 30, 1997 (General Electric and
Bonneville Power Authority) totaled $203,602 and $200,000, respectively (21% and
20%, respectively of all sales). Sales to the
14
<PAGE>
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). 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.
8. Defense Industry Downsizing - Historical Dependence on Government Contracts.
Recent world events have resulted in a decreased demand for defense related
products causing a general downsizing of the American defense industry. These
factors, along with federal budget constraints, have caused the Company to
realize order cancellations in the amount of $650,000 since 1990 and for another
$600,000 placed on a production hold pending specific releases. The Company's
ability to continue to attract and retain orders from defense contractors, which
as a group accounted for $442,627 in fiscal 1996 or 23% of the Company's total
revenue of $1,924,466, 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.
9. 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.
10. 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 $1.73,
representing a dilution of $3.27 per share (65%) from the $5.00 offering price
of the shares. See "Dilution."
11. 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
15
<PAGE>
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".
12. 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".
13. 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".
14. 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 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".
16
<PAGE>
15. "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.
16. Restricted Shares of Common Stock Eligible for Future Sale. Immediately
prior to the sale of the Shares hereunder, the Company had an aggregate
2,799,736 shares of its Common Stock issued and outstanding, 330,356 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 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 __________, 1998, without the prior written
consent of the Representative. See "Underwriting."
17. 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
17
<PAGE>
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."
18. 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".
19. 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."
20. 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."
21. 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."
22. 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 3,499,736 shares of Common Stock
18
<PAGE>
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 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 twelve (12) 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 twelve (12) months following the date of this Prospectus without the prior
written consent of the Representative. 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.
23. 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".
19
<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:
Approximate Percentage
Approximate Amount of Net Proceeds
------------------ ----------------------
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%
- --------
(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. 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."
20
<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.
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.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 30, 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 APRIL 30, 1997
---------------------------------------------------
ACTUAL ADJUSTMENTS AS ADJUSTED
------ ----------- -----------
<S> <C> <C> <C>
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.50; Series A;
4% cumulative; 162,000 shares authorized,
155,000 shares issued and outstanding $ 77,500 $ -- $ 77,500
Preferred Stock, par value $.50; Series B;
$.90 cumulative; 50,000 shares authorized;
1197 shares issued and outstanding 598 -- 598
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 2,443,973 shares including 8,776 shares held in
Treasury before offering; after offering 3,499,736(1) 2,443,973 (1) 700,000 3,143,973
Additional paid in capital 4,124,013 (1) 2,050,000 6,174,013
Retained earnings (deficit) (3,156,420) -- (3,156,420)
Treasury stock (131,734) -- (131,734)
----------- ------------
TOTAL STOCKHOLDERS'
EQUITY 3,357,930 -- 6,107,930
----------- ------------
TOTAL CAPITALIZATION $ 3,357,930 -- $ 6,107,930
=========== ============
</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.
22
<PAGE>
Bridge Financing
In December 1996 and January 1997, the Company obtained bridge financing
from seven (7) 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) December 31, 1997 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 offering 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."
23
<PAGE>
DILUTION
Prior to this offering, there were 2,799,736 shares of the Company's Common
Stock outstanding. As of April 30, 1997, the net tangible book value of the
Company was $3,301,007. The net tangible book value per share of the Company,
immediately prior to this offering is, therefore, $1.18. 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 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 $150,000 in Convertible Bridge Notes (See "Bridge Financing"), the
pro forma net tangible book value of the Company would be $1.73 per share.
Investors in this Offering, therefore, will sustain an immediate dilution to the
extent of $3.27 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:
Offering price per share............................ $5.00
Net tangible book value per share before Offering... $1.18
Increase per share attributable to the Offering..... $ .55
Net tangible book value per share after Offering.... $1.73
Dilution per share to new investors................. $3.27
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 $150,000 in Convertible Bridge Notes.
Percentage of
Shares Percentage of Total Total
Purchased Total Shares Consideration Consideration
New Investors 700,000 20% $ 3,500,000 34.8%
Present Stockholders 2,799,736 80% $ 6,567,986 65.2%
----------- ----------- ----------- -----
Total 3,499,736 100% $10,067,986 100%
24
<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>
NINE MONTHS ENDED APRIL 30 YEAR ENDED JULY 31
-------------------------- ---------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and other income $ 978,979 $ 1,519,975 $ 1,924,466 $ 2,090,933 $ 2,044,860 $ 1,486,298 $ 2,997,308
Income (loss) from
continuing operations (137,662) (209,402) 293,552 (1,014,296) (1,182,988) (322,005) 72,026
Income (loss) from
continuing operations historic (.12) (.20) .28 (.12) (.27) (.07) .02
Income (loss) from continuing
operations per share, after
giving effect to 1-for-100
reverse stock split in August 1995 (12.01) (27.22) (7.41) 1.66
Pro forma income from continuing
operations per share* .12
Total assets 3,979,136 4,026,335 3,927,834 3,882,235 3,739,294 4,601,015 4,586,003
Long-term debt and capitalized
lease obligations 0 949,853 4,973 34,103 3,829,625 3,732,961 2,654,957
</TABLE>
* After giving effect to 1,400,000 shares of Common Stock issuable in
exchange for the unpaid amount of principal and interest due to the Bank.
25
<PAGE>
AT APRIL 30, 1997
-------------------------------------------
ACTUAL ADJUSTMENT AS ADJUSTED
----------- ----------- -----------
Working Capital $ 2,928,784 (1) $ 2,750,000 $ 5,678,784
Total Assets 3,979,136 (1) 2,403,354 6,382,490
Long-Term Liabilities - 0- -0- -0-
Stockholders' Equity 3,357,930 (1) 2,750,000 6,107,930
- ----------
(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 after
giving effect to Underwriter discounts and expenses of this offering.
26
<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 Income & Percentage
of Revenue from Operations Expense Items Increase/Decrease
- -------------------------------------- ------------- ------------------------------------------------
Years Ended July 31,
- -----------------------
1996 1995 1994 1995 to 1996 1994 to 1995 1993 to 1994
- ----------------------- ------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
100.0% 100.0% 100.0% Sales & other (8.00)% 2.2% 37.5%
- ------ ------- ------ income ------ ------ ----
67.20* 92.20* 98.40* Cost of products (32.90) (4.20) 203.6
sold
49.20 44.20 41.70 Selling, general 2.40 8.40 6.0
& administrative
6.80 12.10 17.70 Interest (48.00) (30.0) 7.8
- ------ ------- ------ ------ ------ ----
123.20 (148.50) 157.80 Total costs & (23.60) ( 3.80) 78.8
- ------ ------- ------ expenses ------ ------ ----
(23.20) (48.50) (57.80) Income (loss) (56.00) (14.30) (269.8)
before taxes
-- (23.50) -- Income taxes (100.00) (96.4)
- ------ ------- ------ (credits) ------ ------ ----
(23.20)% (25.0)% (57.8)% Income (loss) (14.40)% (14.3)% (267.4)%
before
extraordinary
item
</TABLE>
- ----------
* Includes write-offs for obsolete or excess inventories which were $50,281,
$656,248, and $944,970 for 1996, 1995 and 1994, respectively.
27
<PAGE>
QUARTER AND NINE MONTHS ENDED APRIL 30, 1997 COMPARED TO 1996
A summary of income, costs and expenses for the quarter and nine months ended
April 30, 1997 and corresponding period of the previous year follows:
For the Quarter For the Nine Months
Ended April 30, Ended April 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Revenues $ 111,393 $ 529,802 $ 978,979 $ 1,519,975
Costs and Expenses 219,583 432,555 1,126,525 1,729,477
----------- ----------- ----------- -----------
Net Income/(loss)
after Taxes, before
extraordinary item $ (108,190) $ 97,247 $ (147,546) $ (209,502)
=========== =========== =========== ===========
Revenues for the quarter ended April 30, 1997 totaled $111,393, representing a
decrease of 79% or $418,409 from the $529,802 reported for the same quarter a
year ago. Revenues decreased largely as a result of non-release of several
orders from the various major power companies as well as the absence of new
commercial orders and releases against existing military contracts by the US
government.
Gross margin for the quarter totaled $59,240 representing 53% of revenues as
compared to $346,266 or 65% of revenues for the quarter ended April 30, 1996.
The decrease in gross margin is primarily attributed to the labor inefficiencies
resulting from reduced levels of factory utilization. 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.
Selling, general and administrative expenses decreased from $214,019 to $140,466
for the quarter, representing a decrease of $73,553 as compared to 1996. These
savings are the direct result of downsizing initiatives to offset the decreased
production levels experienced during the quarter.
Interest expense decreased from $35,000 to $17,080 or $17,920 for the quarter
ended April 30, 1997 over the same period of 1996.
28
<PAGE>
As a result of the foregoing, the Company reported a net loss of $108,190, or
$0.04 per share for the quarter compared to net income of $97,247 or $0.10 per
share.
Revenues for the nine months ended April 30, 1997 totaled $978,979 versus
$1,519,975 for the same period last year. The lower revenues were attributable
to continued delays in the release of certain commercial orders, including The
Bonneville Power Administration and the absence of new orders and releases from
the US Government. The order backlog for Bonneville was $1.3 million at April
30, 1997. The Company believes that the delay in release of certain PTR-1000
series orders were due to the forthcoming release of a new PTR-1500 Series Tone
Protection product being developed for the General Electric Company to private
label and market worldwide. The new product was originally scheduled to be
released during the summer of 1997. As a result of limited financial resources,
this program was delayed by approximately six months; the expected release date
for the PTR-1500 is early 1998.
Gross margin for the period totaled $450,481 as compared to $562,540 for the
period ended April 30, 1996, representing 46% and 37% of revenues, respectively.
Gross margins improved as a result of generally higher pricing for special items
requiring limited quantities and fast turnaround.
Selling, general and administrative expenses totaled $518,944 as compared to
$653,571. This decline of $134,627 results from cost cutting initiatives to
reduce administrative and general expenses, especially with respect to personnel
reductions and downsizing.
As a result of the foregoing, operating loss totaled $68,463 as compared to
$91,031.
Interest expense for the nine months totaled $69,199 as compared to $118,371 for
the prior nine month period.
As a result of the foregoing, the Company realized a net loss of $147,546 or
$.06 per share as compared to net income of $530,874 or $.51 per share. The net
income for the nine months ended April 30, 1996 included $740,376, net of tax
benefit of $492,392, in extraordinary items, representing $.72 per share.
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
29
<PAGE>
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.
On August 16, 1995, accrued salaries through April 28, 1995 of $309,109
owed by the Company to Mr. Benou were converted into 61,822 shares of Common
Stock (represents a $5.00 per share assigned value of Common Stock).
On August 16, 1995, in connection with the August 1995 Offering, the Bank
exchanged their existing loan agreement for the following:
(a) $250,000 cash
(b) $1,025,000 five-year term loan
(c) 375,000 common shares of the Company
The debt forgiveness of $1,232,728 on restructuring of the obligation less
the tax benefit thereon is accounted for as an extraordinary gain to the
Company.
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.
30
<PAGE>
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.
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
31
<PAGE>
charges of $945,000 in the twelve month period ended April 30, 1994. This
analysis consisted of a study of the forecasted requisitions of upcoming orders
of the DESC, Conolog's principle defense customer. On examination of prospective
sales, it was determined that the government has no requirements for Conolog's
military products for at least the next twelve to eighteen months.
As a result of the foregoing, gross profit margins totaled $163,914 or 7.8%
of sales for the fiscal year ended July 31, 1995 as compared to $32,330 or 1.6%
of sales for the same twelve month period in 1994. Exclusive of inventory
adjustments, gross profit margins would have been 39% for the year ended July
31, 1995 and 48% for the year ended July 31, 1994.
Selling, General and Administrative Expense totaled $925,000 or 44.2% of
revenues, as compared to $853,000 or 41.7% of revenues for the comparable period
last year.
As a result of the foregoing, an operating loss of $761,000 was realized
for the year ended July 31, 1995 as compared to an operating loss of $821,000
for the same period last year.
Interest expense for the twelve months totaled $254,000 compared to
$362,000 for the fiscal year ended July 31, 1994. The bank had agreed to fix the
total interest owed as of January 31, 1995 and to keep the amount unchanged
through August 16, 1995. Accordingly, no interest expense was accrued from
February 1, 1995 through July 31, 1995.
As a result of the foregoing, the Company incurred a net loss of $522,000
for the twelve months ended July 31, 1995, compared to a net loss of $1,183,000
for the same period last year. The loss in 1995 was reduced by the income tax
benefit derived from previously incurred operating losses not deducted. The
losses, as a result of the Registration, will be deductible against forgiveness
of indebtedness income.
As of July 31, 1995 the Company's backlog totaled $1.3 million, consisting
of a mix of military and commercial telecommunication products, compared to $1.5
million at July 31, 1994. The Company anticipates its commercial shipments to
continue to grow as a percentage of total sales in the foreseeable future.
1994 Compared to 1993
Sales and other income increased $558,500, or 37.5% from 1993. The increase
was due to the concentration of marketing to non-government customers, which
began several years ago but is now beginning to materialize. Government sales in
fiscal 1994, as well as in fiscal 1993 were approximately $700,000 per year. In
fiscal 1992 and earlier, government sales exceeded $2,000,000 per year.
During the quarters ended October 31, 1993, January 31, 1994 and April 30,
1994 not all government requisitions for procurements had been posted at the
government's Defense Electronics
32
<PAGE>
Supply Center ("DESC") facility in Dayton, Ohio. Until all requisitions for
future procurements are listed, the Company could not determine which items
would be phased out or not procured at all.
Based upon the open requisitions by DESC, during the last quarter of the
fiscal year, it was demonstrated that a much reduced future for potential
business existed. Based on the reduced potential quantities, the Company wrote
off a commensurate percentage of its related military inventory, which amounted
to $944,970. In addition, the Company wrote off any parts that had not been
required for products for 4 years and for which no orders had been received in
the past 2 years and no orders anticipated in the coming year. On this basis,
the Company determined that the utility of these parts was zero.
It has been the experience of the Company that when no orders are received
for a product for a period of 2 years, none will be received in the third or
subsequent years. The same is true for any parts that had not been called for
production for 4 years. General parts are interchangeable and unless they are
earmarked for a specific job, a 4 year life is considered normal.
Costs of products sold is a distorted figure, 98.4%, since approximately
$945,000 of old inventory was written off. Had this write-off not occurred, the
cost of sales would have been 52.2%. Although this percentage is greater than
normal, the lack of available cash has hampered management's ability to buy
product at more favorable prices. Inventory was written off in the last quarter
of the fiscal year after an analysis was made of parts in the stockroom that
were at least four years old and for which no orders had been received in the
past two years.
Selling, general and administrative costs increased $48,000 from 1993, or
6%, due primarily to increased salaries.
Interest and expense increased by $26,000, or 7.6%, due to an increase in
rates. Approximately $483,000 of interest to the Bank has been accrued but
unpaid. Under the new restructured loan agreement, that interest will begin to
be paid off beginning July 1995. See "Business - Credit Facility."
Financial Condition, Liquidity and Capital Resources
Financial Condition, Liquidity and Capital Resources at April 30, 1997
Inventories increased $294,800 from July 31, 1996, including approximately
$258,734 for the PTR-1500 Series product.
Accounts receivable decreased $137,193 to $166,827 reflecting lower sales during
the current quarter.
Working Capital at April 30, 1997 was $2,928,784 compared to $1,914,981 at July
31, 1996.
33
<PAGE>
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 toThe 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 quarter ended April 30, 1997 the Company received $74,735 in loans
from CNL Holdings, Inc.
The Company presently meets its cash requirements through existing cash
balances, cash generated from operations, and loans secured in private
transactions.
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
34
<PAGE>
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 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.
1994 Compared to 1993
The Company was not able to meet its commitment made under the restructured
loan agreement dated November 1993. However, the Bank agreed to further
restructure the Credit Facility and extend the payments of principal and
interest. Interest on the loans accrued but were not to be payable until July
31, 1995. Beginning on that date, interest payments were to be made in arrears
on the last day of each month, with all unpaid interest previously accrued
becoming due and
35
<PAGE>
payable on November 30, 1995. All principal on the loans became due and payable
on November 30, 1995. The additional extension was granted after the Company
prepared projections for the forthcoming year. These projections indicated a
certain amount of profitability but not enough cash flow to begin payment of
principal within the fiscal year 1995.
Working capital at July 31, 1994 was $2,086,000 compared to $3,275,000 in
1993. The drop in working capital was primarily due to a write-off of inventory
for military sales, which management feels will not materialize. The working
capital ratio at 1994 was 2.75% compared to 4.9% at 1993.
Management was encouraged by the increase in sales to its non-military
customers. Had projections been realized, the Company should have begun to turn
around and produce a profit in the coming year. Cash flow should have been
sufficient to meet the Company's current obligations.
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.
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.
36
<PAGE>
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 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
37
<PAGE>
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."
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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
bid and asked quotations of the Common Stock, based upon information supplied by
the National Quotation Bureau for the year 1994, and the first two quarters of
1995. Such quotations represent inter-dealer prices, without retail markups,
markdowns or commissions and may not necessarily represent actual transactions.
The Company effected a 1-for-100 reverse stock split on August 16, 1995. As of
_________, 1997, the Company's Common Stock was held by approximately ___
shareholders of record.
Bid Asked
------------------ -----------------
High Low High Low
------------------ -----------------
1994
- ----
First Quarter .05 .04 .15 .14
Second Quarter .05 .03 .15 .125
Third Quarter .05 .001 .15 .06
Fourth Quarter .015 .001 .10 .05
1995
- ----
First Quarter .02 .01 .10 .05
Second Quarter .04 .01 .15 .05
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<PAGE>
The following table sets forth, for the periods indicated, the high and low
prices of the Company's Units (which no longer trade), Common Stock and Class A
Warrants traded on the Nasdaq SmallCap Market for the third and fourth quarters
of 1995, all of 1996 and first two quarters of 1997.
<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
</TABLE>
40
<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 77% of sales
in 1996 ($1,480,000). The decision to embark on this program entailed a major
design effort, including the
41
<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.
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% decrease from fiscal 1995. Sales for the first nine months
ended April 30, 1997, totaled $978,979, a 35% decrease from $1,519,975 for the
same period in 1996. Revenues from the Company's military product sales
represented approximately 60%, 30%, 23% and 18% of sales of the Company in
fiscal 1994, 1995, 1996, and in the first nine months ended April 30, 1997,
respectively, reflecting the Company's emphasis on commercial sales and markets.
42
<PAGE>
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
- Foreign governments
(B) Commercial Sales (Under the tradename " INIVEN" (a Division of
Conolog))
- Direct sales to end users
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<PAGE>
- 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
(4) Communication Link Multihead Fiber Optic Couplers and
Industrial Grade 1200 Baud Modems.
44
<PAGE>
(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.
o Existing installations not properly protected, improving efficiency and
down time.
45
<PAGE>
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
enchancements. 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. See "Risk Factors - Competition; Rapid Technological
Change."
Marketing and Sales
In general, the Company's products are marketed by means of telemarketing
and customer contacts by the Company's direct sales force and through
independent manufacturing sales representatives and distributors.
Military - The Company markets its military sales directly and through
independent manufacturers sales representatives.
Commercial - The Company markets the PTR-1000 by means of Company sales
personnel, through independent manufacturers representatives, and through
distributors, focusing mainly on the largest utilities and co-generators.
In the United States alone there are over 500 large entities generating
electricity which are identified as investor-owned, municipal systems,
cooperative systems and federal, state and district systems. The Company
intends to utilize a
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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 the nine month period
ended April 30, 1997 (General Electric and Bonneville Power Authority) totaled
$203,602 and $200,000, respectively (21% and 20%, 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). None of
such customers has or had any material relationship other than business with the
Company. See "Business-Large Customers".
Raw Materials; Inventory
The Company believes that it has adequate sources of raw materials
available for use in its business. The Company's products are assembled from a
variety of standard electronic components, such as integrated circuits,
transformers, transistors, passive components (ie., resistors, capacitors and
inductors), diodes and assorted hardware such as printed circuit boards,
connectors and faceplates. The Company is not dependent upon any single
supplier. The Company also purchases a number of other electronic components and
sub-assemblies from various suppliers. There has been no material increase in
the cost of most raw materials and the Company has no reason to anticipate any
significant shortage of raw materials in the future. The Company generally is
required to maintain adequate amounts of raw material and parts inventories to
meet delivery requirements of customers and to assure itself of a continuous
availability of these items. See "Risk Factors-Reliance on Component
Manufacturers."
In the past the Company manufactured and held in its inventory finished
products pursuant to the military's specifications and based upon the military's
forecast for future quantities and delivery schedules. When those military
procurements were discontinued as a result of the end of the cold war and the
downsizing of the military establishment, the Company wrote off large portions
of its military inventory. The Company no longer manufactures inventory to meet
forecasts but only to fill specific orders. Therefore, the Company does not
anticipate any future large inventory build-ups or write-downs from military
products.
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<PAGE>
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.
Backlog
As of July 31, 1996 and 1995, the Company had a backlog of approximately
$3,400,000 and $1,300,000. As April 30, 1997, the Company had a backlog of
$2,600,000. It is anticipated that this backlog will be filled during the
balance of the 1998 fiscal year ending July 31, 1998. Approximately 75% of the
Company's backlog relates to government contracts and may be subject to
cancellation under the terms of such contacts.
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<PAGE>
Foreign Operations
During fiscal 1994 the Company had no foreign sales. 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 nine months ended
April 30, 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 April 30, 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.
52
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the officers
and directors of the Company as of the Effective Date.
NAME AGE POSITION
Robert S. Benou 62 President and Director
Arpad J. Havasy 60 Executive Vice President, Secretary, Treasurer and
Director
Louis S. Massad 59 Director
Marc R. Benou 29 Vice President, Assistant Secretary and
Director
Thomas Fogg 61 Vice President-Engineering
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.
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.
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<PAGE>
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.
54
<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, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Summary Compensation Table
- -------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- -------------------------------------------------------------------------------------------------------------------------
Other
Name and Fiscal Year- Annual
Principal End Comp-
Position Salary Bonus ensation Awards Payouts
- -------------------------------------------------------------------------------------------------------------------------
Restricted
Stock Options/ SALTIP All Other
Awards SARS Payouts Compensation
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Benou, 1996 $150,000
President (1)
- -------------------------------------------------------------------------------------------------------------------------
1995 $150,000
- -------------------------------------------------------------------------------------------------------------------------
1994 $170,000
- -------------------------------------------------------------------------------------------------------------------------
</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
55
<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 per annum each year thereafter. In
addition, Mr. Benou is entitled to an annual bonus equal to 6% of the Company's
annual "income before income tax provision" as stated in its annual Form 10-K.
The employment agreement also entitles 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.
56
<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.
57
<PAGE>
On August 16, 1995, accrued salaries of $309,109 owed by the Company to Mr.
Benou were converted into 61,822 shares of Common Stock.
Payment of the Company's liabilities to the Bank under the Credit Facility
were guaranteed by Mr. Benou to the extent of $965,000 and Mr. Havasy to the
extent of $492,000. Their respective guarantees were secured by a pledge to the
Bank of all Common Stock and Series B Preferred Stock owned by each of them. As
a result of the August 1995 Offering, the Bank released the guarantees.
Article Eighth of the Company's Certificate of Incorporation provides that
the Company shall, to the full extent permitted by Section 145 of the Delaware
General Corporation Law, as amended from time to time, indemnify all persons
whom it may indemnify pursuant thereto.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation to provide indemnification to a director, officer,
employee or agent of the corporation, including attorneys' fees, judgments,
fines and amounts paid in settlement, actually and reasonably incurred by him in
connection with such action, suit or proceeding, if such party acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful as
determined in accordance with the statute, and except that with respect to any
action which results in a judgment against the person and in favor of the
corporation the corporation may not indemnify unless a court determines that the
person is fairly and reasonably entitled to the indemnification.
Section 145 further provides that indemnification shall be provided if the
party in question is successful on the merits.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person in connection with the securities
being registered) the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Company has adopted a policy that transactions with affiliated entities
or persons will be on terms no less favorable than could be obtained from
unrelated parties and that all transactions between the Company and its
officers, directors, principal shareholders and affiliates will be approved by a
majority of the Company's Board of Directors.
58
<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 Ownerhip Before Offering Offering
---------------- ------------------- -------------------------------- --------
<S> <C> <C> <C>
Robert S. Benou (2) 200,039 7.15% 5.72%
Arpad J. Havasy (2) 50,117 1.79% 1.43%
Marc R. Benou (2) 45,000 1.61% 1.29%
Louis S. Massad (2) 10,000 .36% .26%
Thomas Fogg (2) 25,200 .90% .72%
All Directors and Officers as A Group (5 persons) 330,356 11.81% 9.42%
</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.
59
<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 2,799,736 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 2,799,736 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 April 30, 1997, there was
$87,600 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 April 30, 1997, there was $25,743 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 2,799,736 shares of its Common Stock issued and outstanding,
350,356 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.
63
<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.
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<PAGE>
The Company and its officers, directors and principal stockholders 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 twelve (12) months from the date of this Prospectus
without the prior written consent of the Representative.
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 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
65
<PAGE>
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.
66
<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.
Class A Percent of Class A
Warrants Owned Warrants Owned
Prior to After Prior to After
Name of Beneficial Owner Offering Offering Offering Offering
- ------------------------ -------- -------- -------- --------
Ekistics, Inc. .................... 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%
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.
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
67
<PAGE>
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 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.
68
<PAGE>
Index to the Financial Statements
Independent Auditors' Report ..................................... F-2
Balance Sheets - April 30, 1997 (Unaudited) and
July 31, 1996 and 1995 ........................................ F-3a, F-3b
Statements of Income - Nine Months Ended April 30,
1997 and 1996 (Unaudited) and Years Ended July 31, 1996,
1995 and 1994 ................................................. F-4
Statements of Stockholders' Equity (Deficiency) - Nine Months
Ended April 30, 1997 (Unaudited) and Years Ended July 31,
1996, 1995 and 1994 ........................................... F-5
Statements of Cash Flows - Nine Months Ended April 30, 1997
and 1996 (Unaudited) and Years Ended July 31, 1996, 1995
and 1994 ...................................................... F-6
Notes to Financial Statements - April 30, 1997 (Unaudited) and
July 31, 1996, 1995 and 1994 .................................. F-7-14
F-1
<PAGE>
Rosenberg Rich Baker Berman & Company
[LETTERHEAD]
Independent Auditors' Report
Board of Directors
Conolog Corporation
We have audited the accompanying balance sheets of Conolog Corporation at July
31, 1996 and 1995, and the related statements of income, stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended July
31, 1996. 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,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended July 31, 1996 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.
/s/ Rosenberg Rich Baker Berman & Company
--------------------------------------------
Maplewood, New Jersey
October 8, 1996, except as to Note 5, which date is September 5, 1997
F-2
<PAGE>
Conolog Corporation
Balance Sheets
<TABLE>
<CAPTION>
April 30, July 31,
-------------- ------------------------
1997 1996 1995
-------------- --------- ----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current Assets
Cash $ 93,660 $ 178,213 $ 27,577
Accounts receivable - less allowances of $14,000
in 1997 and 1996 and $10,000 in 1995 166,827 304,020 171,541
Inventories 3,232,580 2,937,780 2,598,127
Other current assets 56,923 43,517 25,683
Deferred tax asset -- -- 492,352
Deferred offering costs -- -- 86,154
---------- ---------- ----------
3,549,990 3,463,530 3,401,434
---------- ---------- ----------
Property, Plant and Equipment
Land and improvements 34,524 34,524 34,524
Building and improvements 665,327 659,477 651,977
Machinery and equipment 1,289,578 1,289,578 1,298,844
Furniture and fixtures 336,266 330,735 304,472
Auto 3,340 -- --
---------- ---------- ----------
2,329,035 2,314,314 2,289,817
Less allowance for depreciation and amortization 1,923,272 1,880,408 1,820,922
---------- ---------- ----------
405,763 433,906 468,895
---------- ---------- ----------
Other assets 23,383 30,398 11,906
---------- ---------- ----------
Total Assets $3,979,136 $3,927,834 $3,882,235
========== ========== ==========
</TABLE>
F-3a
See notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
April 30, July 31,
-------------- ------------------------
1997 1996 1995
-------------- --------- ----------
(Unaudited)
<S> <C> <C> <C>
Liabilities
Current Liabilities
Notes payable $ 74,735 $ 1,012,500 $ 3,798,000
Accounts payable 95,400 280,629 287,630
Accrued payroll 115,778 41,716 499,761
Accrued interest 6,133 64,699 654,618
Bridge loans 200,000 -- 200,000
Other accrued expenses 120,977 115,723 135,936
Current maturities of capitalized lease obligations 8,184 33,282 54,660
----------- ----------- -----------
Total Current Liabilities 621,207 1,548,549 5,630,605
----------- ----------- -----------
Other Liabilities
Capitalized lease obligations, less current maturities -- 4,973 34,103
Due to officers -- -- 161,705
----------- ----------- -----------
-- 4,973 195,808
----------- ----------- -----------
Stockholders' Equity (Deficiency)
Preferred Stock, par value $.50; Series A; 4% cumulative;
162,000 shares authorized; 155,000 shares issued and
outstanding 77,500 77,500 77,500
Preferred Stock, par value $.50; Series B; $.90 cumulative;
50,000 shares authorized; issued and outstanding 1,197
shares at April 30, 1997, 1,197 shares in 1996 and 21,321 in
1995 597 597 10,661
Preferred stock par value $5.00, 2,000,000 shares authorized,
0 shares outstanding -- -- --
Common Stock, par value $1.00; 20,000,000 shares
authorized; issued 2,443,973 at April 30, 1997, issued
1,035,186 shares in 1996 and 52,239 in 1995, including
8,776 shares held in Treasury 2,443,973 1,035,186 52,239
Additional Paid-In Capital 4,124,013 4,401,636 952,994
Retained Earnings (Deficit) (3,156,420) (3,008,873) (2,905,838)
Treasury Shares at Cost (131,734) (131,734) (131,734)
----------- ----------- -----------
Total Stockholders' Equity (Deficiency) 3,357,929 2,374,312 (1,944,178)
----------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 3,979,136 $ 3,927,834 $ 3,882,235
=========== =========== ===========
</TABLE>
F-3b
See notes to the financial statements.
<PAGE>
Conolog Corporation
Statements of Income
<TABLE>
<CAPTION>
Nine Months Ended April 30, Year Ended July 31,
--------------------------- -------------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Sales and other income $ 978,979 $ 1,519,975 $ 1,924,466 $ 2,090,933 $ 2,044,860
----------- ----------- ----------- ----------- -----------
Costs and Expenses:
Cost of products sold 528,498 957,435 1,242,001 1,270,771 1,067,560
Selling, general and administrative 518,944 653,571 946,954 924,524 852,951
Interest 69,199 118,371 131,854 253,686 362,317
Write-off of obsolete or excess
inventories -- -- 50,281 656,248 944,970
----------- ----------- ----------- ----------- -----------
1,116,641 1,729,377 2,371,090 3,105,229 3,227,798
----------- ----------- ----------- ----------- -----------
Loss Before Income Taxes and
Extraordinary Items (137,662) (209,402) (446,624) (1,014,296) (1,182,938)
Income taxes (benefit) 9,884 100 200 (492,252) 50
----------- ----------- ----------- ----------- -----------
Net Loss Before Extraordinary Items (147,546) (209,502) (446,824) (522,044) (1,182,988)
Extraordinary Item (Net of Tax Benefit of $492,392) -- 740,376 740,376 -- --
----------- ----------- ----------- ----------- -----------
Net Income (Loss) $ (147,546) $ 530,874 $ 293,552 $ (522,044) $(1,182,988)
=========== =========== =========== =========== ===========
Earnings (Loss) Per Share Before Extra-
ordinary Item (.12) (.20) (.43) (.12) (.27)
Extraordinary Item -- .71 .71 -- --
Earnings (Loss) Per Share (.12) .51 .28 (.12) (.27)
</TABLE>
See notes to the financial statements.
F-4
<PAGE>
Conolog Corporation
Statement of Stockholders' Equity (Deficiency)
Nine Months Ended April 30, 1997 (Unaudited) and
Years Ended July 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Total
Series A Series B Additional Retained Stockholders'
Preferred Preferred Common Paid-in Earnings Treasury Equity
Stock Stock Stock Capital (Deficit) Stock (Deficiency)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1993 $ 77,500 $ 10,661 $ 52,239 $ 952,994 $(1,200,806) $ (131,734) $ (239,146)
Net loss for the year -- -- -- -- (1,182,988) -- (1,182,988)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at July 31, 1994 77,500 10,661 52,239 952,994 (2,383,794) (131,734) (1,422,134)
Net loss for the year -- -- -- -- (522,044) -- (522,044)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at July 31, 1995 77,500 10,661 52,239 952,994 (2,905,838) (131,734) (1,944,178)
Public stock offering -- (10,064) 982,947 3,448,642 (396,587) -- 4,024,938
Net income for the year -- -- -- -- 293,552 -- 293,552
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at July 31, 1996 77,500 597 1,035,186 4,401,636 (3,008,873) (131,734) 2,374,312
Additional stock issued -- -- 1,408,787 (277,623) -- -- 1,131,164
Net loss for the period -- -- -- -- (147,546) -- (147,546)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 1997 $ 77,500 $ 597 $ 2,443,973 $ 4,124,013 $(3,156,419) $ (131,734) $ 3,357,930
(Unaudited) =========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to the financial statements.
F-5
<PAGE>
Conolog Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended April 30, Year Ended July 31,
-------------------------- -----------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net Income (Loss) $ (147,546) $ 530,874 $ 293,552 $ (522,044) $(1,182,988)
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating
Activities
Deferred income taxes -- -- 492,352 (492,352) --
Depreciation and amortization 42,864 46,347 64,994 60,396 57,529
Gain on disposition of equipment -- -- (3,420) -- --
Provision for losses on accounts
receivables -- -- 9,000 -- (28,561)
(Increase) Decrease in Operating Assets
Accounts receivable 137,193 (208,304) (141,479) 74,529 (58,051)
Inventories (294,800) (257,374) (339,653) 392,058 874,989
Other current assets (6,387) (5,941) (17,834) (3,394) 22,555
Increase (Decrease) in Operating Liabilities
Accounts payable (185,229) (81,359) (7,001) 12,330 38,459
Accrued expenses and other liabilities 20,744 (618,819) (1,068,177) 417,484 398,239
----------- ----------- ----------- ----------- -----------
Net Cash Provided (Used) by
Operating Activities (433,161) (594,576) (717,666) (60,993) 122,171
----------- ----------- ----------- ----------- -----------
Cash Flows From Investing Activities
Purchase of property, plant and equipment (14,721) (23,284) (43,163) (19,625) (44,675)
Proceeds from sale of equipment -- -- 18,666 -- --
----------- ----------- ----------- ----------- -----------
Net Cash Used in Investing Activities (14,721) (23,284) (24,497) (19,625) (44,675)
----------- ----------- ----------- ----------- -----------
Cash Flows From Financing Activities
Deferred offering costs -- -- 86,154 (86,154) --
Increase from public stock offering -- 4,409,839 4,421,525 -- --
Proceeds from long-term borrowings -- -- -- -- 75,000
Increase (Decrease) in bridge loan 200,000 (200,000) (200,000) 200,000 --
Repayments of long-term borrowings (1,042,571) (2,773,147) (2,836,008) (38,681) (53,098)
(Increase) reductions in other assets -- -- (20,580) 325 20,672
Dividends paid -- (384,903) (396,587) -- --
Increase (decrease) in due to officers -- (161,705) (161,705) 17,302 (137,333)
Issuance of common stock 1,408,787 --
Additional paid-in capital (277,622) --
From investors 74,735 --
----------- ----------- ----------- ----------- -----------
Net Cash Provided (Used) by
Financing Activities 363,329 890,084 892,799 92,792 (94,759)
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash (84,553) 272,224 150,636 12,174 (17,263)
Cash at Beginning of Period 178,213 27,577 27,577 15,403 32,666
----------- ----------- ----------- ----------- -----------
Cash at End of Period $ 93,660 $ 299,801 $ 178,213 $ 27,577 $ 15,403
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest paid $ 12,365 $ 9,564 $ 772,773 $ 102,816 $ 90,917
Taxes paid $ 17,324 $ -- $ 125 $ 50 $ 50
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Capitalized lease obligations incurred for $ -- $ -- $ -- $ 56,550 $ --
use of equipment
</TABLE>
See notes to the financial statements.
F-6
<PAGE>
Conolog Corporation
Notes to the Financial Statements
April 30, 1997 (Unaudited) and July 31, 1996, 1995 and 1994
(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.
Basis of Presentation
In the opinion of management, the preceding unaudited financial
statements contain all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the financial condition
of the Company as of April 30, 1997 and the results of its operations
for the nine months ended April 30, 1997 and 1996.
Revenue Recognition
Sales are generally recognized when the products are shipped. Sales
under certain fixed-price-type contracts, where progress payments are
received, are recognized when work is performed.
Inventories
Inventories are stated principally at average cost which is not in
excess of market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less allowances for
depreciation and amortization. Depreciation and amortization are
computed by the straight-line method over the estimated useful lives of
the assets.
Income (Loss) Per Share of Common Stock
Income (loss) per share of common stock is computed by dividing net
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 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 relate. 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.
F-7
<PAGE>
Conolog Corporation
Notes to the Financial Statements
April 30, 1997 (Unaudited) and July 31, 1996, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(2) INVENTORIES AT APRIL 30, 1997 (UNAUDITED), JULY 31, 1996 AND JULY 31, 1995
CONSIST OF THE FOLLOWING:
April 30, July 31,
---------- ---------------------------
1997 1996 1995
---------- ---------- ----------
(Unaudited)
Materials and supplies $ $1,313,816 $1,236,905
Work in process 129,675 831,410
Finished goods 1,494,289 529,812
---------- ---------- ----------
$3,232,580 $2,937,780 $2,598,127
========== ========== ==========
(3) NOTES PAYABLE (UNAUDITED)
Bank
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.
F-8
<PAGE>
Conolog Corporation
Notes to the Financial Statements
April 30, 1997 (Unaudited) and July 31, 1996, 1995 and 1994
(3) NOTES PAYABLE (Continued)
Bank
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.
F-9
<PAGE>
Conolog Corporation
Notes to the Financial Statements
April 30, 1997 (Unaudited) and July 31, 1996, 1995 and 1994
(3) NOTES PAYABLE
Bank
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 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 Mach 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.
As of April 30, 1997, $74,735 had been loaned to the Company by CNL.
Subsequent to April 30, 1997 an additional $841,500 had been loaned to
the Company by CNL.
Bridge Loans
In December 1996 and January 1997, the Company obtained bridge
financing from seven (7) lenders in the amount of $200,000. In exchange
for making the loans to the Company, each lender received two (2)
promissory notes. Certain Notes are in the aggregate principal amount
of $150,000 and the other Notes are in the aggregate principal amount
of $50,000. Each of the Notes bears interest at the rate of eight
percent (8%) per annum. The Notes are due and payable upon the earlier
of (i) December 31, 1997 or (ii) the date on which the proposed stock
offering closes. The Company intends to use a portion of the net
proceeds of the proposed offering to repay the Notes.
(4) DUE TO OFFICERS
Effective July 31, 1995 interest has been accrued from inception on these
advances at the cumulative rate of 12% of the outstanding balances. Total
accrued interest on these advances, included in accrued interest in the
accompanying financial statements, is $7,563 and $65,889 for the years
ended at July 31, 1996 and 1995.
(5) CAPITAL STOCK
The Series A Preferred Stock provides 4% ($.02 per share) cumulative
dividends, which were $87,600 in arrears at April 30, 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.
F-10
<PAGE>
Conolog Corporation
Notes to the Financial Statements
April 30, 1997 (Unaudited) and July 31, 1996, 1995 and 1994
(5) CAPITAL STOCK (Continued)
The Series B Preferred Stock provides cumulative dividends of $.90 per
share which were $25,743 in arrears at April 30, 1997. In addition, each
five shares of Series B Preferred Stock is convertible into .20 shares of
Common Stock. The Company may redeem the Series B Preferred Stock at $15
per share plus accrued and unpaid dividends.
(6) WRITE-OFF OF OBSOLETE OR EXCESS INVENTORIES
During 1996, the Company recorded a write-off of obsolete or excess
inventories of $50,281. During 1995 and 1994, the Company recorded a
write-off of obsolete or excess inventories of $656,248 and $944,970,
respectively.
The inventory written off was military related. In management's opinion
these items will not be reordered in the foreseeable future.
(7) INCOME TAXES
Income taxes are comprised of the following:
<TABLE>
<CAPTION>
April 30, July 31,
-------------- ---------------------------------------------------------
1997 1996 1995 1994
-------------- -------------- --------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Deferred Income Taxes (Benefit) $ - $ - $ (492,352) $ -
Current Income Taxes
Federal 9,684 - - -
State 200 200 100 50
-------------- -------------- --------------- --------------
$ 9,884 $ 200 $ (492,252) $ 50
============== ============== =============== ==============
</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, 1996 the Company has a net operating loss carryforward of
approximately $2,968,000 for financial reporting purposes and approximately
$3,025,000 for tax purposes which is available to offset future Federal
taxable income. For Federal purposes, $490,000 of the carryforward expires
in 2003, $346,000 expires in 2008, $1,232,000 expires in 2009 and $957,000
expires in 2010. For state purposes the carryforward is approximately
$2,187,000; $57,000 expires in 2000, $1,232,000 expires in 2001 and
$898,000 expires in 2002. Also, at July 31, 1995 the Company has unused tax
credits available of approximately $103,300 of which $12,100 expires in
2000, $26,300 in 2001 and $64,900 in 2002.
The above net operating loss created a deferred tax asset that has been
fully reserved. The amount is $1,185,209. The Federal income taxes accrued
at April 30, 1997 is the result of the corporation being subject to the
alternative minimum tax rules.
F-11
<PAGE>
Conolog Corporation
Notes to the Financial Statements
April 30, 1997 (Unaudited) and July 31, 1996, 1995 and 1994
(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.
(9) LEASES
The Company leases automobiles, machinery and equipment, and furniture and
fixtures under leases which expire over the next three years. The rental
payments are based on minimum rentals and charges for mileage in excess of
specified amounts for the automobiles. The leases for machinery and
equipment and furniture and fixtures contain a bargain purchase option
exercisable after the initial lease term.
Property, plant and equipment include the following amounts for leases that
have been capitalized:
July 31,
-----------------------------------
1996 1995
--------------- ---------------
Machinery and equipment $ 303,574 $ 322,239
Less allowance for amortization 263,832 248,013
--------------- ---------------
$ 39,742 $ 74,226
=============== ===============
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, 1996:
1997 $ 33,719
1998 5,050
--------------
Total minimum lease payments 38,769
Less amounts representing interest (514)
--------------
Present value of net minimum lease payments 38,255
Less, current maturities of capitalized lease obligations 33,282
--------------
Long-term capitalized lease obligations $ 4,973
==============
F-12
<PAGE>
Conolog Corporation
Notes to the Financial Statements
April 30, 1997 (Unaudited) and July 31, 1996, 1995 and 1994
(9) LEASES (Continued)
The Company leases various equipment under noncancellable operating leases
expiring through July 2000. Future minimum rental payments under the above
leases are follows:
Year Ended July 31,
-------------------
1997 $ 7,659
1998 4,808
1999 4,808
--------------
$ 17,275
==============
Total rental expense for all operating leases of the Company amounted to
approximately $10,353, $11,447 and $16,850 during the years ended July 31,
1996, 1995 and 1994, respectively.
(10) MAJOR CUSTOMERS AND EXPORT SALES
The following summarizes sales to major customers (each 10% or more of net
sales) by the Company:
Sales to
Major Number of Percentage
Year Ended Customers Customers of Total
- ---------- ------------- --------------- ---------------
1996 $ 401,840 1 21
1995 424,849 1 20
1994 597,000 1 29
During 1996 the Company had export sales of $401,840. In 1995 and 1994
the Company did not have any export sales.
(11) SUBSEQUENT EVENTS (UNAUDITED)
On or about September 11, 1997, the Company filed with the SEC a
Registration Statement to sell and issue 700,000 units consisting of one
share of Common Stock and four redeemable Class A Common Stock Purchase
Warrants.
All costs associated with this offering will be deferred and deducted from
the proceeds from the sale of stock. If the Company does not complete this
offering, such costs will be charged to expense.
The Registration Statement also covers the offering of 1,200,000 Class A
Warrants owned by certain selling security holders, the resale of the
Common Stock underlying the Class A Warrants and the exercise of the Class
A Warrants by the transferees of the selling security holders. The Company
will not receive any of the proceeds from the sale of the securities of the
selling security holders.
F-13
<PAGE>
Conolog Corporation
Notes to the Financial Statements
April 30, 1997 (Unaudited) and July 31, 1996, 1995 and 1994
(11) SUBSEQUENT EVENTS (UNAUDITED) (Continued)
The expenses of the offering are estimated to be $400,000, with the
proceeds of approximately $2,750,000 going to the Company.
During the quarter ended April 30, 1997, the Company obtained bridge
financing in the amount of $200,000. In exchange for making the loans to
the Company, the Company executed in favor of the lenders two promissory
notes. Certain bridge notes are in the aggregate principal amount of
$150,000, and the other bridge notes are in the aggregate principal amount
of $50,000. Each of the bridge notes bears interest at the rate of 8% per
annum. The bridge notes are due and payable upon the earlier of (i)
December 31, 1997 or (ii) the date of which the offering closes.
F-14
<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
Offering Offering Offering Offering
-------- -------- -------- --------
Name of Beneficial Owner
- ------------------------
<S> <C> <C> <C> <C>
Ekistics, Inc. ...................................... 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>
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.
A-3
<PAGE>
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 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.
A-4
<PAGE>
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:
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
- -----------
* 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, the Company effected a 1-for-100 reverse stock split of
its Common Stock on all shares of Common Stock outstanding as of such date.
On August 16, 1995, holders of 19,360 shares of the Company's Series B
Preferred Stock (Robert Benou and Arpad J. Havasy, officers and directors of the
Company) converted their shares of Series B Preferred Stock into 387,200 shares
of Common Stock (3,872 post-split shares).
On August 16, 1995, $381,533 of the $420,179 of accrued dividends on the
Series B Preferred Stock at December 31, 1994 were converted into 76,306 shares
of Common Stock and the remaining dividends due to such holders (Messrs. Benou
and Havasy) were waived.
On August 16, 1995, accrued salaries of $309,109 owed by the Company to Mr.
Benou were converted into 61,822 shares of Common Stock.
On August 16, 1995, Chase Manhattan Bank converted approximately $3,000,000
of debt into 375,000 shares of Common Stock.
Between February and March, 1997, all of the principal amount of The Chase
Manhattan Note was converted into 1,400,000 shares of Common Stock and issued to
CNL Holdings, Inc., the holder of the option to purchase such Note. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Credit Facility."
In June 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).
II-2
<PAGE>
Item 16. Exhibits.
Exhibit No. Description of Exhibit
- ----------- ----------------------
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) of DSI Systems, Inc. - incorporated by reference
to Exhibit 1 to the Registrant's Current Report on
Form 8-K for November 1972.
(g) Certificate of Ownership and Merger respecting merger
of Conolog Corporation into the Registrant and the
changing of the Registrant's name from "DSI Systems,
Inc." to "Conolog Corporation" - incorporated by
reference to Exhibit 3 to the Registrant's Current
Report on Form 8-K for June 1975.
(h) Amended By-Laws - incorporated by reference to Exhibit
3(h) to the Registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1981.
4(a)** Specimen Certificate for shares of Common Stock
(b)** Specimen Certificate for Class A Warrant
II-3
<PAGE>
(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.
23.1 **** Consent of Bernstein & Wasserman (included in Exhibit
No. 5)
23.2* Consent of Rosenberg Rich Baker Berman & Company,
Independent Certified Public Accountants.
- ----------------
* Filed herewith.
** Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (33-92424).
II-4
<PAGE>
*** 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.
II-5
<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) Filings Incorporating Subsequent Exchange Act Documents by Reference.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing with a employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
herein and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons of the Registrant
pursuant to the provisions referred to in Item 24 of this Registration Statement
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
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<PAGE>
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(e) Rule 430A
The undersigned Registrant hereby undertakes that:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of a
prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act as part of this Registration Statement as of the time the
Commission declared it effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement for the securities offered in the
Registration Statement, and that the offering of the securities at that time as
the initial bona fide offering of those securities.
(f) Request of Acceleration of Effective Date
The Registrant may elect to request acceleration of the Registration
Statement under Rule 461 of the 1933 Act.
II-7
<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 11th day of September, 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.
Signature Title Date
--------- ----- ----
/s/Robert S. Benou President, Director, Chief September 11, 1997
- --------------------- Executive Officer, Chief
Robert S. Benou Financial Officer and Comptroller
/s/Arpad J. Havasy Executive Vice President, September 11, 1997
- --------------------- Secretary, Treasurer and
Arpad J. Havasy Director
/s/ Marc R. Benou Vice President, September 11, 1997
- --------------------- Assistant Secretary and
Marc R. Benou Director
/s/ Louis S. Massad Director September 11, 1997
- ---------------------
Louis S. Massad
II-8
<PAGE>
Conolog Corporation
5 Columbia Road
Somerville, NJ 08876
UNDERWRITING AGREEMENT
IAR Securities Corp. __________, 1997
99 Wall Street
New York, NY 10005
Gentlemen:
Conolog Corporation, a Delaware corporation (the "Company"), proposes to
issue and sell to IAR Securities Corp. ("IAR" or the "Representative") and to
each of the other underwriters named in Schedule I hereto (the "Underwriters"),
for each of whom you are acting as Representative, an aggregate of 700,000 Units
(the "Units"), each Unit consisting of one share of Common Stock, par value
$1.00 ("Common Stock"), and four Redeemable Class A Common Stock Purchase
Warrants (the "Warrants") of the Company at a public offering price of $5.00 per
Unit. Each Warrant shall entitle the holder to purchase one share of Common
Stock at a price of $6.00 per share as disclosed in the Registration Statement.
The Warrants will be immediately detachable from the Common Stock on the
Effective Date. The Warrants may be called by the Company in accordance with the
terms of the Prospectus. The Units are hereinafter referred to as the "Firm
Units." Upon the request of the Representative, and as provided in Section 3
hereof, the Company will also issue and sell to the Underwriters up to a maximum
of an additional 105,000 Units for the purpose of covering over-allotments. Such
additional Units are hereinafter sometimes referred to as the "Optional Units."
Both the Firm Units and the Optional Units are sometimes collectively referred
to herein as the "Units." All of the securities which are the subject of this
Agreement are more fully described in the Prospectus of the Company described
below. In the event that the Representative does not form an underwriting group
but decides to act as the sole Underwriter, then all references to IAR herein as
Representative shall be deemed to be to it as such sole Underwriter and Section
14 hereof shall be deemed deleted in its entirety.
In an alternate Prospectus, the Registration Statement also covers certain
additional securities for sale by certain Class A Warrant holders hereinafter
referred to as the "Selling Security Holders". Such reoffering by Selling
Security Holders is not the subject of this Underwriting Agreement.
The Company understands that the Underwriters propose to make a public
offering of the Units as soon as the Representative deems advisable after the
Registration Statement hereinafter referred to becomes effective. The Company
hereby confirms its agreement with the Representative and the other Underwriters
as follows:
<PAGE>
SECTION 1. Description of Securities. The Company's authorized and
outstanding capitalization when the public offering of securities contemplated
hereby is permitted to commence, under the Securities Act of 1933, as amended
(the "Act"), and at the Closing Date (hereinafter defined) and the terms of the
Warrants and other securities will be as set forth in the Prospectus
(hereinafter defined).
SECTION 2. Representations and Warranties of the Company. The Company
hereby represents and warrants to, and agrees with, the Underwriters as follows:
(a) A Registration Statement on Form SB-2 and amendments thereto (No.
____-9761) with respect to the Units, including a form of Prospectus
relating thereto, copies of which have been previously delivered to you,
have been prepared by the Company in conformity with the requirements of
the Act, and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission under the Act. The Company, subject to the
provisions of Section 6(a) hereof, may file one or more amendments to such
Registration Statement and Prospectus. The Underwriters will receive copies
of each such amendment.
The date on which such Registration Statement is declared effective
under the Act and the public offering of the Units as contemplated by this
Agreement is therefore authorized to commence, is herein called the
"Effective Date." The Registration Statement and Prospectus, as finally
amended and revised immediately prior to the Effective Date, are herein
called respectively the "Registration Statement" and the "Prospectus." If,
however, a prospectus is filed by the Company pursuant to Rule 424(b) of
the Rules and Regulations which differs from the Prospectus, the term
"Prospectus" shall also include the prospectus filed pursuant to Rule
424(b).
(b) The Registration Statement (and Prospectus), at the time it
becomes effective under the Act, (as thereafter amended or as supplemented
if the Company shall have filed with the Commission an amendment or
supplement), and, with respect to all such documents, on the Closing Date
(hereinafter defined), will in all material respects comply with the
provisions of the Act and the Rules and Regulations, and will not contain
an untrue statement of a material fact and will not omit to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that none of the
representations and warranties contained in this subsection (b) shall
extend to the Underwriters in respect of any statements in or omissions
from the Registration Statement and/or the Prospectus, based upon
information furnished in writing to the Company by the Underwriters
specifically for use in connection with the preparation thereof.
(c) The Company has been duly incorporated and is now, and on the
Closing Date will be, validly existing as a corporation in good standing
under the laws of the State of Delaware, having all required corporate
power and authority to own its
2
<PAGE>
properties and conduct its business as described in the Prospectus. The
Company is now, and on the Closing Date will be, duly qualified to do
business as a foreign corporation in good standing in all of the
jurisdictions in which it conducts its business or the character or
location of its properties requires such qualifications except where the
failure to so qualify would not materially adversely affect the Company's
business, properties or financial condition. The Company has no
subsidiaries, except as are set forth in the Prospectus.
(d) The financial statements of the Company (audited and unaudited)
included in the Registration Statement and Prospectus present fairly the
financial position and results of operations and changes in financial
condition of the Company at the respective dates and for the respective
periods to which they apply; and such financial statements have been
prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved, and are in accordance
with the books and records of the Company.
(e) Rosenberg, Rich, Baker, Berman & Company, independent auditors,
who have given their report on certain financial statements which are
included as a part of the Registration Statement and the Prospectus are
independent public accountants as required under the Act and the Rules and
Regulations.
(f) Subsequent to the respective dates as of which information is
given in the Prospectus and prior to the Closing Date and, except as set
forth in or contemplated in the Prospectus, (I) the Company has not
incurred, nor will it incur, any material liabilities or obligations,
direct or contingent, nor has it, nor will it have entered into any
material transactions, in each case not in the ordinary course of business;
(ii) there has not been, and will not have been, any material change in the
Company's Certificate of Incorporation or in its capital stock or funded
debt; and (iii) there has not been, and will not have been, any material
adverse change in the business, net worth or properties or condition
(financial or otherwise) of the Company whether or not arising from
transactions in the ordinary course of business.
(g) Except as otherwise set forth in the Prospectus, the real and
personal properties of the Company as shown in the Prospectus and
Registration Statement to be owned by the Company are owned by the Company
by good and marketable title free and clear of all liens and encumbrances,
except those specifically referred to in the Prospectus, and except those
which do not materially adversely affect the use or value of such assets
and except the lien for current taxes not now due, or are held by the
Company by valid leases, none of which is in default. Except as disclosed
in the Prospectus and Registration Statement, the Company in all material
respects has full right and licenses, permits and governmental
authorizations required to maintain and operate its business and properties
as the same are now operated and, to its best knowledge, none of the
activities or business of the Company is in material violation of, or
causes the Company to violate any laws, ordinances and regulations
applicable thereto, the violation of which
3
<PAGE>
would have a material adverse impact on the condition (financial or
otherwise), business, properties or net worth of the Company.
(h) The Company has no material contingent obligations, nor are its
properties or business subject to any material risks, which may be
reasonably anticipated, which are not disclosed in the Prospectus.
(i) Except as disclosed in the Prospectus and Registration Statement,
there are no material actions, suits or proceedings at law or in equity of
a material nature pending, or to the Company's knowledge, threatened
against the Company which are not adequately covered by insurance, which
might result in a material adverse change in the condition (financial or
otherwise), properties or net worth of the Company, and there are no
proceedings pending or, to the knowledge of the Company, threatened against
the Company before or by any Federal or State Commission, regulatory body,
or administrative agency or other governmental body, wherein an unfavorable
ruling, decision or finding would materially adversely affect the business,
properties or net worth or financial condition or income of the Company,
which are not disclosed in the Prospectus.
(j) All of the outstanding shares of Common Stock and preferred stock
are duly authorized and validly issued and outstanding, fully paid,
non-assessable, and do not have any and were not issued in violation of any
preemptive rights. All of the Common Stock as described in the Prospectus
when paid for shall be duly authorized and validly issued and outstanding,
fully paid, non-assessable, and will not have any and will not be issued in
violation of any preemptive rights. The Common Stock issuable upon exercise
of the Warrants when issued and paid for in accordance with the Warrant
Agreement shall be duly authorized and validly issued and outstanding,
fully paid, non-assessable, and will not have any and will not be issued in
violation of any preemptive rights. The Common Stock and Warrants will be
delivered in accordance with this Agreement and the Warrant Agreement
between the Company and Continental Stock Transfer & Trust Company. The
Underwriters will receive good and marketable title to the Units purchased
by them from the Company, free and clear of all liens, encumbrances,
claims, security interests, restrictions, stockholders' agreements and
voting trusts whatsoever. Except as set forth in the Prospectus, there are
no outstanding options, warrants, or other rights, providing for the
issuance of, and no commitments, plans or arrangements to issue, any shares
of any class of capital stock of the Company, or any security convertible
into, or exchangeable for, any shares of any class of capital stock of the
Company. All of the Units of the Company to which this Agreement relates
conform to the statements relating to them that are contained in the
Registration Statement and Prospectus.
(k) The certificate or certificates required to be furnished to the
Underwriters pursuant to the provisions of Section 11 hereof will be true
and correct.
4
<PAGE>
(l) The execution and delivery by the Company of this Agreement has
been duly authorized by all necessary corporate action and it is a valid
and binding obligation of the Company, enforceable against it in accordance
with its terms except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws pertaining
to creditors' rights generally.
(m) Except as disclosed in the Prospectus, no default exists, and no
event has occurred which, with notice or lapse of time, or both, would
constitute a default in the due performance and observance of any material
term, covenant or condition by the Company or any other party, of any
material indenture, mortgage, deed of trust, note or any other material
agreement or instrument to which the Company is a party or by which it or
its business or its properties may be bound or affected, except (I) as
disclosed in the Prospectus, (ii) such defaults as have been waived by all
parties who would otherwise have a remedy or right with respect thereto or
(iii) such defaults which will not cause any material adverse change in the
business, net worth, properties or conditions (financial or otherwise), of
the Company. The Company has full power and lawful authority to authorize,
issue and sell the Units to be sold by it hereunder on the terms and
conditions set forth herein and in the Registration Statement and in the
Prospectus. No consent, approval, authorization or other order of any
regulatory authority is required for such authorization, issue or sale,
except as may be required under the Act or State securities laws. The
execution and delivery of this Agreement, the consummation of the
transactions herein contemplated, and compliance with the terms hereof will
not conflict with, or constitute a default under any indenture, mortgage,
deed of trust, note or any other agreement or instrument to which the
Company is now a party or by which it or its business or its properties may
be bound or affected; the Certificate of Incorporation and any amendments
thereto; the by-laws of the Company, as amended; or any law, order, rule or
regulation, writ, injunction or decree of any government, governmental
instrumentality, or court, domestic or foreign, having jurisdiction over
the Company or its business or properties.
(n) No officer or director of the Company has taken, and each officer
and director has agreed that he will not take, directly or indirectly, any
action designed to stabilize or manipulate the price of the Units, the
Common Stock or the Warrants in the open market following the Closing Date
or any other type of action designed to, or that may reasonably be expected
to cause or result in such stabilization or manipulation, or that may
reasonably be expected to facilitate the initial sale, or resale, of any of
the securities which are the subject of this Agreement.
(o) The Warrants to be issued to the Representative (the
"Underwriters' Unit Warrants") hereunder will be, when issued, duly and
validly authorized and executed by the Company and will constitute valid
and binding obligations of the Company, legally enforceable in accordance
with their terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws pertaining
to creditors rights generally), and the Company will have duly authorized,
reserved and set
5
<PAGE>
aside the shares of its Common Stock issuable upon exercise of the
Underwriters' Unit Warrants and the underlying Warrants, (hereinafter
called the "Underwriters' Class Warrants") and such stock, when issued and
paid for upon exercise of the Underwriters' Unit Warrants and the
Underwriters' Class A Warrants in accordance with the provisions thereof,
will be duly authorized and validly issued, fully-paid and non-assessable.
(p) All of the aforesaid representations, agreements, and warranties
shall survive delivery of, and payment for, the Units.
SECTION 3. Issuance, Sale and Delivery of the Firm Units, the Optional
Units and the Underwriters' Warrants.
(a) Upon the basis of the representations, warranties, covenants and
agreements of the Company herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue to the several
Underwriters, and the Underwriters, severally and not jointly, agree to purchase
from the Company, the number of the Firm Units set forth opposite the respective
names of the Underwriters in Schedule I hereto, plus any additional Units which
such Underwriter may become obligated to purchase pursuant to the provisions of
Section 14 hereof.
The purchase price of the Units to be paid by the several Underwriters
shall be $4.50 per Unit ($5.00 per Unit less a ten percent discount equal to
$.50 per Unit).
In addition, and upon the same basis, and subject to the same terms and
conditions, the Company hereby grants an option to you to purchase, but only for
the purpose of covering over-allotments, upon not less than two days' notice
from the Representative, the Optional Units, or any portion thereof, at the same
price per Unit as that set forth in the preceding sentence; and each Underwriter
agrees, severally and not jointly, to purchase Optional Units in the same
proportion in which it has agreed to purchase Firm Units. Notwithstanding
anything contained herein to the contrary, you individually and not as
Representative may provide in the Agreement Among Underwriters for the
Representative to purchase all or any part of the Optional Units and are not
obligated to offer the Optional Units to the other Underwriters. The Optional
Units may be exercised at any time, and from time to time, thereafter within a
period of 45 calendar days following the Effective Date. The time(s) and date(s)
(if any) so designated for delivery and payment for the Optional Units shall be
set forth in the notice to the Company. Such dates are herein defined as the
Additional Closing Date(s).
(b) Payment for the Firm Units shall be made by certified or official bank
checks in New York Clearing House funds, payable to the order of the Company at
the offices of the Representative, or its clearing agent, or at such other place
as shall be agreed upon by the Representative and the Company, upon delivery of
the Firm Units to the Representative for the respective accounts of the
Underwriters. In making payment to the Company with respect to the Firm Units,
the Representative may first deduct all
6
<PAGE>
sums due to it for the balance of the non-accountable expense allowance and
under the Financial Consulting Agreement (as hereinafter defined). Such delivery
and payment shall be made at 9:30 A.M., New York City Time on the third business
day after the Effective Date which may be extended by the Representative to not
later than the fifth business day, following the Effective Date (unless
postponed in accordance with the provisions of Section 14 hereof) or at such
other time as shall be agreed upon by the Representative and the Company. The
time and date of such delivery and payment are hereby defined as the Closing
Date. It is understood that each Underwriter has authorized the Representative,
for the account of such Underwriter, to accept delivery of, receipt for, and
make payment of the purchase price for, the Firm Units which it has agreed to
purchase. You, individually, and not as Representative may (but shall not be
obligated to) make payment of the purchase price for the Firm Units to be
purchased by any Underwriter whose check shall not have been received by the
Closing Date, for the account of such Underwriter, but any such payment shall
not relieve such Underwriter from its obligations hereunder.
(c) Payment for the Optional Units shall be made at the offices of the
Representative, or its clearing agent or at such other place as shall be agreed
upon by the Representative and the Company, in accordance with the notice
delivered pursuant to Section 3(a) which shall be no later than seven business
days from the expiration of the 45-day option period.
(d) Certificates for the Firm Units and for the Optional Units shall be
registered in such name or names and in such authorized denominations as the
Representative may request in writing at least two business days prior to the
Closing Date, and the Additional Closing Date(s) (if any). The Company shall
permit the Representative to examine and package said certificates for delivery
at least one full business day prior to the Closing Date and prior to the
Additional Closing Date(s). The Company shall not be obligated to sell or
deliver any of the Firm Units except upon tender of payment by the Underwriters
for all of the Firm Units agreed to be purchased by them hereunder. The
Representative, however, shall have the sole discretion to determine the number
of Optional Units, if any, to be purchased.
(e) At the time of making payment for the Firm Units, the Company also
hereby agrees to sell to the Representative, Warrants to purchase 70,000 Units
for an aggregate purchase price of $70 (hereinafter referred to as the
"Underwriters' Unit Warrants"). The 70,000 Units underlying the Underwriters'
Warrants shall be identical to the Units sold to the public. Each Underwriters'
Unit Warrant shall entitle the owner thereof to purchase one Unit of the Company
at an exercise price of $6.00 per Unit. Such Underwriters' Unit Warrants are to
become exercisable one year from the Effective Date, and shall remain
exercisable for a period of four years thereafter. From the Effective Date and
until one (1) year thereafter, such warrants may be transferred only to officers
or partners of the Underwriters and selling group members and their officers or
partners.
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<PAGE>
The Underwriters' Unit Warrants shall contain customary clauses protecting
the holders thereof in the event the Company pays stock dividends, effects stock
splits, or effects a sale of assets, merger or consolidation.
(f) On and subject to the Closing Date, the Company will give irrevocable
instructions to its transfer agent and Depository Trust Company to deliver to
the Representative (at the Company's expense) for a period of five years from
the Closing Date, daily transfer sheets showing any transfers of the Units,
Common Stock and Warrants and in the case of the transfer agent, from time to
time during the aforesaid period a complete stockholders' list will be promptly
furnished by the Company when requested by the Representative on not more than
two occasions per year.
SECTION 4. Public Offering. The several Underwriters agree, subject to the
terms and provisions of this Agreement, to offer the Units to the public as soon
as practicable after the Effective Date, at the initial offering price of $5.00
per Unit and upon the terms described in the Prospectus. The Representative may,
from time to time, decrease the public offering price, after the initial public
offering, to such extent as the Representative may determine, however, such
decreases will not affect the price payable to the Company hereunder.
SECTION 5. Registration Statement and Prospectus. The Company will furnish
the Representative, without charge, two signed copies of the Registration
Statement and of each amendment thereto, including all exhibits thereto and such
amount of conformed copies of the Registration Statement and Amendments as may
be reasonably requested by the Representative for distribution to each of the
Underwriters and Selected Dealers.
The Company will furnish, at its expense, as many printed copies of a
Preliminary Prospectus and of the Prospectus as the Representative may request
for the purposes contemplated by this Agreement. If, while the Prospectus is
required to be delivered under the Act or the Rules and Regulations, any event
known to the Company relating to or affecting the Company shall occur which
should be set forth in a supplement to or an amendment of the Prospectus in
order to comply with the Act (or other applicable law) or with the Rules and
Regulations, the Company will forthwith prepare, furnish and deliver to the
Representative and to each of the other Underwriters and to others whose names
and addresses are designated by the Representative, in each case at the
Company's expense, a reasonable number of copies of such supplement or
supplements to or amendment or amendments of, the Prospectus.
The Company authorizes the Underwriters and the selected dealers, if any,
in connection with the distribution of the Units and all dealers to whom any of
the Units may be sold by the Underwriters or by any participating broker-dealer
("Selected Dealer") to use the Prospectus, as from time to time amended or
supplemented, in connection with the offering and sale of the Units and in
accordance with the applicable
8
<PAGE>
provisions of the Act and the applicable Rules and Regulations and applicable
State securities laws.
SECTION 6. Covenants of the Company. The Company covenants and agrees with
each Underwriter that:
(a) After the date hereof, the Company will not at any time, whether
before or after the Effective Date, file any amendment to the Registration
Statement or the Prospectus, or any supplement to the Prospectus, of which
the Representative shall not previously have been advised and furnished
with a copy, or to which the Representative or the Underwriters' counsel
shall have reasonably objected in writing on the ground that it is not in
compliance with the Act or the Rules and Regulations.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective (provided, however, the Company shall not
cause the Registration Statement to become effective without the written
consent of IAR) and will advise the Representative, (i) when the
Registration Statement shall have become effective and when any amendment
thereto shall have become effective, and when any amendment of or
supplement to the Prospectus shall be filed with the Commission, (ii) when
the Commission shall make request or suggestion for any amendment to the
Registration Statement or the Prospectus or for additional information and
the nature and substance thereof, and (iii) of the issuance by the
Commission of an order suspending the effectiveness of the Registration
Statement or of the initiation of any proceedings for that purpose, and
will use its best efforts to prevent the issuance of such an order, or if
such an order shall be issued, to obtain the withdrawal thereof at the
earliest possible moment.
(c) The Company will prepare and file with the Commission, promptly
upon the request of the Representative, such amendments, or supplements to
the Registration Statement or Prospectus, in form and substance
satisfactory to counsel to the Company, as in the reasonable opinion of
Lester Morse P.C., as counsel to the Underwriters, may be necessary or
advisable in connection with the offering or distribution of the Units, and
will diligently use its best efforts to cause the same to become effective.
(d) The Company will, at its expense, when and as requested by the
Representative, supply all necessary documents, exhibits and information,
and execute all such applications, instruments and papers as may be
required, in the opinion of the Underwriters' counsel, to qualify the Units
or such part thereof as the Representative may determine, for sale under
the so-called "Blue Sky" Laws of such states as the Representative shall
designate, and to continue such qualification in effect so long as required
for the purposes of the distribution of the Units, provided, however, that
the Company shall not be required to qualify as a foreign corporation or
dealer in securities or to file a consent to service of process in any
state in any action other than one arising out of the offering or sale of
the Units.
(e) The Company will, at its own expense, file and provide, and
continue to file and provide, such reports, financial statements and other
information as may be
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required by the Commission, or the proper public bodies of the States in
which the Units may be qualified for sale, for so long as required by
applicable law, rule or regulation and will provide the Representative with
copies of all such registrations, filings and reports on a timely basis.
(f) During the period of five years from the Effective Date, the
Company will deliver to the Underwriter a copy of each annual report of the
Company, and will deliver to the Underwriter (i) within 50 days after the
end of each of the Company's first three quarter-yearly fiscal periods, a
balance sheet of the Company as at the end of such quarter-yearly period,
together with a statement of its income and a statement of changes in its
cash flow for such period (Form 10-Q or 10-QSB), all in reasonable detail,
signed by its principal financial or accounting officer, (ii) within 105
days after the end of each fiscal year, a balance sheet of the Company as
at the end of such fiscal year, together with a statement of its income and
statement of cash flow for such fiscal year (Form 10-K or 10- KSB), such
balance sheet and statement of cash flow for such fiscal year to be in
reasonable detail and to be accompanied by a certificate or report of
independent public accountants, (who may be the regular accountants for the
Company), (iii) as soon as available a copy of every other report
(financial or other) mailed to the stockholders, and (iv) as soon as
available a copy of every non-confidential report and financial statement
furnished to or filed with the Commission or with any securities exchange
pursuant to requirements by or agreement with such exchange or the
Commission pursuant to the Securities Exchange Act of 1934, as amended (the
"1934 Act"), or any regulations of the Commission thereunder. If and for so
long as the Company has one or more active subsidiaries, the financial
statements required by (i) and (ii) above shall be furnished on a
consolidated basis in respect of the Company and all of the Company's
subsidiaries. The financial statements referred to in (ii) shall also be
furnished to all of the stockholders of the Company as soon as practicable
after the 105 days referred to therein.
(g) The Company shall comply with all periodic reporting and proxy
solicitation requirements imposed by the Commission pursuant to the 1934
Act, and shall promptly furnish you with copies of all material filed with
the Commission pursuant to the 1934 Act or otherwise furnished to
shareholders of the Company.
(h) The Company will make generally available to its security holders,
as soon as practicable, but in no event later than 15 months after the
Effective Date, an earnings statement of the Company (which need not be
audited) in reasonable detail, covering a period of at least twelve months
beginning after the Effective Date, which earnings statement shall satisfy
the provisions of Section 11(a) of the Act.
(i) The Company will, on or about the Effective Date, apply for (or
maintain) listing in Standard and Poor's Corporation Records and Standard &
Poor's Monthly Stock Guide and shall use its best efforts to have the
Company listed in such reports for a period of not less than five (5) years
from the Closing Date. The Company will request accelerated treatment in
the Daily News Supplement of Standard and Poor's Corporation Records.
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(j) The Company shall employ the services of an auditing firm
acceptable to the Representative in connection with the preparation of the
financial statements required to be included in the Registration Statement
and shall continue to appoint such auditors or such other auditors as are
reasonably acceptable to the Representative for a period of five (5) years
following the Effective Date of the Registration Statement. Said financial
statements shall be prepared in accordance with Regulation S-X under the
General Rules and Regulations of the 1933 Act. The firm of Rosenberg, Rich,
Baker, Berman & Company are deemed acceptable to the Underwriter. The
Company shall appoint Continental Stock Transfer & Trust Company transfer
agent (the "Transfer Agent") for the Common Stock and as Warrant Agent for
the Warrants.
(k) Until such time as the Company's Common Stock is listed on the New
York Stock Exchange, the American Stock Exchange, or the NASDAQ/NMS; the
Company shall cause its legal counsel or an independent firm acceptable to
the Representative to provide the Representative with a survey, to be
updated upon request of the Underwriter, of those states in which the
securities of the Company may be traded in non-issuer transactions under
the Blue Sky laws of the states and the basis for such authority. The first
such survey shall be delivered by such counsel at closing; the second such
survey shall be delivered by such counsel within five business days of
publication of the Company in Standard & Poor's Corporation Records and,
thereafter upon request of the Underwriter.
(l) As soon as practicable after the Closing Date, the Company will
deliver to the Representative and its counsel a total of two bound volumes
of copies of all documents relating to the public offering which is the
subject of this Agreement.
(m) The Company and its officers, directors and principal stockholders
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 two (2) months from the Effective
Date without the prior written consent of the Representative.
SECTION 7. Expenses of the Company.
(a) The Company shall be responsible for and shall bear all expenses
directly and necessarily incurred in connection with the proposed financing,
including: (I) the preparation, printing and filing of the Registration
Statement and amendments thereto, including NASD and SEC filing fees,
preliminary and final Prospectus and the printing of the Underwriting Agreement,
the Agreement Among the Underwriters and the Selected Dealers' Agreement, a Blue
Sky Memorandum and material to be circulated to the Under writers by us; (ii)
the issuance and delivery of certificates representing the Common Stock and
Warrants including original issue and transfer taxes, if any; (iii) the
qualifications of the Company's Units (covered by the "firm commitment"
offering) under State securities or "Blue Sky" laws, including counsel fees of
Lester Morse P.C. relating thereto in the sum of Thirty ($30,000) Dollars
($_________ of which has been paid, together with appropriate state filing fees)
plus disbursements relating to, but not limited to, long-distance telephone
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calls, photocopying, messengers, excess postage, overnight mail and courier
services; and (iv) the fees and disbursements of counsel for the Company and the
accountants for the Company. Upon the commencement of the necessary state Blue
Sky filings by our counsel, the Company shall supply him at his request, all
necessary state filing fees.
(b) In addition, the Company shall bear each of the following costs:
investigative reports (such as Bishop's Reports) of the Company's executive
officers, directors and principal shareholders, not to exceed $5,000 in the
aggregate and (ii) otherwise unreimbursed postage including mailing of
preliminary and final prospectuses incurred by or on behalf of the
Representative and the Underwriters in preparation for, or in connection with
the offering and sale and distribution of the Units on an accountable basis.
SECTION 8. Payment of Underwriters' Expenses.
On the Closing Date and Additional Closing Date(s) (if any) the Company
will pay to you an expense allowance equal to three (3%) percent of the total
gross proceeds derived from the public offering contemplated by this Agreement
for the fees and disbursements of counsel to the Underwriters and for costs of
otherwise unreimbursed advertising, traveling, postage, telephone and telegraph
expenses and other miscellaneous expenses incurred by or on behalf of the
Representative and the Underwriters in preparation for, or in connection with
the offering and sale and distribution of the Units; and you shall not be
obligated to account to the Company for such disbursements and expenses.
Further, in the event that this Agreement is terminated pursuant to Section 12
hereof, the Company will be obligated to reimburse the Representative on an
accountable basis for its reasonable out-of-pocket expenses incurred in
connection hereunder.
SECTION 9. Indemnification.
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters, and each person who controls each of the Underwriters within the
meaning of Section 15 of the Act, from and against any and all losses, claims,
damages, expenses, or liabilities, joint or several, to which they or any of
them may become subject under the Act or any other statute or at common law or
otherwise, and to reimburse persons indemnified as above for any reasonable
legal or other expense (including the cost of any investigation and preparation)
incurred by them (as incurred), or any of them, in connection with
investigating, defending against or appearing as a third party witness in
connection with any claim or litigation, whether or not resulting in any
liability, but only insofar as such losses, claims, liabilities, expenses or
litigation arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or the
Prospectus (as amended or supplemented, if amended or supplemented), or in any
"Blue Sky" application, or arising out of or based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances
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<PAGE>
under which they are made, not misleading; provided, however, that the indemnity
agreement contained in this subsection (a) shall not apply to amounts paid in
settlement of any such claims or litigation if such settlement is effected
without the consent of the Company, nor shall it apply to the Underwriters or
any person controlling the Underwriters in respect of any such losses, claims,
damages, expenses, liabilities or litigation arising out of, or based upon, any
such untrue statement or alleged untrue statement, or any such omission or
alleged omission, if such statement or omission was made in reliance upon and in
conformity with written information furnished in writing to the Company by such
Underwriter, or on its behalf, specifically for use in connection with the
preparation of the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto or any such "Blue Sky" application.
(b) Each of the Underwriters severally agrees, in the same manner and to
the same extent as set forth in subsection (a) above, to indemnify and hold
harmless the Company, each of the directors and officers who have signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act, with respect to any statement in or
omission from the Registration Statement, or the Prospectus (as amended or as
supplemented, if amended or supplemented), or in any "Blue Sky" application, if
such statement or omission was made in reliance upon and in conformity with
written information furnished in writing to the Company by such Underwriter, or
on its behalf, specifically for use in connection with the preparation of the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, or any such application. An Underwriter shall not be liable
for amounts paid in settlement of any such claim or litigation if such
settlement was effected without its consent.
(c) Each indemnified party shall give prompt notice to each indemnifying
party of any claim asserted against it and of any action commenced against it in
respect of which indemnity may be sought hereunder. The omission to so notify an
indemnifying party shall relieve such party of its obligation to indemnify
pursuant to this Agreement, but failure to so notify an indemnifying party shall
not relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, subject to the provisions herein
stated, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section 9 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. The indemnified
party shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that the
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<PAGE>
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (I) the employment of such counsel has been specifically authorized in
writing by the indemnifying party or (ii) the defendants in any such action
include both the indemnified and the indemnifying party and the indemnified
party shall have reasonably concluded that there may be a conflict between the
positions of the indemnifying party and the indemnified party in conducting the
defense of any such action or that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to those
available to the indemnifying party (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of such
indemnified party or parties), it being understood, however, that the
indemnifying party shall not, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for the
indemnified party which firm shall be designated in writing by the indemnified
party.
(d) The respective indemnity agreements between the Underwriters and the
Company contained in subsections (a) and (b) above, and the representations and
warranties of the Company set forth in Section 2 hereof or elsewhere in this
Agreement, shall remain operative and in full force and effect, regardless of
any investigation made by or on behalf of the Underwriters or by or on behalf of
any controlling person of the Underwriters or the Company or any such officer or
director or any controlling person of the Company, and shall survive the
delivery of the Units. Any successor of the Company, or of the Underwriters, or
of any controlling person of the Underwriters or the Company, as the case may
be, shall be entitled to the benefit of such respective indemnity agreements.
(e) In order to provide for just and equitable contribution under the Act
in any case in which (I) any person entitled to indemnification under this
Section 9 makes claim for indemnification pursuant hereto but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 9 provides for indemnification in
such case, or (ii) contribution under the Act may be required on the part of any
such person in circumstances for which indemnification is provided under this
Section 9, then, and in each such case, the Company and the Underwriters shall
contribute to the aggregate losses, claims, damages, expenses or liabilities to
which they may be subject (after any contribution from others) in such
proportions so that the Underwriters are responsible in the aggregate for the
proportion of such losses, claims, damages or liabilities represented by the
percentage that the underwriting discounts and commissions appearing on the
cover page of the Prospectus bears to the public offering price appearing
thereon, and the Company is responsible for the remaining portion; provided,
that, in any such case, no person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
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Within twenty days after receipt by any party to this Agreement (or its
representative) of notice of the commencement of any action, suit or proceeding,
such party will, if a claim for contribution in respect thereof is to be made
against another party (the "contributing party"), notify the contributing party,
in writing, of the commencement thereof, but the omission so to notify the
contributing party will not relieve it from any liability which it may have to
any other party other than for contribution hereunder. In case any such action,
suit or proceeding is brought against any party, and such party so notifies a
contributing party or his or its representative of the commencement thereof
within the aforesaid twenty days, the contributing party will be entitled to
participate therein with the notifying party and any other contributing party
similarly notified. Any such contributing party shall not be liable to any party
seeking contribution on account of any settlement of any claim, action or
proceeding effected by such party seeking contribution without the written
consent of such contributing party. The contribution provisions contained in
this Section 9 are in addition to any other rights or remedies which either
party hereto may have with respect to the other or hereunder.
SECTION 10. Effectiveness of Agreement. This Agreement shall become
effective (I) at 10:00 A.M., New York Time, on the first full business day after
the Effective Date, or (ii) at the time of the initial public offering by the
Underwriters of the Units, whichever shall first occur. The time of the initial
public offering by the Underwriters of the Units for the purposes of this
Section 10, shall mean the time, after the Registration Statement becomes
effective, of the release by the Representative for publication of the first
newspaper advertisement which is subsequently published relating to the Units,
or the time, after the Registration Statement becomes effective, when the Units
are first released by the Representative for offering by the Underwriters or
dealers by letter or telegram, whichever shall first occur. The Representative
agrees to notify the Company immediately after it shall have taken any action,
by release or otherwise, whereby this Agreement shall have become effective.
This Agreement shall, nevertheless, become effective at such time earlier than
the time specified above, after the Effective Date, as the Representative may
determine by notice to the Company.
SECTION 11. Conditions of the Underwriters' Obligations. The obligations of
the several Underwriters to purchase and pay for the Units which the
Underwriters have agreed to purchase hereunder are subject to: the accuracy, as
of the date hereof and as of the Closing Date and the Additional Closing
Date(s), if any, (together, the "Closing Dates"), of all of the representations
and warranties of the Company contained in this Agreement; the Company's
compliance with, or performance of, all of its covenants, undertakings and
agreements contained in this Agreement that are required to be complied with or
performed on or prior to each of the Closing Dates and to the following
additional conditions:
(a) On or prior to the Closing Date, no order suspending the effectiveness
of the Registration Statement shall have been issued and no proceeding for that
purpose shall have been instituted or be pending or, to the knowledge of the
Company, shall be threatened by the Commission; any request for additional
information on the part of the
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<PAGE>
Commission (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of the Commission;
and neither the Registration Statement nor any amendment thereto shall have been
filed to which counsel to the Underwriters shall have reasonably objected, in
writing.
(b) The Representative shall not have disclosed in writing to the Company
that the Registration Statement or Prospectus or any amendment or supplement
thereto contained, as of the date thereof, an untrue statement of a fact which,
in the opinion of counsel to the Underwriters, is material, or omits to state a
fact which, in the opinion of such counsel, is material and is required to be
stated therein, or is necessary to make the statements therein not materially
misleading.
(c) Between the date hereof and the Closing Date, the Company shall not
have sustained any loss on account of fire, explosion, flood, accident, calamity
or other cause, of such character as materially adversely affects its business
or property, whether or not such loss is covered by insurance.
(d) Between the date hereof and the Closing Date, there shall be no
litigation instituted or threatened against the Company, and there shall be no
proceeding instituted or, to the knowledge of the Company, threatened against
the Company before or by any federal or state commission, regulatory body or
administrative agency or other governmental body, domestic or foreign, wherein
an unfavorable ruling, decision or finding would materially adversely affect the
business, licenses, permits, operations or financial condition or income of the
Company.
(e) Except as contemplated herein or as set forth in the Registration
Statement and Prospectus, during the period subsequent to the Effective Date and
prior to the Closing Date, (A) the Company shall have conducted its business in
the usual and ordinary manner as the same was being conducted on the date of the
filing of the initial Registration Statement and (B) except in the ordinary
course of its business, the Company shall not have incurred any material
liabilities or obligations (direct or contingent), or disposed of any of its
assets, or entered into any material transaction, and (C) the Company shall not
have suffered or experienced any material adverse change in its business,
affairs or in its condition, financial or otherwise. On the Closing Date, the
capital stock and surplus accounts of the Company shall be substantially as
great as at its last financial report without considering the proceeds from the
sale of the Units except to the extent that any decrease is disclosed in or
contemplated by the Prospectus.
(f) The authorization of the Units, the Common Stock and the Warrants, the
Registration Statement, the Prospectus and all corporate proceedings and other
legal matters incident thereto and to this Agreement, shall be reasonably
satisfactory in all respects to counsel to the Underwriters.
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(g) The Company shall have furnished to the Representative the opinions,
dated the Closing Date, and Additional Closing Date(s), addressed to you, of its
counsel that:
(i) The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of Delaware with
full corporate power and authority to own and operate its properties and to
carry on its business as set forth in the Registration Statement and
Prospectus; it has authorized and outstanding capital as set forth in the
Registration Statement and Prospectus; and the Company is duly licensed or
qualified as a foreign corporation in all jurisdictions in which by reason
of maintaining an office in such jurisdiction or by owning or leasing real
property in such jurisdiction it is required to be so licensed or qualified
except where failure to be so qualified or licensed would have no material
adverse effect.
(ii) All of the outstanding shares of Common Stock and preferred stock
are duly and validly issued and outstanding, fully paid, and
non-assessable, and do not have any, and were not issued in violation of
any, preemptive rights. The Company will have duly authorized, reserved and
set aside shares of Common Stock issuable upon exercise of the Warrants and
any other outstanding options or warrants and when issued in accordance
with such terms contained in the Prospectus, will be duly and validly
authorized and issued, fully paid and non-assessable.
(iii) All of the Units of the Company to which this Agreement relates
conform to the statements relating to them that are contained in the
Registration Statement and Prospectus (excluding financial statements).
(iv) The Underwriters against payment therefor, will receive good and
marketable title to the Units purchased by them from the Company in
accordance with the terms and provisions of this Agreement.
(v) To the best of the knowledge of such counsel, except as set forth
in the Prospectus, there are no outstanding options, warrants, or other
rights, providing for the issuance of, and, no commitments, plans or
arrangements to issue, any shares of any class of capital stock of the
Company, or any security convertible into, or exchangeable for, any shares
of any class of capital stock of the Company.
(vi) To the best of such counsel's knowledge, no consents, approvals,
authorizations or orders of agencies, officers or other regulatory
authorities are necessary for the valid authorization, issue or sale of the
Units hereunder, except such as may be required under the Act or state
securities or Blue Sky Laws.
(vii) The Registration Statement has become effective under the Act
and, to the best of the knowledge of such counsel, no order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and the Registration
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Statement and Prospectus, and each amendment thereof and supplement
thereto, comply as to form in all material respects with the requirements
of the Act and the Rules and Regulations (except that no opinion need be
expressed as to financial statements and financial data contained in the
Registration Statement or Prospectus), and in the course of the preparation
of the Registration Statement, nothing has come to the attention of said
counsel to cause them to believe that either the Registration Statement or
the Prospectus or any such amendment or supplement contains any untrue
statement of a material fact or omits to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; and such counsel is familiar with all contracts referred to in
the Registration Statement or in the Prospectus and such contracts are
sufficiently summarized or disclosed therein, or filed as exhibits thereto,
as required, and such counsel does not know of any other contracts required
to be summarized or disclosed or filed; and such counsel does not know of
any legal or governmental proceedings pending or threatened to which the
Company is a party, or in which property of the Company is the subject, of
a character required to be disclosed in the Registration Statement or the
Prospectus which are not disclosed and properly described therein.
(viii) The Underwriters' Unit Warrants to be issued to the
Representative hereunder will be, when issued against payment therefor duly
and validly authorized and executed by the Company and will constitute
valid and binding obligations of the Company, legally enforceable in
accordance with their terms (except as such enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
now or hereafter in effect relating to creditors' rights generally), and
the Company will have duly authorized, reserved and set aside the shares of
its Common Stock issuable upon exercise of the Underwriters' Warrants and
Underwriters' Class A Warrants , and such stock, when issued and paid for
upon exercise of the Underwriters' Unit Warrants and Underwriters' Class A
Warrants in accordance with the provisions thereof, will be duly and
validly authorized and issued, fully-paid and non-assessable.
(ix) The Company holds by valid lease, its properties as shown in the
Prospectus, and is in all material respects complying with all laws,
ordinances and regulations applicable thereto.
(x) This Agreement has been duly authorized and executed by the
Company and is a valid and binding agreement of the Company.
(xi) To the best of the knowledge of such counsel, no default exists,
and no event has occurred which, with notice or lapse of time, or both,
would constitute a default in the due performance and observance of any
material term, covenant or condition by the Company or any other party, of
any indenture, mortgage, deed of trust, note or any other agreement or
instrument known to counsel to which the Company is a party or by which it
or its business or its properties may be bound or affected, except as
disclosed in the Prospectus. The Company has full power and lawful
authority to authorize, issue and sell the Units on the terms and
conditions set forth herein and in the Registration Statement and in the
Prospectus. No consent, approval, authorization or other order of
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any regulatory authority is required for such authorization, issue or sale,
except as may be required under the Act or State securities laws. The
execution and delivery of this Agreement, the consummation of the
transactions herein contemplated, and compliance with the terms hereof will
not conflict with, or constitute a default under any indenture, mortgage,
deed or trust, note or any other agreement or instrument known to counsel
to which the Company is now a party or by which it or its business or its
properties may be bound or affected; the Certificate of Incorporation and
any amendments thereto; the by-laws of the Company; or any law, order, rule
or regulation, writ, injunction or decree of any government, governmental
instrumentality, or court, domestic or foreign, having jurisdiction over
the Company or its business or properties known to counsel.
(xii) To the best of the knowledge of such counsel, there are no
material actions, suits or proceedings at law or in equity of a material
nature pending or to such counsel's knowledge threatened against the
Company which are not adequately covered by insurance and there are no
proceedings pending, or to the knowledge of such counsel threatened,
against the Company before or by any Federal or State Commission,
regulatory body, or administrative agency or other governmental body,
wherein an unfavorable ruling, decision or finding would materially
adversely affect the business, business prospects, franchise, licenses,
permits, operation or financial condition or income of the Company, which
are not disclosed in the Prospectus.
Such opinion shall also cover such other matters incident to the
transactions contemplated by this Agreement as the Representative shall
reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact.
(h) The Company shall have furnished to the Representative certificates of
the President of the Company, dated as of the Closing Date, and Additional
Closing Date(s), to the effect that:
(i) Each of the representations and warranties of the Company
contained in Section 2 hereof is true and correct in all material respects
at and as of such Closing Date, and the Company has performed or complied
with all of its agreements, covenants and undertakings contained in this
Agreement and has performed or satisfied all the conditions contained in
this Agreement on its part to be performed or satisfied at the Closing
Date;
(ii) The Registration Statement has become effective and no order
suspending the effectiveness of the Registration Statement has been issued,
and, to the best of the knowledge of the respective signers, no proceeding
for that purpose has been initiated or is threatened by the Commission;
(iii) The respective signers have each carefully examined the
Registration Statement and the Prospectus and any amendments and
supplements thereto, and to the best of their knowledge the Registration
Statement and the Prospectus
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and any amendments and supplements thereto and all statements contained
therein are true and correct in all material respects, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading and, since the effective date of the
Registration Statement, there has occurred no event required to be set
forth in an amended or supplemented Prospectus which has not been so set
forth except changes which the Registration Statement and Prospectus
indicate might occur.
(iv) Except as set forth or contemplated in the Registration Statement
and Prospectus, since the respective dates as of which, or periods for
which, information is given in the Registration Statement and Prospectus
and prior to the date of such certificate (A) there has not been any
material adverse change, financial or otherwise, in the business, business
prospects, earnings, general affairs or condition (financial or otherwise),
of the Company (in each case whether or not arising in the ordinary course
of business), and (B) the Company has not incurred any material
liabilities, direct or contingent, or entered into any material
transactions, otherwise than in the ordinary course of business other than
as referred to in the Registration Statement or Prospectus and except
changes which the Registration Statement and Prospectus indicate might
occur.
(i) The Company shall have furnished to the Representative on the Closing
Date, such other certificates of executive officers of the Company additional to
those specifically mentioned herein, as the Representative may have reasonably
requested, as to: the accuracy and completeness of any statement in the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto; the representations and warranties of the Company herein; the
performance by the Company of its obligations hereunder; or the fulfillment of
the conditions concurrent and precedent to the obligations of the Underwriters
hereunder, which are required to be performed or fulfilled on or prior to the
Closing Date.
(j) At the time this Agreement is executed, and on each Closing Date you
shall have received a letter from Rosenberg, Rich, Baker, Berman & Company
addressed to the Representative, as Representative of the Underwriters, and
dated, respectively, as of the date of this Agreement and as of each Closing
Date in form and substance reasonably satisfactory to the Representative, to the
effect that:
(i) They are independent public accountants within the meaning of the
Act and the applicable published Rules and Regulations of the Commission;
(ii) In their opinion, the financial statements and related schedules
of the Company included in the Registration Statement and Prospectus and
covered by their reports comply as to form in all material respects with
the applicable accounting requirements of the Act and the published Rules
and Regulations of the Commission issued thereunder;
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(iii) On the basis of limited procedures in accordance with standards
established by the American Institute of Certified Public Accountants,
including (1) a reading of the latest available financial statements of the
Company (a copy of which shall be attached to such letter), (2) a reading
of the latest available minutes of the meetings of the stockholders and the
Board of Directors of the Company as set forth in the minute books of the
Company, officials of the Company having advised you and them that the
minutes of all such meetings through that date were set forth therein, (3)
consultations with officials of the Company responsible for financial and
accounting matters of the Company, which procedures do not constitute an
examination in accordance with generally accepted accounting standards, and
would not necessarily reveal material adverse changes in the financial
position or results of operations or inconsistencies in the application of
generally accepted accounting principles, nothing has come to their
attention which in their judgment would lead them to believe that (a) the
unaudited financial statements and related schedules of the Company
included in the Registration Statement and Prospectus do not comply as to
form in all material respects with the applicable accounting requirements
of the Act and the published Rules and Regulations of the Commission issued
thereunder, or were not prepared in accordance with generally accepted
accounting principles and practices consistent in all material respects
with those followed in the preparation of the comparable financial
statements and schedules covered by their reports included in the
Registration Statement and Prospectus, or would require any material
adjustments for a fair presentation of the information purported to be
shown thereby or (b) during the period from the date of the Capitalization
table included in the Prospectus to a specified date not more than four
business days prior to the date of such letter, there has been any material
change in the capital stock or debt of the Company, or (c) during the
period from the date of the latest balance sheet and related statements of
operations, changes in stockholders' equity and changes in financial
position included in the Prospectus and covered by their reports contained
therein to the date of the letter, there has been any material adverse
change in the financial condition, or results of operations, of the
Company; and
(iv) In addition to the examination referred to in their reports
included in the Registration Statement and the Prospectus and the limited
procedures referred to in clause (iii) above, they have carried out certain
specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information which are derived from the
general accounting records of the Company which appear in the Prospectus
under the captions "Capitalization", "Management's Discussion and Analysis
of Financial Condition and Results of Operations", "Executive
Compensation", "Certain Transactions", "Selected Financial Data,"
"Dilution," and "Risk Factors," as well as such other financial information
as may be specified by the Representative, and that they have compared such
amounts, percentages and financial information with the accounting records
of the Company and have found them to be in agreement.
All the opinions, letters, certificates and evidence mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions
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<PAGE>
hereof only if they are in form and substance reasonably satisfactory to
counsel to the Underwriters, whose approval shall not be unreasonably
withheld, conditioned or delayed.
If any of the conditions specified in this Section shall not have been
fulfilled when and as required by this Agreement to be fulfilled, this Agreement
and all obligations of the Underwriters hereunder may be terminated and canceled
by the Representative by notifying the Company of such termination and
cancellation in writing or by telegram at any time prior to, or on, the Closing
Date and any such termination and cancellation shall be without liability of any
party hereto to any other party, except with respect to the provisions of
Sections 7 and 8 hereof. The Representative may, of course, waive, in writing,
any conditions which have not been fulfilled or extend the time for their
fulfillment.
SECTION 12. Termination.
(a) This Agreement may be terminated by the Representative by written or
telegraphic notice to the Company at any time before it becomes effective
pursuant to Section 10.
(b) This Agreement may be terminated by the Representative by written or
telegraphic notice to the Company, at any time after it becomes effective, in
the event that the Company, after notice from the Representative and an
opportunity to cure, shall have failed or been unable to comply with any of the
terms, conditions or provisions of this Agreement on the part of the Company to
be performed, complied with or fulfilled within the respective times herein
provided for, including without limitation Section 6(g) hereof, unless
compliance therewith or performance or satisfaction thereof shall have been
expressly waived by the Representative in writing. This Agreement may also be
terminated if (i) qualifications are received or provided by the Company's
independent public accountants or attorneys to the effect of either inabilities
in furnishing certifications as to material items including, without limitation,
information contained within the footnotes to the financial statements, or as
affecting matters incident to the issuance and sale of the securities
contemplated or as to corporate proceedings or other matters or (ii) there is
any action, suit or proceeding, threatened or pending, at law or equity against
the Company, or by any Federal, State or other commission, board or agency
wherein any unfavorable result or decision could materially adversely affect the
business, property, or financial condition of the Company which was not
disclosed in the Prospectus.
(c) This Agreement may be terminated by the Representative by written or
telegraphic notice to the Company at any time after it becomes effective, if the
offering of, or the sale of, or the payment for, or the delivery of, the Units
is rendered impracticable or inadvisable because (i) additional material
governmental restriction, not in force and effect on the date hereof, shall have
been imposed upon trading in securities generally or minimum or maximum prices
shall have been generally established on the New York Stock Exchange or trading
in securities generally on such exchange shall have been suspended or a general
banking moratorium shall have been established by Federal or New York State
authorities or (ii) a war or other national calamity shall have occurred
involving the
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<PAGE>
United States or (iii) the condition of the market for securities in general
shall have materially and adversely changed, or (iv) the condition of any matter
materially affecting the Company or its business or business prospects, is such
that it would be undesirable, impractical or inadvisable to proceed with, or
consummate, this Agreement or the public offering of the Units.
(d) Any termination of this Agreement pursuant to this Section 12 shall be
without liability of any character (including, but not limited to, loss of
anticipated profits or consequential damages) on the part of any party hereto,
except that the Company shall remain obligated to pay the costs and expenses
provided to be paid by it specified in Sections 6, 7 and 8, to the extent
therein provided. In addition, the Underwriter shall account to the Company for
any advance and shall reimburse the Company for any portion of the advance not
expended for actual out-of-pocket expenses. In the event that the Representative
terminates this agreement pursuant to the provisions of Section 12(b), the
Representative shall be entitled to reimbursement of expenses on an accountable
basis.
SECTION 13. Finder. The Company and the Underwriters mutually represent
that they know of no person who rendered any service in connection with the
introduction of the Company to the Underwriters and that they know of no claim
by anyone for a "finder's fee" or similar type of fee, in connection with the
public offering which is the subject of this Agreement. Each party hereby
indemnifies the other against any such claims by any person known to it, and not
known to the other party hereto, who shall claim to have rendered services in
connection with the introduction of the Company to the Underwriters and/or to
have such a claim.
SECTION 14. Substitution of Underwriters.
(a) If one or more Underwriters default in its or their obligations to
purchase and pay for Units hereunder and if the aggregate amount of such Units
which all Underwriters so defaulting have agreed to purchase does not exceed 10%
of the aggregate number of Units constituting the Units, the non-defaulting
Underwriters shall have the right and shall be obligated severally to purchase
and pay for (in addition to the Units set forth opposite their names in Schedule
I) the full amount of the Units agreed to be purchased by all such defaulting
Underwriters and not so purchased, in proportion to their respective commitments
hereunder. In such event the Representative, for the accounts of the several
non-defaulting Underwriters, may take up and pay for all or any part of such
additional Units to be purchased by each such Underwriter under this subsection
(a), and may postpone the Closing Date to a time not exceeding seven full
business days; or
(b) If one or more Underwriters (other than the Representative) default in
its or their obligations to purchase and pay for the Units hereunder and if the
aggregate amount of such Units which all Underwriters so defaulting shall have
agreed to purchase shall exceed 10% of the aggregate number of Units, or if one
or more Underwriters for any reason permitted hereunder cancel its or their
obligations to purchase and pay for Units
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<PAGE>
hereunder, the non-canceling and non-defaulting Underwriters (hereinafter called
the "Remaining Underwriters") shall have the right, but shall not be obligated
to purchase such Units in such proportion as may be agreed among them, at the
Closing Date. If the Remaining Underwriters do not purchase and pay for such
Units at such Closing Date, the Closing Date shall be postponed for one business
day and the remaining Underwriters shall have the right to purchase such Units,
or to substitute another person or persons to purchase the same or both, at such
postponed Closing Date. If purchasers shall not have been found for such Units
by such postponed Closing Date, the Closing Date shall be postponed for a
further two business days and the Company shall have the right to substitute
another person or persons, satisfactory to you to purchase such Units at such
second postponed Closing Date. If the Company shall not have found such
purchasers for such Units by such second postponed Closing Date, then this
Agreement shall automatically terminate and neither the Company nor the
remaining Underwriters (including the Representative) shall be under any
obligation under this Agreement (except that the Company shall remain liable to
the extent provided in Section 7 hereof). As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 14. Nothing in this subparagraph (b) will relieve a defaulting
Underwriter from its liability, if any, to the other Underwriters for damages
occasioned by its default hereunder (and such damages shall be deemed to
include, without limitation, all expenses reasonably incurred by each
Underwriter in connection with the proposed purchase and sale of the Units) or
obligate any Underwriter to purchase or find purchasers for any Units in excess
of those agreed to be purchased by such Underwriter under the terms of Sections
3 and 14 hereof.
SECTION 15. Registration of the Underwriters' Unit Warrants and
Underwriters' Class A Warrants. The Company agrees that it will, upon request by
the Representative or the holders of a majority of the Underwriters' Unit
Warrants and Underlying Securities (i.e. Underwriters' Class A Warrants and
shares of Common Stock issuable upon exercise thereof) within the period
commencing one year after the Effective Date, and for a period of five years
from the Effective Date, on one occasion only at the Company's sole expense,
cause the Underwriters' Unit Warrants and/or the Underlying Securities issuable
upon exercise of the Underwriters' Unit Warrants, to be the subject of a
post-effective amendment, a new Registration Statement, if appropriate
(hereinafter referred to as the "demand Registration Statement"), so as to
enable the Representative and/or its assigns to offer publicly the Underwriters'
Unit Warrants and/or the Underlying Securities. The Company agrees to register
such securities expeditiously and, where possible, within forty-five (45)
business days after receipt of such requests. The Company agrees to use its
"best efforts" to cause the post-effective amendment, new Registration Statement
to become effective and for a period of nine (9) months thereafter to reflect in
the post-effective amendment, new Registration Statement, financial statements
which are prepared in accordance with Section 10(a)(3) of the Act and any facts
or events arising which, individually or in the aggregate, represent a
fundamental and/or material change in the information set forth in such
post-effective amendment or new Registration Statement. The holders of the
Underwriters' Unit Warrants may demand registration without exercising such
Warrants and, in fact, are never required to exercise same.
24
<PAGE>
The Company understands and will agree that if, at any time within the
period commencing one year after the Effective Date and ending seven years after
the Effective Date of the Company's Registration Statement, it should file a
Registration Statement with the Commission pursuant to the Securities Act,
regardless of whether some of the holders of the Underwriters' Unit Warrants and
Underlying Securities shall have theretofore availed themselves of the right
provided above, the Company, at its own expense, will offer to said holders the
opportunity to register the Underwriters' Unit Warrants and Underlying
Securities. This paragraph is not applicable to a Registration Statement filed
by the Commission with the Commission on Form S-8 or any other inappropriate
form.
In addition to the rights above provided, the Company will cooperate with
the then holders of the Underwriters' Unit Warrants and Underlying Securities in
preparing and signing a Registration Statement, on one occasion only in addition
to the Registration Statements discussed above, required in order to sell or
transfer the aforesaid Underwriters' Unit Warrants and Underlying Securities and
will supply all information required therefor, but such additional Registration
Statement shall be at the then Holders' cost and expense unless the Company
elects to register additional shares of the Company's Common Stock in which case
the cost and expense of such Registration Statement will be prorated between the
Company and the Holders of the Underwriters' Unit Warrants and Underlying
Securities according to the aggregate sales price of the securities being
issued. The Holders of the Underwriters' Unit Warrants may include such Warrants
in any such filing without exercising the Underwriters' Unit Warrants, and in
fact, are never required to exercise same. The Company can, at any time for any
reason, withdraw any such registration except in connection with a Registration
Statement filed pursuant to the Company's demand Registration Statement.
SECTION 16. Other Agreements.
(a) On the Effective Date, the Company will enter into an agreement
retaining the Representative as a financial consultant pursuant to which the
Representative shall receive a consulting fee in an amount equal to $35,000 per
year or a total of $70,000 for services for two (2) year from the Effective
Date, payable in full in advance on the Closing Date, which shall include, but
not be limited to, advising the Company in connection with possible acquisition
opportunities, advising the Company regarding shareholder relations including
the preparation of the annual report and other releases, assisting in long-term
financial planning, advice in connection with corporate reorganizations and
expansion and capital structure, and other financial assistance.
(b) The Company agrees to file with the NASD all post-effective amendments
or prospectus supplements disclosing actual price and selling terms by the
selling security holders at the same time they are filed with the Commission and
in the event a portion of the securities being registered on behalf of selling
security holders become underwritten, that prior to commencement of the
distribution (i) copies of all underwriting documents proposed for use will be
submitted to the NASD for review and (ii)
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<PAGE>
the maximum compensation to be paid will be approved by the Department. To the
extent the Company receives notification from a related shareholder, the Company
will notify the Representative and the NASD if subsequent to the filing of this
offering any 5% or greater shareholder of the Company is or becomes an affiliate
or associated person of an NASD member participating in the distribution in this
offering.
(c) If the Company shall within five (5) years from the Effective Date,
enter into any agreement or understanding with any person or entity introduced
by the Representative involving (i) the sale of all or substantially all of the
assets and properties of the Company, (ii) the merger or consolidation of the
Company (other than a merger or consolidation effected for the purpose of
changing the Company's domicile) or (iii) the acquisition by the Company of the
assets or stock of another business entity, which agreement or understanding is
thereafter consummated, whether or not during such five (5) year period, the
Company, upon such consummation, shall pay to the Representative an amount equal
to the following percentages of the consideration paid by the Company in
connection with such transaction:
5% of the first $4,000,000 or portion thereof, of such consideration;
4% of the next $1,000,000 or portion thereof, of such consideration;
3% of the next $1,000,00 or portion thereof, of such consideration; and
2% of such consideration in excess of the first $6,000,000 of such
consideration.
The fee payable to the Representative will be in the same form of
consideration as that paid by or to the Company, as the case may be, in any such
transactions.
(d) Commencing twelve months after the Effective Date, the Company will pay
the Representative as its Warrant solicitation agent an amount equal to four
percent (4%) of the aggregate exercise price of each Class A Warrant exercised
provided: (1) the market price of the Common Stock on the date the Warrant was
exercised was greater than the Warrant exercise price on that date; (2) exercise
of the Warrant was solicited by a member of the NASD and the NASD member is
designated in writing by the Warrant holder; (3) the Warrant was not held in a
discretionary account or prior specific written approval was obtained from the
related customer ; (4) disclosure of compensation arrangements was made both at
the time of the offering and at the time of exercise of the Warrant; (5) the
solicitation of the exercise of the Warrant was not in violation of Regulation M
promulgated under the Securities Exchange Act of 1934; and (6) solicitation is
in compliance with NASD Notice to Members 81-38. The Company agrees to pay over
to the Representative any fees due it within five business days after receipt by
the Company of Warrant proceeds. Within ten (10) days of the last day of each
month commencing one year from the Effective Date, the Company will instruct the
Warrant Agent to notify the Representative of each Warrant certificate which has
been properly completed and delivered for exercise by holders of Warrants during
each such month. The Company will instruct the Transfer Agent that the
Representative may at any time during business hours upon reasonable advance
written notice, at its expense, examine the
26
<PAGE>
records of the Company and the Warrant Agent which relate to the exercise of the
Warrants.
SECTION 17. Notice. Except as otherwise expressly provided in this
Agreement, (a) whenever notice is required by the provisions hereof to be given
to the Company, such notice shall be given in writing, by certified mail, return
receipt requested, addressed to the Company at the address set forth herein on
the first page, copy to Bernstein & Wasserman, LLP, 950 Third Avenue, New York,
New York 10022, Attention Stuart Neuhauser, Esq.; and (b) whenever notice is
required by the provisions hereof to be given to the Underwriters, such notice
shall be in writing addressed to the Representative at IAR, at the address set
forth herein on the first page copy to Steven Morse, Esq., Lester Morse P.C.,
Suite 420, 111 Great Neck Road, Great Neck, NY 11021. Any party may change the
address for notices to be sent by giving written notice to the other persons.
SECTION 18. Representations and Agreements to Survive Delivery. Except as
the context otherwise requires, all representations, warranties, covenants, and
agreements contained in this Agreement shall be deemed to be representations,
warranties, covenants, and agreements as at the date hereof and as at the
Closing Date and the Additional Closing Date(s), and all representations,
warranties, covenants, and agreements of the several Underwriters and the
Company, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any of the Underwriters or any of their
controlling persons, and shall survive any termination of this Agreement
(whensoever made) and/or delivery of the Units to the several Underwriters.
SECTION 19. Miscellaneous. This Agreement is made solely for the benefit of
the Underwriters and the Company and their respective successors and assigns,
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successor" or the term "successors and assigns" as used in
this Agreement shall not include any purchaser, as such, of any of the Units.
This Agreement shall not be assignable by any party without the other party's
prior written consent. This Agreement shall be binding upon, and shall inure to
the benefit of, our respective successors and permitted assigns. The foregoing
represents the sole and entire agreement between us with respect to the subject
matter hereof and supersedes any prior agreements between us with respect
thereto. This Agreement may not be modified, amended or waived except by a
written instrument signed by the party to be charged. The validity,
interpretation and construction of this Agreement, and of each part hereof,
shall be governed by the internal laws of the State of New York, without giving
effect to the conflict of laws provisions thereof.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, but all of which together shall be deemed to be one
and the same instrument. If a party signs this Agreement and transmits an
electronic facsimile of the signature page to the other party, the party who
receives the transmission may rely upon the electronic facsimile as a signed
original of this Agreement.
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If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us a counterpart hereof, whereupon this instrument
along with all counterparts will become a binding agreement between the Company
and the Underwriters in accordance with its terms.
Very truly yours,
CONOLOG CORPORATION
By:_____________________________________
(authorized officer)
CONFIRMED AND ACCEPTED, as of the
date first above written:
IAR SECURITIES CORP.
By:_____________________________________
For itself and as the Representative
of the other Underwriters named in
Schedule I hereto.
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SCHEDULE I
Underwriters Number of Units to be
------------ Purchased
---------------------
IAR Securities Corp.
---------
Total 700,000
=======
29
<PAGE>
IAR Securities Corp.
99 Wall Street
New York, NY 10005
CONOLOG CORPORATION
700,000 Units
SELECTED DEALER AGREEMENT
Dear Sirs: ____________, 1997
We, as the Underwriter named in the below referred to Prospectus (the
"Underwriter") have agreed, subject to the terms and conditions of the
Underwriting Agreement dated this date (the "Underwriting Agreement") to
purchase from IAR Securities Corp. (the "Company") at the price set forth on the
cover of such Prospectus, the above referred to 700,000 Units, each consisting
of one (1) share of Common Stock, $1.00 par per share ("Common Stock") and four
(4) Class A Redeemable Common Stock Purchase Warrants ("Warrants"), and up to
an additional 105,000 Units, offered pursuant to an over-allotment option
(collectively being called the "Units"). Each Warrant is exercisable to purchase
(1) share of Common Stock. The Units and certain of the terms on which they are
being purchased and offered are more fully described in the enclosed Prospectus
(the "Prospectus"). Additional copies of the Prospectus will be supplied to you,
in reasonable quantities upon request.
We, as the Underwriter, are offering to certain dealers ("Selected
Dealers"), among whom we are pleased to include you, part of the Units, at the
public offering price less a concession of $___ per Unit. The offering to
Selected Dealers is made subject to the issuance and delivery of the Units to us
and their acceptance by us, to the approval of legal matters by our counsel, and
to the terms and conditions hereof, and may be made by us on the basis of the
reservation of Units or an allotment against subscription, or otherwise in our
discretion.
The initial public offering price of the Units is set forth in the
Prospectus. With our consent, Selected Dealers may allow a discount of not in
excess of $___ per Unit in selling the Units to other dealers meeting the
requirements of the specifications set forth in the affirmation of dealers
contained in the attached Acceptance and Order. Upon our request, you will
notify us of the identity of any dealer to whom you allow such a discount and
any Selected Dealer from whom you receive such a discount.
All orders will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part, to
accept or reject orders in the order of their receipt or otherwise, and to
allot. You are not authorized to give any information or make any representation
other than as set forth in the Prospectus in connection with the sale of any of
the Units. No dealer is authorized to act as agent for
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<PAGE>
the Underwriter, or for the Company or the Selling Security Holder, when
offering any of the Units. Nothing contained herein shall constitute the
Selected Dealers partners with us or with one another.
Upon release by us, you may offer the Units at the public offering price,
subject to the terms and conditions hereof. We may, and the Selected Dealers
may, with our consent, purchase Units from and sell Units to each other at the
public offering price less a concession not in excess of the concession to
Selected Dealers.
Payment for Units purchased by you is to be made at our office (or at such
other place as instructed) at the public offering price, on such date as we may
advise, on one day's notice to you, by certified or official bank check in New
York Clearing House funds payable to our order. Delivery to you of certificates
for the Common Stock and Warrants included in the Units will be made as soon as
is practicable thereafter. Unless specifically authorized by us, payment by you
may not be deferred until delivery of certificates to you. The concession
payable to you will be paid as soon as practicable after the closing.
This Agreement shall terminate at the close of business on the 45th day
after the effective date of the Registration Statement. We may terminate this
Agreement at any time prior thereto by notice to you. Notwithstanding the
termination of this Agreement, you shall remain liable for your proportionate
share of any transfer tax or any liability which may be asserted or assessed
against us or Selected Dealers based upon the claim that the Underwriter and the
Selected Dealers, or any of them, constitute a partnership, association,
unincorporated business or other entity, including in each case your
proportionate share of expenses incurred in defending against any such claim or
liability.
In the event that, prior to the termination of this Agreement we purchase
in the open market or otherwise any Units delivered to you, you agree to repay
to us for the account of the Underwriter the amount of the above concession to
Selected Dealers plus brokerage commissions and any transfer taxes paid in
connection with such purchase; which amounts can be withheld from the concession
otherwise payable to you hereunder. Certificates for the Common Stock and
Warrants included in the Units delivered on any such purchase need not be the
identical certificates originally issued to you.
At any time prior to the termination of this Agreement, you will, upon our
request, report to us the number of Units purchased by you under this Agreement
which then remain unsold and will, upon our request, sell to us for the account
of the Underwriter the number of such unsold Units that we may designate, at the
public offering price less an amount to be determined by us not in excess of the
concession allowed you.
We shall have full authority to take such action as we may deem advisable
in respect of all matters pertaining to the offering, including, without
limitation, stabilization and over-allotment. We shall be under no liability to
you except for our lack of good faith and for obligations assumed by us in this
Agreement, except that you do not waive any rights that you may have under the
Securities Act of 1933, as amended, (the "1933 Act") or the rules and
regulations thereunder.
2
<PAGE>
Upon application to us, we will inform you of the states and other
jurisdictions of the United States in which it is believed that the Units are
qualified for sale under, or are exempt from the requirements of, their
respective securities laws, but we assume no responsibility with respect to your
right to sell Units in any jurisdiction. We have filed a Further State Notice
with respect to the Units with the Department of State of the State of New York.
You confirm that you are familiar with Rule 15c2-8 under the Securities
Exchange Act of 1934 (the "1934 Act"), relating to the distribution of
preliminary and final prospectuses, and confirm that you have complied and will
comply therewith (whether or not the Company is subject to the reporting
requirements of Section 13 or 15(d) of the 1934 Act). We will make available to
you, to the extent made available to us by the Company such number of copies of
the Prospectus as you may reasonably request for purposes contemplated by the
1933 Act, the 1934 Act, and the rules and regulations thereunder.
Your attention is directed to Rule 10b-6 under the 1934 Act, which contains
certain prohibitions against trading by a person interested in a distribution
until such person has completed its participation in the distribution. You
confirm that you will at all times comply with the provisions of such Rule in
connection with this offering.
Any notice from us shall be deemed to have been duly given if telephoned,
and subsequently mailed or transmitted by any standard form of written
tele-communication to you at the address to which this Agreement is mailed, or
if so mailed or transmitted in the first instance.
Please advise us promptly by telephone or any standard form of written
telecommunication of the principal amount of Units ordered by you and confirm
your agreement hereto by signing the Acceptance and Order on the enclosed
duplicate hereof and returning promptly such signed duplicate copy to IAR
Securities Corp.., 99 Wall Street, New York, NY 10005. Upon receipt thereof,
this instrument and such signed duplicate copy will evidence the agreement
between us.
Very truly yours,
IAR SECURITIES CORP.
By:_________________________________
3
<PAGE>
ACCEPTANCE AND ORDER
IAR Securities Corp.
99 Wall Street
New York, NY 10005
Dear Sirs:
We hereby enter our order for ______ Units of Conolog Corporation under the
terms and conditions of the foregoing Agreement.
We agree to all the terms and conditions stated in the foregoing Agreement.
We acknowledge receipt of the Prospectus relating to the above Units and we
further state that in entering this order we have relied upon said Prospectus
and no other statements whatsoever, written or oral. We affirm that we are
either (i) a member in good standing of the National Association of Securities
Dealers, Inc. (the "NASD") or (ii) a dealer with its principal place of business
located outside the United States, its territories, or possessions and not
registered under the Securities Exchange Act of 1934 and not eligible for
membership in the NASD, who hereby agrees to make no sales within the United
States, its territories or its possessions or to persons who are nationals
thereof or residents therein, and in making any sales, to comply with the NASD's
interpretation with respect to free-riding and withholding, as well as all other
pertinent interpretations of the NASD that may be applicable to us. We also
affirm and agree that we will promptly re-offer any Units purchased by us in
conformity with the terms of the offering and in conformity with the NASD
Conduct Rules of the NASD, (including, without limitation, Rules 2730, 2740,
2420 and 2750) and all applicable Rules and Regulations promulgated under the
Securities Exchange Act of 1934.
Date: , 1997 __________________________________
(Name of Selected Dealer)
By:_______________________________
(Authorized Signature)
Address:__________________________
__________________________________
4
<PAGE>
No sale, offer to sell or transfer of the securities represented by this
certificate or any interest therein shall be made unless a registration
statement under the Securities Act of 1933, as amended (the "Act"), with respect
to such transaction is then in effect, or the issuer has received an opinion of
counsel satisfactory to it that such transfer does not require registration
under that Act.
This Warrant will be void after 5:00 p.m. New York time on ___________,
2002 (i.e. five years from the effective date of the Registration Statement).
Warrant No. 1
UNDERWRITERS' UNIT WARRANT
To Subscribe for and Purchase Units of
CONOLOG CORPORATION
(Transferability Restricted as Provided in Paragraph 2 Below)
THIS CERTIFIES THAT, for value received, _______________________________
__________________ or registered assigns, is entitled to subscribe for and
purchase from Conolog Corporation, incorporated under the laws of the State of
Delaware (the "Company"), up to ________ fully paid and non-assessable Units
(the "Underwriters' Warrant") consisting of one fully paid and non-assessable
share of Common Stock of the Company and four Class A Common Stock Purchase
Warrants (the "Underwriters' Class A Warrants") of the Company, as hereinafter
defined, at the "Purchase Price" and during the period hereinafter set forth,
subject, however, to the provisions and upon the terms and conditions
hereinafter set forth. This Warrant is one of an issue of the Company's
Underwriters' Unit Warrants identical in all respects except as to the names of
the holders thereof and the number of Units purchasable thereunder, representing
on the original issue thereof rights to purchase up to 70,000 Units.
1. As used herein:
(a) "Common Stock" or "Common Shares" shall initially refer to the
Company's common stock, $1.00 par value as more fully set forth in Section
5 hereof.
(b) "Warrant Agreement" shall refer to the Warrant Agreement dated as
of ___________, 199_, as amended ______, 1997 between Continental Stock
Transfer & Trust Co. and the Company.
(c) "Class A Warrants" shall refer to the Warrant(s) included in the
Units offered to the public by the Company through IAR SECURITIES CORP.,
pursuant to a
1
<PAGE>
Registration Statement declared effective by the Securities and Exchange
Commission ("SEC") on __________, 1997 and issued or to be issued subject
to terms and conditions of the Warrant Agreement.
(d) "Underwriters' Class A Warrants" shall refer to the Class A
Warrants issuable upon exercise of this Warrant to the holder thereof and
shall be identical in all respects to the Class A Warrants issued in the
public offering.
(e) "Units" shall consist of one share of Common Stock and four Class
A Warrants. The Common Stock included in the Units and issuable upon the
exercise of the Underwriters' Class A Warrants are subject to adjustment
pursuant to Section 4 hereof and the Warrant Agreement.
(f) "Effective Date" shall mean the date that the Securities and
Exchange Commission declares effective form SB-2, File No. 333-________.
(g) "Purchase Price" shall be $6.00 per Unit which is subject to
adjustment pursuant to Section 4 hereof.
(h) "Underwriter" shall refer to IAR SECURITIES CORP.
(i) "Underwriting Agreement" shall refer to the Underwriting Agreement
dated ___________, 1997 between the Company and the Underwriter.
(j) "Underwriters' Unit Warrants" shall refer to Warrants to purchase
an aggregate of up to 70,000 Units issued to the Underwriter or its
designees by the Company pursuant to the Underwriting Agreement (including
the Warrants represented by this Certificate), as such may be adjusted from
time to time pursuant to the terms of Section 4 hereof (and including any
Warrants represented by any certificate issued from time to time in
connection with the transfer, partial exercise, exchange of any Warrants or
in connection with a lost, stolen, mutilated or destroyed Warrant
certificate, if any, or to reflect an adjusted number of Units).
(k) "Underlying Securities" shall refer to and include the Common
Shares and Underwriters' Class A Warrants issuable or issued upon exercise
of the Underwriters' Unit Warrants as well as any Common Shares issued upon
the exercise of the Underwriters' Class A Warrants.
(l) "Holders" shall mean the registered holder of the Underwriters'
Warrants or any issued Underlying Securities.
2. The purchase rights represented by this Warrant may be exercised by the
holder hereof, in whole or in part at any time, and from time to time, for a
period commencing one year from the Effective Date and expiring on ___________,
2002 (the "Expiration Date"), by the surrender of this Warrant, with the
purchase form attached duly executed, at the Company's office (or such office or
agency of the Company as it may
2
<PAGE>
designate in writing to the Holder hereof by notice pursuant to Section 14
hereof), and upon payment by the Holder to the Company in cash, or by certified
check or bank draft of the Purchase Price for such Units. The Company agrees
that the Holder hereof shall be deemed the record owner of such Underlying
Securities as of the close of business on the date on which this Warrant shall
have been presented and payment made for such Units as aforesaid. Certificates
for the Underlying Securities so purchased shall be delivered to the Holder
hereof within a reasonable time, not exceeding five (5) days, after the rights
represented by this Warrant shall have been so exercised. If this Warrant shall
be exercised in part only, the Company shall, upon surrender of this Warrant for
cancellation, deliver a new Underwriters' Warrant evidencing the rights of the
Holder hereof to purchase the balance of the Units which such Holder is entitled
to purchase hereunder. Exercise in full of the rights represented by this
Warrant shall not extinguish the rights granted under Section 9 hereof.
In the event that the Underwriters' Class A Warrants have expired, this
Warrant will entitle the holder to purchase only the shares of Common Stock
included in the Units, subject to adjustment as provided for herein.
3. Subject to the provisions of Section 8 hereof, (i) this Warrant is
exchangeable at the option of the Holder at the aforesaid office of the Company
for other Underwriters' Warrants of different denominations entitling the Holder
thereof to purchase in the aggregate the same number of Units as are purchasable
hereunder; and (ii) this Warrant may be divided or combined with other
Underwriters' Warrants which carry the same rights, in either case, upon
presentation hereof at the aforesaid office of the Company together with a
written notice, signed by the Holder hereof, specifying the names and
denominations in which new Underwriters' Warrants are to be issued, and the
payment of any transfer tax due in connection therewith.
4. The Underwriters' Class A Warrants included in the Units will be subject
to adjustment from time to time as set forth in the Warrant Agreement to the
same extent as the Class A Warrants which have been sold to the public. Subject
and pursuant to the provisions of this Section 4, the Purchase Price and number
of Common Shares included in the Units subject to this Warrant shall be subject
to adjustment from time to time as set forth hereinafter.
(a) If the Company shall, at any time, subdivide its outstanding Common
Shares by recapitalization, reclassification, split up thereof, or other such
issuance without additional consideration, the appropriate Purchase Price
immediately prior to such subdivision shall be proportionately decreased, and if
the Company shall at any time combine the outstanding Common Shares by
recapitalization, reclassification or combination thereof, the Purchase Price
immediately prior to such combination shall be proportionately increased. Any
such adjustment to the Purchase Price or the corresponding adjustment to the
Purchase Price shall become effective at the close of business on the record
date for such subdivision or combination. No adjustment to the Purchase Price
and the number of Common Shares issuable upon exercise of this Warrant shall be
required if such adjustment provides the holders of this Warrant with
3
<PAGE>
disproportionate rights, privileges and economic benefits which are not provided
to the public shareholders.
(b) In the event that prior to the Expiration Date the Company adopts a
resolution to merge, consolidate, or sell percentages in all of its assets, each
Warrant holder upon the exercise of his Underwriters' Warrant will be entitled
to receive the same treatment as a holder of any other share of Common Stock. In
the event the Company adopts a resolution for the liquidation, dissolution, or
winding up of the Company's business, the Company will give written notice of
such adoption of a resolution to the registered holders of the Underwriters'
Warrants. Thereupon all liquidation and dissolution rights under this Warrant
will terminate at the end of thirty (30) days from the date of the notice to the
extent not exercised within those thirty (30) days.
(c) If any capital reorganization or reclassification of the capital stock
of the Company or consolidation or merger of the Company with another
corporation, shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, cash or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, the Company or such successor
or purchasing corporation, as the case may be, shall execute with the Warrant
Agent a supplemental Warrant Agreement providing that each registered holder of
an Underwriters' Unit Warrant shall have the right thereafter and until the
Expiration Date to exercise such Warrant for the kind and amount of stock,
securities, cash or assets receivable upon such reorganization,
reclassification, consolidation, merger or sale by a holder of the number of
shares of Common Stock for the purchase of which such Warrant might have been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger or sale, subject to adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
4.
(d) In case at any time the Company shall declare a dividend or make any
other distribution upon any stock of the Company payable in Common Stock, then
such Common Stock issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold without consideration.
(e) Upon any adjustment of the appropriate respective Purchase Price as
hereinabove provided, the number of Common Shares issuable upon exercise of each
class of Warrant shall be changed to the number of shares determined by dividing
(i) the aggregate Purchase Price payable for the purchase of all shares issuable
upon exercise of that class of Warrant immediately prior to such adjustment by
(ii) the appropriate Purchase Price per share in effect immediately after such
adjustment. For the purposes of the foregoing, no value shall be given to the
Underwriters' Class A Warrants.
(f) No adjustment in the Purchase Price shall be required under Section 4
hereof unless such adjustment would require an increase or decrease in such
price of at least 1% provided, however, that any adjustments which by reason of
the foregoing are not required at the time to be made shall be carried forward
and taken into account and included in determining the amount of any subsequent
adjustment, and provided further,
4
<PAGE>
however, that in case the Company shall at any time subdivide or combine the
outstanding Common Shares as a dividend, said amount of 1% per share shall
forthwith be proportionately increased in the case of a combination or decreased
in the case of a subdivision or stock dividend so as to appropriately reflect
the same.
(g) On the effective date of any new Purchase Price the number of shares as
to which this Warrant may be exercised shall be increased or decreased so that
the total sum payable to the Company on the exercise of this Warrant shall
remain constant.
(h) The form of Underwriters' Unit Warrant need not be changed because of
any change pursuant to this Article, and Underwriters' Unit Warrants issued
after such change may state the Purchase Price and the same number of shares as
is stated in the Underwriters' Unit Warrants initially issued pursuant to this
Warrant. However, the Company may at any time in its sole discretion (which
shall be conclusive) make any change in the form of Underwriters' Unit Warrant
that the Company may deem appropriate and that does not affect the substance
thereof, and any Underwriters' Unit Warrant thereafter issued or countersigned,
whether in exchange or substitution for an outstanding Warrant or otherwise, may
be in the form as so changed.
5. For the purposes of this Warrant, the terms "Common Shares" or "Common
Stock" shall mean (i) the class of stock designated as the common stock of the
Company on the date set forth on the first page hereof or (ii) any other class
of stock resulting from successive changes or re-classifications of such Common
Stock consisting solely of changes in par value, or from no par value to par
value, or from par value to no par value. If at any time, as a result of an
adjustment made pursuant to Section 4, the securities or other property
obtainable upon exercise of this Warrant shall include shares or other
securities of the Company other than Common Shares or securities of another
corporation or other property, thereafter, the number of such other shares or
other securities or property so obtainable shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Shares contained in Section 4 and all
other provisions of this Warrant with respect to Common Shares shall apply on
like terms to any such other shares or other securities or property. Subject to
the foregoing, and unless the context requires otherwise, all references herein
to Common Shares shall, in the event of an adjustment pursuant to Section 4, be
deemed to refer also to any other securities or property then obtainable as a
result of such adjustments.
6. The Company covenants and agrees that:
(a) During the period within which the rights represented by this
Warrant may be exercised, the Company shall, at all times, reserve and keep
available out of its authorized capital stock, solely for the purposes of
issuance upon exercise of this Warrant, such number of its Common Shares as
shall be issuable upon the exercise of this Warrant and the exercise of the
Underwriters' Class A Warrants and at its expense will obtain the listing
thereof on all national securities exchanges on which the Class A Warrants
are then listed; and if at any time the number of authorized Common Shares
shall not be sufficient
5
<PAGE>
to effect the exercise of this Warrant and the exercise of the
Underwriters' Class A Warrants included therein, the Company will take such
corporate action as may be necessary to increase its authorized but
unissued Common Shares to such number of shares as shall be sufficient for
such purpose; the Company shall have analogous obligations with respect to
any other securities or property issuable upon exercise of this Warrant.
(b) All Common Shares which may be issued upon exercise of the rights
represented by this Warrant or upon the exercise of the Underwriters' Class
A Warrants will, upon issuance and payments be validly issued, fully paid,
nonassessable and free from all taxes, liens and charges with respect to
the issuance thereof (except as may be concurrently discharged by the
Company or the Holder); and,
(c) All original issue taxes payable in respect of the issuance of
Common Shares upon the exercise of the rights represented by this Warrant
or the Underwriters' Class A Warrants shall be borne by the Company but in
no event shall the Company be responsible or liable for income taxes or
transfer taxes upon the transfer of any Underwriters' Warrants.
7. Until exercised, this Warrant shall not entitle the Holder hereof to any
voting rights or other rights as a shareholder of the Company, except that the
Holder of this Warrant shall be deemed to be a shareholder of this Company for
the purpose of bringing suit on the ground that the issuance of shares of Common
Stock the Company is improper under the laws of the Company's state of
incorporation.
8. This Warrant shall not be sold, transferred, assigned or hypothecated
for a period of twelve (12) months from the Effective Date of the Company's
public offering with respect to which this Warrant has been issued, except to
officers of the Underwriter, and/or the other underwriters and/or selected
dealers who participated in such offering, or the officers or partners of such
underwriters and/or selected dealers. In no event shall this Warrant be sold,
transferred, assigned or hypothecated except in conformity with the applicable
provisions of the Act as then in force or any similar Federal statute then in
force, and all applicable "Blue Sky" laws.
9. The Holder of this Warrant, by acceptance hereof, agrees that, prior to
the disposition of this Warrant or of any Underlying Securities theretofore
purchased upon the exercise hereof, under circumstances that might require
registration of such securities under the Act, or any similar Federal statute
then in force, such Holder will give written notice to the Company expressing
such Holder's intention of effecting such disposition, and describing briefly
such Holder's intention as to the disposition to be made of this Warrant and/or
the Underlying Securities theretofore issued upon exercise hereof. Promptly upon
receiving such notice, the Company shall present copies thereof to its counsel
and the provisions of the following subdivisions shall apply:
(a) If, in the opinion of such counsel, the proposed disposition does
not require registration under the Act, or any similar Federal statute then
in force, of this
6
<PAGE>
Warrant and/or the securities issuable or issued upon the exercise of this
Warrant, the Company shall, as promptly as practicable, notify the Holder
hereof of such opinion, whereupon such Holder shall be entitled to dispose
of this Warrant and/or such Underlying Securities theretofore issued upon
the exercise hereof, all in accordance with the terms of the notice
delivered by such Holder to the Company.
(b) If, in the opinion of such counsel, such proposed disposition
requires such registration or qualification under the Act, or similar
Federal statute then in force, of this Warrant and/or the Underlying
Securities issuable or issued upon the exercise of this Warrant, the
Company shall promptly give written notice of such opinion to the Holder
hereof and to the then holders of the securities theretofore issued upon
the exercise of this Warrant at the respective addresses thereof shown on
the books of the Company. Section 15 of the Underwriting Agreement contains
certain registration rights which are incorporated herein by reference in
their entirety.
10. Whenever, pursuant to Section 9 hereof, a registration statement
relating to the Underwriters' Warrant or Underlying Securities is filed under
the Act, the Company agrees to indemnify and hold harmless the Holder of this
Warrant, or of securities issuable or issued upon the exercise hereof, from and
against any claims and liabilities arising out of or based upon any untrue
statement of a material fact, or omission to state a material fact required to
be stated, in any such registration statement or prospectus, except insofar as
such claims or liabilities are caused by any such untrue statement or omission
based on information furnished in writing to the Company by such Holder, or by
any other such Holder affiliated with the Holder who seeks indemnification, as
to which the Holder hereof, by acceptance hereof, agrees to indemnify and hold
harmless the Company, in the same manner as set forth herein.
11. If this Warrant, or any of the securities issuable pursuant hereto,
require qualification or registration with, or approval of, any governmental
official or authority (other than registration under the Act, or any similar
Federal statute at the time in force), before such shares may be issued on the
exercise hereof, the Company, at its expense, will take all requisite action in
connection with such qualification, and will use its best efforts to cause such
securities and/or this Warrant to be duly registered or approved, as may be
required.
12. This Warrant is exchangeable, upon its surrender by the registered
Holder at such office or agency of the Company as may be designated by the
Company, for new Underwriters' Unit Warrants of like tenor, representing, in the
aggregate, the right to subscribe for and purchase the number of Units or Common
Shares as the case may be that may be subscribed for and purchased hereunder,
each of such new Underwriters' Unit Warrants to represent the right to subscribe
for and purchase such number of Units or Common Shares, as the case may be, as
shall be designated by the registered Holder at the time of such surrender. Upon
receipt of evidence satisfactory to the Company of the loss, theft, destruction
or mutilation of this Warrant, and, in the case of any such loss, theft or
destruction, upon delivery of a bond of indemnity satisfactory to the Company,
or in the case of such mutilation, upon surrender or cancellation of this
Warrant, the Company will
7
<PAGE>
issue to the registered Holder a new Underwriters' Unit Warrant of like tenor,
in lieu of this Warrant, representing the right to subscribe for and purchase
the number of Units or Common Shares, as the case may be, that may be subscribed
for and purchased hereunder. Nothing herein is intended to authorize the
transfer of this Warrant except as permitted under Section 8.
13. Every Holder hereof, by accepting the same, agrees with any subsequent
Holder hereof and with the Company that this Warrant and all rights hereunder
are issued and shall be held subject to all of the terms, conditions,
limitations and provisions set forth in this Warrant, and further agrees that
the Company and its transfer agent may deem and treat the registered Holder of
this Warrant as the absolute owner hereof for all purposes and shall not be
affected by any notice to the contrary.
14. All notices required hereunder shall be given by first-class mail,
postage prepaid; if given by the Holder hereof, addressed to the Company at 5
Columbia Road, Somerville, N.J. 08876; or such other address as the Company may
designate in writing to the Holder hereof; and if given by the Company,
addressed to the Holder at the address of the Holder shown on the books of the
Company.
15. The Company will not merge or consolidate with or into any other
corporation, or sell or otherwise transfer its property, assets and business
substantially as an entirety to another corporation, unless the corporation
resulting from such merger or consolidation (if not the Company), or such
transferee corporation, as the case may be, shall expressly assume, by
supplemental agreement satisfactory in form to the Underwriter, the due and
punctual performance and observance of each and every covenant and condition of
this Warrant to be performed and observed by the Company.
16. The validity, construction and enforcement of this Warrant shall be
governed by the laws of the State of New York without giving effect to the
conflict of laws provisions thereof and jurisdiction is hereby vested in the
Courts of said State in the event of the institution of any legal action under
this Warrant.
8
<PAGE>
IN WITNESS WHEREOF, CONOLOG CORPORATION has caused this Warrant to be
signed by its duly authorized officers under its corporate seal, to be dated
_____________, 1997.
CONOLOG CORPORATION
By:_________________________
Attest:
_______________________________
(Corporate Seal)
9
<PAGE>
PURCHASE FORM
To Be Executed
Upon Exercise of Warrant
The undersigned hereby exercises the right to purchase _________Units, each Unit
consisting of one Common Shares and four Underwriters' Class A Warrants
evidenced by the within Warrant, according to the terms and conditions thereof,
and herewith makes payment of the purchase price in full. The undersigned
requests that certificates for such shares and warrants shall be issued in the
name set forth below.
Dated: , 19
_____________________________________
Signature
_____________________________________
Print Name of Signatory
_____________________________________
Name to whom certificates are to
be issued if different from above
Address:_____________________________
_____________________________________
Social Security No.__________________
or other identifying number
If said number of shares and warrants shall not be all the shares and
warrants purchasable under the within Warrant, the undersigned requests that a
new Warrant for the unexercised portion shall be registered in the name of:
_____________________________________
(Please Print)
_____________________________________
Address:
_____________________________________
Social Security No.
or other identifying number
_____________________________________
Signature
10
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED , hereby
sells assigns and transfers to , Soc. Sec. No.
[ ] the within Warrant, together with all rights, title and interest therein,
and does hereby irrevocably constitute and appoint attorney to transfer
Warrant on the register of the within named Company, with full power of
substitution.
_____________________________________
Signature
Dated: , 19
Signature Guaranteed:
________________________________
11
<PAGE>
Conolog Corporation
5 Columbia Road
Somerville, N.J. 08876
____________, 1997
IAR Securities Corp.
99 Wall Street
New York, New York 10005
Gentlemen:
The following sets forth our understanding with respect to your providing
financial advisory services for this corporation.
l. For a period of two (2) years commencing on the date hereof, you will
render financial consulting services to this corporation as such services shall
be required but in no event shall such services require more than two business
days per month. Your services shall include the following:
(a) to advise and assist in matters pertaining to the financial
requirements of our corporation and to assist, as and when required, in
formulating plans and methods of financing;
(b) to prepare and present financial reports required by us and to
analyze proposals relating to obtaining funds for our business, mergers
and/or acquisitions;
(c) to assist in our general relationship with the financial community
including brokers, stockholders, financial analysts, investment bankers,
and institutions; and
(d) to assist in obtaining financial management, and technical and
advisory services, and financial and corporate public relations, as may be
requested or advisable.
2. All services required to be performed hereunder shall be requested by us
in writing and, upon not less than seven business days notice, unless such
notice is waived by you. Such notice shall be to the address specified above or
to such other place as you shall designate to us in writing.
3. For the services to be performed hereunder, and for your continued
availabil ity to perform such services, we will pay you a fee of $35,000 per
year or a total of $70,000, which sum is payable in full in advance on the
closing date of our proposed initial public offering. Further, we will reimburse
you for such reasonable out-of-pocket expenses as may be incurred by you on our
behalf, but only to the extent authorized by us.
<PAGE>
IAR Securities Corp.
Page 2
4. This Agreement has been duly approved by our Board of Directors.
5. You shall have no authority to bind this corporation to any contract or
commitment, inasmuch as your services hereunder are advisory in nature.
6. You will maintain in confidence all proprietary, non-published
information obtained by you with respect to our corporation during the course of
the performance of your services hereunder and you shall not use any of the same
for your own benefit or disclose any of the same to any third party, without our
prior written consent, both during and after the term of this Agreement.
7. This Agreement shall not be assignable by either of us without the other
party's prior written consent.
8. This Agreement shall be binding upon, and shall inure to the benefit of,
our respective successors and permitted assigns.
9. The foregoing represents the sole and entire agreement between us with
respect to the subject matter hereof and supersedes any prior agreements between
us with respect thereto. This Agreement may not be modified, amended or waived
except by a written instrument signed by the party to be charged. This Agreement
shall be governed by and construed in accordance with the internal laws of the
State of New York, without regard to the principles of conflicts of laws of such
State.
Please signify your agreement to the foregoing by signing and returning to
us the enclosed copy of this Agreement which will thereupon constitute an
agreement between us.
Very truly yours,
CONOLOG CORPORATION
BY ___________________________________
Robert S. Benou, President
Agreed and Consented to:
IAR SECURITIES CORP.
BY ________________________________
President
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of June, 1997 between CONOLOG CORPORATION
("Company"), a Delaware corporation having an office at 5 Columbia Road,
Somerville, New Jersey 08876 and ROBERT S. BENOU ("Executive"), residing at 525
Hillside Avenue, Mountainside, New Jersey 07092.
W I T N E S S E T H:
1. Employment.
1.01 Term. Company hereby employs Executive, and Executive hereby accepts
employment with Company with the duties hereinafter set forth, for a period
commencing on June 1, 1997 and ending May 31, 2002 subject, however, to earlier
termination in accordance with the provisions of this Agreement. This Agreement
shall automatically renew on a year-to-year basis unless terminated by either
party hereto giving written notice to the other at least 90 days prior to May
31, 2002 or any May 31 thereafter.
2. Duties. Executive shall be President of Company and shall perform such
duties as may from time to time be assigned to him by Company's Board of
Directors. Executive agrees that, during the term of this Agreement, he will
devote his full time, skills and efforts to the performance of his duties
hereunder and to the furtherance of the interests of the business of Company.
3. Compensation and Related Matters.
3.01 Fixed Salary. As compensation for Executive's services Company shall
pay Executive a salary of $150,000 per annum for the period June 1, 1997 through
May 31, 1998, and an increase of $20,000 per annum for each twelve month period
thereafter (the "Fixed Salary") in equal monthly (or more frequent) installments
less appropriate payroll deductions as required by law. In addition to his Fixed
Salary, Executive shall receive, with respect to each full fiscal year during
the term hereof, commencing with the year ending July 31, 1998, an annual bonus
(the "Profit Bonus") equal to six percent (6%) of the Company's annual "Income
Before Income Tax Provision" as stated on the Company's Annual Report on Form
10-K. The Profit Bonus shall be payable within 120 days after the end of the
Company's fiscal year.
3.02 Expenses. Company shall pay or reimburse Executive for all reasonable
travel (including automobile), hotel, entertainment and other business expenses
incurred in the performance of Executive's duties upon submission of appropriate
vouchers and other supporting data.
<PAGE>
3.03 Automobile. Executive shall retain exclusive use of the Company's
automobile now in his possession which Company shall replace every three years.
Company shall pay or reimburse Executive for all insurance, gasoline,
maintenance and repair and other expenses incurred in use of the automobile upon
submission of appropriate invoices, vouchers, receipts and other supporting
data.
3.04 Benefits. Executive shall be entitled to (i) participate in all
general pension, profit-sharing, life, medical, disability and other insurance
and executive benefit plans at any time in effect for executives of Company,
provided, however, that nothing herein shall obligate Company to establish or
maintain any executive benefit plan, whether of the type referred to in this
clause (i) or otherwise, and (ii) four (4) weeks vacation during each
twelve-month period of employment at mutually agreeable times.
4. Termination for Cause; Disability; Death; Change of Control.
4.01 For Cause. Company shall have the right to terminate the employment of
Executive hereunder at any time for cause upon written notice. For purposes of
the preceding sentence "for cause" shall mean and be limited to the occurrence
of any of the following acts or events by or relating to Executive: (i) any
material breach of any obligations of Executive under this Agreement which
remains uncured for more than twenty (20) days after written notice thereof by
Company to Executive; (ii) habitual insobriety of Executive while performing his
duties hereunder; (iii) theft or embezzlement from Company or any other material
acts of dishonesty; (iv) repeated insubordination respecting reasonable orders
or directions of Company's Board of Directors, which remains uncured for more
than twenty (20) days after written notice thereof by Company to Executive; or
(v) conviction of a crime (other than traffic violations and minor
misdemeanors). In the event of termination for cause, Executive's Fixed Salary
and Profit Bonus shall terminate as of the effective date of termination of
employment after written notice thereof.
4.02 Without Cause. In the event that during the term hereof, Company
discharges Executive without cause or in the event Company discharges Executive
on written notice under Section 4.01 within six months after a Change of Control
(as that term is hereinafter defined), Executive shall be entitled to receive a
payment equal to 2.99 times Executive's average annual compensation paid by
Company (including Profit Bonus, if any) during the term of this Agreement (the
"Severance Payment"). The Severance Payment shall be immediately due and payable
to Executive in one payment.
4.03 Disability. If Executive, by reason of illness, mental or physical
incapacity (as determined by a physician) or other disability, is unable to
perform his regular duties
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<PAGE>
hereunder for any consecutive period of 90 days or more from its commencement or
for non-consecutive periods aggregating 120 days in any consecutive twelve-month
period, then, in either such event, Company may terminate this Agreement at any
time thereafter upon ten days' written notice to Executive. Any payments to
Executive under any disability insurance or plan maintained by Company shall be
applied against and shall reduce the amount of the salary payable by Company
under this Agreement.
4.04 Death. In the event of Executive's death, this Agreement shall
terminate effective as of the date of death.
4.05 Payment. Subject to the provisions of Section 4.02 and 4.05, in the
event of termination of this Agreement under this Section 4, Executive's Fixed
Salary shall cease as of the date of termination and his Profit Bonus shall be
prorated by multiplying by a fraction the numerator of which is equal to the
number of days in the year prior to termination and the denominator of which is
365.
4.06 Change of Control. If during the term of this Agreement there shall
occur a Change of Control, Executive may, during the six month period following
such Change of Control, voluntarily terminate his employment and such
termination shall, for purposes of all payments and benefits to be provided to
Executive under this Agreement, be treated as a termination without cause. As
used in this Agreement, a Change of Control shall be deemed to have occurred on
the first day on which a majority of the Directors of the Company do not consist
of individuals recommended by Executive.
5. Confidential Information; Non-Competition.
5.01 Confidential Information. Executive shall not, at any time during or
following termination or expiration of the term of this Agreement, directly or
indirectly, disclose, publish or divulge to any person (except in the regular
course of Company's business), or appropriate, use or cause, permit or induce
any person to appropriate or use, any proprietary, secret or confidential
information of Company including, without limitation, knowledge or information
relating to its trade secrets, business methods, the names or requirements of
its customers or clients or the terms of any agreement between the Company and
third parties, all of which Executive agrees are and will be of great value to
Company and shall at all times be kept confidential. Upon termination or
expiration of this Agreement, Executive shall promptly deliver or return to
Company all materials of a proprietary, secret or confidential nature relating
to Company together with any other property of Company which may have
theretofore been delivered to or may then be in possession of Executive.
5.02 Non-Competition. During the term of this Agreement and for a period of
one year after the sooner of the expiration date of this Agreement or the date
when Executive
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<PAGE>
ceases to be employed by Company, Executive shall not either directly or
indirectly, engage, hire, employ, or induce or encourage to leave employment any
employee of the Company. Anything contained herein to the contrary
notwithstanding, in the event Executive's employment is terminated for cause by
Company pursuant to Section 4.01, or in the event Executive shall terminate his
employment in breach of this Agreement, Executive shall not, within the boundary
of the United States, without the prior written consent of Company in each
instance, directly or indirectly, in any manner or capacity, whether for himself
or any other person and whether as proprietor, principal, owner, shareholder,
partner, investor, director, officer, executive, representative, distributor,
consultant, independent contractor or otherwise, engage or have any interest in
any entity which at any time during such term or such one year period is engaged
in the business of providing products and services similar to those provided by
Company.
5.03 Reasonableness. Executive agrees that each of the provisions of this
Section 5 is reasonable and necessary for the protection of Company; that each
such provision is and is intended to be divisible; that if any such provision
(including any sentence, clause or part) shall be held contrary to law or
invalid or unenforceable in any respect in any jurisdiction, or as to any one or
more periods of time, areas or business activities, or any part thereof, the
remaining provisions shall not be affected but shall remain in full force and
effect as to the other and remaining parts; and that any invalid or
unenforceable provision shall be deemed, without further action on the part of
the parties hereto, modified, amended and limited to the extent necessary to
render the same valid and enforceable in such jurisdiction. Executive further
recognizes and agrees that any violation of any of his agreements in this
Section 5 would cause such damage or injury to Company as would be irreparable
and the exact amount of which would be impossible to ascertain and that, for
such reason, among others, Company shall be entitled, as a matter of course, to
injunctive relief from any court of competent jurisdiction restraining any
further violation. Such right to injunctive relief shall be cumulative and in
addition to, and not in limitation of, all other rights and remedies which
Company may possess.
5.04 Survival. The provisions of this Section 5 shall survive the
expiration or termination of this Agreement for any reason.
6. Miscellaneous.
6.01 Notices. All notices under this Agreement shall be in writing and
shall be deemed to have been duly given if personally delivered against receipt
or if mailed by first class registered or certified mail, return receipt
requested, addressed to Company and to Executive at their respective addresses
set forth on the first page of this Agreement, or to such other person or
address as may be designated by like notice hereunder.
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<PAGE>
Any such notice shall be deemed to have been given on the day delivered, if
personally delivered, or on the third day after the date of mailing if mailed.
6.02 Parties in Interest. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
heirs, legal representatives, successors and, in the case of Company, assigns,
but no other person shall acquire or have any rights under or by virtue of this
Agreement, and the obligations of Executive under this Agreement may not be
assigned or delegated.
6.03 Governing Law; Severability. This Agreement shall be governed by and
construed and enforced in accordance with the laws and decisions of the State of
New York applicable to contracts made and to be performed therein without giving
effect to the principles of conflict of laws. In addition to the provisions of
5.03 above, the invalidity or unenforceability of any other provision of this
Agreement, or the application thereof to any person or circumstance, in any
jurisdiction shall in no way impair, affect or prejudice the balance of this
Agreement, which shall remain in full force and effect, or the application
thereof to other persons and circumstances.
6.04 Entire Agreement; Modification; Waiver; Interpretation. This Agreement
contains the entire agreement and understanding between the parties with respect
to the subject matter hereof and supersedes all prior negotiations and oral
understandings, if any. Neither this Agreement nor any of its provisions may be
modified, amended, waived, discharged or terminated, in whole or in part, except
in writing signed by the party to be charged. No waiver of any such provision or
any breach of or default under this Agreement shall be deemed or shall
constitute a waiver of any other provision, breach or default. All pronouns and
words used in this Agreement shall be read in the appropriate number and gender,
the masculine, feminine and neuter shall be interpreted interchangeably and the
singular shall include the plural and vice versa, as the circumstances may
require.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
CONOLOG CORPORATION
By________________________________
Arpad J. Havasy,
Executive Vice President
__________________________________
Robert S. Benou
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<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of June, 1997 between CONOLOG CORPORATION
("Company"), a Delaware corporation having an office at 5 Columbia Road,
Somerville, New Jersey 08876 and MARC R. BENOU ("Executive"), residing at
___________________ , ___________________ ,_________________ .
W I T N E S S E T H:
1. Employment.
1.01 Term. Company hereby employs Executive, and Executive hereby accepts
employment with Company with the duties hereinafter set forth, for a period
commencing on June 1, 1997 and ending May 31, 2002 subject, however, to earlier
termination in accordance with the provisions of this Agreement. This Agreement
shall automatically renew on a year-to-year basis unless terminated by either
party hereto giving written notice to the other at least 90 days prior to May
31, 2002 or any May 31 thereafter.
2. Duties. Executive shall be Vice President of Company and shall perform
such duties as may from time to time be assigned to him by Company's President.
Executive agrees that, during the term of this Agreement, he will devote his
full time, skills and efforts to the performance of his duties hereunder and to
the furtherance of the interests of the business of Company.
3. Compensation and Related Matters.
3.01 Fixed Salary. As compensation for Executive's services Company shall
pay Executive a salary of $55,000 per annum for the period June 1, 1997 through
May 31, 1998, and an increase of $6,000 per annum for each twelve month period
thereafter (the "Fixed Salary") in equal monthly (or more frequent) installments
less appropriate payroll deductions as required by law. In addition to his Fixed
Salary, Executive shall receive, with respect to each full fiscal year during
the term hereof, commencing with the year ending July 31, 1998, an annual bonus
(the "Profit Bonus") equal to three percent (3%) of the Company's annual "Income
Before Income Tax Provision" as stated on the Company's Annual Report on Form
10-K. The Profit Bonus shall be payable within 120 days after the end of the
Company's fiscal year.
3.02 Expenses. Company shall pay or reimburse Executive for all reasonable
travel (including automobile), hotel, entertainment and other business expenses
incurred in the performance of Executive's duties upon submission of appropriate
vouchers and other supporting data.
<PAGE>
3.03 Automobile. Executive shall retain exclusive use of the Company's
automobile now in his possession which Company shall replace every three years.
Company shall pay or reimburse Executive for all insurance, gasoline,
maintenance and repair and other expenses incurred in use of the automobile upon
submission of appropriate invoices, vouchers, receipts and other supporting
data.
3.04 Benefits. Executive shall be entitled to (i) participate in all
general pension, profit-sharing, life, medical, disability and other insurance
and executive benefit plans at any time in effect for executives of Company,
provided, however, that nothing herein shall obligate Company to establish or
maintain any executive benefit plan, whether of the type referred to in this
clause (i) or otherwise, and (ii) three (3) weeks vacation during each
twelve-month period of employment at mutually agreeable times.
4. Termination for Cause; Disability; Death; Change of Control.
4.01 For Cause. Company shall have the right to terminate the employment of
Executive hereunder at any time for cause upon written notice. For purposes of
the preceding sentence "for cause" shall mean and be limited to the occurrence
of any of the following acts or events by or relating to Executive: (i) any
material breach of any obligations of Executive under this Agreement which
remains uncured for more than twenty (20) days after written notice thereof by
Company to Executive; (ii) habitual insobriety of Executive while performing his
duties hereunder; (iii) theft or embezzlement from Company or any other material
acts of dishonesty; (iv) repeated insubordination respecting reasonable orders
or directions of Company's Board of Directors, which remains uncured for more
than twenty (20) days after written notice thereof by Company to Executive; or
(v) conviction of a crime (other than traffic violations and minor
misdemeanors). In the event of termination for cause, Executive's Fixed Salary
and Profit Bonus shall terminate as of the effective date of termination of
employment after written notice thereof.
4.02 Without Cause. In the event that during the term hereof, Company
discharges Executive without cause or in the event Company discharges Executive
on written notice under Section 4.01 within six months after a Change of Control
(as that term is hereinafter defined), Executive shall be entitled to receive a
payment equal to 2.99 times Executive's average annual compensation paid by
Company (including Profit Bonus, if any) during the term of this Agreement (the
"Severance Payment"). The Severance Payment shall be immediately due and payable
to Executive in one payment.
4.03 Disability. If Executive, by reason of illness, mental or physical
incapacity (as determined by a physician) or other disability, is unable to
perform his regular duties
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<PAGE>
hereunder for any consecutive period of 90 days or more from its commencement or
for non-consecutive periods aggregating 120 days in any consecutive twelve-month
period, then, in either such event, Company may terminate this Agreement at any
time thereafter upon ten days' written notice to Executive. Any payments to
Executive under any disability insurance or plan maintained by Company shall be
applied against and shall reduce the amount of the salary payable by Company
under this Agreement.
4.04 Death. In the event of Executive's death, this Agreement shall
terminate effective as of the date of death.
4.05 Payment. Subject to the provisions of Section 4.02 and 4.05, in the
event of termination of this Agreement under this Section 4, Executive's Fixed
Salary shall cease as of the date of termination and his Profit Bonus shall be
prorated by multiplying by a fraction the numerator of which is equal to the
number of days in the year prior to termination and the denominator of which is
365.
4.06 Change of Control. If during the term of this Agreement there shall
occur a Change of Control, Executive may, during the six month period following
such Change of Control, voluntarily terminate his employment and such
termination shall, for purposes of all payments and benefits to be provided to
Executive under this Agreement, be treated as a termination without cause. As
used in this Agreement, a Change of Control shall be deemed to have occurred on
the first day on which a majority of the Directors of the Company do not consist
of individuals recommended by Company's current President, Robert S. Benou.
5. Confidential Information; Non-Competition.
5.01 Confidential Information. Executive shall not, at any time during or
following termination or expiration of the term of this Agreement, directly or
indirectly, disclose, publish or divulge to any person (except in the regular
course of Company's business), or appropriate, use or cause, permit or induce
any person to appropriate or use, any proprietary, secret or confidential
information of Company including, without limitation, knowledge or information
relating to its trade secrets, business methods, the names or requirements of
its customers or clients or the terms of any agreement between the Company and
third parties, all of which Executive agrees are and will be of great value to
Company and shall at all times be kept confidential. Upon termination or
expiration of this Agreement, Executive shall promptly deliver or return to
Company all materials of a proprietary, secret or confidential nature relating
to Company together with any other property of Company which may have
theretofore been delivered to or may then be in possession of Executive.
5.02 Non-Competition. During the term of this Agreement and for a period of
six months after the sooner of the
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<PAGE>
expiration date of this Agreement or the date when Executive ceases to be
employed by Company, Executive shall not either directly or indirectly, engage,
hire, employ, or induce or encourage to leave employment any employee of the
Company. Anything contained herein to the contrary notwithstanding, in the event
Executive's employment is terminated for cause by Company pursuant to Section
4.01, or in the event Executive shall terminate his employment in breach of this
Agreement, Executive shall not, within the boundary of the United States,
without the prior written consent of Company in each instance, directly or
indirectly, in any manner or capacity, whether for himself or any other person
and whether as proprietor, principal, owner, shareholder, partner, investor,
director, officer, executive, representative, distributor, consultant,
independent contractor or otherwise, engage or have any interest in any entity
which at any time during such term or such one year period is engaged in the
business of providing products and services similar to those provided by
Company.
5.03 Reasonableness. Executive agrees that each of the provisions of this
Section 5 is reasonable and necessary for the protection of Company; that each
such provision is and is intended to be divisible; that if any such provision
(including any sentence, clause or part) shall be held contrary to law or
invalid or unenforceable in any respect in any jurisdiction, or as to any one or
more periods of time, areas or business activities, or any part thereof, the
remaining provisions shall not be affected but shall remain in full force and
effect as to the other and remaining parts; and that any invalid or
unenforceable provision shall be deemed, without further action on the part of
the parties hereto, modified, amended and limited to the extent necessary to
render the same valid and enforceable in such jurisdiction. Executive further
recognizes and agrees that any violation of any of his agreements in this
Section 5 would cause such damage or injury to Company as would be irreparable
and the exact amount of which would be impossible to ascertain and that, for
such reason, among others, Company shall be entitled, as a matter of course, to
injunctive relief from any court of competent jurisdiction restraining any
further violation. Such right to injunctive relief shall be cumulative and in
addition to, and not in limitation of, all other rights and remedies which
Company may possess.
5.04 Survival. The provisions of this Section 5 shall survive the
expiration or termination of this Agreement for any reason.
6. Miscellaneous.
6.01 Notices. All notices under this Agreement shall be in writing and
shall be deemed to have been duly given if personally delivered against receipt
or if mailed by first class registered or certified mail, return receipt
requested, addressed to Company and to Executive at their respective addresses
set forth on the first page of this Agreement, or to such other
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<PAGE>
person or address as may be designated by like notice hereunder. Any such notice
shall be deemed to have been given on the day delivered, if personally
delivered, or on the third day after the date of mailing if mailed.
6.02 Parties in Interest. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
heirs, legal representatives, successors and, in the case of Company, assigns,
but no other person shall acquire or have any rights under or by virtue of this
Agreement, and the obligations of Executive under this Agreement may not be
assigned or delegated.
6.03 Governing Law; Severability. This Agreement shall be governed by and
construed and enforced in accordance with the laws and decisions of the State of
New York applicable to contracts made and to be performed therein without giving
effect to the principles of conflict of laws. In addition to the provisions of
5.03 above, the invalidity or unenforceability of any other provision of this
Agreement, or the application thereof to any person or circumstance, in any
jurisdiction shall in no way impair, affect or prejudice the balance of this
Agreement, which shall remain in full force and effect, or the application
thereof to other persons and circumstances.
6.04 Entire Agreement; Modification; Waiver; Interpretation. This Agreement
contains the entire agreement and understanding between the parties with respect
to the subject matter hereof and supersedes all prior negotiations and oral
understandings, if any. Neither this Agreement nor any of its provisions may be
modified, amended, waived, discharged or terminated, in whole or in part, except
in writing signed by the party to be charged. No waiver of any such provision or
any breach of or default under this Agreement shall be deemed or shall
constitute a waiver of any other provision, breach or default. All pronouns and
words used in this Agreement shall be read in the appropriate number and gender,
the masculine, feminine and neuter shall be interpreted interchangeably and the
singular shall include the plural and vice versa, as the circumstances may
require.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
CONOLOG CORPORATION
By____________________________________
Arpad J. Havasy,
Executive Vice President
______________________________________
Marc R. Benou
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<PAGE>
Rosenberg Rich Baker Berman & Company
[LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
Conolog Corporation
We consent to the use in this Registration Statement of Conolog Corporation on
Form S-1 of our report dated October 8, 1996.
We also consent to the reference to us under the caption "Experts" in such
Registration Statement.
/s/ Rosenberg Rich Baker Berman & Company
--------------------------------------------
Maplewood, New Jersey
October 10, 1997
