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CONOLOG CORPORATION
5 COLUMBIA ROAD
SOMERVILLE, NEW JERSEY 08876
--------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 19, 2006
--------------
To the Shareholders of
CONOLOG CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of CONOLOG
CORPORATION (the 'Company'), a Delaware corporation, will be held at the offices
of Milberg Weiss Bershad & Schulman LLP, One Pennsylvania Plaza, New York, New
York 10119, on Wednesday, April 19, 2006, at 4:30 p.m., Eastern time, for the
following purposes:
1. To elect five directors to serve, subject to the provisions of the
By-laws, until the next Annual Meeting of Shareholders and until their
respective successors have been duly elected and qualified;
2. To vote on a proposal to approve a Subscription Agreement between the
Company and three subscribers, dated January 19, 2006 (the '2006 Subscription
Agreement') pursuant to which the Company sold convertible notes having an
aggregate principal balance of $1,250,000, which are convertible into 1,000,000
shares of the Company's common stock ('Common Stock') at a conversion price of
$1.25 per share and warrants to purchase 1,000,000 shares of the Company's
Common Stock at $.9579 per share.
3. To vote on a proposal to grant an aggregate of 450,000 shares of the
Company's common stock to its officers, directors, employees and consultants;
4. To vote on a proposal to give the Board of Directors the discretion to
reduce the warrant exercise price of warrants to purchase an aggregate of
1,440,000 shares of the Company's Common Stock which were issued in connection
with a Subscription Agreement dated July 19, 2005.
5. To vote on a proposal to amend the Company's Certificate of Incorporation
to increase the number of the Company's authorized shares of Common Stock from
20,000,000 to 30,000,000;
6. To ratify the selection of Bagell, Josephs, Levine & Co., LLC as the
Company's independent auditors for the fiscal year ending July 31, 2006; and
7. To act on such other matters as may properly come before the meeting or
any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on March 3, 2006 as
the record date for the meeting and only holders of shares of record at that
time will be entitled to notice of and to vote at the Annual Meeting of
Shareholders or any adjournment or adjournments thereof.
By Order of the Board of Directors.
ROBERT S. BENOU
Chairman, Chief Executive Officer and
Chief Financial Officer
Somerville, New Jersey
March 20, 2006
IMPORTANT
IF YOU CANNOT PERSONALLY ATTEND THE MEETING, IT IS REQUESTED THAT YOU INDICATE
YOUR VOTE ON THE ISSUES INCLUDED ON THE ENCLOSED PROXY AND DATE, SIGN AND MAIL
IT IN THE ENCLOSED SELF-ADDRESSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED
IN THE UNITED STATES.
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CONOLOG CORPORATION
5 COLUMBIA ROAD
SOMERVILLE, NEW JERSEY 08876
--------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 19, 2006
--------------
The enclosed proxy is solicited by the Board of Directors of Conolog
Corporation (the 'Company'), a Delaware corporation in connection with the
Annual Meeting of Shareholders to be held at the offices of Milberg Weiss
Bershad & Schulman LLP, One Pennsylvania Plaza, New York, New York 10119 on
Wednesday, April 19, 2006, at 4:30 p.m., Eastern time, and any adjournments
thereof, for the purposes set forth in the accompanying Notice of Meeting.
Unless instructed to the contrary on the proxy, it is the intention of the
persons named in the proxy to vote the proxies:
1. To elect five directors to serve, subject to the provisions of the
By-laws, until the next Annual Meeting of Shareholders and until their
respective successors have been duly elected and qualified;
2. To vote on a proposal to approve a Subscription Agreement between the
Company and three subscribers, dated January 19, 2006 (the '2006 Subscription
Agreement') pursuant to which the Company sold convertible notes having an
aggregate principal balance of $1,250,000, which are convertible into 1,000,000
shares of the Company's common stock ('Common Stock') at a conversion price of
$1.25 per share and warrants to purchase 1,000,000 shares of the Company's
Common Stock at $.9579 per share;
3. To vote on a proposal to grant an aggregate of 450,000 shares of the
Company's Common Stock to its officers, directors, employees and consultants;
4. To vote on a proposal to give the Board of Directors the discretion to
reduce the warrant exercise price of warrants to purchase an aggregate of
1,440,000 shares of the Company's Common Stock which were issued in connection
with a Subscription Agreement dated July 19, 2005;
5. To vote on a proposal to amend the Company's Certificate of
Incorporation to increase the number of the Company's authorized shares of
Common Stock from 20,000,000 to 30,000,000;
6. To ratify the selection of Bagell, Josephs, Levine & Co., LLC as the
Company's independent auditors for the fiscal year ending July 31, 2006; and
7. To act on such other matters as may properly come before the meeting or
any adjournment or adjournments thereof.
The record date with respect to this solicitation is the close of business
on March 3, 2006 and only shareholders of record at that time will be entitled
to vote at the meeting. The principal executive office of the Company is
5 Columbia Road, Somerville, New Jersey 08876, and its telephone number is (908)
722-8081. The shares of Common Stock represented by all validly executed proxies
received in time to be taken to the meeting and not previously revoked will be
voted at the meeting. This proxy may be revoked by the shareholder at any time
prior to its being voted by filing with the Secretary of the Company either a
notice of revocation or a duly executed proxy bearing a later date. This proxy
statement and the accompanying proxy were mailed to you on or about March 20,
2006.
OUTSTANDING SHARES; QUORUM; REQUIRED VOTE
The number of outstanding shares of Common Stock entitled to vote at the
meeting is 7,422,627, not including 220 common shares held in treasury. Each
share of Common Stock is
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entitled to one vote. The presence in person or by proxy at the Annual Meeting
of the holders of one-third of such shares shall constitute a quorum. There is
no cumulative voting. Assuming the presence of a quorum at the Annual Meeting:
directors shall be elected by a plurality of the votes cast;
the affirmative vote of the holders of a majority of the Company's total
outstanding common shares as of March 3, 2006 is necessary to approve the
proposal to amend the Company's Certificate of Incorporation to increase
the number of the Company's authorized shares of Common Stock from 20,000
to 30,000;
the affirmative vote of a majority of the common shares present at the
meeting and entitled to vote on each matter is required:
to approve the 2006 Subscription Agreement, attached hereto as
Appendix 'C';
to approve the proposal to grant an aggregate of 450,000 shares of the
Company's Common Stock to its officers, directors, employees and
consultants;
to approve Bagell, Josephs, Levine & Co., LLC as the Company's
auditors for the 2006 fiscal year.
Votes shall be counted by one or more persons who shall serve as the
inspectors of election. The inspectors of election will canvas the shareholders
present in person at the meeting, count their votes and count the votes
represented by proxies presented. Abstentions and broker nonvotes are counted
for purposes of determining the number of shares represented at the meeting, but
are deemed not to have voted on the proposal. Broker nonvotes occur when a
broker nominee (who has voted on one or more matters at the meeting) does not
vote on one or more other matters at the meeting because it has not received
instructions to so vote from the beneficial owner and does not have
discretionary authority to so vote.
For purposes of determining the votes cast with respect to any matter
presented for consideration at the meeting, only those votes cast 'for' or
'against' are included. However, if a proxy is signed but no specification is
given, the shares will be voted 'FOR' Proposals 1, 2, 3, 4, 5 and 6 (to elect
the Board's nominees to the Board of Directors, to approve the 2006 Subscription
Agreement, to approve giving the Company's directors the discretion to grant an
aggregate of 450,000 shares of the Company's Common Stock to the Company's
officers, directors, employees and consultants, to approve giving the Company's
Board of Directors the discretion to reduce the warrant exercise price of
warrants to purchase an aggregate of 1,440,000 shares of the Company's Common
Stock issued pursuant to a Subscription Agreement dated July 19, 2005, to amend
the Company's Certificate of Incorporation to increase the number of the
Company's authorized shares of Common Stock from 20,000,000 to 30,000,000 and to
ratify the selection of Bagell, Josephs, Levine & Co., LLC as the Company's
independent auditors for the 2006 fiscal year).
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The persons named in the accompanying proxy will vote for the election of
the following five persons as directors, all of whom are currently members of
the Board, to hold office until the next annual meeting of shareholders and
until their respective successors have been elected and qualified. Unless
specified to be voted otherwise, each proxy will be voted for the nominees named
below. All five nominees have consented to serve as directors if elected.
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<Table>
<Caption>
NAME AGE POSITION WITH THE COMPANY DIRECTOR SINCE
---- --- ------------------------- --------------
Robert S. Benou..................... 71 Chairman, Chief Executive Officer, 1968
Chief Financial Officer, Treasurer and
Director
Marc R. Benou....................... 38 President, Chief Operating Officer, 1995
Secretary and Director
Louis S. Massad..................... 67 Director 1995
Edward J. Rielly.................... 38 Director 1998
David M. Peison..................... 38 Director 2004
</Table>
Robert S. Benou has been the Company's Chairman and Chief Executive Officer
since May 1, 2001. From 1968 until May 1, 2001, he served as the Company's
President. Mr. Benou is also the Company's Chief Financial Officer and
Treasurer. Mr. Benou's responsibilities include new product development and
supervision of sales and marketing. From June 2001 until August 2005, Mr. Benou
served as a member of the board of Henry Bros. Electronics, Inc. (formerly known
as Diversified Security Solutions, Inc.), a publicly held company that is a
single-source/turn-key provider of technology-based security solutions for
medium and large companies and government agencies. Since December 2003, Mr.
Benou has served as a member of the board of directors of Exegenics, Inc., a
publicly held company. Mr. Benou is a graduate of Victoria College and holds a
BS degree from Kingston College, England and a BSEE from Newark College of
Engineering, in addition to industrial management courses at Newark College of
Engineering. Robert S. Benou is the father of Marc R. Benou.
Marc R. Benou has been the Company's President and Chief Operating Officer
since May 1, 2001. Mr. Benou is also the Company's Secretary. Mr. Benou joined
the Company in 1991 and is responsible for material purchasing and inventory
control. From March 1995 until May 1, 2001, he served as Vice President. Mr.
Benou has been on the company's Board and has served as the Company's assistant
secretary since March 1995. Mr. Benou attended Lehigh and High Point University
and holds a BS degree in Business Administration and Management. Marc R. Benou
is the son of Robert S. Benou, the Company's Chairman Chief Executive Officer
and Chief Financial Officer.
Louis S. Massad has been a Director of the Company since April 1995. From
2000 until 2003 Mr. Massad was the Chief Financial Officer, Vice President and a
Director of Henry Bros. Electronics, Inc. (formerly known as Diversified
Security Solutions, Inc.). From 1997 to 2000, Mr. Massad was a consultant to
Henry Bros. Electronics, Inc. From 1986 to 1997, Mr. Massad was a Vice
President, Chief Financial Officer and Director of Computer Power Inc. Mr.
Massad holds a BS and MS degree from Cairo University (Egypt) and an MBA from
Long Island University, New York.
Edward J. Rielly has been a Director of the Company since January 1998. Mr.
Rielly is a Manager, Business Systems, with HSBC, a financial corporation, where
his responsibilities include various credit card websites. Mr. Rielly has worked
for HSBC in various capacities since 2001. From March 2000 to November, 2001,
Mr. Rielly was a Senior Consultant with Esavio Corporation. From February 1998
to February 2000, Mr. Rielly was an Application Developer with Chubb
Corporation. From 1993 to 1998, Mr. Rielly was an Application Developer with the
United States Golf Association. Mr. Rielly is a graduate of Lehigh University
and holds a BS in Computer Science.
David M. Peison has been as a Director of the Company since October 2004.
Since October 2005, Mr. Peison has been in the global markets division of HSBC
Bank. From 2002 until 2005, Mr. Peison was with Deutsche Bank's global markets
division in New York City. From 1992 to 2000, Mr. Peison was in a private law
practice in Florida and New York City. Mr. Peison holds an MBA from Emory
University in Atlanta, GA, a Juris Doctor from The Dickinson School of Law of
Pennsylvania State University and is admitted to the Florida, New York and
Massachusetts Bars. Mr. Peison obtained his BA degree from Lehigh University in
Bethlehem, PA.
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MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the fiscal year ended July 31, 2005, the Board of Directors held 3
meetings and acted by written consent in lieu of a meeting on nine occasions.
All of the directors attended all of the meetings of the Board of Directors.
The Company has Board of Directors and an Audit Committee, which consists of
Messrs. Louis S. Massad, Edward J. Rielly and David M. Peison. The Company's
Board of Directors has adopted a written charter for the Audit Committee
(attached hereto as Appendix A). The Audit Committee has the obligations
specified in the Audit Committee charter. The Audit Committee did not meet
during the fiscal year ended July 31, 2005 but acted by written consent one
time. The Board of Directors believes that Messrs. Massad, Peison and Reilly are
independent as defined in Nasdaq Rule 4200. The Company does not have a standing
compensation committee. The Board of Directors has determined that Mr. Louis
Massad meets the requirements adopted by the Securities and Exchange Commission
for qualification as an 'Audit Committee Financial Expert'.
The Company has a Nominating Committee, which is comprised of Louis S.
Massad and Edward J. Rielly. The Company's Board of Directors has adopted a
written charter for the Nominating Committee (attached hereto as Appendix B).
The Nominating Committee is responsible for (i) reviewing the appropriate size,
function and needs of the Board of Directors, (ii) developing the Board's policy
regarding tenure and retirement of directors, (iii) establishing criteria for
evaluating and selecting new members of the Board, subject to Board approval
thereof, and (iv) identifying and recommending to the Board for approval
individuals qualified to become members of the Board of Directors, consistent
with criteria established by the Committee and the Board. Except as may be
required by rules promulgated by NASDAQ or the SEC. Currently there are no
specific, minimum qualifications that must be met by each candidate for the
Board of Directors, nor are there any specific qualities or skills that are
necessary for one or more of the members of the Board of Directors to possess.
The Nominating Committee did not meet during the fiscal year ended July 31,
2005.
COMMUNICATING WITH OUR DIRECTORS
We have adopted a policy regarding shareholder communications with
directors. Pursuant to that policy, shareholders who wish to communicate with
the Board of Directors or with specified members of the Board of Directors
should do so by sending any communication to Conolog Corporation, 5 Columbia
Road, Somerville, New Jersey 08876; Attention: Secretary.
Any such communication should state the number of shares beneficially owned
by the shareholder making the communication. Our Secretary will forward such
communication to the full Board of Directors or to any individual member or
members of the Board of Directors to whom the communication is directed, unless
the communication is unduly hostile, threatening, illegal or similarly
inappropriate, in which case the Secretary has the authority to discard the
communication or take appropriate legal action regarding the communication.
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EXECUTIVE OFFICERS
The executive officers of the Company are Robert S. Benou, Chairman, Chief
Executive Officer, Chief Financial Officer and Treasurer, and Marc R. Benou,
President, Chief Operating Officer and Secretary, information as to each of whom
is set forth above, and Thomas R. Fogg, Vice President -- Engineering. Mr. Fogg
joined the Company in 1976 as Chief Engineer responsible for analog and guidance
projects. Since 1986, when he became Vice President -- Engineering, he has 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.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid to executive officers whose
compensation was in excess of $100,000 for any of the three fiscal years ended
July 31, 2005, 2004 and 2003. No other executive officers received total salary
and bonus compensation in excess of $100,000 during any of these fiscal years.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------------- ---------------------------------------------------------
CLOSING
PRICE OF
COMMON
RESTRICTED STOCK ON
FISCAL STOCK DATE OF
YEAR- AWARDS RESTRICTED SECURITIES
NAME AND PRINCIPAL END (# OF STOCK UNDERLYING OTHER
POSITION (JULY 31) SALARY BONUS SHARES)(3) AWARD OPTIONS/SARS(4) COMPENSATION
-------- --------- ------ ----- ---------- ----- --------------- ------------
Robert Benou, ....... 2005 $323,333 $125,000(1) 85,000 $3.13 0 $18,000***
Chairman, Chief 2004 $312,000* 0 390,000 $4.49 0 $12,780***
Executive Officer, 2003 $291,666* 0 0 -- 0 $12,780***
Chief Financial
Officer, Treasurer
and Director
Marc Benou, Chief ... 2005 $111,000 $ 60,000(2) 80,000 $3.13 0
Operating Officer, 2004 $ 98,500** 0 340,000 $4.49 0
President, Secretary 2003 $ 91,333** 0 0 -- 0
and Director
</Table>
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* Robert Benou forgave his entire salary for the fiscal years ended July 31,
2004 and, 2003.
** For the fiscal years ended July 31, 2004 and July 31, 2003, Marc Benou
forgave salary in the amount of $63,500, and $54,644 respectively.
*** Other Compensation consisted of a car allowance.
(1) During the fiscal year ended July 31, 2005, the independent members of the
Company's Board of Directors approved the grant of a $125,000 bonus to
Robert. Benou. The Company began paying Mr. Benou's 2005 bonus in September
2005, in monthly installments of $9,000, which may increase depending on the
Company's cash requirements. Mr. Benou's entire bonus of $125,000 will be
paid in the next fiscal year. The Company is recording the liability in
fiscal year-ended July 31, 2005 because the bonus was paid for Mr. Benou's
contributions to the Company during the 2005 fiscal year.
(2) During the fiscal year ended July 31, 2005, the independent members of the
Company's Board of Directors approved the granting of a $60,000 bonus to Mr.
Marc Benou. The Company paid Mr. Benou's bonus in two installments of
$30,000 in August and September 2005, respectively. The Company is recording
the liability in fiscal year-ended July 31, 2005 because the bonus was paid
for Mr. Benou's contributions to the Company during the 2005 fiscal year.
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(3) On February 10, 2005, our shareholders approved the granting of 350,000
shares of our Common Stock to our directors, officers and employees. As of
July 31, 2005, all of these shares were granted.
(4) On July 9, 2002 our shareholders approved our 2002 Stock Option Plan under
which up to 190,000 shares of our Common Stock may be granted to our
employees, directors and consultants. To date, no options have been granted
under this plan. The exercise price of options granted under the 2002 Stock
Option Plan will be the fair market value of our Common Stock on the date
immediately preceding the date on which the option is granted.
EMPLOYMENT AGREEMENTS
Mr. Robert Benou is serving under an employment agreement commencing June 1,
1997 and ending May 31, 2002, which pursuant to its terms renews for one-year
terms until cancelled by either the Company or Mr. Benou. As of August 1, 2005,
Mr. Benou's annual base salary is $350,000 and increases by $20,000 on June 1st
of each year. In addition, Mr. Benou is entitled to an annual bonus equal to 6%
of the Company's annual 'income before income tax provision' as stated in its
annual Form 10-KSB. The employment agreement also entitles Mr. Benou to the use
of an automobile and to employee benefit plans, such as, life, health, pension,
profit sharing and other plans. Under the employment agreement, employment
terminates upon death or disability of the employee and the employee may be
terminated by the Company for cause.
Mr. Marc Benou is serving under an employment agreement commencing June 1,
1997 and ending May 31, 2002, which pursuant to its terms renews for one-year
terms until cancelled by either the Company or Mr. Benou. As of August 1, 2005,
Mr. Benou's base salary is $112,000 and he receives annual increases of $6,000.
Mr. Benou is entitled to an annual bonus equal to 3% of the Company's annual
'income before income tax provision' as stated in its annual Form 10-KSB. The
employment agreement also entitles Mr. Benou to the use of an automobile and to
employee benefit plans, such as; life, health, pension, profit sharing and other
plans. Under the employment agreement, employment is terminated upon death or
disability of the employee and employee may be terminated by the Company for
cause.
COMPENSATION OF DIRECTORS
No director of the Company receives any cash compensation for his services
as such, but directors may receive stock options pursuant to the Company's stock
option plan and grants of the Company's common stock. Currently, the Company has
three directors who are not employees, Messrs. Louis Massad, David Peison and
Edward Rielly.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The independent members of the Company's board of directors made all
material decisions concerning executive compensation during the fiscal year
ended July 31, 2005. Other than Mr. Robert Benou, who served as a member of the
board of directors of Henry Bros. Electronics, Inc. until August 2005 and who is
a member of the board of directors of eXegenics, Inc., no executive officer of
the Company served as a member of the Board of Directors of another entity
during the fiscal year ended July 31, 2005.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, requires our directors and officers, and
persons who own more than 10% of our Common Stock, to file with the Securities
and Exchange Commission initial reports of beneficial ownership and reports of
changes in beneficial ownership of our Common Stock and other equity securities.
Our officers, directors and greater than 10% beneficial owners are required by
SEC regulation to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the fiscal year ended July 31,
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2005, all Section 16(a) filing requirements applicable to our officers,
directors and greater than 10% beneficial owners were complied with, except that
not all of Messrs. Robert Benou's and Marc Benou's, Statements of Change in
Beneficial Ownership on Form 4 were timely filed. Messrs. Robert Benou and Marc
Benou have since filed their Statements of Change in Beneficial Ownership.
Additionally, Mr. Peison's Form 3, Initial Statement of Beneficial Ownership,
was not timely filed. This form has since been filed.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of February 1, 2006, certain information
with respect to the beneficial ownership of our Common Stock by each shareholder
known by us to be the beneficial owner of more than 5% of our Common Stock and
by each of our current directors and executive officers. Each person has sole
voting and investment power with respect to the shares of common stock, except
as otherwise indicated. Information relating to beneficial ownership of common
stock by our principal shareholders and management is based upon information
furnished by each person using 'beneficial ownership' concepts under the rules
of the Securities and Exchange Commission. Under these rules a person is deemed
to be a beneficial owner of a security if that person has or shares voting
power, which includes the power to vote or direct the voting of the security or
investment power, which includes the power to vote or direct the voting of the
security.
A person is also deemed to be a beneficial owner of any security of which
that person has a right to acquire beneficial ownership within 60 days. Shares
of Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise or conversion of options are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person shown in the table.
Under the Securities and Exchange Commission rules, more than one person may
be deemed to be a beneficial owner of the same securities and a person may be
deemed to be a beneficial owner of securities as to which he or she may not have
any pecuniary beneficial interest.
The applicable percentage of ownership is based on 7,417,847 shares of our
Common Stock issued and outstanding as of February 1, 2006.
<Table>
<Caption>
AMOUNT AND NATURE OF
NAME AND TITLE BENEFICIAL OWNERSHIP PERCENT OF CLASS
-------------- -------------------- ----------------
Robert S. Benou, Chairman, CEO, CFO Treasurer and
Director................................................ 205,900 2.78%
Marc R. Benou, President, COO, Secretary and Director..... 229,000 3.09%
Louis Massad, Director.................................... 0 *
Thomas Fogg, Vice President -- Engineering................ 0 *
Edward J. Rielly, Director................................ 0 *
David Peison, Director.................................... 20,000 *
All Executive Officers and Directors as a Group (6
Persons)................................................ 454,900 6.13%
Barclays Global Investors, N.A. (1)....................... 414,663 5.59%
DKR Capital Partners LP (2)............................... 883,960 10.96%
</Table>
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* Less than 1%
The address for each of the named individuals is c/o Conolog Corporation, 5
Columbia Road, Somerville, New Jersey 08876.
(1) The information for Barclays Global Investors, N.A. is based on
information contained in a Schedule 13G filed with the Securities and Exchange
Commission on January 26, 2006. The principal business address is 45 Fremont
Street, San Francisco, CA 94105.
(2) The information for DKR Capital Partners LP is based on information
contained in a schedule 13G/A filed with the Securities and Exchange Commission
on February 27, 2006. The address for DKR Capital Partners LP is 1281 East Main
Street, Stamford CT 06902. The beneficial
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ownership of DKR Capital Partners LP ('DKR') may include warrants to purchase
650,000 shares of the Company's common stock and 233,960 shares of the Company's
common stock. If the warrants were exercised, DKR would hold over 9.9% of the
Company's common stock upon such exercise. Notwithstanding the foregoing, the
warrants provide a limitation on the exercise of such warrants, such that the
number of Common Stock that may be acquired by the holder upon exercise of the
warrants shall be limited to the extent necessary to ensure that following such
exercise the total number of shares of Common Stock then beneficially owned by
such holder does not exceed 9.99% of the total number of issued and outstanding
shares of Common Stock (including for such purpose the shares of Common Stock
issuable upon such exercise) for the purposes of Section 13 (d) of the
Securities Exchange Act of 1934, as amended. DKR, a registered investment
adviser, is the managing general partner of DKR Oasis Management Company L.P.
('DKROMC'), which is the investment manager of DKR SoundShore Oasis Holding Fund
Ltd. ('SoundShore Oasis'). DKR is the managing general partner of DKROMC and
DKROMC is the investment manager of Sound Shore Oasis. As such, each of DKR and
DKROMC has the right to vote, or to direct the vote of, the securities issued to
Soundshore.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Robert Benou, our Chairman, Chief Executive Officer and Chief Financial
Officer has made a series of loans to the Company. The Company repaid $103,000
of the principal balance during the fiscal year ended July 31, 2004. The Company
repaid the remaining principal balance of $166,929, and paid $23,371 in simple
interest at 4% over the life of the loans, during the fiscal year ended July 31,
2005.
PROPOSAL NO. 2
APPROVAL OF A SUBSCRIPTION AGREEMENT DATED JANUARY 19, 2006, PURSUANT TO WHICH
THE COMPANY MAY ISSUE MORE THAN 20% OF THE COMPANY'S ISSUED AND OUTSTANDING
COMMON STOCK
Rule 4350(i) of the National Association of Securities Dealers, Inc. (the
'NASD') requires shareholder approval of a transaction other than a public
offering involving the sale, issuance or potential issuance by an issuer of
common stock (or securities convertible into or exercisable for common stock) at
a price that is less than the greater of book or market value of the stock if
the number of shares of Common Stock to be issued is or may be equal to 20% or
more of the Common Stock, or 20% or more of the voting power, outstanding before
the issuance (the 'Rule 4350(i) NASD 20% Share Limitation'). If, however,
shareholder approval is not obtained, the issuer would not be permitted to issue
any shares above the 20% threshold at a price that is less than the greater of
book or market value of the Company's common stock. The following is a summary
of certain provisions of the Subscription Agreement dated January 19, 2006
between the Company and three subscribers pursuant to which the Company sold
convertible notes having an aggregate principal balance of $1,250,000 (the '2006
Subscription Agreement') as well as the documents related to the Subscription
Agreement. The following summary is subject to the complete terms of the
Subscription Agreement and the related documents, copies of which are included
as appendices C (Subscription Agreement), D (Convertible Note) and E (Warrant),
the terms of which are hereby incorporated by reference. The convertible notes
and warrants issued pursuant to the Subscription Agreement are referred to
herein as the related documents.
THE TRANSACTION
The Subscription Agreement
Pursuant to the 2006 Subscription Agreement, the Company sold, in a private
placement exempt from the registration requirements of the Securities Act of
1933, as amended, to three subscribers (the 'Subscribers') convertible notes
having an aggregate principal balance of $1,250,000 (the 'Convertible Notes')
and warrants to purchase an aggregate of 1,000,000 shares of
8
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the Company's Common Stock at an exercise price of $.9579 per share (the
'Convertible Notes Offering').
From the sale of the Convertible Notes and warrants, the Company received
net proceeds of $1,110,000, before deducting its attorneys' fees and other fees
related to the Convertible Notes Offering. First Montauk Securities Corp.
('First Montauk') acted as the selling agent in the Convertible Notes offering.
The Company paid First Montauk 10% of the principal amount of the Convertible
Notes sold in the offering ($125,000) and issued First Montauk warrants to
acquire 200,000 shares of Common Stock (20% of the aggregate number of shares of
Common Stock that the subscribers would receive if they, immediately after the
closing of the sale of the Convertible Notes converted the entire principal
amount of the Convertible Notes) on the same terms and conditions as the
warrants issued to the Subscribers. Pursuant to the 2006 Subscription Agreement,
the Company paid $15,000 to the law firm that represented the Subscribers.
The 2006 Subscription Agreement provides that until the later of (i) the
issuing of Common Stock pursuant to the Convertible Notes is approved by the
Company's shareholders (if the Approval is required by the applicable NASD
Market Place Rules and/or the Nasdaq's corporate governance rules) or (ii) six
months after January 19, 2006 and during an Event of Default (as defined in the
Convertible Note), provided there is an effective registration statement current
and available for resale of the Company's Registrable Securities (as defined in
the 2006 Subscription Agreement), the Company will not enter into an agreement
to nor issue any equity, convertible debt or other securities convertible into
Common Stock or equity of the Company nor modify any of the foregoing which may
be outstanding at anytime, without the prior written consent of the Subscribers,
which consent may be withheld for any reason. The 2006 Subscription Agreement
also provides that until six months after January 19, 2006, the Company will not
enter into any equity line of credit or similar agreement, nor issue nor agree
to issue any floating or variable priced equity linked instruments nor any of
the foregoing or equity with price reset rights.
Pursuant to the 2006 Subscription Agreement, and other than pursuant to
certain exceptions detailed in the 2006 Subscription Agreement, until the sooner
of (i) 30 days from the date the registration statement filed on behalf of the
Subscribers is declared effective by the Securities and Exchange Commission, or
(ii) until all of the Shares of (as defined in the Subscription Agreement) and
shares issued upon conversion of the warrants issued to the Subscribers have
been resold or transferred by the Subscribers, the Subscribers have the right to
participate in proposed sales by the Company of its securities. Additionally,
Section 12(b) of the 2006 Subscription Agreement provides that other than in
connection with certain excepted issuances detailed in the 2006 Subscription
Agreement, if at any time until the sooner of 180 days from the Registration
Statement is declared effective by the Securities and Exchange Commission
(provided the issuance of the Company's Common Stock pursuant to the Convertible
Note has been approved by the Company's shareholders or is not required by
Nasdaq) or the date the Convertible Notes have been paid off, the Company, other
than in connection with certain excepted issuances described in the 2006
Subscription Agreement, issues or agrees to issue shares of its Common Stock at
less than $1.25 (subject to the terms of the Convertible Note) per share (the
'Conversion Price') without the consent of the Subscribers holding Convertible
Notes, the Conversion Price shall be reduced to such other lower issue price
(the 'Favored Nation Provision').
The 2006 Subscription Agreement also provides that the Subscribers are not
entitled to convert the Convertible Notes into a number of shares of Common
Stock which would be in excess of the sum of (i) the number of shares of Common
Stock beneficially owned by any Subscriber and its Affiliates and (ii) the
number of shares of Common Stock issuable upon the conversion of the Convertible
Notes which would result in the beneficial ownership by the Subscriber and its
Affiliates of more than 4.99% of the outstanding shares of Common Stock of the
Company on each Conversion Date (as this is defined in the 2006 Subscription
Agreement). Provided, however, the Subscribers may waive the conversion
limitation in whole or in part upon and effective after 61 days prior written
notice to the Company.
The 2006 Subscription Agreement provides that the Company in its sole
discretion may reduce the Conversion Price of the Convertible Notes that have
not been paid off or fully converted if
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the Company's shareholders have approved the transaction or if such approval is
not required by the applicable rules of the Nasdaq.
The securities sold to the Subscribers pursuant to the 2006 Subscription
Agreement were not registered under the Securities Act of 1933, as amended, and
may not be offered or sold within the United States absent registration or an
available exemption from such registration requirements. Pursuant to the 2006
Subscription Agreement the Company is obligated to file a registration statement
with the Securities and Exchange Commission to register the resale of the Common
Stock issuable upon conversion of the Convertible Notes and the shares of Common
Stock issuable upon exercise of the warrants under the Securities Act.
The Company is using the proceeds from the sale of the Convertible Notes for
general corporate purposes.
THE CONVERTIBLE NOTES
As stated above, pursuant to the 2006 Subscription Agreement, the Company
sold and issued to three Subscribers Convertible Notes having an aggregate
principal balance of $1,250,000. A form of the Convertible Notes is attached
hereto as Appendix 'D.' The conversion price of each note is $1.25 per share. If
the Convertible Notes are fully converted, the Company will issue 1,000,000
shares of Common Stock to the holders of the Convertible Notes. The Company will
not receive any proceeds if the notes are converted nor will it receive any
proceeds if the Subscribers sell the shares of Common Stock issued upon
conversion of the Convertible Notes. Interest payable on the Convertible Notes
accrues from January 19, 2006 at a rate of 5% per annum and is payable quarterly
in arrears. Amortizing payments of the outstanding principal amount and interest
on the Notes begins on January 19, 2008 and the same day of each month
thereafter until the principal amount and interest have been repaid in full
(each a 'Repayment Date').
Pursuant to the Convertible Notes, and subject to its terms, the Company may
make payments on the interest due on the Convertible Note (i) in cash within
three business days of the applicable Repayment Date or (ii) in registered
Common Stock, which shall be at an applied conversion rate equal to the lesser
of (A) $1.25 (subject to adjustment as specified in the Note) or (B) eighty-five
percent (85%) of the volume weighted average price of the Common Stock as
reported by Bloomberg L.P. ('VWAP') for the ten days preceding such Repayment
Date. Unless waived by the Holder of the Convertible Note, the Company may not
elect to make payments on interest due on the Convertible Note in Common Stock
in an amount of shares of Common Stock which would exceed in the aggregate for
all Holders of Notes similar to the Convertible Note, thirty-five percent of the
aggregate daily trading volume for the seven trading days preceding the
Repayment Date as reported by Bloomberg L.P. multiplied by the VWAP for such
seven day period.
THE WARRANTS
As stated above, upon exercise of the warrants issued to the Subscribers (a
form of which is attached hereto as Appendix 'E'), the Company will issue
1,000,000 shares of Common Stock. Additionally, as stated, in connection with
the Convertible Note Offering, the Company granted First Montauk warrants to
purchase 200,000 shares of Common Stock on the same terms and conditions as the
warrants issued to the Subscribers. The exercise price of the warrants is $.9579
(as adjusted pursuant to the terms of the warrants, the 'Purchase Price') per
share. If there is an Effective Registration Statement (as defined in the
Subscription Agreement) pursuant to which shares of the Company's Common Stock
issuable upon conversion of the Convertible Notes and the warrants issued
pursuant to the 2006 Subscription Agreement have been registered with the
Securities and Exchange Commission, then the warrants are only exercisable in
cash, provided, however, if the Registration Statement is not effective, then
the Subscribers may exercise their warrants by (i) by paying cash equal to the
applicable aggregate Purchase Price, (ii) by cashless exercise in accordance
with the terms of the warrant or (iii) any combination of any of the foregoing
methods.
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If the warrants are fully exercised (including those issued to First
Montauk) for cash, the Company would receive, $1,149,480.
ISSUANCE OF 20% OR MORE OF THE OUTSTANDING COMMON STOCK
On January 18, 2006 and immediately after the completion of the sale of the
Convertible Notes, there were 7,417,847 shares of Common Stock issued and
outstanding, which under NASD Rule 4350(i) would prohibit the Company from
issuing more than 1,483,569 shares of Common Stock at a price that is less than
the greater of the book or market value of the Company's Common Stock without
shareholder approval. Because certain provisions of the 2006 Subscription
Agreement and related documents may require the Company to issue shares above
this threshold number at a price that is less than the greater than the book or
market value of the Company's Common Stock, shareholder approval is being sought
to give the Company the ability to issue such additional shares. Specifically,
provisions of the 2006 Subscription Agreement which may require that additional
shares be issued include: the Favored Nations Provision, the provision enabling
the Company to reduce the Conversion Price of the Notes and the provision of the
Convertible Notes which enables the Company to pay interest due on the
Convertible Notes by issuing shares of its Common Stock to the holders of the
Convertible Notes instead of paying the interest due on the Convertible Notes in
cash.
As stated above, pursuant to the Favored Nations provision of the
Subscription Agreement, if, at any time until the sooner of 180 days from the
Registration Statement is declared effective by the Securities and Exchange
Commission or the date the Convertible Notes have been paid off, the Company
sells shares of its Common Stock at less than $1.25 per share (other than in
connection with certain excepted issuances described in the Subscription
Agreement) without the consent of the Subscribers holding Convertible Notes, the
Conversion Price of the Convertible Notes shall be reduced to such other lower
issue price. Additionally, the Subscription Agreement enables the Company to
reduce the Conversion Price of the Notes. However, Company will not be able to
reduce the Conversion Price of the Convertible Notes, pay interest due on the
Convertible Notes by issuing shares of its Common Stock or issue shares pursuant
to the Favored Nations provision if doing so would cause the Company to issue
more than 1,483,569 shares of its Common Stock at a price that is less than the
greater of book or market value of the Company's Common Stock, including the
shares issuable pursuant to the Convertible Note.
If the Company were to issue additional shares of its Common Stock pursuant
to the Subscription Agreement and the related documents, such issuances may
affect the rights of existing holders of the Company's Common Stock to the
extent that future issuances of Common Stock reduce each existing shareholder's
proportionate ownership and voting rights in the Company. In addition, possible
dilution caused by future issuances of Common Stock could lead to a decrease in
the Company's net income per share in future periods and a resulting decline in
the market price of the Company's Common Stock.
The Board of Directors believes that it is in the Company's best interest to
have the ability to issue an aggregate amount of Common Stock that may exceed
the Rule 4350 (i) NASD 20% Share Limitation, pursuant to the Subscription
Agreement and related documents because this may enable the Company to, among
other things, pay the interest due on the Convertible Notes by issuing the
holders of the Convertible Notes shares of the Company's Common Stock and
encourage the Subscribers to convert the Convertible Notes by reducing the
Conversion Price which will enable the Company to conserve its cash.
THE BOARD OF DIRECTORS RECOMMENDS VOTING 'FOR' APPROVING THE EXECUTION OF THE
SUBSCRIPTION AGREEMENT AND THE ISSUANCE OF MORE THAN 20% OF THE COMPANY'S
OUTSANDING COMMON STOCK, AT A PRICE THAT MAY BE LESS THAN THE GREATER OF BOOK OR
MARKET VALUE OF THE COMPANY'S COMMON STOCK, PURSUANT TO THE SUBSCRIPTION
AGREEMENT AND THE RELATED DOCUMENTS.
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PROPOSAL NO. 3
APPROVAL OF STOCK GRANTS
There is being submitted to the shareholders for approval at the Annual
Meeting, the granting of an aggregate of 450,000 shares of the Company's
restricted Common Stock to the Company's officers, directors, employees and
consultants. If approved by our shareholders, the Board will be authorized to,
from time-to-time, issue an aggregate of 450,000 shares of the Company's Common
Stock to the Company's officers, directors, employees and consultants. The
specific number of shares of the Company's Common Stock granted to any officer,
director, employee or consultant and the specific officers, directors, employees
and/or consultants granted shares will be determined by the Board. The aggregate
number of shares that can be granted will not be adjusted to reflect splits of
the Company's common stock. Officers, directors, employees and consultants will
be required to pay the Company the sum of $.01 per share prior to the issuance
of their shares. The Common Stock will be granted in reliance on the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended, as
transactions not involving a public offering.
We believe that stock grants play an important role in providing officers,
directors and employees with an incentive and inducement to contribute fully to
the growth and development of the Company because of the opportunity to acquire
a proprietary interest in the Company.
Those officers, directors, employees and consultants receiving stock grants
will receive, for nominal consideration, the opportunity to profit from any rise
in the market value of the common stock. This will dilute the equity interest of
the Company's other shareholders. The grant of shares also may affect the
Company's ability to obtain additional capital during the term of any options.
FEDERAL INCOME TAX CONSEQUENCES OF THE RESTRICTED STOCK GRANTS
Generally, the recipient of a restricted stock grant will recognize ordinary
income for federal income tax purposes in an amount equal to the excess of the
fair market value of the shares of Common Stock received at the time the shares
first become transferable or are no longer subject to forfeiture over the
purchase price, if any, paid by the recipient for such common stock, and such
amount will then be deductible for federal income tax purposes by the Company.
For tax purposes, in addition to other restrictions, the Common Stock is
considered to be subject to a substantial risk of forfeiture as long as the sale
of the shares could subject the recipient to suit under the 'short swing profit'
provisions of Section 16 of the Securities Exchange Act of 1934, as amended.
Alternatively, if the recipient of a restricted stock award so elects, the
recipient will recognize ordinary income on the date of grant in an amount equal
to the excess of the fair market value of the shares of Common Stock (without
taking into account any lapse restrictions) on such date, over the purchase
price, if any, paid by the recipient for such common stock, and such amount will
then be deductible by the Company. In the event of the forfeiture of the Common
Stock included in a restricted stock award, the recipient will not be entitled
to any deduction except to the extent the recipient paid for such common stock.
Upon a sale of the Common Stock included in the restricted stock or award, the
recipient will recognize capital gain or loss, as the case may be, equal to the
difference between the amount realized from such sale and the recipient's tax
basis for such shares of common stock.
THE BOARD OF DIRECTORS RECOMMENDS VOTING 'FOR' APPROVING THE GRANTING OF AN
AGGREGATE OF 450,000 SHARES OF THE COMPANY'S COMMON STOCK AS SET FORTH ABOVE.
PROPOSAL NO. 4
REDUCTION OF WARRANT EXERCISE OF WARRANTS ISSUED
TO FIVE INVESTORS IN A PRIVATE PLACEMENT
On July 19, 2005 (the 'Closing Date'), Conolog Corporation (the 'Company')
entered into a Subscription Agreement (the '2005 Subscription Agreement') with
five investors relating to the issuance and sale, in a private placement
('Private Placement') exempt from the registration requirements of the
Securities Act of 1933, as amended (the 'Securities Act'). Pursuant to the
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2005 Subscription Agreement, the company issued 1,200,000 shares of its Common
Stock at a price of $1.25 per share (the 'Purchase Price') and warrants to
purchase 1,200,000 shares of the Company's Common Stock at a price of $1.6892
per share (the 'Warrant Exerchise Price') which are exercisable for a period
commencing six months from the Closing Date and terminating on the fifth
anniversary of the issuance of such warrant. The Company received gross proceeds
of $1,500,000 and net proceeds of $1,339,993.50 before deducting attorneys'
fees, printing fees and other miscellaneous fees related to the private
placement. First Montauk acted as selling agent in the private placement.
Pursuant to the Selling Agent Agreement between the Company and First Montauk,
First Montauk was paid a cash fee of $150,000 (10% of the aggregate purchase
price of the Common Stock sold to the Subscribers ). The Company also issued
First Montauk, including First Montauk's employees and affiliates, warrants to
purchase 240,000 shares of its Common Stock on the same terms as those issued to
Subscribers. The issuance of the warrant to First Montauk (including its
employees and affiliates) was made in reliance upon the exemption provided in
Section 4(2) of the Securities Act. Pursuant to the Subscription Agreement and
the agreement between the Company and the Selling Agent, the Company filed a
registration statement with the Securities and Exchange Commission to register
the resale of the securities and the (securities issuable upon the exercise of
the warrants) under the Securities Act.
To encourage the exercise of the Warrants, the Board of Directors is
recommending that it be given the discretion to lower the Warrant Exercise Price
from time-to-time in its sole discretion provided it does not lower the Warrant
Exercise below $0.65 per share. If the warrants are exercised by the five
investors and First Montauk (including First Montauk's employees and
affiliates), the Company would receive proceeds from such exercise, which would
increase the shareholders' equity and the Company will have more cash for use in
its operations.
The Board of Directors believes that having the discretion to reduce the
Warrant Exercise will enable the Company to raise additional capital and
increase shareholder equity.
THE BOARD OF DIRECTORS RECEOMMENDS VOTING 'FOR' GIVING IT THE DISCRETION TO
REDUCE THE WARRANT EXERCISE PRICE OF WARRANTS ISSUED PURSUANT TO THE 2005
SUBSCRIPTION AGREEMENT PROVIDED THAT IT DOES NOT REDUCE THE WARRANT EXERCISE
BELOW $0.65 PER SHARE.
PROPOSAL NO. 5
INCREASE OF THE CORPORATIONS AUTHORIZED SHARES
On February 24, 2006, the Board of Directors unanimously declared advisable
an amendment to the Company's Certificate of Incorporation to provide for an
increase in the number of shares of Common Stock included in the authorized
capital of the Company, from 20,000,000 shares to 30,000,000 shares, subject to
the approval of the amendment by the Company's shareholders. The proposed
amendment would not change the number of shares of preferred stock that is
currently authorized (2,000,000). The text of this proposed amendment is
included in the Certificate of Amendment attached hereto as Appendix F.
The Company is required by Delaware law to obtain shareholder approval for
any amendment to its Certificate of Incorporation. After considering the
Company's current number of issued and outstanding shares of Common Stock, its
current outstanding equity obligations and the potential of future opportunities
to raise capital, the Board of Directors has determined that it is necessary to
increase the number of shares of Common Stock authorized for issuance from
20,000,000 shares to 30,000,000 shares.
If approved by our shareholders, the increase in authorized capital would
become effective as soon as reasonably practicable after the Annual Meeting by
filing the Certificate of Amendment with the Secretary of State of the State of
Delaware.
The Board of Directors believes that the proposed amendment will provide the
Company with flexibility for issuances of equity, thus maintaining the Company's
ability to respond to any corporate opportunities which may arise in the future
while continuing to have enough shares in reserve to satisfy current
obligations. The unissued shares would be available for issuance from
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time to time for various corporate purposes, including employee compensation
plans, acquisitions and public or private sales for cash as a means of raising
capital. The increase in authorized capital would mean that the additional
authorized shares would be available for issuance from time to time at the
discretion of your Board without further shareholder action except as may be
required for a particular transaction, by law, the policies of the Nasdaq or any
contractual obligations of the Company that may be in effect at the time of
issuance which will in many cases avoid any potential expense or delay in
connection with obtaining shareholder approval for a particular issuance of
shares.
The proposal to increase the authorized capital of the Company may affect
the rights of existing holders of Common Stock to the extent that future
issuances of Common Stock reduce each existing shareholder's proportionate
ownership and voting rights in the Company. In addition, possible dilution
caused by future issuances of Common Stock could lead to a decrease in the
Company's net income per share in future periods and a resulting decline in the
market price of the Company's Common Stock. It is not anticipated that adoption
of the amendment would have any other effect on the holders of the Company's
Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR AMENDING THE COMPANY'S
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF THE COMPANY'S AUTHORIZED
SHARES OF COMMON STOCK FROM 20,000,000 TO 30,000,0000 SHARES.
PROPOSAL NO. 6
RATIFICATION OF SECTION OF AUDITORS
The Board of Directors recommends the selection of Bagell, Josephs &
Company, L.L.C. ('Bagell Josephs') as independent auditors to examine the
Company's financial statements for the fiscal year ending July 31, 2006.
Representatives of Bagell Josephs are expected to be present at the Annual
Meeting of Shareholders with the opportunity to make a statement if they desire
to do so and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS VOTING 'FOR' RATIFYING BAGELL, JOSEPHS &
COMPANY, L.L.C. AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING
JULY 31, 2006.
On September 13, 2004, Rosenberg Rich Baker Berman & Company ('Rosenberg
Rich Baker') resigned as the Company's independent auditors and provided written
notice to the Company that the auditor-client relationship had ceased.
The reports of Rosenberg Rich Baker on the consolidated financial statements
of the Company and its subsidiaries for the Company's fiscal years ended July
31, 2004 and July 31, 2003 did not contain an adverse opinion or a disclaimer of
opinion, nor were they modified as to uncertainty or audit scope or accounting
principles.
The decision to resign was made by Rosenberg Rich Baker and, accordingly, no
action was taken by the Company's audit committee to recommend or approve this
change of accountants.
During the Company's fiscals year ended July 31, 2004 and July 31, 2003 and
the subsequent interim period through September 13, 2004, there were no
disagreements between the Company and Rosenberg Rich Baker on any matter of
accounting principles or practices, financial statement disclosures, or auditing
scope or procedure, which, if not resolved to Rosenberg Rich Baker's
satisfaction, would have caused Rosenberg Rich Baker to make reference to the
subject matter of the disagreements in its report on the Company's financial
statements for such periods. In addition, during the subsequent interim period
through September 13, 2004, Rosenberg Rich Baker did not advise the Company
that: (i) internal controls necessary to develop reliable financial statements
did not exist; (ii) information has come to Rosenberg Rich Baker's attention
which made it unwilling to rely on management's representations or unwilling to
be associated with the financial statements prepared by management; or that
(iii) the scope of the audit should be expanded significantly, or information
has come to the attention of Rosenberg Rich Baker that it has concluded will, or
if further investigated might, materially impact the fairness or reliability of
a previously issued audit
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report or the underlying financial statements, or the financial statements
issued or to be issued covering the fiscal period(s) subsequent to the date of
the most recent audited financial statements and the issue was not resolved to
the satisfaction of Rosenberg Rich Baker prior to its resignation or dismissal.
AUDIT FEES
The aggregate fees for professional services rendered by Bagell Josephs for
the audit of our annual financial statements for 2005 and 2004 and for the
review of the Company's financial statements included in the Company's Form
10-QSB filed with the Securities and Exchange Commission during 2004 and 2005
were approximately $30,000 and $33,000, respectively. The aggregate fees for
professional services rendered by Rosenberg Rich Baker for the review of the
financial statements included in the Quarterly Reports on Form 10-QSB in 2004
were $12,000.
AUDIT-RELATED FEES
No fees were billed by Bagell Josephs for the fiscal years ended July 2004
and 2005 for assurance and related services that are reasonably related to the
performance of the audit or review of the Company's financial statements and are
not reported under the caption 'Audit Fees.'
TAX FEES
No fees were were billed by Bagell Josephs for the fiscal years ended July
2005 and 2004 for professional services rendered for tax compliance, tax advice
and tax planning for the Company.
ALL OTHER FEES
No fees were billed by Bagell, Josephs, Levine & Co., LLC for professional
services rendered for the fiscal years ended 2005 and 2004, other than as stated
above under the captions 'Audit Fees' and 'Tax Fees.' The Audit Committee is
responsible for pre-approving all audit services and all non-audit services to
be provided by independent accountants that are permitted under applicable law
and regulation, and all corresponding fees and terms, in accordance with
procedures established by the Audit Committee in respect of such approvals,
subject to the de minimus exception for non-audit services permitted by SEC
rules and regulations. For fiscal years 2005 and 2004, none of the fees listed
above were covered by the de minimus exception.
FORM 10-KSB
The Company is providing without charge to each person solicited by this
proxy statement a copy of the Company's Annual Report on Form 10-KSB for the
fiscal year ended July 31, 2005 including the financial statements and financial
statement schedules required to be filed with the Securities and Exchange
Commission for the Company's most recent fiscal year as well as a copy of its
10-QSB for the quarter ended October 31, 2005.
OTHER MATTERS
The Board of Directors does not know of any matters other than those
mentioned above to be presented to the meeting. If any other matters do come
before the meeting, the persons named in the proxy will exercise their
discretion in voting thereof.
SHAREHOLDER PROPOSALS
Proposals by any shareholders intended to be presented at the next Annual
Meeting of Shareholders must be received by the Company for inclusion in
material relating to such meeting not later than March 17, 2007.
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EXPENSES
All expenses in connection with solicitation of proxies will be borne by the
Company. Officers and regular employees of the Company may solicit proxies by
personal interview and telephone, telegraph, mail, or facsimile. Arrangements
will be made with brokerage houses and other custodians, nominees and
fiduciaries to forward proxy soliciting materials to the beneficial owners of
stock held of record by such persons, and the Company will reimburse them for
reasonable out-of-pocket expenses incurred by them in doing so.
By Order of the Board of Directors,
/s/ ROBERT S. BENOU
--------------------------------------
ROBERT S. BENOU
CHAIRMAN & CHIEF EXECUTIVE OFFICER
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APPENDIX A
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CONOLOG CORPORATION
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
-------------------
I. PURPOSE
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities by reviewing: the
financial reports and other financial information provided by the Corporation to
any governmental body or the public; the Corporation's systems of internal
controls regarding finance, accounting, legal compliance and ethics that
management and the Board have established; and the Corporation's auditing,
accounting and financial reporting process generally. Consistent with this
function, the Audit Committee should encourage continuous improvement of and
foster adherence to, the Corporation's policies, procedures and practices at all
levels. The Audit Committee's primary duties and responsibilities are to:
1. Serve as an independent and objective party to monitor the
Corporation's financial reporting process and internal control system.
2. Review and appraise the audit efforts of the Corporation's
independent accountants.
3. Provide an open avenue of communication among the independent
accountants, financial and senior management and the Board of Directors.
The Audit Committee will primarily fulfill these responsibilities by
carrying out the activities enumerated in Section IV of this Charter.
II. COMPOSITION
The Audit Committee shall be comprised of three or more directors as
determined by the Board, a majority of whom shall be independent directors. An
independent director means a person other than an officer or other employee of
the Company or any of its subsidiaries or any other individual having a
relationship which, in the opinion of the Company's board of directors, would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a director. A director shall not be considered independent
if, among other things, he or she has:
been employed by the Corporation or its affiliates in the current or past
three years;
accepted any compensation from the Corporation or its affiliates in excess
of $60,000 during the previous fiscal year (except for board service,
retirement plan benefits, or non-discretionary compensation);
an immediate family member who is, or has been in the past three years,
employed by the Corporation or its affiliates as an executive officer;
been a partner, controlling shareholder or an executive officer of any
for-profit business to which the Corporation made, or from which it
received, payments (other than those which arise solely from investments
in the corporation's securities) that exceed five percent of the
organization's consolidated gross revenues for that year, or $200,000,
whichever is more, in any of the past three years; or
been employed as an executive of another entity where any of the
Corporation's executives serve on that entity's compensation committee.
All members of the Committee shall have a working familiarity with basic
finance and accounting practices, and at least one member of the Committee shall
have accounting or related financial management expertise.
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The members of the Committee shall be elected by the Board at the annual
meeting of the Board or until their successors shall be duly elected and
qualified. Unless a Chair is elected by the full Board, the members of the
Committee may designate a Chair by majority vote of the full Committee
membership.
III. MEETINGS
The Committee shall meet at least four times annually, or more frequently as
circumstances dictate. As part of its job to foster open communication, the
Committee should meet at least annually with management and the independent
accountants in separate executive sessions to discuss any matters that the
Committee or each of these groups believe should be discussed privately. In
addition, the Committee or at least its Chair should meet with the independent
accountants and management quarterly to review the Corporation's financials
consistent with Section IV.3 below.
IV. RESPONSIBILITIES
To fulfill its responsibilities and duties the Audit Committee shall:
DOCUMENTS/REPORTS REVIEW
1. Review and update this Charter periodically, at least annually, as
conditions dictate.
2. Review the Corporation's annual financial statements and any reports or
other financial information submitted to any governmental body, or the public,
including any certification, report, opinion, or review rendered by the
independent accountants.
3. Review with financial management and the independent accountants the
10-QSB prior to its filing or prior to the release of earnings. The Chair of the
Committee may represent the entire Committee for purposes of this review.
INDEPENDENT ACCOUNTANTS
4. Recommend to the Board of Directors the selection of the independent
accountants, considering independence and effectiveness and approve the fees and
other compensation to be paid to the independent accountants. On an annual
basis, the Committee should review and discuss with the accountants all
significant relationships the accountants have with the Corporation to determine
the accountants' independence.
5. Review the performance of the independent accountants and approve any
proposed discharge of the independent accountants when circumstances warrant.
6. Periodically consult with the independent accountants out of the presence
of management about internal controls and the fullness and accuracy of the
Corporation's financial statements.
FINANCIAL REPORTING PROCESS
7. In consultation with the independent accountants, review the integrity of
the Corporation's financial reporting process, both internal and external.
8. Consider the independent accountant's judgments about the quality and
appropriateness of the Corporation's accounting principles as applied to its
financial reporting.
9. Consider and approve, if appropriate, major changes to the Corporation's
accounting principles and practice as suggested by the independent accountants
or management.
PROCESS IMPROVEMENT
10. Establish regular and separate systems of reporting to the Audit
Committee by each of management and the independent accountants regarding any
significant judgments made in
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management's preparation of the financial statements and the view of each as to
the appropriateness of such judgments.
11. Following completion of the annual audit, review separately with each of
management and the independent accountants any significant difficulties
encountered during the course of the audit, including any restrictions on the
scope of work or access to required information.
12. Review any significant disagreement among management and the independent
accountants in connection with the preparation of the financial statements.
13. Review with the independent accountants and management the extent to
which changes or improvements in financial or accounting practices, as approved
by the Audit Committee, have been implemented.
ETHICAL AND LEGAL COMPLIANCE
14. Establish, review and update periodically a Code of Ethical Conduct and
ensure that management has established a system to enforce this Ethical Code.
15. Review managements' monitoring of the Corporation's compliance with the
Corporation's Ethical Code, and ensure that management has the proper review
system in place to ensure that the Corporation's financial statements, reports
and other financial information disseminated to governmental organizations, and
the public satisfy legal requirements.
16. Review, with the Corporation's counsel, legal compliance matters
including corporate securities trading policies.
17. Review with the Corporation's counsel, any legal matter that could have
a significant impact on the Corporation's financial statements.
18. Perform any other activities consistent with this Charter, the
Corporation's By-laws and governing law, as the Committee or Board deems
necessary or appropriate.
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APPENDIX B
-------------------
NOMINATING COMMITTEE CHARTER
OF THE NOMINATING COMMITTEE
OF CONOLOG CORPORATION
-------------------
This shall be the Nominating Committee Charter of Conolog Corporation ('the
Company').
I. PURPOSE
The purpose of the Nominating Committee (the 'Committee') of the Board of
Directors ('the 'Board of the Company') is to assist the Board in discharging
the Board's responsibilities regarding:
(a) Reviewing the appropriate size, function and needs of the Board of
Directors;
(b) developing the Board's policy regarding tenure and retirement of
directors;
(c) establishing criteria for evaluating and selecting new members of
the Board, subject to Board approval thereof and
(d) identifying and recommending to the Board for approval individuals
qualified to become members of the Board of Directors, consistent with
criteria established by the Committee and the Board
In addition to the powers and responsibilities expressly delegated to the
Committee in this Charter, the Committee may exercise any other powers and carry
out any other responsibilities delegated to it by the Board from time to time
consistent with the Company's bylaws. The powers and responsibilities delegated
by the Board to the Committee in this Charter or otherwise shall be exercised
and carried out by the Committee as it deems appropriate without requirement of
Board approval, and any decision made by the Committee (including any decision
to exercise or refrain from exercising any of the powers delegated to the
Committee hereunder) shall be at the Committee's sole discretion. While acting
within the scope of the powers and responsibilities delegated to it, the
Committee shall have and may exercise all the powers and authority of the Board.
To the fullest extent permitted by law, the Committee shall have the power to
determine which matters are within the scope of the powers and responsibilities
delegated to it.
II. MEMBERSHIP
The Committee shall be composed of two directors, as determined by the
Board, each of whom have never been employed by the Company and each of whom
(a) satisfies the independence requirements of the NASDAQ, and (b) has
experience, in the business judgment of the Board, that would be helpful in
addressing the matters delegated to the Committee.
The members of the Committee, including the Chair of the Committee, shall be
appointed by the Board. Committee members may be removed from the Committee,
with or without cause, by the Board. Any action duly taken by the Committee
shall be valid and effective, whether or not the members of the Committee at the
time of such action are later determined not to have satisfied the requirements
for membership provided herein.
III. MEETINGS AND PROCEDURES
The Chair (or in his or her absence, a member designated by the Chair) shall
preside at each meeting of the Committee and set the agendas for Committee
meetings. The Committee shall have the authority to establish its own rules and
procedures for notice and conduct of its meetings so long as they are not
inconsistent with the provisions of the Company's bylaws that are applicable to
the Committee.
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The Committee shall meet on a regularly scheduled basis at least two times
per year and more frequently as the Committee deems necessary or desirable.
All non-management directors that are not members of the Committee may
attend and observe meetings of the Committee, but shall not participate in any
discussion or deliberation unless invited to do so by the Committee, and in any
event shall not be entitled to vote. The Committee may, at its discretion,
include in its meetings members of the Company's management, or any other person
whose presence the Committee believes to be desirable and appropriate.
Notwithstanding the foregoing, the Committee may exclude from its meetings any
person it deems appropriate, including but not limited to, any non-management
director that is not a member of the Committee.
The Committee may retain any independent counsel, experts or advisors that
the Committee believes to be desirable and appropriate. The Committee may also
use the services of the Company's regular legal counsel or other advisors to the
Company. The Company shall provide for appropriate funding, as determined by the
Committee, for payment of compensation to any such persons employed by the
Committee and for ordinary administrative expenses of the Committee that are
necessary or appropriate in carrying out its duties. The Committee shall have
sole authority to retain and terminate any search firm to be used to identify
director candidates, including sole authority to approve such search firm's fees
and other retention terms.
The Chair shall report to the Board regarding the activities of the
Committee at appropriate times and as otherwise requested by the Chairman of the
Board.
IV. DUTIES AND RESPONSIBILITIES
1. (a) At an appropriate time prior to each annual meeting of shareholders
at which directors are to be elected or reelected, the Committee shall recommend
to the Board for nomination by the Board such candidates as the Committee, in
the exercise of its judgment, has found to be well qualified and willing and
available to serve.
(b) At an appropriate time after a vacancy arises on the Board or a director
advises the Board of his or her intention to resign, the Committee shall
recommend to the Board for appointment by the Board to fill such vacancy, such
prospective member of the Board as the Committee, in the exercise of its
judgment, has found to be well qualified and willing and available to serve.
(c) For purposes of (a) and (b) above, the Committee may consider the
following criteria, among others the Committee shall deem appropriate, in
recommending candidates for election to the Board:
(i) personal and professional integrity, ethics and values;
(ii) experience in corporate management, such as serving as an officer
or former officer of a publicly held company;
(iii) experience in the Company's industry and with relevant social
policy concerns;
(iv) experience as a board member of another publicly held company;
(v) academic expertise in an area of the Company's operations; and
(vi) practical and mature business judgment.
2. The Committee shall, at least annually, review the performance of each
current director and shall consider the results of such evaluation when
determining whether or not to recommend the nomination of such director for an
additional term.
3. In appropriate circumstances, the Committee, in its discretion, shall
consider and may recommend the removal of a director for cause, in accordance
with the applicable provisions of the Company's certificate of incorporation and
bylaws.
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4. The Committee shall oversee the Board in the Board's annual review of its
performance (including its composition and organization), and will make
appropriate recommendations to improve performance.
5. The Committee shall develop and recommend to the Board a policy regarding
the consideration of director candidates recommended by the Company's security
holders and procedures for submission by security holders of director nominee
recommendations.
6. The Committee shall evaluate its own performance on an annual basis,
including its compliance with this Charter, and provide the Board with any
recommendations for changes in procedures or policies governing the Committee.
The Committee shall conduct such evaluation and review in such manner as it
deems appropriate.
7. The Committee shall periodically report to the Board on its findings and
actions.
8. The Committee shall review and reassess this Charter at least annually
and submit any recommended changes to the Board for its consideration.
V. DELEGATION OF DUTIES
In fulfilling its responsibilities, the Committee shall be entitled to
delegate any or all of its responsibilities to a subcommittee of the Committee,
to the extent consistent with the Company's certificate of incorporation, bylaws
and applicable law and rules of markets in which the Company's securities then
trade.
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APPENDIX C
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this 'Agreement'), dated as of January 19,
2006, by and among Conolog Corporation, a Delaware corporation (the 'Company'),
and the subscribers identified on the signature page hereto (each a 'Subscriber'
and collectively 'Subscribers').
WHEREAS, the Company and the Subscribers are executing and delivering this
Agreement in reliance upon an exemption from securities registration afforded by
the provisions of Section 4(2), Section 4(6) and/or Regulation D
('Regulation D') as promulgated by the United States Securities and Exchange
Commission (the 'Commission') under the Securities Act of 1933, as amended (the
'1933 Act').
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the
Subscribers, as provided herein, and the Subscribers, in the aggregate, shall
purchase up to Five Million Dollars ($5,000,000) (the 'Purchase Price') of
principal amount of promissory notes of the Company ('Note' or 'Notes'), a form
of which is annexed hereto as Exhibit A, convertible into shares of the
Company's common stock, $0.01 par value (the 'Common Stock') at a per share
conversion price set forth in the Note ('Conversion Price'); and share purchase
warrants (the 'Warrants'), in the form annexed hereto as Exhibit B, to purchase
shares of Common Stock (the 'Warrant Shares'). The Notes, shares of Common Stock
issuable upon conversion of the Notes (the 'Shares'), the Warrants and the
Warrant Shares are collectively referred to herein as the 'Securities'; and
WHEREAS, the aggregate proceeds of the sale of the Notes and the Warrants
contemplated hereby shall be held in escrow pursuant to the terms of a Funds
Escrow Agreement to be executed by the parties substantially in the form
attached hereto as Exhibit C (the 'Escrow Agreement').
NOW, THEREFORE, in consideration of the mutual covenants and other
agreements contained in this Agreement the Company and the Subscribers hereby
agree as follows:
1. Conditions To Closing. Subject to the satisfaction or waiver of the
terms and conditions of this Agreement, on the Closing Date, each Subscriber
shall purchase and the Company shall sell to each Subscriber a Note in the
principal amount designated on the signature page hereto. The aggregate
amount of the Notes to be purchased by the Subscribers on the Closing Date
shall, in the aggregate, be equal to the Closing Purchase Price.
2. Closing Date. The 'Closing Date' shall be the date that subscriber
funds representing the net amount due the Company from the Closing Purchase
Price of the Offering is transmitted by wire transfer or otherwise to or for
the benefit of the Company. Notwithstanding anything to the contrary herein,
the parties to this Agreement agree that the Closing Date shall be deemed to
be January 19, 2006. The consummation of the transactions contemplated
herein for all Closings shall take place at the offices of Grushko &
Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176, upon
the satisfaction of all conditions to Closing set forth in this Agreement.
3. Class A Warrants. On the Closing Date, the Company will issue and
deliver Class A Warrants to the Subscribers (the 'Warrants'). One Class A
Warrant will be issued for each one Share which would be issued on the
Closing Date assuming the complete conversion of the Notes issued on such
Closing Date at the Conversion Price in effect on the Closing Date assuming
such Closing Date were a Conversion Date. The per Warrant Share exercise
price to acquire a Warrant Share upon exercise of a Warrant shall be equal
to $103% of the closing bid price of the Company's common stock on the
Principal Market for the trading day preceding, the Closing Date, as
reported by Bloomberg L.P. The Class A Warrants shall be exercisable until
five (5) years after the Closing Date. The Warrants will be exercisable on a
cashless basis as described in the Warrants.
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4. Subscriber's Representations and Warranties. Each Subscriber hereby
represents and warrants to and agrees with the Company only as to such
Subscriber that:
(a) Organization and Standing of the Subscribers. If the Subscriber
is an entity, such Subscriber is a corporation, partnership or other
entity duly incorporated or organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization.
(b) Authorization and Power. Each Subscriber has the requisite power
and authority to enter into and perform this Agreement and to purchase
the Notes and Warrants being sold to it hereunder. The execution,
delivery and performance of this Agreement by such Subscriber and the
consummation by it of the transactions contemplated hereby and thereby
have been duly authorized by all necessary corporate or partnership
action, and no further consent or authorization of such Subscriber or its
Board of Directors, stockholders, partners, members, as the case may be,
is required. This Agreement has been duly authorized, executed and
delivered by such Subscriber and constitutes, or shall constitute when
executed and delivered, a valid and binding obligation of the Subscriber
enforceable against the Subscriber in accordance with the terms thereof.
(c) No Conflicts. The execution, delivery and performance of this
Agreement and the consummation by such Subscriber of the transactions
contemplated hereby or relating hereto do not and will not (i) result in
a violation of such Subscriber's charter documents or bylaws or other
organizational documents or (ii) conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of any agreement, indenture or instrument or
obligation to which such Subscriber is a party or by which its properties
or assets are bound, or result in a violation of any law, rule, or
regulation, or any order, judgment or decree of any court or governmental
agency applicable to such Subscriber or its properties (except for such
conflicts, defaults and violations as would not, individually or in the
aggregate, have a material adverse effect on such Subscriber). Such
Subscriber is not required to obtain any consent, authorization or order
of, or make any filing or registration with, any court or governmental
agency in order for it to execute, deliver or perform any of its
obligations under this Agreement or to purchase the Notes or acquire the
Warrants in accordance with the terms hereof, provided that for purposes
of the representation made in this sentence, such Subscriber is assuming
and relying upon the accuracy of the relevant representations and
agreements made by the Company herein.
(d) Information on Company. The Subscriber has had access at the
EDGAR Website of the Commission to the Company's Form 10-KSB for the year
ended July 31, 2004 and all periodic or other reports filed with the
Commission (hereinafter referred to as the 'Reports'). In addition, the
Subscriber has received in writing from the Company such other
information concerning its operations, financial condition and other
matters as the Subscriber has requested in writing (such other
information is collectively, the 'Other Written Information'), and
considered all factors the Subscriber deems material in deciding on the
advisability of investing in the Securities.
(e) Information on Subscriber. The Subscriber is, and will be at the
time of the conversion of the Notes and exercise of the Warrants, an
'accredited investor', as such term is defined in Regulation D
promulgated by the Commission under the 1933 Act, is experienced in
investments and business matters, has made investments of a speculative
nature and has purchased securities of United States publicly-owned
companies in private placements in the past and, with its
representatives, has such knowledge and experience in financial, tax and
other business matters as to enable the Subscriber to make an informed
investment decision with respect to the proposed purchase of the Note,
which represents a speculative investment. The Subscriber has the
authority and is duly and legally qualified to purchase and own the
Securities. The Subscriber is able to bear the risk of such
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investment for an indefinite period and to afford a complete loss
thereof. The information set forth on the signature page hereto regarding
the Subscriber is accurate.
(f) Purchase of Notes and Warrants. On the Closing Date, the
Subscriber will purchase the Notes and Warrants as principal for its own
account for investment only and not with a view toward, or for resale in
connection with, the public sale or any distribution thereof.
(g) Compliance with Securities Act. The Subscriber understands and
agrees that the Securities have not been registered under the 1933 Act or
any applicable state securities laws, by reason of their issuance in a
transaction that does not require registration under the 1933 Act (based
in part on the accuracy of the representations and warranties of
Subscriber contained herein), and that such Securities must be held
indefinitely unless a subsequent disposition is registered under the 1933
Act or any applicable state securities laws or is exempt from such
registration.
(h) Shares Legend. The Shares and the Warrant Shares shall bear the
following or similar legend:
'THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO [THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED.'
(i) Warrants Legend. The Warrants shall bear the following or similar
legend:
'THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON
EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR ANY
APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS
NOT REQUIRED.'
(j) Note Legend. The Note shall bear the following legend:
'THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS
NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION
OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.'
(k) Communication of Offer. The offer to sell the Securities was
communicated to the Subscriber by the Company. At no time was the
Subscriber presented with or solicited by any leaflet, newspaper or
magazine article, radio or television advertisement, or any other form of
general advertising or solicited or invited to attend a promotional
meeting otherwise than in connection and concurrently with such
communicated offer.
(l) Authority; Enforceability. This Agreement and other agreements
delivered together with this Agreement or in connection herewith have
been duly authorized, executed and
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delivered by the Subscriber and are valid and binding agreements
enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights
generally and to general principles of equity; and Subscriber has full
corporate power and authority necessary to enter into this Agreement and
such other agreements and to perform its obligations hereunder and under
all other agreements entered into by the Subscriber relating hereto.
(m) Restricted Securities. Subscriber understands that the Securities
have not been registered under the 1933 Act and such Subscriber will not
sell, offer to sell, assign, pledge, hypothecate or otherwise transfer
any of the Securities unless pursuant to an effective registration
statement under the 1933 Act. Notwithstanding anything to the contrary
contained in this Agreement, and provided that prior to any transfer, the
Subscriber and the proposed transferee execute and deliver to the Company
a representation letter that is reasonably acceptable to the Company,
such Subscriber may transfer (without restriction and without the need
for an opinion of counsel) the Securities to its Affiliates (as defined
below) provided that each such Affiliate is an 'accredited investor'
under Regulation D, such Affiliate agrees to be bound by the terms and
conditions of this Agreement. The Company will be liable for damages
arising out of any unreasonable delay in reissuing Common Stock to an
Affiliate of the Subscriber. Subscriber indemnifies the Company in the
event an exemption from such transfer under the 1933 Act is found not to
have been available. For the purposes of this Agreement, an 'Affiliate'
of any person or entity means any other person or entity directly or
indirectly controlling, controlled by or under direct or indirect common
control with such person or entity. Affiliate includes each subsidiary of
the Company. For purposes of this definition, 'control' means the power
to direct the management and policies of such person or firm, directly or
indirectly, whether through the ownership of voting securities, by
contract or otherwise.
(n) No Governmental Review. Each Subscriber understands that no
United States federal or state agency or any other governmental or state
agency has passed on or made recommendations or endorsement of the
Securities or the suitability of the investment in the Securities nor
have such authorities passed upon or endorsed the merits of the offering
of the Securities.
(o) Correctness of Representations. Each Subscriber represents as to
such Subscriber that the foregoing representations and warranties are
true and correct as of the date hereof and, unless a Subscriber otherwise
notifies the Company prior to each Closing Date shall be true and correct
as of the Closing Date.
(p) Survival. The foregoing representations and warranties shall
survive the Closing Date until three years after the Closing Date.
5. Company Representations and Warranties. The Company represents and
warrants to and agrees with each Subscriber that except as set forth in the
Reports and as otherwise qualified in the Transaction Documents:
(a) Due Incorporation. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction
of its incorporation and has the requisite corporate power to own its
properties and to carry on its business is disclosed in the Reports. The
Company is duly qualified as a foreign corporation to do business and is
in good standing in each jurisdiction where the nature of the business
conducted or property owned by it makes such qualification necessary,
other than those jurisdictions in which the failure to so qualify would
not have a Material Adverse Effect. For purpose of this Agreement, a
'Material Adverse Effect' shall mean a material adverse effect on the
financial condition, results of operations, properties or business of the
Company taken as a whole. For purposes of this Agreement, 'Subsidiary'
means, with respect to any entity at any date, any corporation, limited
or general partnership, limited liability company, trust, estate,
association, joint venture or other business entity) of which more than
50%
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of (i) the outstanding capital stock having (in the absence of
contingencies) ordinary voting power to elect a majority of the board of
directors or other managing body of such entity, (ii) in the case of a
partnership or limited liability company, the interest in the capital or
profits of such partnership or limited liability company or (iii) in the
case of a trust, estate, association, joint venture or other entity, the
beneficial interest in such trust, estate, association or other entity
business is, at the time of determination, owned or controlled directly
or indirectly through one or more intermediaries, by such entity. All the
Company's material Subsidiaries as of the Closing Date are set forth on
Schedule 5(a) hereto.
(b) Outstanding Stock. All issued and outstanding shares of capital
stock of the Company have been duly authorized and validly issued and are
fully paid and nonassessable.
(c) Authority; Enforceability. Except for the Approval, if the
Approval is required by the applicable NASD Market Place Rules and/or
Nasdaq's corporate governance rules, the Agreement, the Note, the
Warrants, the Escrow Agreement, and any other agreements delivered
together with this Agreement or in connection herewith (collectively
'Transaction Documents') have been duly authorized, executed and
delivered by the Company and are valid and binding agreements enforceable
in accordance with their terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights
generally and to general principles of equity. Except for the Approval,
if the Approval is required by the applicable NASD Market Place Rules
and/or Nasdaq's corporate governance rules, the Company has full
corporate power and authority necessary to enter into and deliver the
Transaction Documents and to perform its obligations thereunder.
(d) Additional Issuances. There are no outstanding agreements or
preemptive or similar rights affecting the Company's common stock or
equity and no outstanding rights, warrants or options to acquire, or
instruments convertible into or exchangeable for, or agreements or
understandings with respect to the sale or issuance of any shares of
common stock or equity of the Company or other equity interest in any of
the Subsidiaries of the Company except as described on Schedule 5(d), or
in the Reports. The Common stock of the Company on a fully diluted basis
outstanding as of the last trading day preceding the Closing Date is set
forth on Schedule 5(d).
(e) Consents. Except for the Approval described in Section 9 of this
Agreement, if the Approval is required by applicable NASD Market Place
Rules and/or Nasdaq's corporate governance rules, and the approval and/or
notice required by the corporate governance rules of the NASDAQ Capital
Market (formerly known as the NASDAQ SmallCap Market) (the 'SmallCap'),
including but not limited to the requirement to file an Additional Shares
Listing Application with the SmallCap at least (15) days prior to the
issuance of the Shares or the Warrant Shares, no consent, approval,
authorization or order of any court, governmental agency or body or
arbitrator having jurisdiction over the Company, or any of its
Affiliates, any Principal Market, nor the Company's shareholders is
required for the execution by the Company of the Transaction Documents
and compliance and performance by the Company of its obligations under
the Transaction Documents, including, without limitation, the issuance
and sale of the Securities.
(f) No Violation or Conflict. Assuming the representations and
warranties of the Subscribers in Section 4 are true and correct, neither
the issuance and sale of the Securities nor the performance of the
Company's obligations under this Agreement and all other agreements
entered into by the Company relating thereto by the Company will:
(i) violate, conflict with, result in a breach of, or constitute
a default (or an event which with the giving of notice or the lapse
of time or both would be reasonably likely to constitute a default in
any material respect) of a material nature under (A) the articles or
certificate of incorporation, charter or bylaws of the Company,
(B) to the Company's knowledge, any decree, judgment, order, law,
treaty, rule,
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regulation or determination applicable to the Company of any court,
governmental agency or body, or arbitrator having jurisdiction over
the Company or over the properties or assets of the Company or any of
its Affiliates, (C) the terms of any bond, debenture, note or any
other evidence of indebtedness, or any agreement, stock option or
other similar plan, indenture, lease, mortgage, deed of trust or
other instrument to which the Company or any of its Affiliates is a
party, by which the Company or any of its Affiliates is bound, or to
which any of the properties of the Company or any of its Affiliates
is subject, or (D) the terms of any 'lock-up' or similar provision of
any underwriting or similar agreement to which the Company, or any of
its Affiliates is a party except the violation, conflict, breach, or
default of which would not have a Material Adverse Effect; or
(ii) result in the creation or imposition of any lien, charge or
encumbrance upon the Securities or any of the assets of the Company
or any of its Affiliates; or
(iii) result in the activation of any anti-dilution rights or a
reset or repricing of any debt or security instrument of any other
creditor or equity holder of the Company, nor result in the
acceleration of the due date of any obligation of the Company; or
(iv) result in the activation of any piggy-back registration
rights of any person or entity holding securities or debt of the
Company or having the right to receive securities of the Company.
(g) The Securities. The Securities upon issuance:
(i) are, or will be, free and clear of any security interests,
liens, claims or other encumbrances, subject to restrictions upon
transfer under the 1933 Act and any applicable state securities laws;
(ii) have been, or will be, duly and validly authorized and on
the date of issuance of the Shares and upon exercise of the Warrants,
the Shares and Warrant Shares will be duly and validly issued, fully
paid and nonassessable or if registered pursuant to the 1933 Act, and
resold pursuant to an effective registration statement will be free
trading and unrestricted);
(iii) will not have been issued or sold in violation of any
preemptive or other similar rights of the holders of any securities
of the Company; and
(iv) will not subject the holders thereof to personal liability
by reason of being such holders provided Subscriber's representations
herein are true and accurate and Subscribers take no actions or fail
to take any actions required for their purchase of the Securities to
be in compliance with all applicable laws and regulations; and
(v) will not result in a violation of Section 5 under the 1933
Act.
(h) Litigation. There is no pending or, to the best knowledge of the
Company, threatened action, suit, proceeding or investigation before any
court, governmental agency or body, or arbitrator having jurisdiction
over the Company, or any of its Affiliates that would affect the
execution by the Company or the performance by the Company of its
obligations under the Transaction Documents. Except as disclosed in the
Reports, there is no pending or, to the best knowledge of the Company,
basis for or threatened action, suit, proceeding or investigation before
any court, governmental agency or body, or arbitrator having jurisdiction
over the Company, or any of its Affiliates which litigation if adversely
determined would have a Material Adverse Effect.
(i) Reporting Company. The Company is a publicly-held company subject
to reporting obligations pursuant to Section 13 of the Securities
Exchange Act of 1934 (the '1934 Act') and has a class of common shares
registered pursuant to Section 12(g) of the 1934 Act. Pursuant to the
provisions of the 1934 Act, as amended, the Company has filed all 10-KSB
and 10-QSB reports required to be filed thereunder with the Commission
during the preceding twelve months.
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(j) No Market Manipulation. The Company and its Affiliates have not
taken, and will not take, directly or indirectly, any action designed to,
or that might reasonably be expected to, cause or result in stabilization
or manipulation of the price of the Common Stock to facilitate the sale
or resale of the Securities or affect the price at which the Securities
may be issued or resold, provided, however, that this provision shall not
prevent the Company from engaging in investor relations/public relations
activities consistent with past practices.
(k) Information Concerning Company. The Reports contain all material
information relating to the Company and its operations and financial
condition as of their respective dates and all the material information
required to be disclosed therein. Since the last day of the fiscal year
of the most recent audited financial statements included in the Reports
('Latest Financial Date'), and except as modified in the Other Written
Information or in the Schedules hereto, there has been no Material
Adverse Event relating to the Company's business, financial condition or
affairs not disclosed in the Reports. The Reports do not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances when made.
(l) Stop Transfer. The Company will not issue any stop transfer order
or other order impeding the sale, resale or delivery of any of the
Securities, except as may be required by any applicable federal or state
securities laws and unless contemporaneous notice of such instruction is
given to the Subscriber.
(m) Defaults. The Company is not in violation of its articles of
incorporation or bylaws. The Company is (i) not in default under or in
violation of any other material agreement or instrument to which it is a
party or by which it or any of its properties are bound or affected,
which default or violation would have a Material Adverse Effect,
(ii) not in default with respect to any order of any court, arbitrator or
governmental body or subject to or party to any order of any court or
governmental authority arising out of any action, suit or proceeding
under any statute or other law respecting antitrust, monopoly, restraint
of trade, unfair competition or similar matters, or (iii) to the
Company's knowledge not in violation of any statute, rule or regulation
of any governmental authority which violation would have a Material
Adverse Effect.
(n) Not an Integrated Offering. Neither the Company, nor any of its
Affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any
offers to buy any security under circumstances that would cause the offer
of the Securities pursuant to this Agreement to be integrated with prior
offerings by the Company for purposes of the 1933 Act or any applicable
stockholder approval provisions, including, without limitation, under the
rules and regulations of the SmallCap Market or any Principal Market
which would impair exemptions relied upon in this Offering (as defined in
Section 8(b)). Nor will the Company or any of its Affiliates take any
action or steps that would cause the offer or issuance of the Securities
to be integrated with other offerings which would impair the exemptions
relied upon in this Offering or the Company's ability to timely comply
with its obligations hereunder.
(o) No General Solicitation. Neither the Company, nor any of its
Affiliates, nor to its knowledge, any person acting on its or their
behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the 1933 Act) in
connection with the offer or sale of the Securities.
(p) Listing. The Company's common stock is quoted on the SmallCap.
Other than prior notices, all of which the Company has complied with and
the notice dated June 24, 2004, and any subsequent notifications related
thereto from the SmallCap, the Company has not received any oral or
written notice that its common stock is not eligible nor will become
ineligible for quotation on the SmallCap nor that its common stock does
not meet all requirements for the continuation of such quotation. As of
the date hereof, other than the requirements of NASD Market Place Rule
Section 4310 (c) (4), the Company
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satisfies all the requirements for the continued quotation of its common
stock on the SmallCap.
(q) No Undisclosed Liabilities. Other than the execution of this
Subscription Agreement and the transactions contemplated therein, the
Company has no liabilities or obligations which are material,
individually or in the aggregate, which are not disclosed in the Reports
and Other Written Information, other than those incurred in the ordinary
course of the Company's businesses since the Latest Financial Date and
which, individually or in the aggregate, would reasonably be expected to
have a Material Adverse Effect, except as disclosed on Schedule 5(q).
(r) No Undisclosed Events or Circumstances. Other than the execution
of this Subscription Agreement and the transactions contemplated therein,
since the Latest Financial Date, no event or circumstance has occurred or
exists with respect to the Company or its businesses, properties,
operations or financial condition, that, under applicable law, rule or
regulation, requires public disclosure or announcement prior to the date
hereof by the Company but which has not been so publicly announced or
disclosed in the Reports.
(s) Capitalization. The authorized and outstanding capital stock of
the Company as of the date of this Agreement and the Closing Date (not
including the Securities) are set forth on Schedule 5(d). Except as set
forth on Schedule 5(d) or as disclosed in the Reports, there are no
options, warrants, or rights to subscribe to, securities, rights or
obligations convertible into or exchangeable for or giving any right to
subscribe for any shares of capital stock of the Company or any of its
Subsidiaries. All of the outstanding shares of Common Stock of the
Company have been duly and validly authorized and issued and are fully
paid and nonassessable.
(t) Dilution. The Company's executive officers and directors
understand the nature of the Securities being sold hereby and recognize
that the issuance of the Securities will have a potential dilutive effect
on the equity holdings of other holders of the Company's equity or rights
to receive equity of the Company. The board of directors of the Company
has concluded, in its good faith business judgment that the issuance of
the Securities is in the best interests of the Company. The Company
specifically acknowledges that subject to the Company's receiving the
Approval, if the Approval is required by the applicable NASD Market Place
rules and/or Nasdaq's corporate governance rules, its obligation to issue
the Shares upon conversion of the Notes, and the Warrant Shares upon
exercise of the Warrants is binding upon the Company and enforceable
regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Company or parties entitled to
receive equity of the Company.
(u) No Disagreements with Accountants and Lawyers. There are no
disagreements of any kind presently existing, or reasonably anticipated
by the Company to arise, between the Company and the accountants and
lawyers formerly or presently employed by the Company, including but not
limited to disputes or conflicts over payment owed to such accountants
and lawyers.
(v) DTC Status. The Company's transfer agent is a participant in and
the Common Stock is eligible for transfer pursuant to the Depository
Trust Company Automated Securities Transfer Program. The name, address,
telephone number, fax number, contact person and email address of the
Company transfer agent is set forth on Schedule 5(v) hereto.
(w) Investment Company. Neither the Company nor any Affiliate is an
'investment company' within the meaning of the Investment Company Act of
1940, as amended.
(x) Solvency. Based on the financial condition of the Company as of
the Closing Date after giving effect to the receipt by the Company of the
proceeds from the Offering (i) the Company's fair saleable value of its
assets exceeds the amount that will be required to be paid on or in
respect of the Company's existing debts and other liabilities (including
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known contingent liabilities) as they mature; (ii) the Company's assets
do not constitute unreasonably small capital to carry on its business for
the current fiscal year as now conducted and as proposed to be conducted
including its capital needs taking into account the particular capital
requirements of the business conducted by the Company, and projected
capital requirements and capital availability thereof; and (iii) the
current cash flow of the Company, together with the proceeds the Company
would receive, were it to liquidate all of its assets, after taking into
account all anticipated uses of the cash, would be sufficient to pay all
amounts on or in respect of its debt when such amounts are required to be
paid. The Company does not intend to incur debts beyond its ability to
pay such debts as they mature (taking into account the timing and amounts
of cash to be payable on or in respect of its debt).
(y) Correctness of Representations. The Company represents that the
foregoing representations and warranties are true and correct as of the
date hereof in all material respects, and, unless the Company otherwise
notifies the Subscribers prior to each Closing Date, shall be true and
correct in all material respects as of the Closing Date.
(z) Survival. The foregoing representations and warranties shall
survive the Closing Date until two years after the Closing Date.
6. Regulation D Offering. The offer and issuance of the Securities to
the Subscribers is being made pursuant to the exemption from the
registration provisions of the 1933 Act afforded by Section 4(2) or
Section 4(6) of the 1933 Act and/or Rule 506 of Regulation D promulgated
thereunder. On the Closing Date, the Company will provide an opinion
reasonably acceptable to Subscriber from the Company's legal counsel opining
on the availability of an exemption from registration under the 1933 Act as
it relates to the offer and issuance of the Securities and other matters
reasonably requested by Subscribers. A form of the legal opinion is annexed
hereto as Exhibit D. The Company will provide, at the Company's expense,
such other legal opinions in the future as are reasonably necessary for the
issuance and resale of the Common Stock issuable upon conversion of the
Notes and exercise of the Warrants pursuant to an effective registration
statement, provided, however, the Subscriber seeking such opinion meets all
applicable requirements for such resale and provided such Subscriber
provides the Company and/or its counsel with such information as the
Company's counsel may need in order to render such opinion. Subscriber
agrees that any legal opinions required hereunder or under any other
Transaction Documents may be supplied by the Company's in house General
Counsel.
7.1. Conversion of Note.
(a) Upon the conversion of a Note or part thereof, the Company shall,
at its own cost and expense, take all necessary action, including
obtaining and delivering, an opinion of counsel to assure that the
Company's transfer agent shall issue stock certificates in the name of
Subscriber (or its nominee) or such other persons as designated by
Subscriber and in such denominations to be specified at conversion
representing the number of shares of Common Stock issuable upon such
conversion, provided however, if the stock certificates being issued
pursuant to this Section are being issued to the Subscriber's nominee and
not in connection with a sale thereof, prior to such issuance, the
Subscriber and the proposed nominee shall execute and deliver to the
Company a representation letter that is reasonably acceptable to the
Company. The Company warrants that no instructions other than these
instructions have been or will be given to the transfer agent of the
Company's Common Stock and that, unless waived by the Subscriber, the
Shares will, subject to the provisions of this Subscription Agreement, be
free-trading, and freely transferable, and will not contain a legend
restricting the resale or transferability of the Shares provided the
Shares are being sold pursuant to an effective registration statement
covering the Shares or are otherwise exempt from registration. Subscriber
hereby agrees to indemnify the Company in the event an exemption from
such transfer under the 1933 Act is found not to have been available.
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(b) Subscriber will give notice of its decision to exercise its right
to convert the Note, interest, any sum due to the Subscriber under the
Transaction Documents including Liquidated Damages, or part thereof by
telecopying an executed and completed Notice of Conversion (a form of
which is annexed as Exhibit A to the Note) to the Company via confirmed
telecopier transmission or otherwise pursuant to Section 12(a) of this
Agreement. The Subscriber will be required to surrender the Note prior to
the conversion of the Note. Subscriber will also be required to surrender
the note within three business days of the satisfaction by the Company of
such Note. Each date on which a Notice of Conversion is telecopied to the
Company in accordance with the provisions hereof shall be deemed a
Conversion Date. The Company will itself or cause the Company's transfer
agent to transmit the Company's Common Stock certificates representing
the Shares issuable upon conversion of the Note to the Subscriber via
express courier for receipt by such Subscriber within five (5) business
days after receipt by the Company of the Notice of Conversion (such fifth
day being the 'Delivery Date'). In the event the Shares are
electronically transferable, then delivery of the Shares must be made by
electronic transfer provided request for such electronic transfer has
been made by the Subscriber and the Subscriber has complied with all
applicable securities laws in connection with the sale of the Common
Stock, including, without limitation, the prospectus delivery
requirements. A Note representing the balance of the Note not so
converted will be provided by the Company to the Subscriber if requested
by Subscriber, provided the Subscriber has delivered the original Note to
the Company. In the event that a Subscriber does not surrender a Note for
reissuance upon partial payment or conversion, the Subscriber hereby
indemnifies the Company against any and all loss or damage attributable
to a third-party claim in an amount in excess of the actual amount then
due under the Note. 'Business day' and 'trading day' as employed in the
Transaction Documents is a day that the New York Stock Exchange is open
for trading for three or more hours.
(c) The Company understands that a delay in the delivery of the
Shares in the form required pursuant to Section 7.1 hereof, or the
Mandatory Redemption Amount described in Section 7.2 hereof, respectively
after the Delivery Date or the Mandatory Redemption Payment Date (as
hereinafter defined) could result in economic loss to the Subscriber. As
compensation to the Subscriber for such loss, the Company agrees to pay
(as liquidated damages and not as a penalty) to the Subscriber for late
issuance of Shares in the form required pursuant to Section 7.1 hereof
upon Conversion of the Note in the amount of $100 per business day after
the Delivery Date for each $10,000 of Note principal amount being
converted of the corresponding Shares which are not timely delivered. The
Company shall pay any payments incurred under this Section in immediately
available funds upon demand.
(d) Nothing contained herein or in any document referred to herein or
delivered in connection herewith shall be deemed to establish or require
the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of
interest or dividends required to be paid or other charges hereunder
exceed the maximum permitted by such law, any payments in excess of such
maximum shall be credited against amounts owed by the Company to the
Subscriber and thus refunded to the Company.
(e) The Company may in its sole discretion reduce the Conversion
Price of any Notes that have not been paid off or fully converted if
(i) the Approval has been obtained or (ii) if the Approval is not
required by the applicable NASD Market Place Rules and/or the Nasdaq's
corporate governance rules. In the event the Conversion Price is reduced
pursuant to this Section 7.1(e), the Company shall notify any Subscribers
holding Notes which have not been paid by the Company or fully converted
by the Subscribers of such reduced Conversion Price.
7.2. Mandatory Redemption at Subscriber's Election. In the event
(i) the Company is prohibited from issuing Shares, (ii) the Company fails to
timely deliver Shares on a Delivery
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Date, (iii) upon the occurrence of any other Event of Default (as defined in
the Note or in this Agreement), (iv) of the liquidation, dissolution or
winding up of the Company, or (v) a Change of Control (as defined below) any
of which that continues for more than ten days, then at the Subscriber's
election, the Company must pay to the Subscriber ten (10) business days
after request by the Subscriber, at the Subscriber's election, a sum of
money determined by (y) multiplying up to the outstanding principal amount
of the Note designated by the Subscriber by 120%, or (z) multiplying the
number of Shares otherwise deliverable upon conversion of an amount of Note
principal and/or interest designated by the Subscriber (with the date of
giving of such designation being a 'Deemed Conversion Date') at the
Conversion Price that would be in effect on the Deemed Conversion Date by
the highest closing price of the Common Stock on the Principal Market for
the period commencing on the Deemed Conversion Date until the day prior to
the receipt by the Subscriber of the Mandatory Redemption Payment, whichever
is greater, together with accrued but unpaid interest thereon ('Mandatory
Redemption Payment'). The Mandatory Redemption Payment must be received by
the Subscriber on the same date as the Company Shares otherwise deliverable
or within ten (10) business days after request, whichever is sooner
('Mandatory Redemption Payment Date'). Upon receipt of the Mandatory
Redemption Payment, the corresponding Note principal and interest will be
deemed paid and no longer outstanding. Liquidated damages calculated
pursuant to Section 7.1(c) hereof, that have been paid or accrued for the
twenty day period prior to the actual receipt of the Mandatory Redemption
Payment by the Subscriber shall be credited against the Mandatory Redemption
Payment. For purposes of this Section 7.2, 'Change in Control' shall mean
(i) the Company becoming a Subsidiary of another entity, (ii) a majority of
the board of directors of the Company as of the Closing Date no longer
serving as directors of the Company except due to natural causes, (iii) the
sale, lease or transfer of substantially all the assets of the Company or
Subsidiaries.
7.3. Maximum Conversion. The Subscriber shall not be entitled to convert
on a Conversion Date that amount of the Note in connection with that number
of shares of Common Stock which would be in excess of the sum of (i) the
number of shares of common stock beneficially owned by the Subscriber and
its Affiliates on a Conversion Date, and (ii) the number of shares of Common
Stock issuable upon the conversion of the Note with respect to which the
determination of this provision is being made on a Conversion Date, which
would result in beneficial ownership by the Subscriber and its Affiliates of
more than 4.99% of the outstanding shares of common stock of the Company on
such Conversion Date. Beneficial ownership shall be determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended, and
Regulation 13d-3 thereunder. Subject to the foregoing, the Subscriber shall
not be limited to aggregate conversions of only 4.99% and aggregate
conversions by the Subscriber may exceed 4.99%. The Subscriber may waive the
conversion limitation described in this Section 7.3, in whole or in part,
upon and effective after 61 days prior written notice to the Company. The
Subscriber may decide whether to convert a Note or exercise Warrants to
achieve an actual 4.99% ownership position.
7.4. Injunction Posting of Bond. In the event a Subscriber shall elect
to convert a Note or part thereof or exercise the Warrant in whole or in
part, the Company may not refuse conversion or exercise based on any claim
that such Subscriber or any one associated or affiliated with such
Subscriber has been engaged in any violation of law, or for any other
reason, unless, an injunction from a court, on notice, restraining and or
enjoining conversion of all or part of such Note or exercise of all or part
of such Warrant shall have been sought and obtained by the Company and the
Company has posted a surety bond for the benefit of such Subscriber in the
amount of 120% of the outstanding principal and interest of the Note, or
aggregate purchase price of the Warrant Shares which are sought to be
subject to the injunction, which bond shall remain in effect until the
completion of arbitration/litigation of the dispute and the proceeds of
which shall be payable to such Subscriber to the extent Subscriber obtains
judgment. Notwithstanding the foregoing, if the Company receives an order
restraining it from converting from a court or administration agency of
competent jurisdiction, it shall comply without a bond requirement.
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7.5. Buy-In. In addition to any other rights available to the
Subscriber, if the Company fails to deliver to the Subscriber such shares
issuable upon conversion of a Note by the Delivery Date and if after seven
(7) business days after the Delivery Date the Subscriber purchases (in an
open market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by such Subscriber of the Common Stock which the
Subscriber was entitled to receive upon such conversion (a 'Buy-In'), then
the Company shall pay in cash to the Subscriber (in addition to any remedies
available to or elected by the Subscriber) the amount by which (A) the
Subscriber's total purchase price (including brokerage commissions, if any)
for the shares of Common Stock so purchased exceeds (B) the aggregate
principal and/or interest amount of the Note for which such conversion was
not timely honored, together with interest thereon at a rate of 15% per
annum, accruing until such amount and any accrued interest thereon is paid
in full (which amount shall be paid as liquidated damages and not as a
penalty). For example, if the Subscriber purchases shares of Common Stock
having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted conversion of $10,000 of note principal and/or interest, the
Company shall be required to pay the Subscriber $1,000, plus interest. The
Subscriber shall provide the Company written notice and acceptable written
proof of the purchase and the amount thereof and indicating the amounts
payable to the Subscriber in respect of the Buy-In.
7.6 Adjustments. The Conversion Price, Warrant exercise price and amount
of Shares issuable upon conversion of the Notes and exercise of the Warrants
shall be adjusted as described in this Agreement, the Notes and Warrants.
7.7. Redemption. The Note and Warrants shall not be redeemable or
mandatorily convertible except as described in the Note and Warrants.
8. Broker/Legal Fees.
(a) Broker's Commission. The Company on the one hand, and each
Subscriber (for himself only) on the other hand, agrees to indemnify the
other against and hold the other harmless from any and all liabilities to
any persons claiming brokerage commissions or similar fees other than
other than , ('Broker') on account of services purported to
have been rendered on behalf of the indemnifying party in connection with
this Agreement or the transactions contemplated hereby and arising out of
such party's actions. Anything in this Agreement to the contrary
notwithstanding, each Subscriber is providing indemnification only for
such Subscriber's own actions and not for any action of any other
Subscriber. The liability of the Company and each Subscriber's liability
hereunder is several and not joint. The Company agrees that it will pay
the Broker the fees set forth on Schedule 8 hereto ('Broker's Fees'). The
Company represents that to the best of its knowledge there are no other
parties entitled to receive fees, commissions, or similar payments in
connection with the offering described in this Agreement except the
Broker.
(b) Legal Fees. The Company shall pay to Grushko & Mittman, P.C., a
cash fee of $15,000 and the Broker shall pay to Grushko & Mittman, P.C. a
cash fee of $10,000 ('Legal Fees') as reimbursement for services rendered
to the Subscribers in connection with this Agreement and the purchase and
sale of the Notes and Warrants (the 'Offering'). The Legal Fees will be
payable on the Closing Date out of funds held pursuant to the Escrow
Agreement.
9. Covenants of the Company. The Company covenants and agrees with the
Subscribers as follows:
(a) Stop Orders. So long as the Subscribers own any of the
Securities, the Company will advise the Subscribers, within two hours
after the Company receives notice of issuance by the Commission, any
state securities commission or any other regulatory authority of any stop
order or of any order preventing or suspending any offering of any
securities of the Company, or of the suspension of the qualification of
the Common Stock
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of the Company for offering or sale in any jurisdiction, or the
initiation of any proceeding for any such purpose.
(b) Listing. The Company shall promptly secure the listing of the
shares of the Common Stock and the Warrant Shares upon each national
securities exchange, or automated quotation system upon which they are or
become eligible for listing (subject to official notice of issuance) and
shall maintain such listing so long as any Notes or Warrants are
outstanding, provided the Company's Common Stock continues to be listed
on such national securities exchange or automated quotation system. So
long as Subscriber own any securities, the Company will use its best
reasonable efforts to maintain the listing of its Common Stock on the
American Stock Exchange, SmallCap, Nasdaq National Market System, OTC
Bulletin Board, or New York Stock Exchange (whichever of the foregoing is
at the time the principal trading exchange or market for the Common Stock
(the 'Principal Market')), and will comply in all respects with the
Company's reporting, filing or other obligations under the bylaws or
rules of the Principal Market, as applicable. So long as the Subscriber
own the securities, the Company will provide the Subscribers copies of
all notices it receives notifying the Company of the threatened and
actual delisting of the Common Stock from any Principal Market. As of the
date of this Agreement and the Closing Date, the SmallCap is the
Principal Market.
(c) Market Regulations. The Company shall notify the Commission, the
Principal Market and applicable state authorities, in accordance with
their requirements, of the transactions contemplated by this Agreement,
and shall take all other necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the
legal and valid issuance of the Securities to the Subscribers and
promptly provide copies thereof to Subscriber.
(d) Filing Requirements. From the date of this Agreement and until
the sooner of (i) two (2) years after the Closing Date, or (ii) until all
the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, the Company will (A) cause its
Common Stock to continue to be registered under Section 12(b) or 12(g) of
the 1934 Act, (B) comply in all respects with its reporting and filing
obligations under the 1934 Act, (C) voluntarily comply with all reporting
requirements that are applicable to an issuer with a class of shares
registered pursuant to Section 12(g) of the 1934 Act, if Company is not
subject to such reporting requirements, and (D) comply with all
requirements related to any registration statement filed pursuant to this
Agreement. The Company will use its best efforts not to take any action
or file any document (whether or not permitted by the 1933 Act or the
1934 Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing
obligations under said acts until two (2) years after the Closing Date.
Until the earlier of the resale of the Common Stock, and the Warrant
Shares by each Subscriber or two (2) years after the Warrants have been
exercised, the Company will use its best efforts to continue the listing
or quotation of the Common Stock on a Principal Market and will comply in
all respects with the Company's reporting, filing and other obligations
under the bylaws or rules of the Principal Market. The Company agrees to
timely file a Form D with respect to the Securities if required under
Regulation D and to provide a copy thereof to each Subscriber promptly
after such filing.
(e) Use of Proceeds. The proceeds of the Offering will be employed by
the Company for the purposes set forth on Schedule 9(e) hereto. Except as
set forth on Schedule 9(e), the Purchase Price may not and will not be
used for accrued and unpaid officer and director salaries, payment of
financing related debt, redemption of outstanding notes or equity
instruments of the Company, litigation related expenses or settlements,
brokerage fees, nor non-trade obligations outstanding on a Closing Date.
For so long as any Notes are outstanding, the Company will not prepay any
financing related debt obligations nor redeem any equity instruments of
the Company.
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(f) Reservation. Prior to the Closing Date, the Company undertakes to
reserve, pro rata, on behalf of the Subscribers from its authorized but
unissued common stock, a number of common shares equal to 175% of the
amount of Common Stock necessary to allow each Subscriber to be able to
convert all Notes issuable pursuant to this Agreement and interest
thereon and reserve 100% of the amount of Warrant Shares issuable upon
exercise of the Warrants. Failure to have sufficient shares reserved
pursuant to this Section 9(f) for five (5) consecutive business days or
fifteen (15) days in the aggregate shall be a material default of the
Company's obligations under this Agreement and an Event of Default under
the Note.
(g) Taxes. From the date of this Agreement and until the sooner of
(i) two (2) years after the Closing Date, or (ii) until all the Shares
and Warrant Shares have been resold or transferred by all the Subscribers
pursuant to the Registration Statement or pursuant to Rule 144, without
regard to volume limitations, the Company will promptly pay and
discharge, or cause to be paid and discharged, when due and payable, all
lawful taxes, assessments and governmental charges or levies imposed upon
the income, profits, property or business of the Company; provided,
however, that any such tax, assessment, charge or levy need not be paid
if the validity thereof shall currently be contested in good faith by
appropriate proceedings and if the Company shall have set aside on its
books adequate reserves with respect thereto, and provided, further, that
the Company will pay all such taxes, assessments, charges or levies
forthwith upon the commencement of proceedings to foreclose any lien
which may have attached as security therefore.
(h) Insurance. From the date of this Agreement and until the sooner
of (i) two (2) years after the Closing Date, or (ii) until all the Shares
and Warrant Shares have been resold or transferred by all the Subscribers
pursuant to the Registration Statement or pursuant to Rule 144, without
regard to volume limitations, the Company will keep its assets which are
of an insurable character insured by financially sound and reputable
insurers against loss or damage by fire, explosion and other risks
customarily insured against by companies in the Company's line of
business, in amounts sufficient to prevent the Company from becoming a
co-insurer and not in any event less than one hundred percent (100%) of
the insurable value of the property insured; and the Company will
maintain, with financially sound and reputable insurers, insurance
against other hazards and risks and liability to persons and property to
the extent and in the manner customary for companies in similar
businesses similarly situated and to the extent available on commercially
reasonable terms.
(i) Books and Records. From the date of this Agreement and until the
sooner of (i) two (2) years after the Closing Date, or (ii) until all the
Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, the Company will keep true
records and books of account in which full, true and correct entries will
be made of all dealings or transactions in relation to its business and
affairs in accordance with generally accepted accounting principles
applied on a consistent basis.
(j) Governmental Authorities. From the date of this Agreement and
until the sooner of (i) two (2) years after the Closing Date, or
(ii) until all the Shares and Warrant Shares have been resold or
transferred by all the Subscribers pursuant to the Registration Statement
or pursuant to Rule 144, without regard to volume limitations, the
Company shall duly observe and conform in all material respects to all
valid requirements of governmental authorities relating to the conduct of
its business or to its properties or assets.
(k) Intellectual Property. From the date of this Agreement and until
the sooner of (i) two (2) years after the Closing Date, or (ii) until all
the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, the Company shall maintain in
full force and effect its corporate existence, rights and franchises and
all
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licenses and other rights to use intellectual property owned or possessed
by it and reasonably deemed to be necessary to the conduct of its
business, unless it is sold for value.
(l) Properties. From the date of this Agreement and until the sooner
of (i) two (2) years after the Closing Date, or (ii) until all the Shares
and Warrant Shares have been resold or transferred by all the Subscribers
pursuant to the Registration Statement or pursuant to Rule 144, without
regard to volume limitations, the Company will keep its properties in
good repair, working order and condition, reasonable wear and tear
excepted, and from time to time make all necessary and proper repairs,
renewals, replacements, additions and improvements thereto; and the
Company will at all times comply with each provision of all leases to
which it is a party or under which it occupies property if the breach of
such provision could reasonably be expected to have a Material Adverse
Effect.
(m) Confidentiality/Public Announcement. From the date of this
Agreement and until the sooner of (i) six months after the Closing Date,
or (ii) until all the Shares and Warrant Shares have been resold or
transferred by all the Subscribers pursuant to the Registration Statement
or pursuant to Rule 144, without regard to volume limitations, the
Company agrees that except in connection with a Form 8-K or the
Registration Statement or as otherwise required in any other Commission
filing or in filings with the SmallCap or such other Principal Market, it
will not disclose publicly the identity of the Subscribers unless
expressly agreed to in writing by a Subscriber, only to the extent
required by law or regulations of the SmallCap or such other Principal
Market. In any event and subject to the foregoing, the Company shall make
a public announcement describing the Offering not later than the third
business day after the Closing Date. The Company also undertakes to file
a Form 8-K describing the Offering. In the Form 8-K or public
announcement, the Company will specifically disclose the amount of common
stock outstanding immediately after the Closing. A form of the proposed
Form 8-K or public announcement to be employed in connection with the
Closing is annexed hereto as Exhibit E. The Subscribers expressly consent
to the filing of such Form 8-K and the making of the aforementioned
public announcement.
(n) Further Registration Statements. Except for a registration
statement filed on behalf of the Subscribers pursuant to Section 11 of
this Agreement and as set forth on Schedule 11.1 hereto, the Company will
not file any registration statements or amend any already filed
registration statement, including but not limited to Forms S-8, with the
Commission or with state regulatory authorities without the consent of
the Subscriber until the sooner of (i) the Registration Statement shall
have been current and available for use in connection with the resale of
the Registrable Securities (as defined in Section 11.1(i)) for a period
of 30 days or (ii) until all the Shares and Warrant Shares have been
resold or transferred by the Subscribers pursuant to the Registration
Statement or Rule 144, without regard to volume limitations (the
'Exclusion Period'). The Exclusion Period will be tolled during the
pendency of an Event of Default as defined in the Note.
(o) Blackout. The Company undertakes and covenants that until the end
of the Exclusion Period, the Company will not enter into any acquisition,
merger, exchange or sale or other transaction that could have the effect
of delaying the effectiveness of any pending registration statement or
causing an already effective registration statement to no longer be
effective or current for a period ten (10) or more consecutive days nor
more than twenty (20) days during any consecutive three hundred and
sixty-five (365) day period.
(p) Non-Public Information. The Company covenants and agrees that
neither it nor any other person acting on its behalf will provide any
Subscriber or its agents or counsel with any information that the Company
believes constitutes material non-public information, unless prior
thereto such Subscriber shall have agreed in writing to receive such
information. The Company understands and confirms that each Subscriber
shall be
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relying on the foregoing representations in effecting transactions in
securities of the Company.
(q) Shareholder Approval. If required by the applicable NASD Market
Place Rules and/or Nasdaq's corporate governance rules, the Company and
Subscriber agree that until the Company either obtains shareholder
approval of the issuance of the Securities, or an exemption from NASDAQ's
corporate governance rules as they may apply to the Shares and Warrants,
and an opinion of counsel reasonably acceptable to Subscriber that the
issuance of the Shares and Warrants will not violate NASDAQ's corporate
governance rules nor may result in a delisting of the Company's common
stock from the SmallCap (the 'Approval'), each Subscriber may not receive
any Shares or Warrants. If the Approval is required by the applicable
NASD Market Place Rules, and or Nasdaq's corporate governance rules, the
Company covenants to use its best reasonable efforts to obtain the
Approval to allow the issuance of the Shares and Warrants. If the
Approval is required by the applicable NASD Market Place Rules and/or the
Nasdaq's corporate governance rules, the Company further covenants to
file the preliminary proxy statement relating to the Approval with the
Commission on or before thirty (30) days after the Closing Date ('Proxy
Filing Date'). If the Approval is required by the applicable NASD Market
Place Rules and/or the Nasdaq's corporate governance rules, the Company
further covenants to use its best reasonable efforts to obtain the
Approval not later than the sooner of seventy-five (75) days from the
Closing Date ('Approval Date'). If the Approval is required by the
applicable NASD Market Place Rules and/or Nasdaq's corporate governance
rules, the Company's failure to (i) file the proxy on or before the Proxy
Filing Date; or (ii) the Company's failure to convene a meeting or
shareholders with a quorum present and vote upon the Approval within
seventy-five (75) days, or in the case of an SEC review, one hundred and
five (105) days after the Closing Date; or (iii) the Company's failure to
obtain the Approval on or before the Approval Date (any of the preceding
being an 'Approval Default') shall be deemed a rejection ('Rejection')
and the Company shall immediately notify each Subscriber of such Approval
Default; provided, however that any Subscriber may waive such Rejection
During the ten (10) business days following its receipt of notification
from the Company that such Approval Default has occurred, in which case
the Company shall remain obligated to such Subscriber to use its best
reasonable efforts to file the proxy and obtain the Approval as set forth
above.
(r) For purposes of this Section, in the event the Subscribers or
their permitted assignees no longer own any Notices, Warrants and none of
the Shares and Warrant Shares are held in the name of the Subscribers,
the Shares and Warrant Shares shall be deemed to have been transferred by
the Subscribers unless the Subscriber provide the Company with written
proof reasonably acceptable to the Company that the Shares or Warrant
Shares are still owned by such Subscriber or such Subscriber's Affiliate.
10. Covenants of the Company and Subscriber Regarding Indemnification.
(a) The Company agrees to indemnify, hold harmless, reimburse and
defend the Subscribers, the Subscribers' officers, directors, agents,
Affiliates, control persons, and principal shareholders, against any
claim, cost, expense, liability, obligation, loss or damage (including
reasonable legal fees) of any nature, incurred by or imposed upon the
Subscriber or any such person which results, arises out of or is based
upon (i) any material misrepresentation by Company or material breach of
any warranty by Company in this Agreement or in any Exhibits or Schedules
attached hereto, or other agreement delivered pursuant hereto; or (ii)
after any applicable notice and/or cure periods, any material breach or
default in performance by the Company of any covenant or undertaking to
be performed by the Company hereunder, or any other agreement entered
into by the Company and Subscriber relating hereto.
(b) Each Subscriber agrees to indemnify, hold harmless, reimburse and
defend the Company and each of the Company's officers, directors, agents,
Affiliates, control persons
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against any claim, cost, expense, liability, obligation, loss or damage
(including reasonable legal fees) of any nature, incurred by or imposed
upon the Company or any such person which results, arises out of or is
based upon (i) any material misrepresentation by such Subscriber or a
material breach of any warranty by the Subscribers in this Agreement or
in any Exhibits or Schedules attached hereto, or other agreement
delivered pursuant hereto; or (ii) after any applicable notice and/or
cure periods, any material breach or default in performance by such
Subscriber of any covenant or undertaking to be performed by such
Subscriber hereunder, or any other agreement entered into by the Company
and Subscribers, relating hereto.
(c) The procedures set forth in Section 11.6 shall apply to the
indemnification set forth in Sections 10(a) and 10(b) above.
11.1. Registration Rights. The Company hereby grants the following
registration rights to holders of the Securities.
(i) On one occasion, for a period commencing ninety-one (91) days
after the Closing Date, but not later than two (2) years after the
Closing Date, upon a written request therefor from any record holder or
holders of more than 50% of the Shares issued and issuable upon
conversion of the outstanding Notes and outstanding Warrant Shares, the
Company shall prepare and file with the Commission a registration
statement under the 1933 Act registering the Registrable Securities, as
defined in Section 11.1(iv) hereof, which are the subject of such request
for unrestricted public resale by the holder thereof. For purposes of
Sections 11.1(i) and 11.1(ii), Registrable Securities shall not include
Securities which are (A) registered for resale in an effective
registration statement, (B) included for registration in a pending
registration statement, or (C) which have been issued without further
transfer restrictions after a sale or transfer pursuant to Rule 144 under
the 1933 Act. Upon the receipt of such request, the Company shall
promptly give written notice to all other record holders of the
Registrable Securities that such registration statement is to be filed
and shall include in such registration statement Registrable Securities
for which it has received written requests within ten (10) days after the
Company gives such written notice. Such other requesting record holders
shall be deemed to have exercised their demand registration right under
this Section 11.1(i).
(ii) From the Closing Date but not later than two (2) years after the
Closing Date, if the Company at any time proposes to register any of its
securities under the 1933 Act for sale to the public, whether for its own
account or for the account of other security holders or both, except with
respect to registration statements on Forms S-4, S-8 or another form not
available for registering the Registrable Securities for sale to the
public, provided the Registrable Securities are not otherwise registered
for resale by the Subscribers or Holder pursuant to an effective
registration statement, each such time it will give at least fifteen (15)
days' prior written notice to the record holder of the Registrable
Securities of its intention so to do. Upon the written request of the
holder, received by the Company within ten (10) days after the giving of
any such notice by the Company, to register any of the Registrable
Securities not previously registered, the Company will cause such
Registrable Securities as to which registration shall have been so
requested to be included with the securities to be covered by the
registration statement proposed to be filed by the Company, all to the
extent required to permit the sale or other disposition of the
Registrable Securities so registered by the holder of such Registrable
Securities (the 'Seller' or 'Sellers'). In the event that any
registration pursuant to this Section 11.1(ii) shall be, in whole or in
part, an underwritten public offering of common stock of the Company, the
number of shares of Registrable Securities to be included in such an
underwriting may be reduced by the managing underwriter if and to the
extent that the Company and the underwriter shall reasonably be of the
opinion that such inclusion would adversely affect the marketing of the
securities to be sold by the Company therein; provided, however, that the
Company shall notify the Seller in writing of any such reduction.
Notwithstanding the foregoing provisions, or Section 11.4
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hereof, the Company may withdraw or delay or suffer a delay of any
registration statement referred to in this Section 11.1(ii) without
thereby incurring any liability to the Seller.
(iii) If, at the time any written request for registration is
received by the Company pursuant to Section 11.1(i), the Company has
determined to proceed with the actual preparation and filing of a
registration statement under the 1933 Act in connection with the proposed
offer and sale for cash of any of its securities for the Company's own
account and the Company actually does file such other registration
statement, such written request shall be deemed to have been given
pursuant to Section 11.1(ii) rather than Section 11.1(i), and the rights
of the holders of Registrable Securities covered by such written request
shall be governed by Section 11.1(ii).
(iv) The Company shall file with the Commission a Form SB-2
registration statement (the 'Registration Statement') (or such other form
that it is eligible to use) in order to register the Registrable
Securities for resale and distribution under the 1933 Act on the sooner
of (i) within five (5) calendar days after the Approval has been
obtained, if the Approval is required by the applicable NASD Market Place
Rules and/or Nasdaq's corporate governance rules, or (ii) ninety-seven
(97) days after the Closing Date (the 'Filing Date'), and use its
reasonable best efforts cause to be declared effective not later than
sixty (60) calendar days after the Filing Date (the 'Effective Date').
The Company will register not less than a number of shares of common
stock in the aforedescribed registration statement that is equal to 175%
of the Shares issuable upon conversion of all of the Notes issuable to
the Subscribers, and 100% of the Warrant Shares issuable pursuant to this
Agreement upon exercise of the Warrants (collectively the 'Registrable
Securities'). The Registrable Securities shall be reserved and set aside
exclusively for the benefit of each Subscriber and Warrant holder, pro
rata, and not issued, employed or reserved for anyone other than each
such Subscriber and Warrant holder. The Registration Statement will
immediately be amended or additional registration statements will be
immediately filed by the Company as necessary to register additional
shares of Common Stock to allow the public resale of all Common Stock
included in and issuable by virtue of the Registrable Securities. Except
with the written consent of the Subscriber, or as described on Schedule
11.1 hereto, no securities of the Company other than the Registrable
Securities will be included in the Registration Statement, provided,
however, and notwithstanding anything to the contrary herein, the Company
may include any shares issued to the Broker or any designee of the
Broker, upon the exercise of warrants granted to the Broker pursuant to
the Agreement between the Broker and the Company dated January , 2006.
It shall be deemed a Non-Registration Event if at any time after the date
the Registration Statement is declared effective by the Commission
('Actual Effective Date') the Company has registered for resale on behalf
of the Sellers fewer than 125% of the amount of Common Shares issuable
upon full conversion of all sums due under the Notes and 100% of the
Warrant Shares issuable upon exercise of the Warrants.
11.2. Registration Procedures. If and whenever the Company is required
by the provisions of Section 11.1(i), 11.1(ii), or (iv) to effect the
registration of any Registrable Securities under the 1933 Act, the Company
will, as expeditiously as possible:
(a) subject to the timelines provided in this Agreement, prepare and
file with the Commission a registration statement required by Section 11,
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for the period of
the distribution contemplated thereby (determined as herein provided),
promptly provide to the holders of the Registrable Securities copies of
all filings and Commission letters of comment and notify Subscribers (by
telecopier and by e-mail addresses provided by Subscribers) and Grushko &
Mittman, P.C. (by telecopier and or by email to COUNSLERS@AOL.COM) within
two (2) business days that the Company receives notice that (i) the
Commission has no comments or no further
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comments on the Registration Statement, and (ii) the registration
statement has been declared effective (failure to timely provide notice
as required by this Section 11.2(a) shall be a material breach of the
Company's obligation and an Event of Default as defined in the Notes and
a Non-Registration Event as defined in Section 11.4 of this Agreement);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective until such registration statement has been effective
for a period of two (2) years, and comply with the provisions of the 1933
Act with respect to the disposition of all of the Registrable Securities
covered by such registration statement in accordance with the Sellers'
intended method of disposition set forth in such registration statement
for such period;
(c) furnish to the Sellers, at the Company's expense, such number of
copies of the registration statement and the prospectus included therein
(including each preliminary prospectus) as such persons reasonably may
request in order to facilitate the public sale or their disposition of
the securities covered by such registration statement or make them
electronically available;
(d) use its commercially reasonable best efforts to register or
qualify the Registrable Securities covered by such registration statement
under the securities or 'blue sky' laws of New York and such
jurisdictions as the Sellers shall request in writing, provided, however,
that the Company shall not for any such purpose be required to qualify
generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general
service of process in any such jurisdiction;
(e) if applicable, list the Registrable Securities covered by such
registration statement with any securities exchange on which the Common
Stock of the Company is then listed;
(f) if a prospectus relating to the Shares or the Warrant Shares is
required to be delivered under the 1933 Act, notify the Subscribers
within two hours of the Company's becoming aware of the happening of any
event of which the Company has knowledge as a result of which the
prospectus contained in such registration statement, as then in effect,
includes an 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 in light of the circumstances then
existing or which becomes subject to a Commission, state or other
governmental order suspending the effectiveness of the registration
statement covering any of the Shares; and
(g) provided same would not be in violation of the provision of
Regulation FD under the 1934 Act, make available for inspection by the
Sellers, and any attorney, accountant or other agent retained by the
Seller or underwriter, all publicly available, non-confidential financial
and other records, pertinent corporate documents and properties of the
Company, and cause the Company's officers, directors and employees to
supply all publicly available, non-confidential information reasonably
requested by the seller, attorney, accountant or agent in connection with
such registration statement.
11.3. Provision of Documents. In connection with each registration
described in this Section 11, each Seller will furnish to the Company in
writing such information and representation letters with respect to itself
and the proposed distribution by it as reasonably shall be necessary in
order to assure compliance with federal and applicable state securities
laws.
11.4. Non-Registration Events. The Company and the Subscribers agree
that the Sellers will suffer damages if the Registration Statement is not
filed by the Filing Date and not declared effective by the Commission by the
Effective Date, and any registration statement required under Section
11.1(i) or 11.1(ii) is not filed within 60 days after written request and
declared effective by the Commission within 120 days after such request, and
maintained in the manner and within the time periods contemplated by Section
11 hereof, and it would not be feasible to ascertain the extent of such
damages with precision. Accordingly, if (A) the
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Registration Statement is not filed on or before the Filing Date, (B) is not
declared effective on or before the Effective Date, (C) due to the action or
inaction of the Company the Registration Statement is not declared effective
within 3 business days after receipt by the Company or its attorneys of a
written or oral communication from the Commission that the Registration
Statement will not be reviewed or that the Commission has no further
comments, (D) if the registration statement described in Sections 11.1(i) or
11.1(ii) is not filed within 60 days after such written request, or is not
declared effective within 120 days after such written request, or (E) any
registration statement described in Sections 11.1(i), 11.1(ii) or 11.1(iv)
is filed and declared effective but shall thereafter cease to be effective
without being succeeded within 15 business days by an effective replacement
or amended registration statement or for a period of time which shall exceed
30 days in the aggregate per year (defined as a period of 365 days
commencing on the Actual Effective Date (each such event referred to in
clauses (A) through (E) of this Section 11.4 is referred to herein as a
'Non-Registration Event'), then the Company shall deliver to the holder of
Registrable Securities, as Liquidated Damages, an amount equal to two
percent (2%) for each 30 days or part thereof of the Purchase Price of the
Notes remaining unconverted and purchase price of Shares issued upon
conversion of the Notes owned of record by such holder which are subject to
such Non-Registration Event. Notwithstanding anything to the contrary in
this section, a maximum of four percent (4%) liquidated damages will be
payable in connection with the Non-Registration Event described in this
Section 11.4. The Company must pay the Liquidated Damages in cash. The
Liquidated Damages must be paid within 10 days after the end of each thirty
(30) day period or shorter part thereof for which Liquidated Damages are
payable. In the event a Registration Statement is filed by the Filing Date
but is withdrawn prior to being declared effective by the Commission, then
such Registration Statement will be deemed to have not been filed. The
Company shall use its best reasonable efforts to respond to all oral or
written comments received from the Commission relating to the Registration
Statement within 15 days in connection with the initial filing of the
Registration Statement and within 10 days in connection with amendments to
the Registration Statement after receipt of such comments from the
Commission. Failure to timely respond to Commission comments is a Non-
Registration Event for which Liquidated Damages shall accrue and be payable
by the Company to the holders of Registrable Securities at the same rate set
forth above. Notwithstanding the foregoing, the Company shall not be liable
to the Subscriber under this Section 11.4 for any events or delays occurring
as a consequence of the acts or omissions of the Subscribers contrary to the
obligations undertaken by Subscribers in this Agreement. Liquidated Damages
will not accrue nor be payable pursuant to this Section 11.4 nor will a
Non-Registration Event be deemed to have occurred for times during which
Registrable Securities are transferable by the holder of Registrable
Securities pursuant to Rule 144(k) under the 1933 Act.
11.5. Expenses. All reasonable expenses incurred by the Company in
complying with Section 11, including, without limitation, all registration
and filing fees, printing expenses (if required), fees and disbursements of
counsel and independent public accountants for the Company, fees and
expenses (including reasonable counsel fees) incurred in connection with
complying with state securities or 'blue sky' laws, fees of the National
Association of Securities Dealers, Inc., transfer taxes, and fees of
transfer agents and registrars, are called 'Registration Expenses.' All
underwriting discounts and selling commissions applicable to the sale of
Registrable Securities are called 'Selling Expenses.' The Company will pay
all Registration Expenses in connection with the registration statement
under Section 11. Selling Expenses in connection with each registration
statement under Section 11 shall be borne by the Seller and may be
apportioned among the Sellers in proportion to the number of shares sold by
the Seller relative to the number of shares sold under such registration
statement or as all Sellers thereunder may agree.
11.6. Indemnification and Contribution.
(a) In the event of a registration of any Registrable Securities
under the 1933 Act pursuant to Section 11, the Company will, to the
extent permitted by law, indemnify and
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hold harmless the Seller, each officer of the Seller, each director of
the Seller, each underwriter of such Registrable Securities thereunder
and each other person, if any, who controls such Seller or underwriter
within the meaning of the 1933 Act, against any losses, claims, damages
or liabilities, joint or several, to which the Seller, or such
underwriter or controlling person may become subject under the 1933 Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in
any registration statement under which such Registrable Securities was
registered under the 1933 Act pursuant to Section 11, any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereof, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of the circumstances when made, and will subject to the provisions
of Section 11.6(c) reimburse the Seller, each such underwriter and each
such controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable to the Seller to the extent that any such
damages arise out of or are based upon an untrue statement or omission
made in any preliminary prospectus if (i) the Seller failed to send or
deliver a copy of the final prospectus delivered or made available by the
Company to the Seller with or prior to the delivery of written
confirmation of the sale by the Seller to the person asserting the claim
from which such damages arise, (ii) the final prospectus would have
corrected such untrue statement or alleged untrue statement or such
omission or alleged omission, or (iii) to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by any such Seller, or any
such controlling person in writing specifically for use in such
registration statement or prospectus.
(b) In the event of a registration of any of the Registrable
Securities under the 1933 Act pursuant to Section 11, each Seller
severally but not jointly will, to the extent permitted by law, indemnify
and hold harmless the Company, and each person, if any, who controls the
Company within the meaning of the 1933 Act, each officer of the Company
who signs the registration statement, each director of the Company, each
underwriter and each person who controls any underwriter within the
meaning of the 1933 Act, against all losses, claims, damages or
liabilities, joint or several, to which the Company or such officer,
director, underwriter or controlling person may become subject under the
1933 Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material
fact contained in the registration statement under which such Registrable
Securities were registered under the 1933 Act pursuant to Section 11, any
preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and each such officer,
director, underwriter and controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, provided,
however, that the Seller will be liable hereunder in any such case if and
only to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity
with information pertaining to such Seller, as such, furnished in writing
to the Company by such Seller specifically for use in such registration
statement or prospectus, and provided, further, however, that the
liability of the Seller hereunder shall be limited to the net proceeds
actually received by the Seller from the sale of Registrable Securities
covered by such registration statement.
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(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall,
if a claim in respect thereof is to be made against the indemnifying
party hereunder, notify the indemnifying party in writing thereof, but
the omission so to notify the indemnifying party shall not relieve it
from any liability which it may have to such indemnified party other than
under this Section 11.6(c) and shall only relieve it from any liability
which it may have to such indemnified party under this Section 11.6(c),
except and only if and to the extent the indemnifying party is prejudiced
by such omission. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate in and, to the extent it shall wish, to assume and undertake
the defense thereof with counsel satisfactory to such indemnified party,
and, after notice from the indemnifying party to such indemnified party
of its election so to assume and undertake the defense thereof, the
indemnifying party shall not be liable to such indemnified party under
this Section 11.6(c) for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than
reasonable costs of investigation and of liaison with counsel so
selected, provided, however, that, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be
reasonable defenses available to it which are different from or
additional to those available to the indemnifying party or if the
interests of the indemnified party reasonably may be deemed to conflict
with the interests of the indemnifying party, the indemnified parties, as
a group, shall have the right to select one separate counsel and to
assume such legal defenses and otherwise to participate in the defense of
such action, with the reasonable expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed
by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution in the
event of joint liability under the 1933 Act in any case in which either
(i) a Seller, or any controlling person of a Seller, makes a claim for
indemnification pursuant to this Section 11.6 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 11.6
provides for indemnification in such case, or (ii) contribution under the
1933 Act may be required on the part of the Seller or controlling person
of the Seller in circumstances for which indemnification is not provided
under this Section 11.6; then, and in each such case, the Company and the
Seller will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others)
in such proportion so that the Seller is responsible only for the portion
represented by the percentage that the public offering price of its
securities offered by the registration statement bears to the public
offering price of all securities offered by such registration statement,
provided, however, that, in any such case, (y) the Seller will not be
required to contribute any amount in excess of the public offering price
of all such securities sold by it pursuant to such registration
statement; and (z) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act)
will be entitled to contribution from any person or entity who was not
guilty of such fraudulent misrepresentation.
11.7. Delivery of Unlegended Shares.
(a) Within three (3) business days (such third business day being the
'Unlegended Shares Delivery Date') after the business day on which the
Company has received (i) a notice that Shares or Warrant Shares or any
other Common Stock held by a Subscriber have been sold pursuant to the
Registration Statement or Rule 144 under the 1933 Act, (ii) a
representation that the prospectus delivery requirements, or the
requirements of Rule 144, as applicable and if required, have been
satisfied, and (iii) the original share certificates representing the
shares of Common Stock that have been sold, and (iv) in the
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case of sales under Rule 144, customary representation letters of the
Subscriber and/or Subscriber's broker regarding compliance with the
requirements of Rule 144, the Company at its expense, (y) shall deliver,
and shall cause legal counsel selected by the Company to deliver to its
transfer agent (with copies to Subscriber) an appropriate instruction and
opinion of such counsel, directing the delivery of shares of Common Stock
without any legends including the legend set forth in Section 4(h) above,
reissuable pursuant to any effective and current Registration Statement
described in Section 11 of this Agreement or pursuant to Rule 144 under
the 1933 Act (the 'Unlegended Shares'); and (z) cause the transmission of
the certificates representing the Unlegended Shares together with a
legended certificate representing the balance of the submitted Shares
certificate, if any, to the Subscriber at the address specified in the
notice of sale, via express courier, by electronic transfer or otherwise
on or before the Unlegended Shares Delivery Date.
(b) In lieu of delivering physical certificates representing the
Unlegended Shares, if the Company's transfer agent is participating in
the Depository Trust Company ('DTC') Fast Automated Securities Transfer
program, upon request of a Subscriber, so long as the certificates
therefor do not bear a legend and the Subscriber is not obligated to
return such certificate for the placement of a legend thereon, the
Company shall cause its transfer agent to electronically transmit the
Unlegended Shares by crediting the account of Subscriber's prime Broker
with DTC through its Deposit Withdrawal Agent Commission system. Such
delivery must be made on or before the Unlegended Shares Delivery Date.
(c) The Company understands that a delay in the delivery of the
Unlegended Shares pursuant to Section 11 hereof later than two business
days after the Unlegended Shares Delivery Date could result in economic
loss to a Subscriber. As compensation to a Subscriber for such loss, the
Company agrees to pay late payment fees (as liquidated damages and not as
a penalty) to the Subscriber for late delivery of Unlegended Shares in
the amount of $100 per business day after the Delivery Date for each
$10,000 of purchase price of the Unlegended Shares subject to the
delivery default. If during any 360 day period, the Company fails to
deliver Unlegended Shares as required by this Section 11.7 for an
aggregate of thirty (30) days, then each Subscriber or assignee holding
Securities subject to such default may, at its option, require the
Company to redeem all or any portion of the Shares and Warrant Shares
subject to such default at a price per share equal to 120% of the
Purchase Price of such Common Stock and Warrant Shares ('Unlegended
Redemption Amount'). The amount of the aforedescribed liquidated damages
that have accrued or been paid for the twenty day period prior to the
receipt by the Subscriber of the Unlegended Redemption Amount shall be
credited against the Unlegended Redemption Amount. The Company shall pay
any payments incurred under this Section in immediately available funds
upon demand.
(d) In addition to any other rights available to a Subscriber, if the
Company fails to deliver to a Subscriber Unlegended Shares as required
pursuant to this Agreement, within seven (7) business days after the
Unlegended Shares Delivery Date and the Subscriber purchases (in an open
market transaction or otherwise) shares of common stock to deliver in
satisfaction of a sale by such Subscriber of the shares of Common Stock
which the Subscriber was entitled to receive from the Company (a
'Buy-In'), then the Company shall pay in cash to the Subscriber (in
addition to any remedies available to or elected by the Subscriber) the
amount by which (A) the Subscriber's total purchase price (including
brokerage commissions, if any) for the shares of common stock so
purchased exceeds (B) the aggregate purchase price of the shares of
Common Stock delivered to the Company for reissuance as Unlegended Shares
together with interest thereon at a rate of 15% per annum, accruing until
such amount and any accrued interest thereon is paid in full (which
amount shall be paid as liquidated damages and not as a penalty). For
example, if a Subscriber purchases shares of Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to $10,000 of
purchase price of shares of Common Stock delivered to the Company for
reissuance as Unlegended Shares, the Company shall be required to pay the
Subscriber $1,000, plus interest. The Subscriber
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shall provide the Company written notice indicating the amounts payable
to the Subscriber in respect of the Buy-In.
(e) In the event a Subscriber shall request delivery of Unlegended
Shares as described in Section 11.7 and the Company is required to
deliver such Unlegended Shares pursuant to Section 11.7, the Company may
not refuse to deliver Unlegended Shares based on any claim that such
Subscriber or any one associated or affiliated with such Subscriber has
been engaged in any violation of law, or for any other reason, unless, an
injunction or temporary restraining order from a court, on notice,
restraining and or enjoining delivery of such Unlegended Shares or
exercise of all or part of said Warrant shall have been sought and
obtained and the Company has posted a surety bond for the benefit of such
Subscriber in the amount of 120% of the amount of the aggregate purchase
price of the Common Stock and Warrant Shares which are subject to the
injunction or temporary restraining order, which bond shall remain in
effect until the completion of arbitration/litigation of the dispute and
the proceeds of which shall be payable to such Subscriber to the extent
Subscriber obtains judgment in Subscriber's favor.
11.8 Covenants of Subscriber. The Subscriber covenants and promises to
(i) the timely provision of any Subscriber information required hereunder or
reasonably requested by the Company in connection with the filing and
declaration of effectiveness of the Registration Statement and any
amendments to the Registration Statement; (ii) the timely execution of any
and all documents required hereunder or reasonably requested by the Company
in connection with the filing and declaration of effectiveness of the
Registration Statement and any amendments to the Registration Statement; and
(iii) any other timely action as required hereunder or reasonably requested
by the Company in connection with the filing and declaration of
effectiveness of the Registration Statement and any amendments of the
Registration Statement.
12. (a) Right of Participation. Commencing on the date of this Agreement
and through the Exclusion Period, the Subscribers shall be given not less
than ten (10) business days prior written notice of any proposed sale by the
Company of its common stock or other securities or debt obligations, except
in connection with (i) employee stock options or compensation plans,
(ii) as full or partial consideration in connection with any merger,
consolidation or purchase of substantially all of the securities or assets
of any corporation or other entity, (iii) issuance of an aggregate of
600,000 Shares of the Company's Common Stock which may be issued to
officers, directors, consultants and employees to the Company, or (iv) the
issuance of the stock of the company in connection with any outstanding
warrants, options, convertible preferred stock or any other security of the
company which has been described in the Reports or Other Written Information
filed with the Commission or delivered to the Subscribers prior to the
Closing Date (collectively 'Excepted Issuances'). The Subscribers who
exercise their rights pursuant to this Section 11(a) shall have the right
during the ten (10) business days following receipt of the notice to
participate in the purchase of such offered common stock, debt or other
securities in accordance with the terms and conditions set forth in the
notice of sale in the same proportion to each other as their purchase of
Shares in the Offering. In the event such terms and conditions are modified
during the notice period, the Subscribers shall be given prompt notice of
such modification and shall have the right during the original notice period
or for a period of five (5) business days following the notice of
modification, whichever is longer, to exercise such right. In the event
there is an Approval Default, this Right of Participation shall be extended
and effective for 180 days after such Approval Default.
(b) Favored Nations Provision. Until the sooner of 180 days from the
Actual Effective Date of the Registration Statement, provided the
Approval has been obtained or is not required by the applicable NASD
Market Place Rules and/or Nasdaq's corporate governance rules, or the
date the Notes have been paid, other than in connection with the Excepted
Issuances, if the Company shall offer, issue or agree to issue any common
stock or securities convertible into or exercisable for shares of common
stock (or modify any of the foregoing which may be outstanding) to any
person or entity at a price per
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share or conversion or exercise price per share which shall be less than
the Conversion Price without the consent of each Subscriber holding
Notes, the Conversion Price shall be reduced to such other lower issue
price. For purposes of the issuance and adjustment described in this
paragraph, the issuance of any security of the Company carrying the right
to convert such security into shares of Common Stock or of any warrant,
right or option to purchase Common Stock shall result in the reduction of
the Conversion Price upon the sooner of the agreement to or actual
issuance of such convertible security, warrant, right or option and again
at any time upon any subsequent issuances of shares of Common Stock upon
exercise of such conversion or purchase rights if such issuance is at a
price lower than the Conversion Price in effect upon such issuance. The
rights of the Subscriber set forth in this Section 12 are in addition to
any other rights the Subscriber has pursuant to this Agreement, the Note,
any Transaction Document, and any other agreement referred to or entered
into in connection herewith.
(c) Paid In Kind. The Subscriber may demand that some or all of the
sums payable to the Subscriber pursuant to Sections 7.1(c), 7.2, 7.5,
11.4, 11.7(c), 11.7(d) and 11.7(e) that are not paid within ten business
days after the required payment date be paid in shares of Common Stock
valued at the Conversion Price in effect at the time Subscriber makes
such demand or, at the Subscriber's election, at such other valuation
described in the Transaction Documents. In addition to any other rights
granted to the Subscriber herein, the Subscriber is also granted the
registration rights set forth in Section 11.1(ii) hereof in relation to
the aforedescribed shares of Common Stock.
(d) Maximum Exercise of Rights. In the event the exercise of the
rights described in Sections 12(a), 12(b) and 12(c) would result in the
issuance of an amount of common stock of the Company that would exceed
the maximum amount that may be issued to a Subscriber calculated in the
manner described in Section 7.3 of this Agreement, then the issuance of
such additional shares of common stock of the Company to such Subscriber
will be deferred in whole or in part until such time as such Subscriber
is able to beneficially own such common stock without exceeding the
maximum amount set forth calculated in the manner described in Section
7.3 of this Agreement. The determination of when such common stock may be
issued shall be made by each Subscriber as to only such Subscriber.
(e) Offering Restrictions. Until the later of the (i) the Approval,
if the Approval is required by the applicable NASD Market Place Rules
and/or the Nasdaq's corporate governance rules, or (ii) six months after
the Closing Date and during the pendency of an Event of Default, provided
there is an effective registration statement current and available for
resale of the Registrable Securities, the Company will not enter into an
agreement to nor issue any equity, convertible debt or other securities
convertible into common stock or equity of the Company nor modify any of
the foregoing which may be outstanding at anytime, without the prior
written consent of the Subscriber, which consent may be withheld for any
reason. Until six months after the Closing Date, the Company will not
enter into any equity line of credit or similar agreement, nor issue nor
agree to issue any floating or variable priced equity linked instruments
nor any of the foregoing or equity with price reset rights.
13. Miscellaneous.
(a) Notices. All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt
requested, postage prepaid, (iii) delivered by reputable air courier
service with charges prepaid, or (iv) transmitted by hand delivery,
telegram, or facsimile, addressed as set forth below or to such other
address as such party shall have specified most recently by written
notice. Any notice or other communication required or permitted to be
given hereunder shall be deemed effective (a) upon hand delivery or
delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at
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the address or number designated below (if delivered on a business day
during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be
received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or
upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communications shall be: (i) if to the Company, to:
Conolog Corporation, 5 Columbia Road, Somerville, NJ 08876, Attn: Robert
Benou, telecopier: (908) 722-5461, with a copy by telecopier only to:
Milberg Weiss Bershad & Schulman LLP, One Penn Plaza, New York, NY 10119
Attn: Arnold N. Bressler, Esq., telecopier: (212) 273-4373, (ii) if to
the Subscribers, to: the one or more addresses and telecopier numbers
indicated on the signature pages hereto, with an additional copy by
telecopier only to: Grushko & Mittman, P.C., 551 Fifth Avenue, Suite
1601, New York, New York 10176, telecopier number: (212) 697-3575, and
(iii) if to the Broker, to: , Attn: , telecopier:
.
(b) Entire Agreement; Assignment. This Agreement and other documents
delivered in connection herewith represent the entire agreement between
the parties hereto with respect to the subject matter hereof and may be
amended only by a writing executed by both parties. Neither the Company
nor the Subscribers have relied on any representations not contained or
referred to in this Agreement and the documents delivered herewith. No
right or obligation of the Company shall be assigned without prior notice
to and the written consent of the Subscribers.
(c) Counterparts/Execution. This Agreement may be executed in any
number of counterparts and by the different signatories hereto on
separate counterparts, each of which, when so executed, shall be deemed
an original, but all such counterparts shall constitute but one and the
same instrument. This Agreement may be executed by facsimile signature
and delivered by facsimile transmission.
(d) Law Governing this Agreement. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York
without regard to conflicts of laws principles that would result in the
application of the substantive laws of another jurisdiction. Any action
brought by either party against the other concerning the transactions
contemplated by this Agreement shall be brought only in the civil or
state courts of New York or in the federal courts located in New York
County. The parties executing this Agreement and other agreements
referred to herein or delivered in connection herewith on behalf of the
Company agree to submit to the jurisdiction of such courts and waive
trial by jury. In the event that any provision of this Agreement or any
other agreement delivered in connection herewith is invalid or
unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or
rule of law. Any such provision which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any
other provision of any agreement.
(e) Specific Enforcement, Consent to Jurisdiction. The Company and
Subscriber acknowledge and agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to one or more
preliminary and final injunctions to prevent or cure breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof, this being in addition to any other remedy to which
any of them may be entitled by law or equity. Subject to Section 13(d)
hereof, each of the Company, Subscriber and any signature hereto in his
personal capacity hereby waives, and agrees not to assert in any such
suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction in New York of such court, that the suit, action or
proceeding is brought in
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an inconvenient forum or that the venue of the suit, action or proceeding
is improper. Nothing in this Section shall affect or limit any right to
serve process in any other manner permitted by law.
(f) Damages. In the event the Subscriber is entitled to receive any
liquidated damages pursuant to the Transactions, the Subscriber may elect
to receive the greater of actual damages or such liquidated damages.
(g) Independent Nature of Subscribers. The Company acknowledges that
the obligations of each Subscriber under the Transaction Documents are
several and not joint with the obligations of any other Subscriber, and
no Subscriber shall be responsible in any way for the performance of the
obligations of any other Subscriber under the Transaction Documents. The
Company acknowledges that each Subscriber has represented that the
decision of each Subscriber to purchase Securities has been made by such
Subscriber independently of any other Subscriber and independently of any
information, materials, statements or opinions as to the business,
affairs, operations, assets, properties, liabilities, results of
operations, condition (financial or otherwise) or prospects of the
Company which may have been made or given by any other Subscriber or by
any agent or employee of any other Subscriber, and no Subscriber or any
of its agents or employees shall have any liability to any Subscriber (or
any other person) relating to or arising from any such information,
materials, statements or opinions. The Company acknowledges that nothing
contained in any Transaction Document, and no action taken by any
Subscriber pursuant hereto or thereto (including, but not limited to, the
(i) inclusion of a Subscriber in the Registration Statement and
(ii) review by, and consent to, such Registration Statement by a
Subscriber) shall be deemed to constitute the Subscribers as a
partnership, an association, a joint venture or any other kind of entity,
or create a presumption that the Subscribers are in any way acting in
concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents. The Company
acknowledges that each Subscriber shall be entitled to independently
protect and enforce its rights, including without limitation, the rights
arising out of the Transaction Documents, and it shall not be necessary
for any other Subscriber to be joined as an additional party in any
proceeding for such purpose. The Company acknowledges that it has elected
to provide all Subscribers with the same terms and Transaction Documents
for the convenience of the Company and not because Company was required
or requested to do so by the Subscribers. The Company acknowledges that
such procedure with respect to the Transaction Documents in no way
creates a presumption that the Subscribers are in any way acting in
concert or as a group with respect to the Transaction Documents or the
transactions contemplated thereby.
(h) As used in the Agreement, 'consent of the Subscribers' or similar
language means the consent of holders of not less than 80% of the total
of the Shares issued and issuable upon conversion of outstanding Notes
owned by Subscribers on the date consent is requested.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (A)
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
CONOLOG CORPORATION
a Delaware corporation
By:
-----------------------------------
Name:
Title:
Dated: January 19, 2006
<Table>
<Caption>
SUBSCRIBER NOTE PRINCIPAL
---------- --------------
$
</Table>
- ---------------------------------------------
(Signature)
By:
- ---------------------------------------------
<Page>
LIST OF EXHIBITS AND SCHEDULES
<Table>
Exhibit A -- Form of Note
Exhibit B -- Form of Warrant
Exhibit C -- Escrow Agreement
Exhibit D -- Form of Legal Opinion
Exhibit E -- Form of Form 8-K or Public Announcement
Schedule 5(a) -- Subsidiaries
Schedule 5(d) -- Additional Issuances / Capitalization
Schedule 5(q) -- Undisclosed Liabilities
Schedule 8 -- Broker
Schedule 9(e) -- Use of Proceeds
Schedule 11.1 -- Other Registrable Securities
</Table>
<Page>
APPENDIX D
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND THE
COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO CONOLOG CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
CONVERTIBLE NOTE
FOR VALUE RECEIVED, CONOLOG CORPORATION, a Delaware corporation (hereinafter
called 'Borrower'), hereby promises to pay to
(the 'Holder') or its registered assigns or successors in interest or order,
without demand, the sum of ( )
('Principal Amount'), with simple and unpaid interest thereon, on January 18,
2010 (the 'Maturity Date'), if not sooner paid.
This Note has been entered into pursuant to the terms of a subscription
agreement between the Borrower, the Holder and certain other holders (the 'Other
Holders') of secured convertible promissory notes (the 'Other Notes'), dated of
even date herewith (the 'Subscription Agreement'), and shall be governed by the
terms of such Subscription Agreement. Unless otherwise separately defined
herein, all capitalized terms used in this Note shall have the same meaning as
is set forth in the Subscription Agreement. The following terms shall apply to
this Note:
ARTICLE I
INTEREST; AMORTIZATION
1.1. Interest Rate. Subject to Section 5.7 hereof, interest payable on this
Note shall accrue at a rate per annum (the 'Interest Rate') of five percent
(5%). Interest on the Principal Amount shall accrue from the date of this Note
and shall be payable quarterly, in arrears, together with Principal Amount
payments as described below and on the Maturity Date, whether by acceleration or
otherwise. Provided the Company has timely obtained the Approval (as defined in
Section 9(q) of the Subscription Agreement), if the Approval is required by
applicable NASD Market Place Rules and/or Nasdaq's corporate governance rules
and provided there is an effective registration statement current and available
for the resale of the Shares and Warrant Shares (as defined in the Subscription
Agreement), and further provided no Event of Default is continuing following a
ten day cure period, then in the event the closing bid price of the Common Stock
is more than $1.25 for each of the ten (10) days preceding an interest payment
date, then interest for that quarter shall be waived and shall not accrue.
1.2. Minimum Monthly Principal Payments. Amortizing payments of the
outstanding Principal Amount and interest of this Note shall commence on the
twenty-fourth (24th) month anniversary date of this Note and on the same day of
each month thereafter (each a 'Repayment Date') until the Principal Amount and
interest have been repaid in full, whether by the payment of cash or by the
conversion of such Principal amount and interest into Common Stock pursuant to
the terms hereof. Subject to Section 2.1 and Article 3 below, on each Repayment
Date the Borrower shall make payments to the Holder in the amount of 4.167
percent of the initial Principal Amount, all interest accrued on the Note as of
the Repayment Date and any other amounts which are then owing under this Note
that have not been paid (collectively, the 'Monthly Amount'). Amounts of
conversions of Principal Amount and interest made by the Holder or Borrower
pursuant to Section 2.1 or Article III, and amounts converted pursuant to
Section 2.3 of this Note shall be applied first against outstanding fees and
damages, then against accrued interest on the Principal Amount and then to
Monthly Amounts commencing with the Monthly Amount first payable and then
Monthly Amounts thereafter in chronological order. Any Principal Amount,
interest and any
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other sum arising under the Subscription Agreement that remains outstanding on
the Maturity Date shall be due and payable on the Maturity Date.
1.3. Default Interest Rate. Following the occurrence and during the
continuance of an Event of Default, which, if susceptible to cure is not cured
within twenty (20) days, otherwise then from the first date of such occurrence,
the annual interest rate on this Note shall (subject to Section 5.7)
automatically be increased to fifteen percent (15%).
ARTICLE II
CONVERSION REPAYMENT
2.1. Payment of Monthly Amount in Cash or Common Stock. Subject to Section
3.2 hereof, the Borrower, at the Borrower's election, shall pay the Monthly
Amount (i) in cash in an amount equal to 100% of the Principal Amount component
of the Monthly Amount and 100% of all other components of the Monthly Amount,
within three (3) business days after the applicable Repayment Date, or (ii) in
registered Common Stock at an applied conversion rate equal to the lesser of
(A) the Fixed Conversion Price (as defined in section 3.1 hereof), or
(B) eighty-five percent (85%) of the volume weighted average price of the common
stock as reported by Bloomberg L.P. using the AQR function for the Principal
Market ('VWAP') for the ten trading days preceding such Repayment Date. Unless
waived by the Holder, the Borrower may not elect to pay a Monthly Amount due on
a Repayment Date in Common Stock in an amount of shares of Common Stock which
would exceed in the aggregate for all Holders of Notes similar to this Note,
thirty-five percent (35%) of the aggregate daily trading volume for the seven
trading days preceding the Repayment Date as reported by Bloomberg L.P. for the
Principal Market multiplied by the VWAP for such seven day period. Amounts paid
with shares of Common Stock must be delivered to the Holder not later than three
(3) business days after the applicable Repayment Date. The Borrower must send
notice to the Holder by confirmed telecopier not later than 6:00 P.M., New York
City time on the fifth trading day preceding a Repayment Date notifying Holder
of Borrower's election to pay the Monthly Redemption Amount in cash or Common
Stock. The Notice must state the amount of cash and or stock to be paid and
include supporting calculations. Elections by the Borrower must be made to all
Other Holders in proportion to the relative Note principal held by the Holder
and the Other Holders. If such notice is not timely sent or if the Monthly
Redemption Amount is not timely delivered, then Holder shall have the right,
instead of the Company, to elect within five trading days after the applicable
Repayment whether to be paid in cash or Common Stock. Such Holder's election
shall not be construed to be a waiver of any default by Borrower relating to
non-timely compliance by Borrower with any of its obligations under this Note
2.2. No Effective Registration. Notwithstanding anything to the contrary
herein, no amount payable hereunder may be paid in shares of Common Stock by the
Borrower without the Holder's consent unless (a) either (i) an effective current
Registration Statement covering the shares of Common Stock to be issued in
satisfaction of such obligations exists, or (ii) an exemption from registration
of the Common Stock is available pursuant to Rule 144(k) of the 1933 Act, and
(b) no Event of Default hereunder (or an event that with the passage of time or
the giving of notice could become an Event of Default), exists and is
continuing, unless such event or Event of Default is cured within any applicable
cure period or is otherwise waived in writing by the Holder in whole or in part
at the Holder's option.
2.3. Optional Redemption of Principal Amount. Provided an Event of Default
or an event which with the passage of time or the giving of notice could become
an Event of Default has not occurred, whether or not such Event of Default has
been cured, the Borrower will have the option of prepaying the outstanding
Principal amount of this Note ('Optional Redemption'), in whole or in part, by
paying to the Holder a sum of money equal to one hundred and twenty percent
(120%) of the Principal amount to be redeemed, together with accrued but unpaid
interest thereon and any and all other sums due, accrued or payable to the
Holder arising under this Note or any Transaction Document through the
Redemption Payment Date as defined below (the 'Redemption Amount'). Borrower's
election to exercise its right to prepay must be by notice in writing ('Notice
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of Redemption'). The Notice of Redemption shall specify the date for such
Optional Redemption (the 'Redemption Payment Date'), which date shall be either
two (2) business days or thirty (30) business days after the date of the Notice
of Redemption (the 'Redemption Period'). A Notice of Redemption shall not be
effective with respect to any portion of the Principal Amount for which the
Holder has a pending election to convert, or for conversions initiated or made
by the Holder during the Redemption Period if the Redemption Period is based on
thirty days prior notice. On the Redemption Payment Date, the Redemption Amount,
less any portion of the Redemption Amount against which the Holder has exercised
its conversion rights, shall be paid in good funds to the Holder. In the event
the Borrower fails to pay the Redemption Amount on the Redemption Payment Date
as set forth herein, then (i) such Notice of Redemption will be null and void,
(ii) Borrower will have no right to deliver another Notice of Redemption, and
(iii) Borrower's failure may be deemed by Holder to be a non-curable Event of
Default. A Redemption Notice may be given only at a time a Registration
Statement is effective. A Notice of Redemption may not be given nor may the
Borrower effectuate a Redemption without the consent of the Holder, if at any
time during the Redemption Period an Event of Default or an Event which with the
passage of time or giving of notice could become an Event of Default (whether or
not such Event of Default has been cured), has occurred or the Registration
Statement registering the Registrable Securities is not effective each day
during the Redemption Period.
2.4. Mandatory Conversion. Provided an Event of Default has not occurred,
unless such Event of Default has been cured at least twenty (20) days prior to
the delivery of written notice by Borrower as hereinafter described, then,
commencing after the Actual Effective Date, the Borrower will have the option by
written notice to the Holder ('Notice of Mandatory Conversion') of compelling
the Holder to convert all or a portion of the outstanding and unpaid principal
of the Note and accrued interest, thereon, into Common Stock at the Conversion
Price then in affect ('Mandatory Conversion'). The Notice of Mandatory
Conversion, which notice must be given on the first day following a consecutive
ten (10) day trading period during which the closing bid price for the Company's
Common Stock as reported by Bloomberg, LP for the Principal Market shall be more
than $2.40 each day and provided during the Lookback Period, daily average
trading volume is not less than 100,000 shares. The date the Notice of Mandatory
Conversion is given is the 'Mandatory Conversion Date.' The Notice of Mandatory
Conversion shall specify the aggregate principal amount of the Note which is
subject to Mandatory Conversion, which amount may not exceed in the aggregate,
for all Holders who received Notes similar in term and tenure as this Note, the
dollar volume of Common Stock traded on the Principal Market during the seven
(7) trading days immediately preceding the Mandatory Conversion Date. Mandatory
Conversion Notices must be given proportionately to all Holders of Notes who
received Notes similar in term and tenure as this Note. The Borrower shall
reduce the amount of Note principal and interest subject to a Notice of
Mandatory Conversion by the amount of Note Principal and interest for which the
Holder had delivered a Notice of Conversion to the Borrower during the twenty
(20) trading days preceding the Mandatory Conversion Date. Each Mandatory
Conversion Date shall be a deemed Conversion Date and the Borrower and the
Holder will be required to comply with Section 2.1 above.
ARTICLE III
CONVERSION RIGHTS
3.1. Holder's Conversion Rights. Subject to Section 3.2, the Holder shall
have the right, but not the obligation at all times, to convert all or any
portion of the then aggregate outstanding Principal Amount of this Note, into
shares of Common Stock, subject to the terms and conditions set forth in this
Article III at the rate of $1.25 per share of Common Stock ('Fixed Conversion
Price') as same may be adjusted pursuant to this Note and the Subscription
Agreement. The Holder may exercise such right by delivery to the Borrower of a
written Notice of Conversion pursuant to Section 3.3. After the occurrence of an
Event of Default, the Fixed Conversion Price shall be the lesser of the Fixed
Conversion Price or 85% of the VWAP for the five trading days prior to a
Conversion Date.
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3.2. Conversion Limitation. The Holder shall not be entitled to convert on a
Conversion Date that amount of the Note in connection with that number of shares
of Common Stock which would be in excess of the sum of (i) the number of shares
of Common Stock beneficially owned by the Holder and its affiliates on a
Conversion Date, (ii) any Common Stock issuable in connection with the
unconverted portion of the Note, and (iii) the number of shares of Common Stock
issuable upon the conversion of the Note with respect to which the determination
of this provision is being made on a Conversion Date, which would result in
beneficial ownership by the Holder and its affiliates of more than 4.99% of the
outstanding shares of Common Stock of the Borrower on such Conversion Date. For
the purposes of the provision to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to
the foregoing, the Holder shall not be limited to aggregate conversions of only
4.99% and aggregate conversion by the Holder may exceed 4.99%. The Holder shall
have the authority and obligation to determine whether the restriction contained
in this Section 3.2 will limit any conversion hereunder and to the extent that
the Holder determines that the limitation contained in this Section applies, the
determination of which portion of the Notes are convertible shall be the
responsibility and obligation of the Holder. The Holder may waive the conversion
limitation described in this Section 3.2, in whole or in part, upon and
effective after 61 days prior written notice to the Borrower. The Holder may
allocate decide whether to convert a Note or exercise Warrants to achieve an
actual 4.99% ownership position.
3.3. Mechanics of Holder's Conversion.
(a) In the event that the Holder elects to convert any amounts outstanding
under this Note into Common Stock, the Holder shall give notice of such election
by delivering an executed and completed notice of conversion (a 'Notice of
Conversion') to the Borrower, which Notice of Conversion shall provide a
breakdown in reasonable detail of the Principal Amount, accrued interest and
amounts being converted. The original Note is not required to be surrendered to
the Borrower until all sums due under the Note have been paid. On each
Conversion Date (as hereinafter defined) and in accordance with its Notice of
Conversion, the Holder shall make the appropriate reduction to the Principal
Amount, accrued interest and fees as entered in its records. Each date on which
a Notice of Conversion is delivered or telecopied to the Borrower in accordance
with the provisions hereof shall be deemed a 'Conversion Date.' A form of Notice
of Conversion to be employed by the Holder is annexed hereto as Exhibit A.
(b) Pursuant to the terms of a Notice of Conversion, the Borrower will issue
instructions to the transfer agent accompanied by an opinion of counsel, if so
required by the Borrower's transfer agent and shall cause the transfer agent to
transmit the certificates representing the Conversion Shares to the Holder by
crediting the account of the Holder's designated broker with the Depository
Trust Corporation ('DTC') through its Deposit Withdrawal Agent Commission
('DWAC') system within three (3) business days after receipt by the Borrower of
the Notice of Conversion (the 'Delivery Date'). In the case of the exercise of
the conversion rights set forth herein the conversion privilege shall be deemed
to have been exercised and the Conversion Shares issuable upon such conversion
shall be deemed to have been issued upon the date of receipt by the Borrower of
the Notice of Conversion. The Holder shall be treated for all purposes as the
record holder of such shares of Common Stock, unless the Holder provides the
Borrower written instructions to the contrary. Notwithstanding the foregoing to
the contrary, the Borrower or its transfer agent shall only be obligated to
issue and deliver the shares to the DTC on the Holder's behalf via DWAC (or
certificates free of restrictive legends) if the registration statement
providing for the resale of the shares of Common Stock issuable upon the
conversion of this Note is effective and the Holder has complied with all
applicable securities laws in connection with the sale of the Common Stock,
including, without limitation, the prospectus delivery requirements. In the
event that Conversion Shares cannot be delivered to the Holder via DWAC, the
Borrower shall deliver physical certificates representing the Conversion Shares
by the Delivery Date.
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3.4. Conversion Mechanics.
(a) The number of shares of Common Stock to be issued upon each conversion
of this Note pursuant to this Article III shall be determined by dividing that
portion of the Principal Amount and interest and fees to be converted, if any,
by the then applicable Fixed Conversion Price.
(b) The Fixed Conversion Price and number and kind of shares or other
securities to be issued upon conversion shall be subject to adjustment from time
to time upon the happening of certain events while this conversion right remains
outstanding, as follows:
A. Merger, Sale of Assets, etc. If the Borrower at any time shall
consolidate with or merge into or sell or convey all or substantially all
its assets to any other corporation, this Note, as to the unpaid principal
portion thereof and accrued interest thereon, shall thereafter be deemed to
evidence the right to purchase such number and kind of shares or other
securities and property as would have been issuable or distributable on
account of such consolidation, merger, sale or conveyance, upon or with
respect to the securities subject to the conversion or purchase right
immediately prior to such consolidation, merger, sale or conveyance. The
foregoing provision shall similarly apply to successive transactions of a
similar nature by any such successor or purchaser. Without limiting the
generality of the foregoing, the anti-dilution provisions of this Section
shall apply to such securities of such successor or purchaser after any such
consolidation, merger, sale or conveyance.
B. Reclassification, etc. If the Borrower at any time shall, by
reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note, as to the
unpaid principal portion thereof and accrued interest thereon, shall
thereafter be deemed to evidence the right to purchase an adjusted number of
such securities and kind of securities as would have been issuable as the
result of such change with respect to the Common Stock immediately prior to
such reclassification or other change.
C. Stock Splits, Combinations and Dividends. If the shares of Common
Stock are subdivided or combined into a greater or smaller number of shares
of Common Stock, or if a dividend is paid on the Common Stock in shares of
Common Stock, the Conversion Price shall be proportionately reduced in case
of subdivision of shares or stock dividend or proportionately increased in
the case of combination of shares, in each such case by the ratio which the
total number of shares of Common Stock outstanding immediately after such
event bears to the total number of shares of Common Stock outstanding
immediately prior to such event.
D. Share Issuance. Until the sooner of 180 days from the Actual
Effective Date of the Registration Statement, and if the Approval is
required by applicable NASD Market Place Rules and/or Nasdaq's corporate
governance rules provided the Approval has been obtained, or the date the
Notes have been paid, if the Borrower shall issue any Common Stock except
for the Excepted Issuances (as defined in the Subscription Agreement), prior
to the complete conversion or payment of this Note, for a consideration less
than the Fixed Conversion Price that would be in effect at the time of such
issue, then, and thereafter successively upon each such issuance, the Fixed
Conversion Price shall be reduced to such other lower issue price. For
purposes of this adjustment, the issuance of any security or debt instrument
of the Borrower carrying the right to convert such security or debt
instrument into Common Stock or of any warrant, right or option to purchase
Common Stock shall result in an adjustment to the Fixed Conversion Price
upon the issuance of the above-described security, debt instrument, warrant,
right, or option and again upon the issuance of shares of Common Stock upon
exercise of such conversion or purchase rights if such issuance is at a
price lower than the then applicable Conversion Price. The reduction of the
Fixed Conversion Price described in this paragraph is in addition to the
other rights of the Holder described in the Subscription Agreement.
(c) Whenever the Conversion Price is adjusted pursuant to Section 3.4(b)
above, the Borrower shall promptly mail to the Holder a notice setting forth the
Conversion Price after such adjustment and setting forth a statement of the
facts requiring such adjustment.
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3.5. Reservation. During the period the conversion right exists, Borrower
will reserve from its authorized and unissued Common Stock not less than one
hundred seventy-five percent (175%) of the number of shares to provide for the
issuance of Common Stock upon the full conversion of this Note. Borrower
represents that upon issuance, such shares will be duly and validly issued,
fully paid and non-assessable. Borrower agrees that its issuance of this Note
shall constitute full authority to its officers, agents, and transfer agents who
are charged with the duty of executing and issuing stock certificates to execute
and issue the necessary certificates for shares of Common Stock upon the
conversion of this Note.
3.6 Issuance of Replacement Note. Upon any partial conversion of this Note,
a replacement Note containing the same date and provisions of this Note shall,
at the written request of the Holder, be issued by the Borrower to the Holder
for the outstanding Principal Amount of this Note and accrued interest which
shall not have been converted or paid, provided Holder has surrendered an
original Note to the Company. In the event that the Holder elects not to
surrender a Note for reissuance upon partial payment or conversion, the Holder
hereby indemnifies the Borrower against any and all loss or damage attributable
to a third-party claim in an amount in excess of the actual amount then due
under the Note.
3.7 Shareholder Approval. If the Approval is required by applicable NASD
Market Place Rules and/or Nasdaq's corporate governance rules, then until the
Company either obtains shareholder approval of the issuance of the Securities,
or an exemption from NASDAQ's corporate governance rules as they may apply to
the Shares, and an opinion from counsel reasonably acceptable to Subscriber that
the issuance of the Shares will not violate NASDAQ's corporate governance rules
nor may result in a delisting of the Company's common stock from the SmallCap,
the Holder may not receive any Shares.
ARTICLE IV
EVENTS OF DEFAULT
The occurrence of any of the following events of default ('Event of
Default') shall, at the option of the Holder hereof, make all sums of principal
and interest then remaining unpaid hereon and all other amounts payable
hereunder immediately due and payable, upon demand, without presentment, or
grace period, all of which hereby are expressly waived, except as set forth
below:
4.1 Failure to Pay Principal or Interest. The Borrower fails to pay any
installment of Principal Amount, interest or other sum due under this Note or
any Transaction Document when due and such failure continues for a period of
five (5) business days after the due date.
4.2 Breach of Covenant. The Borrower breaches any material covenant or other
term or condition of the Subscription Agreement, this Note or Transaction
Document in any material respect and such breach, if subject to cure, continues
for a period of ten (10) business days after written notice to the Borrower from
the Holder.
4.3 Breach of Representations and Warranties. Any material representation or
warranty of the Borrower made herein, in the Subscription Agreement, Transaction
Document or in any agreement, statement or certificate given in writing pursuant
hereto or in connection herewith or therewith shall be false or misleading in
any material respect as of the date made and the Closing Date.
4.4 Receiver or Trustee. The Borrower or any Subsidiary of Borrower shall
make an assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for them or for a substantial part of their
property or business; or such a receiver or trustee shall otherwise be
appointed.
4.5 Judgments. Any money judgment, writ or similar final process shall be
entered or filed against Borrower or any subsidiary of Borrower or any of their
property or other assets for more than $100,000, and shall remain unvacated,
unbonded or unstayed for a period of forty-five (45) days.
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4.6 Non-Payment. The Borrower shall have received a notice of default, which
remains uncured for a period of more than twenty (20) business days, on the
payment of any one or more debts or obligations aggregating in excess of One
Hundred Thousand Dollars (US $100,000.00) beyond any applicable grace period;
4.7 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law,
or the issuance of any notice in relation to such event, for the relief of
debtors shall be instituted by or against the Borrower or any Subsidiary of
Borrower and if instituted against them are not dismissed within sixty (60) days
of initiation.
4.8 Delisting. Failure of the Common Stock to be quoted or listed on the
Principal Market; failure to comply with the requirements for continued listing
on the Bulletin Board for a period of seven consecutive trading days; or
notification from the Bulletin Board or any Principal Market that the Borrower
is not in compliance with the conditions for such continued listing on the
Principal Market.
4.9 Stop Trade. An SEC or judicial stop trade order or Principal Market
trading suspension with respect to Borrower's Common Stock that lasts for five
or more consecutive trading days.
4.10 Failure to Deliver Common Stock or Replacement Note. Borrower's failure
to timely deliver Common Stock to the Holder pursuant to and in the form
required by this Note or the Subscription Agreement, and, if requested by
Borrower, a replacement Note, and such failure continues for a period of five
(5) business days after the due date.
4.11 Non-Registration Event. The occurrence of a Non-Registration Event as
described in the Subscription Agreement.
4.12 Reverse Splits. The Borrower effectuates a reverse split of its Common
Stock without twenty days prior written notice to the Holder.
4.13 Cross Default. A default by the Borrower of a material term, covenant,
warranty or undertaking of any Transaction Document or other agreement to which
the Borrower and Holder are parties, or the occurrence of a material event of
default under any such other agreement which is not cured after any required
notice and/or cure period.
ARTICLE V
MISCELLANEOUS
5.1 Failure or Indulgence Not Waiver. No failure or delay on the part of
Holder hereof in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege. All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.
5.2 Notices. All notices, demands, requests, consents, approvals, and other
communications required or permitted hereunder shall be in writing and, unless
otherwise specified herein, shall be (i) personally served, (ii) deposited in
the mail, registered or certified, return receipt requested, postage prepaid,
(iii) delivered by reputable air courier service with charges prepaid, or
(iv) transmitted by hand delivery, telegram, or facsimile, addressed as set
forth below or to such other address as such party shall have specified most
recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be: (i) if to the Borrower to: Conolog Corporation,
5 Columbia Road, Somerville, NJ 08876,
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Attn: Robert Benou, telecopier: (908) 722-5461, with a copy by telecopier only
to: Milberg Weiss Bershad & Schulman LLP, One Penn Plaza, New York, NY 10119
Attn: Arnold N. Bressler, Esq., telecopier: (212) 868-1229, and (ii) if to the
Holder, to the name, address and telecopy number set forth on the front page of
this Note, with a copy by telecopier only to Grushko & Mittman, P.C., 551 Fifth
Avenue, Suite 1601, New York, New York 10176, telecopier number:
(212) 697-3575.
5.3 Amendment Provision. The term 'Note' and all reference thereto, as used
throughout this instrument, shall mean this instrument as originally executed,
or if later amended or supplemented, then as so amended or supplemented.
5.4 Assignability. This Note shall be binding upon the Borrower and its
successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns.
5.5 Cost of Collection. If default is made in the payment of this Note,
Borrower shall pay the Holder hereof reasonable costs of collection, including
reasonable attorneys' fees.
5.6 Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York, without regard to conflicts
of laws principles that would result in the application of the substantive laws
of another jurisdiction. Any action brought by either party against the other
concerning the transactions contemplated by this Agreement shall be brought only
in the state courts of New York or in the federal courts located in the State of
New York. The prevailing party shall be entitled to recover from the other party
its reasonable attorney's fees and costs. In the event that any provision of
this Note is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any such provision which may prove invalid or unenforceable under
any law shall not affect the validity or unenforceability of any other provision
of this Note. Nothing contained herein shall be deemed or operate to preclude
the Holder from bringing suit or taking other legal action against the Borrower
in any other jurisdiction to collect on the Borrower's obligations to Holder, to
realize on any collateral or any other security for such obligations, or to
enforce a judgment or other court in favor of the Holder.
5.7 Maximum Payments. Nothing contained herein shall be deemed to establish
or require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum permitted by
such law, any payments in excess of such maximum shall be credited against
amounts owed by the Borrower to the Holder and thus refunded to the Borrower.
5.8. Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.
5.9 Redemption. This Note may not be redeemed or called without the consent
of the Holder except as described in this Note.
5.10 Shareholder Status. The Holder shall not have rights as a shareholder
of the Borrower with respect to unconverted portions of this Note. However, the
Holder will have the rights of a shareholder of the Borrower with respect to the
Shares of Common Stock to be received after delivery by the Holder of a
Conversion Notice to the Borrower.
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IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name
by an authorized officer as of the 19th day of January, 2006.
CONOLOG CORPORATION
By:
-----------------------------------
Name:
Title:
Witness:
-------------------------------
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NOTICE OF CONVERSION
(To be executed by the Registered Holder in order to convert the Note)
The undersigned hereby elects to convert $ of the principal and
$ of the interest due on the Note issued by Conolog Corporation on
December , 2005 into Shares of Common Stock of Conolog Corporation (the
'Borrower') according to the conditions set forth in such Note, as of the date
written below.
Date of Conversion: ____________________________________________________________
Conversion Price: ______________________________________________________________
Number of Shares of Common Stock Beneficially Owned on the Conversion Date: Less
than 5% of the outstanding Common Stock of Conolog Corporation
Shares To Be Delivered: ________________________________________________________
Signature: _____________________________________________________________________
Print Name: ____________________________________________________________________
Address: _______________________________________________________________________
_______________________________________________________________________
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APPENDIX E
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT
AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO CONOLOG CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
Right to Purchase shares of
Common Stock of Conolog Corporation
(subject Form of adjustment as provided
herein)
COMMON STOCK PURCHASE WARRANT
No. 2006-00____ Issue Date: January 19, 2006
CONOLOG CORPORATION, a corporation organized under the laws of the State of
Delaware (the 'Company'), hereby certifies that, for value received,
, Fax: or its assigns (the 'Holder'), is entitled,
subject to the terms set forth below, to purchase from the Company at any time
after the sooner of July 18, 2006 (180 days from the Issue Date), or the Company
obtaining the Approval as defined in Section 9(r) of the Subscription Agreement
if the Approval is required by the applicable NASD Market Place Rules and/or
Nasdaq's corporate goverence rules, until 5:00 p.m., E.S.T on the fifth (5th)
anniversary of the Issue Date (the 'Expiration Date'), up to fully paid
and nonassessable shares of Common Stock at a per share purchase price of $.9579
[103% of the closing bid prices as reported by Bloomberg L.P. for the Principal
Market for the trading day preceding the Closing Date]. The aforedescribed
purchase price per share, as adjusted from time to time as herein provided, is
referred to herein as the 'Purchase Price.' The number and character of such
shares of Common Stock and the Purchase Price are subject to adjustment as
provided herein. The Company may reduce the Purchase Price without the consent
of the Holder. Capitalized terms used and not otherwise defined herein shall
have the meanings set forth in that certain Subscription Agreement (the
'Subscription Agreement'), dated January 19, 2006, entered into by the Company
and Holders of the Warrant.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term 'Company' shall include Conolog Corporation and any
corporation which shall succeed or assume the obligations of Conolog
Corporation hereunder.
(b) The term 'Common Stock' includes (a) the Company's Common Stock,
$0.01 par value per share, as authorized on the date of the Subscription
Agreement, and (b) any other securities into which or for which any of the
securities described in (a) may be converted or exchanged pursuant to a plan
of recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term 'Other Securities' refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of
or in addition to Common Stock, or which at any time shall be issuable or
shall have been issued in exchange for or in replacement of Common Stock or
Other Securities pursuant to Section 5 or otherwise.
(d) The term 'Warrant Shares' shall mean the Common Stock issuable upon
exercise of this Warrant.
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1. Exercise of Warrant.
1.1. Number of Shares Issuable upon Exercise. From and after the Issue Date
through and including the Expiration Date, the Holder hereof shall be entitled
to receive, upon exercise of this Warrant in whole in accordance with the terms
of subsection 1.2 or upon exercise of this Warrant in part in accordance with
subsection 1.3, shares of Common Stock of the Company, subject to adjustment
pursuant to Section 4.
1.2. Full Exercise. This Warrant may be exercised in full by the Holder
hereof by delivery of an original or facsimile copy of the form of subscription
attached as Exhibit A hereto (the 'Subscription Form') duly executed by such
Holder and the surrender of the original Warrant upon the exercise, to the
Company at its principal office or at the office of its Warrant Agent (as
provided hereinafter), accompanied by payment, in cash, wire transfer or by
certified or official bank check payable to the order of the Company, in the
amount obtained by multiplying the number of shares of Common Stock for which
this Warrant is then exercisable by the Purchase Price then in effect.
1.3. Partial Exercise. This Warrant may be exercised in part (but not for a
fractional share) by surrender of this Warrant in the manner and at the place
provided in subsection 1.2 except that the amount payable by the Holder on such
partial exercise shall be the amount obtained by multiplying (a) the number of
whole shares of Common Stock designated by the Holder in the Subscription Form
by (b) the Purchase Price then in effect. On any such partial exercise, the
Company, at its expense, will forthwith issue and deliver to or upon the order
of the Holder hereof a new Warrant of like tenor, in the name of the Holder
hereof or as such Holder (upon payment by such Holder of any applicable transfer
taxes) may request, the whole number of remaining shares of Common Stock for
which such Warrant may still be exercised.
1.4. Fair Market Value. Fair Market Value of a share of Common Stock as of a
particular date (the 'Determination Date') shall mean:
(a) If the Company's Common Stock is traded on an exchange or is quoted
on the National Association of Securities Dealers, Inc. Automated Quotation
('NASDAQ'), National Market System, the NASDAQ Capital Market or the
American Stock Exchange, LLC, then the closing or last sale price,
respectively, reported for the last business day immediately preceding the
Determination Date;
(b) If the Company's Common Stock is not traded on an exchange or on the
NASDAQ National Market System, the NASDAQ Capital Market or the American
Stock Exchange, Inc., but is traded in the over-the-counter market, then the
average of the closing bid and ask prices reported for the last business day
immediately preceding the Determination Date;
(c) Except as provided in clause (d) below, if the Company's Common
Stock is not publicly traded, then as the Holder and the Company agree, or
in the absence of such an agreement, by arbitration in accordance with the
rules then standing of the American Arbitration Association, before a single
arbitrator to be chosen from a panel of persons qualified by education and
training to pass on the matter to be decided; or
(d) If the Determination Date is the date of a liquidation, dissolution
or winding up, or any event deemed to be a liquidation, dissolution or
winding up pursuant to the Company's charter, then all amounts to be payable
per share to holders of the Common Stock pursuant to the charter in the
event of such liquidation, dissolution or winding up, plus all other amounts
to be payable per share in respect of the Common Stock in liquidation under
the charter, assuming for the purposes of this clause (d) that all of the
shares of Common Stock then issuable upon exercise of all of the Warrants
are outstanding at the Determination Date.
1.5. Company Acknowledgment. The Company will, at the time of the exercise
of the Warrant, upon the request of the Holder hereof acknowledge in writing its
continuing obligation to afford to such Holder any rights to which such Holder
shall continue to be entitled after such exercise in accordance with the
provisions of this Warrant. If the Holder shall fail to make any such request,
such failure shall not affect the continuing obligation of the Company to afford
to such Holder any such rights.
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<Page>
1.6. Trustee for Warrant Holders. In the event that a bank or trust company
shall have been appointed as trustee for the Holder of the Warrants pursuant to
Subsection 3.2, such bank or trust company shall have all the powers and duties
of a warrant agent (as hereinafter described) and shall accept, in its own name
for the account of the Company or such successor person as may be entitled
thereto, all amounts otherwise payable to the Company or such successor, as the
case may be, on exercise of this Warrant pursuant to this Section 1.
1.7 Delivery of Stock Certificates, etc. on Exercise. The Company agrees
that the shares of Common Stock purchased upon exercise of this Warrant shall be
deemed to be issued to the Holder hereof as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within five (5) business days thereafter, the Company at its expense
(including the payment by it of any applicable issue taxes) will cause to be
issued in the name of and delivered to the Holder hereof, or as such Holder
(upon payment by such Holder of any applicable transfer taxes) may direct in
compliance with applicable securities laws, a certificate or certificates for
the number of duly and validly issued, fully paid and nonassessable shares of
Common Stock (or Other Securities) to which such Holder shall be entitled on
such exercise, plus, in lieu of any fractional share to which such Holder would
otherwise be entitled, cash equal to such fraction multiplied by the then Fair
Market Value of one full share of Common Stock, together with any other stock or
other securities and property (including cash, where applicable) to which such
Holder is entitled upon such exercise pursuant to Section 1 or otherwise.
1.8 Shareholder Approval. If required by the applicable NASD Market Place
Rules and/or Nasdaq's corporate governance rules, and notwithstanding anything
to the contrary herein, (i) until the Company either obtains shareholder
approval of the issuance of the Securities, or (ii) an exemption from NASDAQ's
corporate governance rules as they may apply to the Warrant Shares, and an
opinion from counsel reasonably acceptable to Subscriber that the issuance of
the Warrant Shares will not violate NASDAQ's corporate governance rules nor may
result in a delisting of the Company's common stock from the SmallCap, the
Holder may not receive any Warrant Shares.
2. Cashless Exercise.
(a) Except as described below, if a Registration Statement (as defined in
the Subscription Agreement) ('Registration Statement') is effective and the
Holder may sell its shares of Common Stock upon exercise hereof pursuant to the
Registration Statement, this Warrant may be exercisable in whole or in part for
cash only as set forth in Section 1 above. If no such Registration Statement is
available during the time that such Registration Statement is required to be
effective pursuant to the terms of the Subscription Agreement, or if after the
Maturity Date (accelerated or otherwise) of the Note issued pursuant to the
Subscription Agreement any sums due under the Note remains unpaid after any
applicable cure period, then payment upon exercise may be made at the option of
the Holder either in (i) cash, by wire transfer or certified or official bank
check payable to the order of the Company equal to the applicable aggregate
Purchase Price, (ii) by cashless exercise in accordance with Section (b) below
or (iii) by a combination of any of the foregoing methods, for the number of
Common Stock specified in such form (as such exercise number shall be adjusted
to reflect any adjustment in the total number of shares of Common Stock issuable
to the holder per the terms of this Warrant) and the holder shall thereupon be
entitled to receive the number of duly authorized, validly issued, fully-paid
and non-assessable shares of Common Stock (or Other Securities) determined as
provided herein.
(b) If the Notice of Exercise form elects a 'cashless' exercise, the Holder
shall thereby be entitled to receive a number of shares of Common Stock equal to
(x) the excess of the Current Market Value (as defined below) over the total
cash exercise price of the portion of the Warrant then being exercised, divided
by (y) the Market Price of the Common Stock as of the trading day immediately
prior to the date of exercise. For the purposes of this Warrant, the term
'Current Market Value' shall be an amount equal to the Market Price of the
Common Stock as of the trading day immediately prior to the Exercise Date,
multiplied by the number of shares of Common Stock specified in such Notice of
Exercise Form, and 'Market Price of the Common
E-3
<Page>
Stock' shall be the average of the closing bid price of the Common Stock (as
reported by Bloomberg L.P. for the Principal Market) for the 5 Trading days
prior to the exercise date.
(c) The Holder may employ the cashless exercise feature described in
Section (b) above only during the pendency of a Non-Registration Event as
described in Section 11 of the Subscription Agreement or after the Maturity Date
of the Note (accelerated or otherwise) at a time when any sums due under the
Note remains unpaid after any applicable cure period. For purposes of Rule 144
promulgated under the 1933 Act, it is intended, understood and acknowledged that
the Warrant Shares issued in a cashless exercise transaction shall be deemed to
have been acquired by the Holder, and the holding period for the Warrant Shares
shall be deemed to have commenced, on the date this Warrant was originally
issued pursuant to the Subscription Agreement.
3. Adjustment for Reorganization, Consolidation, Merger, etc.
3.1. Reorganization, Consolidation, Merger, etc. In case at any time or from
time to time, the Company shall (a) effect a reorganization, (b) consolidate
with or merge into any other person or (c) transfer all or substantially all of
its properties or assets to any other person under any plan or arrangement
contemplating the dissolution of the Company, then, in each such case, as a
condition to the consummation of such a transaction, proper and adequate
provision shall be made by the Company whereby the Holder of this Warrant, on
the exercise hereof as provided in Section 1, at any time after the consummation
of such reorganization, consolidation or merger or the effective date of such
dissolution, as the case may be, shall receive, in lieu of the Common Stock (or
Other Securities) issuable on such exercise prior to such consummation or such
effective date, the stock and other securities and property (including cash) to
which such Holder would have been entitled upon such consummation or in
connection with such dissolution, as the case may be, if such Holder had so
exercised this Warrant, immediately prior thereto, all subject to further
adjustment thereafter as provided in Section 4.
3.2. Dissolution. In the event of any dissolution of the Company following
the transfer of all or substantially all of its properties or assets, the
Company, prior to such dissolution, shall at its expense deliver or cause to be
delivered the stock and other securities and property (including cash, where
applicable) receivable by the Holder of the Warrants after the effective date of
such dissolution pursuant to this Section 3 to a bank or trust company (a
'Trustee') having its principal office in New York, NY, as trustee for the
Holder of the Warrants.
3.3. Continuation of Terms. Upon any reorganization, consolidation, merger
or transfer (and any dissolution following any transfer) referred to in this
Section 3, this Warrant shall continue in full force and effect and the terms
hereof shall be applicable to the Other Securities and property receivable on
the exercise of this Warrant after the consummation of such reorganization,
consolidation or merger or the effective date of dissolution following any such
transfer, as the case may be, and shall be binding upon the issuer of any Other
Securities, including, in the case of any such transfer, the person acquiring
all or substantially all of the properties or assets of the Company, whether or
not such person shall have expressly assumed the terms of this Warrant as
provided in Section 4. In the event this Warrant does not continue in full force
and effect after the consummation of the transaction described in this
Section 3, then only in such event will the Company's securities and property
(including cash, where applicable) receivable by the Holder of the Warrants be
delivered to the Trustee as contemplated by Section 3.2.
4. Extraordinary Events Regarding Common Stock. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (b) subdivide its outstanding
shares of Common Stock, or (c) combine its outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 4.
The number of
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<Page>
shares of Common Stock that the Holder of this Warrant shall thereafter, on the
exercise hereof as provided in Section 1, be entitled to receive shall be
adjusted to a number determined by multiplying the number of shares of Common
Stock that would otherwise (but for the provisions of this Section 4) be
issuable on such exercise by a fraction of which (a) the numerator is the
Purchase Price that would otherwise (but for the provisions of this Section 4)
be in effect, and (b) the denominator is the Purchase Price in effect on the
date of such exercise.
5. Certificate as to Adjustments. In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of the Warrants, the Company at its expense will promptly cause its
Chief Financial Officer or other appropriate designee to compute such adjustment
or readjustment in accordance with the terms of the Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price
and the number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant. The Company will forthwith
mail a copy of each such certificate to the Holder of the Warrant and any
Warrant Agent of the Company (appointed pursuant to Section 11 hereof).
6. Reservation of Stock, etc. Issuable on Exercise of Warrant; Financial
Statements. The Company will at all times reserve and keep available, solely for
issuance and delivery on the exercise of the Warrants, all shares of Common
Stock (or Other Securities) from time to time issuable on the exercise of the
Warrant.
7. Assignment; Exchange of Warrant. Subject to compliance with applicable
securities laws, this Warrant, and the rights evidenced hereby, may be
transferred by any registered holder hereof (a 'Transferor'). On the surrender
for exchange of this Warrant, with the Transferor's endorsement in the form of
Exhibit B attached hereto (the 'Transferor Endorsement Form') and together with
an opinion of counsel reasonably satisfactory to the Company that the transfer
of this Warrant will be in compliance with applicable securities laws, the
Company at its expense, twice only, but with payment by the Transferor of any
applicable transfer taxes, will issue and deliver to or on the order of the
Transferor thereof a new Warrant or Warrants of like tenor, in the name of the
Transferor and/or the transferee(s) specified in such Transferor Endorsement
Form (each a 'Transferee'), calling in the aggregate on the face or faces
thereof for the number of shares of Common Stock called for on the face or faces
of the Warrant so surrendered by the Transferor. No such transfers shall result
in a public distribution of the Warrant.
8. Replacement of Warrant. On receipt of evidence reasonably 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 of this Warrant, on delivery
of an indemnity agreement or security reasonably satisfactory in form and amount
to the Company or, in the case of any such mutilation, on surrender and
cancellation of this Warrant, the Company at its expense, twice only, will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
9. Registration Rights. The Holder of this Warrant has been granted certain
registration rights by the Company. These registration rights are set forth in
the Subscription Agreement.
10. Maximum Exercise. The Holder shall not be entitled to exercise this
Warrant on an exercise date, in connection with that number of shares of Common
Stock which would be in excess of the sum of (i) the number of shares of Common
Stock beneficially owned by the Holder and its affiliates on an exercise date,
and (ii) the number of shares of Common Stock issuable upon the exercise of this
Warrant with respect to which the determination of this limitation is being made
on an exercise date, which would result in beneficial ownership by the Holder
and its affiliates of more than 4.99% of the outstanding shares of Common Stock
on such date. For the purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and
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<Page>
Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be
limited to aggregate exercises which would result in the issuance of more than
4.99%. The restriction described in this paragraph may be waived, in whole or in
part, upon sixty-one (61) days prior notice from the Holder to the Company. The
Holder may decide whether to convert a Note or exercise this Warrant to achieve
an actual 4.99% ownership position.
11. Warrant Agent. The Company may, by written notice to the Holder of the
Warrant, appoint an agent (a 'Warrant Agent') for the purpose of issuing Common
Stock (or Other Securities) on the exercise of this Warrant pursuant to
Section 1, exchanging this Warrant pursuant to Section 7, and replacing this
Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such
issuance, exchange or replacement, as the case may be, shall be made at such
office by such Warrant Agent.
12. Transfer on the Company's Books. Until this Warrant is transferred on
the books of the Company, the Company may treat the registered holder hereof as
the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
13. Notices. All notices, demands, requests, consents, approvals, and other
communications required or permitted hereunder shall be in writing and, unless
otherwise specified herein, shall be (i) personally served, (ii) deposited in
the mail, registered or certified, return receipt requested, postage prepaid,
(iii) delivered by reputable air courier service with charges prepaid, or
(iv) transmitted by hand delivery, telegram, or facsimile, addressed as set
forth below or to such other address as such party shall have specified most
recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur or (c) three
business days after deposited in the mail if delivered pursuant to
subsection (ii) above. The addresses for such communications shall be: (i) if to
the Company to: Conolog Corporation, 5 Columbia Road, Somerville, NJ 08876,
Attn: Robert Benou, telecopier: (908) 722-5461, with a copy by telecopier only
to: Milberg Weiss Bershad & Schulman LLP, One Penn Plaza, New York, NY 10119
Attn: Arnold N. Bressler, Esq., telecopier: (212) 868-1229, and (ii) if to the
Holder, to the addresses and telecopier number set forth in the first paragraph
of this Warrant, with an additional copy by telecopier only to:
Grushko & Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New
York 10176, telecopier number: (212) 697-3575.
14. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of New York. Any dispute relating to this Warrant shall be
adjudicated in New York County in the State of New York. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
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IN WITNESS WHEREOF, the Company has executed this Warrant as of the date
first written above.
CONOLOG CORPORATION
By:
-----------------------------------
Name: Robert Benou
Title: Chairman and Chief Executive
Officer
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EXHIBIT A
FORM OF SUBSCRIPTION
(TO BE SIGNED ONLY ON EXERCISE OF WARRANT)
TO: CONOLOG CORPORATION
The undersigned, pursuant to the provisions set forth in the attached
Warrant (No. ), hereby irrevocably elects to purchase (check applicable box):
[ ] shares of the Common Stock covered by such Warrant; or
[ ] the maximum number of shares of Common Stock covered by such Warrant
pursuant to the cashless exercise procedure set forth in Section 2.
The undersigned herewith makes payment of the full purchase price for such
shares at the price per share provided for in such Warrant, which is $ .
Such payment takes the form of (check applicable box or boxes):
[ ] $ in lawful money of the United States; and/or
[ ] the cancellation of the Warrant to the extent necessary, in accordance with
the formula set forth in Section 2, to exercise this Warrant with respect to
the maximum number of shares of Common Stock purchasable pursuant to the
cashless exercise procedure set forth in Section 2.
The undersigned requests that the certificates for such shares be issued in the
name of, and delivered to whose address is
.
Number of Shares of Common Stock Beneficially Owned on the date of exercise:
Less than five percent (5%) of the outstanding Common Stock of Conolog
Corporation.
The undersigned represents and warrants that the representations and warranties
in Section 4 of the Subscription Agreement (as defined in this Warrant) are true
and accurate with respect to the undersigned on the date hereof.
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable upon exercise of the within Warrant shall
be made pursuant to registration of the Common Stock under the Securities Act of
1933, as amended (the 'Securities Act'), or pursuant to an exemption from
registration under the Securities Act.
<Table>
Dated:
--------------------------------- --------------------------------------------
(Signature must conform to name of holder as
specified on the face of the Warrant)
--------------------------------------------
--------------------------------------------
(Address)
</Table>
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<Page>
EXHIBIT B
FORM OF TRANSFEROR ENDORSEMENT
(TO BE SIGNED ONLY ON TRANSFER OF WARRANT)
For value received, the undersigned hereby sells, assigns, and transfers
unto the person(s) named below under the heading 'Transferees' the right
represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of CONOLOG CORPORATION to which the within Warrant
relates specified under the headings 'Percentage Transferred' and 'Number
Transferred,' respectively, opposite the name(s) of such person(s) and appoints
each such person Attorney to transfer its respective right on the books of
CONOLOG CORPORATION with full power of substitution in the premises.
<Table>
<Caption>
TRANSFEREES PERCENTAGE TRANSFERRED NUMBER TRANSFERRED
- ----------- ---------------------- ------------------
-------------------------------------------
Dated: , (Signature must conform to name of holder
as specified on the face of the warrant)
Signed in the presence of:
- ---------------------------------------- -------------------------------------------
(Name)
-------------------------------------------
(address)
ACCEPTED AND AGREED:
[TRANSFEREE]
-------------------------------------------
- ---------------------------------------- -------------------------------------------
(Name) (address)
</Table>
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APPENDIX F
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
CONOLOG CORPORATION
--------------------------------------------------------
UNDER SECTION 242 OF THE DELAWARE GENERAL CORPORATION LAW
--------------------------------------------------------
Conolog Corporation, a corporation organized and existing under the laws of
the State of Delaware (the 'Corporation') hereby certifies as follows:
1. The Article Fourth of the Certificate of Incorporation is hereby amended
in its entirety by striking out such Article and inserting in place thereof the
following:
'FOURTH: The total number of shares of all classes of stock which the
Corporation is authorized to issue is thirty-two million (32,000,000) shares,
of which two million (2,000,000) shares having a par value of $.50 per share
are to be classified as Preferred Stock and thirty million (30,000,000)
shares, having a par value of $.01 per share are to be classified as Common
Stock.
2. The foregoing amendment has been duly adopted in accordance with the
provisions of Section 242 of the General Corporation law of the State of
Delaware by the vote of a majority of each class of outstanding stock of the
Corporation entitled to vote thereon.
IN WITNESS WHEREOF, we have signed this Certificate this day of March,
2006.
/s/ Robert S. Benou
---------------------------------
Robert S. Benou,
President, Chairman &
Chief Executive Officer
F-1
Appendix I
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE AND READ THE REVERSE SIDE -
- --------------------------------------------------------------------------------
PROXY CONOLOG CORPORATION
ANNUAL MEETING OF SHAREHOLDERS - April 19, 2006
The undersigned shareholder of Conolog Corporation (the "Company") hereby
appoints Robert S. Benou and Marc R. Benou and each of them as the attorney and
proxy of the undersigned, with full power of substitution, to vote, as indicated
herein, all the common shares of the Company standing in the name of the
undersigned at the close of business on March 3, 2006 at the Annual Meeting of
Shareholders of the Company to be held at the offices of Milberg Weiss Bershad &
Schulman LLP, One Pennsylvania Plaza, New York, New York 10119, at 4:30 p.m.,
local time, on the 19th day of April, 2006, and at any and all adjournments
thereof, with all the powers the undersigned would possess if then and there
personally present and especially (but without limiting the general
authorization and power hereby given) to vote as indicated on the proposals, as
more fully described in the Proxy Statement for the meeting on the following
matters.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS AND WILL BE VOTED FOR THE
ELECTION OF THE PROPOSED DIRECTORS AND FOR THE ABOVE PROPOSALS UNLESS OTHERWISE
INDICATED. THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE,
BUT IF NO CHOICES ARE INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF
ALL NOMINEES AND FOR THE ABOVE PROPOSALS.
(Continued, and to be marked, dated and signed, on the other side)
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- FOLD AND DETACH HERE AND READ THE REVERSE SIDE -
- -----------------------------------------------------------------------------------------------------------------------------------
Please mark your votes
like this [X]
1. Election of Directors 3. Proposal to approve the granting of
FOR [ ] WITHHOLD [ ] an aggregate of 450,000 shares of the
AUTHORITY Company's Common Stock to its
officers, directors, employees and FOR AGAINST ABSTAIN
consultants. [ ] [ ] [ ]
(To withhold authority to vote for any individual nominee,
strike through the nominee's name below)
4. Proposal to approve giving the
Robert S. Benou Marc R. Benou Louis S. Massad Company's Board of Directors the
Edward J. Rielly David S. Peison discretion to reduce the warrant
- -------------------------------------------------------------- exercise price of warrants granted on
July 19, 2005 to purchase 1,200,000
2. Proposal to approve the execution of shares of the Company's common stock,
the Subscription Agreement, dated provided that the Board does not
January 19, 2006, and related reduce the warrant exercise price FOR AGAINST ABSTAIN
documents pursuant to which an amount below $0.65 per share. [ ] [ ] [ ]
equal to more than 20% of the
Company's shares outstanding -----------------------------------------------------------
immediately prior to the execution of
the Subscription Agreement may be FOR AGAINST ABSTAIN 5. Proposal to amend the Company's
issued at a price that is less than [ ] [ ] [ ] Certificate of Incorporation to FOR AGAINST ABSTAIN
the greater of book or market value increase the number of the Company's [ ] [ ] [ ]
of the Company's Common Stock. authorized shares of Common Stock from
20,000,000 shares to 30,000,000 shares.
6. Proposal to ratify the selection of
Bagell, Josephs & Company, L.L.C. as
the Company's independent auditors for FOR AGAINST ABSTAIN
the fiscal year ending July 31, 2006. [ ] [ ] [ ]
7. In their discretion the Proxies are
authorized to vote upon such other
business which may properly come
before the meeting or any adjournment FOR AGAINST ABSTAIN
or adjournments thereof. [ ] [ ] [ ]
COMPANY ID:
PROXY NUMBER:
ACCOUNT NUMBER:
Signature _________________________________________ Signature _________________________________________ Date ______________________
NOTE: Please sign exactly as name appears hereon. When shares are held by joint owners, both owners should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give title as such. If a corporation, please sign in full
corporate name by President or another authorized officer. If a partnership, please sign in partnership name by an authorized
person.
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