<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _____________ to ______________ .
Commission file number 0-25552
---------
DUALSTAR TECHNOLOGIES CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3776834
- ------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11-30 47TH AVENUE, LONG ISLAND CITY, NY 11101
- -------------------------------------------------------------------------------
(Address, including zip code of principal executive offices)
(718) 340-6655
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's common stock,
as of the latest practicable date.
COMMON STOCK, $.01 PAR VALUE -- 9,000,000 SHARES AS OF FEBRUARY 12, 1999
- -------------------------------------------------------------------------------
<PAGE>
INDEX
DUALSTAR TECHNOLOGIES CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - December 31, 1998 and June 30,
1998
Condensed consolidated statements of operations - Three and six months
ended December 31, 1998 and 1997
Condensed consolidated statements of cash flows - Six months ended
December 31, 1998 and 1997
Notes to condensed consolidated financial statements - December 31, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
------------ ------------
UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,509,179 $ 1,356,228
Contracts receivable, net 19,108,999 19,321,514
Retainage receivable 3,640,715 4,574,252
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,687,107 1,507,471
Deferred tax asset - current 178,000 178,000
Prepaid expenses and sundry receivable 791,683 427,725
------------ ------------
TOTAL CURRENT ASSETS 28,915,683 27,365,190
PROPERTY AND EQUIPMENT, NET 3,249,118 3,400,470
OTHER ASSETS:
Deferred tax asset - long-term 924,000 924,000
Other 1,783,177 1,655,099
============ ============
TOTAL ASSETS $ 34,871,978 $ 33,344,759
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 16,742,400 $ 19,086,827
Billings in excess of costs and estimated
earnings on uncompleted contracts 5,631,297 3,882,797
Accrued expenses and other liabilities 3,925,190 4,030,890
------------ ------------
TOTAL CURRENT LIABILITIES 26,298,887 27,000,514
Subordinated convertible note 2,500,000 --
Mortgage payable - long-term 750,000 772,500
Other liabilities 187,750 204,576
------------ ------------
TOTAL LIABILITIES 29,736,637 27,977,590
------------ ------------
CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 90,000 90,000
Additional paid-in capital 14,995,836 14,995,836
Deficit (9,950,495) (9,718,667)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 5,135,341 5,367,169
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 34,871,978 $ 33,344,759
============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED DECEMBER 31, FOR THE SIX MONTHS ENDED DECEMBER 31,
--------------------------------------- -------------------------------------
1998 1997 1998 1997
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Contract revenues earned $ 21,150,276 $ 26,163,105 $ 41,089,481 $ 48,884,352
Cost of revenues earned 19,254,155 23,693,331 37,066,695 44,060,330
------------ ------------ ------------ ------------
Gross profit 1,896,121 2,469,774 4,022,786 4,824,022
General and administrative expenses 2,139,024 2,227,490 4,254,614 4,101,576
------------ ------------ ------------ ------------
(Loss) income before provision
for income taxes (242,903) 242,284 (231,828) 722,446
Provision for income taxes -- -- -- --
============ ============ ============ ============
Net (loss) income $ (242,903) $ 242,284 $ (231,828) $ 722,446
============ ============ ============ ============
Basic (loss) income per share:
Net (loss) income per share $(0.03) $0.03 $(0.03) $0.08
Weighted average shares outstanding 9,000,000 9,000,000 9,000,000 9,000,000
Diluted (loss) income per share:
Net (loss) income per share $(0.03) $0.03 $(0.03) $0.08
Weighted average shares outstanding 9,000,000 9,568,409 9,000,000 9,447,675
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $(2,043,856) $ 729,018
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (179,746) (450,881)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (179,746) (450,881)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term loan 1,000,000 --
Proceeds from subordinated convertible note 2,500,000 --
Principal payments on capital lease obligations (100,947) (31,118)
Principal payments on mortgage (22,500) (18,750)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,376,553 (49,868)
----------- -----------
NET INCREASE IN CASH 1,152,951 228,269
CASH - BEGINNING OF PERIOD 1,356,228 1,110,615
=========== ===========
CASH - END OF PERIOD $ 2,509,179 $ 1,338,884
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three- and
six-month periods ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 1999. For
further information, refer to the financial statements and footnotes thereto
included in DualStar Technologies Corporation and Subsidiaries' Annual Report
on Form 10-K for the fiscal year ended June 30, 1998.
NOTE B - NET (LOSS) INCOME PER SHARE
Basic (loss) income per share is based on the weighted average number of common
shares outstanding during the period. Diluted (loss) income per share includes
the dilutive effect of securities that can be converted into common stock,
including options, warrants and convertible debt, unless the effect is
anti-dilutive.
The weighted average number of shares outstanding for the periods presented is
as follows:
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Basic shares 9,000,000 9,000,000 9,000,000 9,000,000
Dilution (options) -- 568,409 -- 447,675
========= ========= ========= =========
Diluted shares 9,000,000 9,568,409 9,000,000 9,447,675
========= ========= ========= =========
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1998
NOTE C - SUBORDINATED CONVERTIBLE NOTE
On November 25, 1998, the Company sold to an investment group a subordinated
convertible note in the principal amount of $2.5 million, due and payable on
May 25, 2001. The note and unpaid interest bear an interest rate of 7.5% per
annum and is payable semi-annually at the option of the Company. Interest that
is not paid is added to the principal. In the event of default, the lender may
declare the principal and unpaid interest immediately due and payable, and the
outstanding amount will bear an interest rate of 12.5% per annum thereafter.
The note is subordinated to the first mortgage of the Company's building and to
the rights of financial institutions lending money to the Company.
During or at the maturity of the note, the lender has an option to convert the
note into fully-paid and nonassessable shares of the Company's common stock.
The number of shares issued upon the conversion shall not exceed 1,791,000
shares, or 19.9% of the Company's outstanding shares on November 25, 1998.
Initially, the conversion price is $1.40 per share and will be reset on the
180th day following closing and every 90 days thereafter. The reset conversion
price will be the lower of: (i) the average closing price of the Company's
common stock on the 20 trading days immediately preceding the reset date or
(ii) the initial conversion price of $1.40. The number of shares that can be
received upon conversion will be adjusted proportionately for certain
transactions, such as stock dividends and splits, and stockholder
distributions.
If the number of shares issued upon the conversion times the conversion price
is less than the note principal and unpaid interest, the difference, at the
Company's option, will be payable in cash or a one-year term note. The term
note will be secured by the Company's assets and bear an interest rate of 12.5%
per annum.
The Company may require the lender to convert the note into shares of the
Company's common stock at the applicable conversion price in effect on such
date if, at anytime after the 181st day following closing, the closing price of
the common stock, for 20 consecutive days, is $3.00 or more per share. Also at
the end of the term, at the option of the Company, in lieu of paying the lender
the entire note amount, the Company shall have the right to force the
conversion of 25% of the outstanding balance of the note amount into common
stock.
Under the $2.5 million note agreement, the Company has certain restrictions on
certain transactions, such as acquisition of additional indebtedness, related
party transactions, transfer and disposition of assets, issuance of stock
options, stock dividends and splits, and stock repurchases.
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1998
NOTE C - (CONTINUED)
The Company also agreed to increase the total number of directors to eight. The
investment group has the right to designate, and the Company will use its best
efforts to cause the election of, a person reasonably acceptable to the Board
of Directors to fill such newly created directorship. On February 11, 1999, the
investment group's nominee was elected to the Company's Board of Directors.
NOTE D - SUBORDINATED NOTE
In July 1998, the Company sold to an investment group a $1 million subordinated
note. The note bears an interest rate of 10% per annum and is collateralized by
the Company's building, subordinate to the building's first mortgage, in
addition to the Company's cash and accounts receivable. The note and any
interest was due and payable on demand.
On November 25, 1998, in connection with the $2.5 million subordinated
convertible note, referred to in Note C above, the maturity date of the $1
million subordinated note was extended to November 25, 1999 and provisions
relating to events of default were added.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
DualStar Technologies Corporation, through its wholly owned subsidiaries,
provides mechanical, electrical, electronic and control, environmental,
security, telecommunications, direct broadcast satellite and cable television,
and high-speed Internet access systems, services and solutions to a wide range
of customers primarily in the New York Tri-State area.
Certain information contained in this report include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which are subject to certain risks and uncertainties, including those
"Risk Factors" set forth in DualStar Technologies Corporation and Subsidiaries'
(the "Company") Annual Report on Form 10-K for the fiscal year ended June 30,
1998 and which speak only as of the date hereof. Readers are cautioned not to
place undue reliance on these forward-looking statements which speak only as of
the date hereof. The Company undertakes no obligation to release publicly any
revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect unanticipated events or
developments.
CAPITAL RESOURCES AND LIQUIDITY
Cash balances at December 31, and June 30, 1998 were approximately $2.5 million
and $1.4 million, respectively. The Company's operations used approximately
$2.0 million of cash in the six months ended December 31, 1998, and provided
approximately $0.7 million of cash in the six months ended December 31, 1997.
Further, in the six months ended December 31, 1998 and 1997, the Company
acquired capital assets of approximately $180,000 and $451,000, respectively,
substantially all of which represented investments in telecommunication
infrastructure systems for buildings in return for rights to provide telephone,
television and high-speed Internet services to the buildings' residents.
In July and November 1998, the Company entered into a $1 million subordinated
note agreement and a $2.5 million subordinated convertible note agreement,
respectively, with an investment group, as described in Notes C and D of the
Notes to Condensed Consolidated Financial Statements above.
<PAGE>
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such
computer systems will be unable to interpret dates beyond the year 1999, which
could cause a system failure or other computer errors, leading to disruptions
in operations. In 1998, the Company developed a three-phase program for Y2K
compliance. Phase I is the identification of those systems through which the
Company has exposure to Y2K issues. Phase II is the development and
implementation of action plans to be Y2K compliant in all areas by the end of
June 1999. Phase III, to be completed by September 1999, is the final testing
of each major area of exposure to ensure compliance. The Company has identified
two major areas determined to be critical for successful Y2K compliance: (1)
financial and informational system applications, and (2) system and software
suppliers.
The Company, in accordance with Phase I of the program, conducted an internal
review of its systems and contacted suppliers to determine major areas of
exposure to Y2K issues. In the financial and informational systems area, a
number of applications have been identified as Y2K compliant due to their
recent implementation. The Company's core financial and reporting systems are
not yet Y2K compliant but are scheduled for replacement by the end of March
1999 and the final testing of the replaced systems is scheduled to be completed
by August 1999 to ensure Y2K compliance. The Company's non-compliant
informational systems are scheduled for replacement by the end of June 1999 and
are scheduled to be tested for compliance by September 1999. The Company
believes the currently estimated replacement and labor costs to bring the core
financial, reporting and informational system applications into compliance
should not have a material adverse effect on the Company's financial condition
in fiscal 1999 and 2000, although there can be no assurance of this.
The Company has contacted most of its major suppliers with regards to Y2K
compliance. While most of these suppliers state that they are, or intend to be,
Y2K compliant by 2000, the Company has not yet received any confirmations from
the fire and security alarm system suppliers. If the systems provided by these
suppliers are not Y2K compliant, the Company may have to purchase Y2K compliant
fire and security alarm systems from other suppliers. The Company, however,
does not foresee any difficulty in procuring the Y2K compliant systems. In
addition, the Company is currently in the process of assessing costs of
replacing existing non-compliant fire and security alarm systems, if any.
<PAGE>
RESULTS OF OPERATIONS
Contract revenues decreased 19.2% in the three months ended December 31, 1998
to $21.2 million, down $5.0 million from the comparable period of 1997.
Contract revenues decreased 15.9% in the six months ended December 31, 1998 to
$41.1 million, down $7.8 million from the comparable period in 1997. The
decreases were due primarily to the Company either completing or beginning
several large contracts. Since such revenue streams typically peak during the
middle of a project, this depressed contract revenues during these periods.
Gross profit decreased $0.6 million in the three months ended December 31, 1998
to $1.9 million from the comparable period in 1997. Gross profit decreased $0.8
million in the six months ended December 31, 1998 to $4.0 million from the
comparable period in 1997. The gross profit margins were 9.0% and 9.4% for the
three months ended December 31, 1998 and 1997, respectively. The gross profit
margins were 9.8% and 9.9% for the six months ended December 31, 1998 and 1997,
respectively. The decrease in gross profit was attributable to the decrease in
contract revenues.
General and administrative expenses were relatively unchanged for the three and
six months ended December 31, 1998 from the comparable periods in 1997.
However, as a percentage of revenue, general and administrative expenses
increased to 10.1% for the three months ended December 31, 1998 from 8.5% for
the comparable period in 1997, and 10.4% for the six months ended December 31,
1998 from 8.4% for the comparable period in 1997. The increases were due
primarily to the decrease in contract revenues.
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 25, 1998, the Company sold a 7.5% subordinated convertible note,
due May 25, 2001, to Technology Investors Group, LLC ("TIG"), a venture capital
firm, for $2.5 million. The note is convertible at the option of TIG into
1,791,000 shares of the Company's common stock, or 19.9% of DualStar shares
issued and outstanding as of the closing date, at an initial conversion price
of $1.40 per share. The initial conversion price will be reset on the 180th day
following closing and every 90 days thereafter. The Company relied on an
exemption from registration under the Securities Act of 1933, as amended,
provided by section 4(2) and Regulation D promulgated thereunder. The Company
anticipates using the proceeds to expand its share of target markets, for
acquisitions if and when such opportunities become available, and for general
corporate purposes.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 16, 1998, the Company held its 1998 Annual Meeting of Stockholders
of DualStar Technologies Corporation for the election of directors and to
consider proposals to amend the Company's 1994 Stock Option Plan and ratify the
appointment of the Company's independent auditors for the current fiscal year.
The holders of 8,727,044 shares of stock entitled to vote, which constituted a
quorum, were present at the annual meeting in person or by proxy. As of the
record date, there were 9,000,000 shares issued and outstanding.
The following individuals were elected as directors for one year terms by the
following votes:
For Withheld
--- --------
Michael J. Abatemarco 8,585,318 141,726
Gregory Cuneo 8,585,318 141,726
Ronald Fregara 8,585,318 141,726
Armando Spaziani 8,585,318 141,726
Raymond L. Steele 8,585,318 141,726
Elven M. Tangel 8,585,318 141,726
Stephen J. Yager 8,585,318 141,726
The amendment of the 1994 Stock Option Plan to (i) increase the number of
shares available for grant under the 1994 Plan from 2.2 million to 3.5 million,
and (ii) add all directors of the Company as persons eligible for grant of
options, was approved and received the following votes:
For Against Abstain
- --- ------- -------
3,815,092 529,856 204,430
The appointment of Grant Thornton LLP as the Company's auditors for fiscal year
1999 was ratified and received the following votes:
For Against Abstain
- --- ------- -------
8,399,894 136,950 190,200
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) This Report contains the following Exhibits as required by Item 601 of
Regulation S-K.
10.16 Non-Negotiable, Non-Transferable Subordinated, Convertible
Promissory Note, dated November 25, 1998, in the sum of
$2,500,000;
10.17 Note Purchase Agreement, dated as of November 25, 1998, relating
to the purchase of a subordinated convertible note ("Note");
10.18 Registration Rights Agreement, dated as of November 25, 1998,
relating to the provision of certain registration rights in
connection with the purchase and sale of the Note;
10.19 Stockholders' Agreement, dated as of November 25, 1998, relating
to certain matters in connection with the purchase and sale of the
Note.
(b) A Current Report on Form 8-K was filed on November 25, 1998 with respect
to Item 5 of Form 8-K.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DualStar Technologies Corporation
Date February 16, 1999 By: GREGORY CUNEO
---------------------- -------------------------
Gregory Cuneo
Chairman of Board, President
and Chief Executive Officer
Date February 16, 1999 By: ROBERT BIRNBACH
---------------------- -------------------------
Robert Birnbach
Vice President and Chief Financial Officer
Date February 16, 1999 By: JOSEPH CHAN
---------------------- --------------
Joseph Chan
Vice President and Chief Accounting Officer
<PAGE>
Index to Exhibits
Exhibit No. Description
10.16 Non-Negotiable, Non-Transferable Subordinated, Convertible
Promissory Note, dated November 25, 1998, in the sum of $2,500,000;
10.17 Note Purchase Agreement, dated as of November 25, 1998, relating to
the purchase of a subordinated convertible note ("Note");
10.18 Registration Rights Agreement, dated as of November 25, 1998,
relating to the provision of certain registration rights in
connection with the purchase and sale of the Note;
10.19 Stockholders' Agreement, dated as of November 25, 1998, relating to
certain matters in connection with the purchase and sale of the
Note.
<PAGE>
NON-NEGOTIABLE, NON-TRANSFERABLE
SUBORDINATED, CONVERTIBLE PROMISSORY NOTE
$2,500,000 November 25, 1998
FOR VALUE RECEIVED, DUALSTAR TECHNOLOGIES CORPORATION, a Delaware
corporation (the "Company") promises to pay to TECHNOLOGY INVESTORS GROUP, LLC,
a Delaware Limited Liability Company ("Holder" or "TIG"), at 25 Coligni Avenue,
New Rochelle, N.Y. 10801 or at such other place as the Holder may in writing
designate, the principal sum of Two and One-Half Million Dollars ($2,500,000)
with interest (computed on the basis of a 360 day year and the actual number of
days elapsed) at the rate of 7.5% per annum on the balance of the principal
from time to time remaining unpaid, all on the terms and conditions set forth
herein (the "Note" or "Convertible Note"). This Note will be subordinated to
the payment of principal and interest on the debt (the "Senior Debt") of the
Company to any bank, commercial lender or other financial institution (an
"Institutional Lender") incurred subsequent to the date hereof (the "Original
Issue Date"), provided however, that the Company will not incur any Senior Debt
that (i) prevents the exercise or modifies the terms of Holder's conversion
rights hereunder or (ii) by its terms prevents the Company from paying
principal and interest in cash hereunder, except to the extent that the Company
has committed a default on such Senior Debt that permits the Institutional
Lender to accelerate the payment of such debt.
1. Maturity, Interest and Amortization. Unless accelerated pursuant to the
terms of this Note or converted to shares of common stock of the Company (the
"Common Stock") as provided for in Sections 5 and 6 below, the unpaid principal
balance of this Note together with all unpaid interest accrued thereon shall be
due and payable on May 25, 2001 (the "Term"). Interest on the Note shall be
payable semi-annually in arrears in cash or (prior to the final stated maturity
or any accelerated maturity of the Note) in kind, at the option of the Company,
on each May 25th and November 25th with the first payment to be made on May 25,
1999. In the event that the Company elects not to make any semi-annual interest
payment in cash at the time it is due, the principal amount of this Convertible
Note will be increased by the amount of such payment, and interest will accrue
from the due date onwards on the increased principal amount of the Note (the
principal amount of the Convertible Note in effect from time to time plus all
accrued and unpaid interest thereon is hereinafter referred to as the
"Convertible Note Amount"). If the Company shall elect to pay any semi-annual
interest payment to become due hereon in kind rather than in cash, it shall
give written notice thereof to Holder not more than 10 nor less than five New
York City business days in advance of the due date of such interest payment,
which notice shall set forth the revised principal amount of the Convertible
Note. Other than the payment of interest in kind, principal and interest are
payable in lawful money of the United States. All payments received by Holder
under this Note shall be credited first to any charges or other expenses for
which
<PAGE>
Holder is entitled to payment hereunder, next to accrued but unpaid interest,
and third to unpaid principal. The Company shall not have the right to prepay
any portion of the outstanding principal of this Convertible Note.
2. Event of Default/Remedies.
(a) Any of the following events shall constitute an Event of Default:
(i) (A) any failure to pay when due (whether at stated maturity, by
reason of acceleration of the maturity hereof or otherwise) any principal
hereof or (subject to the Company's right to pay interest hereon in kind prior
to the original stated maturity date, or any accelerated maturity date, of this
Note) any interest hereon, or (B) any breach by the Company of any of its other
obligations or covenants under this Note, provided that Borrower shall have 48
hours from the date of receipt of notice to cure a failure to pay money due
hereunder and ten (10) days from the date of receipt of any notice of its
failure to perform any of its other obligations or covenants under this Note
not involving the payment of money to Holder within which to cure said failure
(in which event it shall not be an Event of Default, provided further that if
such breach is not capable of a cure, an Event of Default will be deemed to
have occurred immediately without the necessity of notice to the Company; or
(ii) the Company (A) becomes insolvent or admits in writing its
inability to pay its debts as they mature, (B) makes any assignment for the
benefit of creditors, or (C) applies for or consents to the appointment of a
receiver or trustee for the Company or for a substantial part of the Company's
property or business, or a receiver or trustee otherwise is appointed and is
not discharged within sixty (60) days after such appointment (for purposes of
this subsection, the Company shall be deemed "insolvent" if, as of the
Company's most recent balance sheet, the sum of its debts exceed the sum of its
assets, at a fair valuation, or it is unable to pay its debts as they come
due); or
(iii) any bankruptcy, insolvency, reorganization or liquidation
proceeding or other proceeding for relief under any bankruptcy law or any law
for the relief of debtors is instituted by or against the Company, and if
against the Company, such proceeding is not vacated within sixty (60) days; or
(iv) any money judgment, lien, writ or warrant of attachment, or
similar process is entered or filed against the Company or any of the assets of
the Company and remains unvacated, unbonded, unstayed, undismissed or
undischarged for a period of thirty (30) days or in any event later than five
(5) days before the date of any proposed sale thereunder, provided that a lien
(singly or, if more than one, cumulatively) of less than $250,000 arising in
the normal course of the Company's business, even if it remains unbonded,
unstayed or undismissed for thirty (30) days, shall not be deemed an Event of
Default if the Company has been advised by counsel and thus believes in good
faith that it has a valid defense to the claim giving rise to such lien and
promptly so advises Holder in writing and timely contests such claim; or
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(v) the Company (A) defaults on or breaches in any material respect
any contract with or obligation when due to a third party which default or
breach could reasonably be expected, singly or in the aggregate, to have a
material adverse affect on the Company's business or finances or (B) defaults
in the performance of any material obligation to a third party or Holder
incurred for money borrowed, including without limitation, the Company's
obligations to Holder under that certain Secured Promissory Note, as amended by
that certain amendment of even date hereof (the "Term Note"), in the principal
amount of $1,000,000; or
(vi) the Common Stock is delisted from the NASDAQ National Market
System ("NASDAQ"), unless such delisting occurs in connection with the Common
Stock being traded on either the American Stock Exchange or the New York Stock
Exchange; or
(vii) any representation made in the Note Purchase Agreement, of
even date, by and between Holder and the Company, proves materially false, or
if of a continuing nature, becomes materially false (unless made as of a
specified date).
b. Remedies. Upon the occurrence and during the continuance of an
Event of Default described in subsections 2(a)(ii) or 2(a)(iii) above, all
indebtedness under this Note and the Term Note shall automatically be
immediately due and payable. In addition, Holder, at its option, and without
notice to the Company (other than such notice as is required by law), may take
one or more of the actions described below. Upon the occurrence and during the
continuance of any other Event of Default, Holder at its option and, unless
otherwise specified below, upon no less than one business day's written notice
to the Company (or such other notice as is required by law), may do any one or
more of the following:
(i) declare all indebtedness under this Convertible Note and the
Term Note immediately due and payable and credit any sums received thereafter
to such indebtedness in whatever priority it shall elect; provided, however,
that such application of sums so received shall not serve to waive or cure any
default existing under this Note nor to invalidate any notice of default or any
act done pursuant to such notice and shall not prejudice any rights of Holder;
and
(ii) exercise any or all rights provided or permitted by law or
granted pursuant to this Convertible Note, the Term Note or that certain
Security Agreement, dated July 24, 1998, by and between the Company and TIG
(the "Security Agreement"), in such order and in such manner as Holder may, in
its sole judgment, determine, including without limitation its right to convert
this Note to Common Stock pursuant to Section 5 hereof; provided that, upon
conversion in accordance with the terms hereof, Holder shall not have or
exercise any other rights or remedies hereunder, other than with respect to
claims relating to the calculation or payment of interest or costs and expenses
of collection pursuant to Section 11 hereof, that have arisen up to the time of
or in connection with conversion.
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3. Default Rate. Any amounts not paid when due shall thereafter bear interest
at a rate per annum equal to the 7.5% interest rate set forth above, plus five
percent (5%). If such default rate would but for this sentence, exceed the
maximum lawful rate, the effective interest rate under this Note shall be the
maximum lawful rate, and any amount received by Holder in excess of such rate
shall be applied to principal and then to fees and expenses, or, if no such
amounts are owing, returned to the Company.
4. Waiver. Upon an Event of Default, the Company hereby waives any right of
offset it may now or hereafter have against Holder, and the Company hereby also
waives diligence, presentment, protest and demand, notice of protest, dishonor
and nonpayment of this Note and expressly agrees that, without in any way
affecting the liability of the Company hereunder, Holder may in its sole
discretion extend any maturity date or the time for payment of any installment
due hereunder, accept security, release any party liable hereunder and release
any security hereafter securing this Note. The Company further waives, to the
full extent permitted by law, the right to plead any and all statutes of
limitations as a defense to any demand on this Note, or on any deed of trust,
security agreement, lease assignment, guaranty or other agreement hereafter
securing this Note.
5. Conversion Rights of Holder. The Holder shall have the following right to
convert the Convertible Note into shares of Common Stock:
(a) Optional Conversions. Subject to and in compliance with the
provisions of this Section 5, during or at the conclusion of the Term, the
Convertible Note may, at the option of the Holder, be converted at any time
into fully-paid and nonassessable shares of Common Stock. The number of shares
of Common Stock to which the Holder shall be entitled to at any time upon
conversion of the Note (the "Issuable Shares") shall be based on the Applicable
Conversion Rate (as defined in Section 5(b)) then in effect and shall be
subject to the Conversion Cap (defined in Section 5(d) below). The Holder's
right to convert the Note shall apply with respect to the entire Convertible
Note Amount (but not less than the entire Convertible Note Amount).
(b) Applicable Conversion Rate. The conversion rate in effect at any
time for the conversion of this Note into Common Stock (the "Applicable
Conversion Rate") shall be the quotient obtained by dividing the Convertible
Note Amount by the Conversion Price (as defined in Section 5(c) below) pursuant
to the procedure described in Section 5(d) below.
(c) Conversion Price. The initial Conversion Price for the Convertible
Note shall be $1.40 (the "Initial Conversion Price"), and thereafter shall be
subject to adjustment pursuant to Sections 5(g), 5(h) and 5(l) hereof. The
Conversion Price shall be equal to the Initial Conversion Price until the first
Reset Date (as defined in subsection 5(d)), and shall then be reset from time
to time as described in Section 5(d) hereof, and subject to adjustment from
time to time in accordance with this Section 5. All references to the Initial
Conversion Price or the Conversion Price herein shall mean the Initial
Conversion Price or the Conversion Price as most recently reset or adjusted.
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(d) Reset Conversion Price. The Applicable Conversion Rate shall be
subject to adjustment on the 180th day following the Original Issue Date and
every 90 days thereafter (each such day being a "Reset Date"), as set forth in
this subsection 5(d). The Conversion Price to be used in determining the
Applicable Conversion Rate, commencing with the first Reset Date and for each
subsequent Reset Date, shall be determined as follows: (i) if the average
closing price of the Common Stock quoted on NASDAQ (or such other exchange or
system on which the Common Stock is traded) on the 20 trading days immediately
preceding the Reset Date (the "Reset Conversion Price") is less than the
Initial Conversion Price, the Reset Conversion Price shall be used to determine
the Applicable Conversion Rate or (ii) if the Reset Conversion Price equals or
exceeds the Initial Conversion Price, then the Initial Conversion Price shall
be used to determine the Applicable Conversion Rate. Notwithstanding anything
herein to the contrary: (i) in the event that Holder exercises its conversion
right after a Common Stock split or dividend described in Section 5(g) or 5(h)
hereof and prior to the Reset Date next following such split or dividend, the
Conversion Price for such conversion shall be the Reset Conversion Price in
effect on the Reset Date that immediately preceded such conversion (or the
Initial Conversion Price, if no Reset Date has yet occurred), adjusted
according to the provisions of Section 5(g) or 5(h) hereof and (ii) the number
of shares of Common Stock issued upon the conversion of the Convertible Note
shall in no event exceed 19.9% of the Company's outstanding shares on the
Original Issue Date (1,791,000 shares), except to the extent that such figure
is adjusted pursuant to Section 5(g) or 5(h) hereof (the "Conversion Cap").
(e) Conversion Deficit. If as of the Conversion Notification Date (as
defined in Section 5(f) hereof), the product of the Issuable Shares times the
Conversion Price, is less than the Convertible Note Amount, the difference
shall be payable within five business days of such notification by the Company
to Holder in the form of cash or a term loan (at the election of the Company),
secured by Company assets having a fair market value, net of any encumbrances
on such assets, equal to at least one hundred and fifty percent (150%) of the
principal amount of such term loan, with a maturity not in excess of one year
and bearing an interest rate equal to the lesser of 12.5% or the maximum rate
permitted by law.
(f) Mechanics of Conversion. If Holder desires to convert the Note
into shares of Common Stock pursuant to this Section 5, it shall surrender the
original Note at the office of the Company and shall give written notice to the
Company at such office that Holder elects to convert the same. Such notice
shall state the name in which said holder wishes the certificate or
certificates for shares of Common Stock to be issued, provided that the only
parties that may be named in such certificate are TIG or any
successor-in-interest of TIG created through a change in the legal form of TIG,
its state of formation or incorporation or similar modification not affecting
the beneficial ownership of TIG. Thereupon, the Company shall within 15 days
issue and deliver at such office to Holder a certificate or certificates for
the number of shares of Common Stock to which it is entitled. Such conversion
shall be deemed to have been made at the close of business on the date written
notice of Holder's desire to convert is received by the Company (the
"Conversion Notification Date"). The party named in such certificate shall be
treated for all purposes as the record holder of such shares of
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Common Stock from and after the Conversion Notification Date.
(g) Adjustment for Stock Splits and Combinations. If the Company shall
at any time or from time to time after the Original Issue Date effect a
subdivision of the outstanding Common Stock, the Conversion Cap in effect
immediately before that subdivision shall be proportionately increased and the
Initial Conversion Price and the then existing Reset Conversion Price (if a
Reset Date has occurred) proportionately decreased. If the Company shall at any
time or from time to time after the Original Issue Date combine the outstanding
shares of Common Stock into a smaller number of shares, the Conversion Cap in
effect immediately before the combination shall be proportionately decreased
and the then existing Initial Conversion Price and the then existing Reset
Conversion Price (if a Reset Date has occurred) proportionately increased. Any
adjustment under this Section 5(g) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(h) Adjustment for Common Stock Dividends and Distributions. If the
Company at any time or from time to time after the Original Issue Date makes a
dividend or other distribution payable in additional shares of Common Stock, in
each such event: (A) the then existing Conversion Cap shall be increased as of
the time of such issuance by multiplying the Conversion Cap then in effect by a
fraction (the "Dividend Fraction") (1) the numerator of which is the total
number of shares of Common Stock issued and outstanding immediately prior to
the time of such issuance plus the number of shares of Common Stock issuable in
payment of such dividend or distribution and (2) the denominator of which is
the total number of shares of Common Stock issued and outstanding immediately
prior to the time of such issuance and (B) the then existing Initial Conversion
Price and the then existing Reset Conversion Price (if a Reset Date has
occurred) shall be decreased as of the time of such issuance by multiplying the
Initial Conversion Price by the reciprocal of the Dividend Fraction.
(i) Adjustments for Other Dividends and Distributions. If the Company
at any time or from time to time after the Original Issue Date makes, or fixes
a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the Company
other than shares of Common Stock, in each such event provision shall be made
so that the Holder of the Convertible Note shall receive upon conversion
thereof, in addition to the number of shares of Common Stock receivable
thereupon, the amount of other securities of the Company which it would have
received had the Convertible Note been converted into Common Stock on the date
of such event and had Holder thereafter, during the period from the date of
such event to and including the conversion date, retained such securities
receivable by it as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 5 with respect to
the rights of the Holder of the Convertible Note or with respect to such other
securities by their terms.
(j) Adjustment for Reclassification, Exchange and Substitution.
Subject to the Conversion Cap, if at any time or from time to time after the
Original Issue Date, the Common Stock is changed into the same or a different
number of shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise (other than a
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<PAGE>
subdivision or combination of shares or stock dividend or a reorganization,
merger, consolidation or sale of assets provided for elsewhere in this Section
5), in any such event the Holder of the Convertible Note shall have the right
thereafter to convert such Note into the kind and amount of stock and other
securities and property receivable upon such recapitalization, reclassification
or other change by holders of the Common Stock into which the Note could have
been converted immediately prior to such recapitalization, reclassification or
change, all subject to further adjustment as provided herein or with respect to
such other securities or property by the terms thereof.
(k) Reorganizations, Mergers, Consolidations or Sales of Assets. If at
any time or from time to time after the Original Issue Date, there is a capital
reorganization of the Common Stock (other than a recapitalization, subdivision,
combination, reclassification, exchange or substitution of shares provided for
elsewhere in this Section 5), as a part of such capital reorganization,
provision shall be made so that the Holder of the Convertible Note shall
thereafter be entitled to receive upon conversion of such Note the number of
shares of stock or other securities or property of the Company to which a
holder of the number of shares of Common Stock deliverable upon conversion
would have been entitled on such capital reorganization, subject to adjustment
in respect of such stock or securities by the terms thereof. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 5 with respect to the rights of the Holder of the Convertible Note
after the capital reorganization to the end that the provisions of this Section
5 (including adjustment of the Conversion Price then in effect and the number
of Issuable Shares) shall be applicable after that event and be as nearly
equivalent as practicable.
(l) Sale of Shares Below Fair Market Value.
(1) If at any time or from time to time after the Original
Issue Date, the Company issues or sells, or is deemed by the express
provisions of this subsection (l) to have issued or sold, Additional
Shares of Common Stock (as hereinafter defined), other than as a
dividend or other distribution on any class of stock as provided in
Section 5(h) above or a subdivision or combination of shares of Common
Stock as provided in Section 5(g) above, for an Effective Price (as
defined in subsection 5(l)(4) below) less than the "fair market value"
(defined as the greater of book or market value in accordance with the
rules and regulations of the NASDAQ National Market System) of such
Additional Shares of Common Stock, then and in each such case the then
existing Initial Conversion Price and Reset Conversion Price shall be
reduced, as of the opening of business on the date of such issue or
sale, and for all subsequent calculations under this Note to a price
determined by multiplying the Initial Conversion Price and the Reset
Conversion Price by a fraction (i) the numerator of which shall be (A)
the number of shares of Common Stock deemed outstanding (as defined in
the following sentence) immediately prior to such issue or sale, plus
(B) the number of shares of Common Stock which the "aggregate
consideration received" (computed in accordance with subsection
5(l)(2)) by the Company for the total number of Additional Shares of
Common Stock so issued would purchase at such Conversion Price, and
(ii) the denominator of which shall be the number of
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<PAGE>
shares of Common Stock deemed outstanding (as defined in the
following sentence) immediately prior to such issue or sale plus the
total Additional Shares of Common Stock so issued. For the purposes
of the preceding sentence, all outstanding shares of Common Stock and
all shares of Common Stock issuable upon conversion of the
Convertible Note that are outstanding as of the close of business on
the day next preceding the date of issue or sale of Additional Shares
of Common Stock shall be deemed outstanding.
(2) For the purpose of making any adjustment required under this
Section 5(l), the "aggregate consideration received" by the Company
for any issue or sale of Additional Shares of Common Stock shall (A)
to the extent it consists of cash, be computed at the net amount of
cash received by the Company after deduction of any underwriting or
similar commissions, compensation or concessions paid or allowed by
the Company in connection with such issue or sale but without
deduction of any expenses payable by the Company, (B) to the extent it
consists of property other than cash, be computed at the fair value of
that property as determined in good faith by the Board of Directors,
and (C) if Additional Shares of Common Stock, Convertible Securities
(as herein defined) or rights or options to purchase either Additional
Shares of Common Stock or Convertible Securities are issued or sold
together with other stock or securities or other assets of the Company
for a consideration which covers both, be computed as the portion of
the consideration so received that may be reasonably determined in
good faith by the Board of Directors to be allocable to such
Additional Shares of Common Stock, Convertible Securities or rights or
options.
(3) For the purpose of the adjustment required under this Section
5(l), if the Company issues or sells any rights or options for the
purchase of, or stock or other securities convertible into, Additional
Shares of Common Stock (such convertible stock or securities being
herein referred to as "Convertible Securities") and if the Effective
Price of such Additional Shares of Common Stock is less than the fair
market value of such Additional Shares of Common Stock, in each case
the Company shall be deemed to have issued at the time of the issuance
of such rights or options or Convertible Securities the maximum number
of Additional Shares of Common Stock issuable upon exercise or
conversion thereof and to have received as consideration for the
issuance of such shares an amount equal to the total amount of the
consideration, if any, received by the Company for the issuance of
such rights or options or Convertible Securities, plus, in the case of
such rights or options, the minimum amounts of consideration, if any,
payable to the Company upon the exercise of such rights or options,
plus, in the case of Convertible Securities, the minimum amounts of
consideration, if any, payable to the Company (other than by
cancellation of liabilities or obligations evidenced by such
Convertible Securities) upon the conversion thereof; provided that if,
in the case of Convertible Securities, the minimum amounts of such
consideration cannot be ascertained but are a function of antidilution
or similar protective clauses, the Company shall be deemed to have
received the minimum amounts of consideration without reference to
such clauses; provided further that if the minimum amount of
consideration payable to
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the Company upon the exercise or conversion of rights, options or
Convertible Securities is reduced over time or on the occurrence or
nonoccurrence of specified events other than by reason of
antidilution adjustments, the Effective Price shall be recalculated
using the figure to which such minimum amount of consideration is
reduced; provided further that if the minimum amount of consideration
payable to the Company upon the exercise or conversion of such
rights, options or Convertible Securities is subsequently increased,
the Effective Price shall be again recalculated using the increased
minimum amount of consideration payable to the Company upon the
exercise or conversion of such rights, options or Convertible
Securities. No further adjustment of the Conversion Price, as
adjusted upon the issuance of such rights, options or Convertible
Securities, shall be made as a result of the actual issuance of
Additional Shares of Common Stock on the exercise of any such rights
or options or the conversion of any such Convertible Securities. If
any such rights or options or the conversion privilege represented by
any such Convertible Securities shall expire without having been
exercised, the Conversion Price as adjusted upon the issuance of such
rights, options or Convertible Securities shall be readjusted to the
Conversion Price which would have been in effect had an adjustment
been made on the basis that the only Additional Shares of Common
Stock so issued were the Additional Shares of Common Stock, if any,
actually issued or sold on the exercise of such rights or options or
rights of conversion of such Convertible Securities, and such
Additional Shares of Common Stock, if any, were issued or sold for
the consideration actually received by the Company upon such
exercise, plus the consideration, if any, actually received by the
Company for the granting of all such rights or options, whether or
not exercised, plus the consideration received for issuing or selling
the Convertible Securities actually converted, plus the
consideration, if any, actually received by the Company (other than
by cancellation of liabilities or obligations evidenced by such
Convertible Securities) on the conversion of such Convertible
Securities, provided that such readjustment shall not apply to shares
that have previously been converted.
(4) "Additional Shares of Common Stock" for purposes hereof shall mean
all shares of Common Stock issued by the Company, whether or not
subsequently reacquired or retired by the Company, other than (A)
shares of Common Stack issued upon conversion of the Convertible Note
and (B) up to three million five hundred thousand (3,500,000) shares
of Common Stock, and/or options, warrants or other Common Stock
purchase rights, including stock appreciation rights, issued after the
Original Issue Date under the Company's 1994 Stock Option Plan,
including the proposed amendment thereof (the "1994 Stock Option Plan
Shares"), to employees, officers or directors of, or consultants or
advisors to the Company or any subsidiary, net of repurchases and
option expirations (provided that shares issued pursuant to the
exercise of options or warrants issued after the Original Issue Date
shall not be included in such number if such shares were included at
the time the option or warrant was issued). Notwithstanding anything
above to the contrary, any 1994 Stock Option Plan Shares (i) sold to
eligible participants in such Plan after the Original Issue Date at
less than their fair market value or (ii) purchased after the Original
Issue Date
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upon the exercise of option awards that provide for an exercise price
less than the fair market value of the Common Stock on the date of
award, shall be deemed Additional Shares of Common Stock for purposes
of this Section 5(l). The "Effective Price" of Additional Shares of
Common Stock shall mean the quotient determined by dividing the total
number of Additional Shares of Common Stock issued or sold, or deemed
to have been issued or sold by the Company under this Section 5(l),
into the aggregate consideration received, or deemed to have been
received by the Company for such issue under this Section 5(l), for
such Additional Shares of Common Stock.
(m) Certificate of Adjustment. In each case of an adjustment or
readjustment of the Conversion Price, the Conversion Cap or the Applicable
Conversion Rate, the Company, at its expense, shall compute such adjustment or
readjustment in accordance with the provisions hereof and prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate, by
first class mail, postage prepaid, to the Holder at the Holder's address as
shown in the Company's books. The certificate shall set forth such adjustment
or readjustment, showing in reasonable detail the facts upon which such
adjustment or readjustment is based and the computation thereof.
(n) Notices of Record Date. Upon (i) any taking by the Company of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution, or (ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
merger or consolidation of the Company with or into any other corporation, or
any transfer of all or substantially all the assets of the Company to any other
person, or any voluntary or involuntary dissolution, liquidation or winding up
of the Company, the Company shall mail to the Holder of the Convertible Note at
least five (5) business days prior to the record date specified therein a
notice specifying (1) the date on which any such record is to be taken for the
purpose of such dividend or distribution and a description of such dividend or
distribution, (2) the date on which any such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or winding up is
expected to become effective, and (3) the date, if any, that is to be fixed as
to when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding up.
6. Conversion Rights of the Company
(a) Mandatory Conversion. The Company may upon notice of such action
to Holder require Holder to convert the Note into shares of Common Stock
("Mandatory Conversion") at the then Applicable Conversion Rate if, at anytime
after the 181st day following the Original Issue Date, the closing price of the
Common Stock on NASDAQ or such other exchange or system on which the Common
Stock is traded, for twenty (20) consecutive trading days, is $3.00 or more per
share, with such price to be adjusted in the event of Common Stock splits,
combinations dividends or distributions in the same manner as provided in
Sections 5(g) and 5(h) for the Conversion Cap.
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(b) Partial Conversion/Redemption. At the end of the Term, the Company
shall pay the Convertible Note, at the Convertible Note Amount, in cash;
provided, however, that at the option of the Company, in lieu of paying to
Holder the entire Convertible Note Amount, the Company shall have the right,
upon written notice of such action to Holder within two business days prior to
the end of the Term, to force the conversion of 25% of the outstanding balance
of the Convertible Note Amount into Common Stock at a price equal to the lower
of $1.40 or the Conversion Price, subject to the Conversion Cap and the
procedure described in this Section 6(b) (the "Mandatory Partial Conversion
Right"). The number of shares of Common Stock to be issued in such conversion
will be determined by the following method: one-quarter of the Convertible Note
Amount (at maturity), will be divided by the lower of $1.40 or the Conversion
Price in effect on such date, and multiplied by 1.2. By way of example,
assuming that at the end of the Term one-quarter of the Convertible Note Amount
was equal to $750,000, and the Conversion Price was $1.00 per share, the
Company, upon exercising its Mandatory Partial Conversion Right, would issue
900,000 shares (1.2 x 750,000).
7. Other Conversion Provisions.
(a) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of the Convertible Note. If the conversion would result
in the issuance of any fractional share, the Corporation shall, in lieu of
issuing any fractional share, pay cash equal to the product of such fraction
multiplied by the Common Stock's fair market value (determined as provided in
subsection 5(l)(1)) on the date of conversion.
(b) Reservation of Stock Issuable Upon Conversion. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the Convertible Note, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of the Convertible Note. If
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of the Convertible Note, the Company
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.
(c) Notices. Any notice required by the provisions of this Convertible
Note shall be in writing and shall be deemed effectively given: (i) upon
personal delivery to the party to be notified, (ii) when sent by confirmed
telex or facsimile, (iii) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (iv) two (2) days
after deposit with a nationally recognized overnight courier, with written
verification of receipt. All notices shall be addressed to Holder at the
address set forth herein or at such subsequent address as Holder shall provide
to the Company in writing.
(d) Payment of Taxes. The Company will pay all taxes (other than taxes
based upon income) and other governmental charges that may be imposed with
respect
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to the issue or delivery of shares of Common Stock upon conversion of the
Convertible Note.
(e) No Dilution or Impairment. The Company shall not amend its
Articles of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but shall at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the Holder against dilution or other
impairment.
8. Covenants. The approval of the Holder is required before the Company may
take those actions set forth in Section 5 (the "Covenants") of that certain
Note Purchase Agreement, dated the date hereof, by and between the Holder and
the Company . Such Covenants are incorporated herein by reference as if set
forth in full below and shall remain in effect so long as this Note remains
outstanding. No reference in Section 5 hereof to actions that the Company may
take shall be deemed in any way to prejudice or limit Holder's rights to
enforce the Covenants. The Company acknowledges that the Covenants are a
material inducement to Holder's willingness to purchase the Convertible Note,
and that Holder would not be willing to purchase the Note in the absence of the
Covenants. Accordingly, except to the extent that the Covenants expressly limit
Holder's discretion, the Company acknowledges that Holder shall be free to
enforce the Covenants in its absolute discretion or to condition its consent as
it sees fit.
9. Legal Fees. The Company agrees to pay all Holder's reasonable costs and
expenses, including without limitation reasonable attorneys' fees actually
incurred by Holder in connection with the enforcement of any obligation of the
Company under this Note.
10. Governing Law. This Note shall be governed by and construed in accordance
with the laws of the State of New York.
11. Severability. Should any provision or portion of this Note be held
unenforceable or invalid for any reason, the remaining provisions and portions
of this Note shall be unaffected by such holding.
DUALSTAR TECHNOLOGIES CORPORATION
By: /s/ Elven M. Tangel
----------------------------
Its: Chairman
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NOTE PURCHASE AGREEMENT
NOTE PURCHASE AGREEMENT ("Agreement") dated November 25, 1998 between
DUALSTAR TECHNOLOGIES CORPORATION, a Delaware corporation having its principal
office at 11-30 47th Avenue, Long Island City, New York 11101 (the
"Corporation"); and TECHNOLOGY INVESTORS GROUP, LLC, a Delaware limited
liability company having its address at 25 Coligni Avenue, New Rochelle, New
York 10801 ("TIG").
1. Sale and Purchase of Convertible Note. At the Closing (as
hereinafter set forth), the Corporation shall sell and deliver to TIG, and TIG
shall purchase, the Corporation's Subordinated Convertible Note (the "Note") in
the principal amount of $2,500,000 at a purchase price of $2,500,000 (the
"Purchase Price"). The Note shall be in the form attached hereto as Exhibit A.
2. Closing. The Closing of the sale and purchase of the Note shall
take place at 10:00 a.m. on November 25, 1998 at the offices of Gould & Wilkie,
One Chase Manhattan Plaza, New York, New York 10005. At the Closing, (a) the
Corporation shall deliver to TIG the Note; (b) TIG shall deliver to the
Corporation the Purchase Price by bank wire in immediately available funds; (c)
the Corporation and TIG shall deliver to each other an executed copy of a
stockholders agreement in the form attached hereto as Exhibit B (the
"Stockholders Agreement"); (d) the Corporation and TIG shall deliver to each
other an executed copy of a registration rights agreement in the form attached
hereto as Exhibit C (the "Registration Rights Agreement"); and (e) the
Corporation and certain stockholders of the Corporation, and TIG and its
members shall deliver to each other an executed copy of a letter agreement
regarding restrictions on the sale or purchase of the stock of the Corporation
in the form attached hereto as Exhibit D. All deliveries and payments at the
Closing shall be made simultaneously.
3. Representations, Warranties and Agreements of TIG. TIG represents,
warrants, covenants, and agrees as follows:
3.1 TIG is a limited liability company duly organized, validly
existing, and in good standing under the laws of the State of Delaware. This
Agreement has been duly authorized, executed and delivered by TIG and is the
legal, valid and binding obligation of TIG enforceable in accordance with its
terms, except as the enforcement thereof may be limited by bankruptcy and other
laws of general application relating to creditor's rights or general principles
of equity.
3.2 TIG is an "Accredited Investor" within the meaning of Rule 501(a),
promulgated under the Securities Act of 1933, as amended (the "Securities
Act"), and, together with its financial advisors, if any, has such knowledge
and experience in financial and business matters as to be capable of evaluating
the merits and risks involved in the investment in the Note, and the shares of
Common Stock of the Corporation issuable upon conversion thereof (the
"Shares").
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3.3 TIG has received and reviewed, and is familiar with, the terms and
conditions of this Agreement, and TIG confirms that all documents, records and
books pertaining to the investment in the Corporation and requested by it,
including but not limited to the Corporation's Quarterly Report on Form 10-Q
for the three months ended September 30, 1998; the Annual Report on Form 10-K,
for the fiscal year ended June 30, 1998; the Quarterly Report on Form 10-Q for
the nine months ended March 31, 1998; the Quarterly Report on Form 10-Q for the
six months ended December 31, 1997; the Quarterly Report on Form 10-Q for the
three months ended September 30, 1997; and the Notice of Meeting and Proxy
Statement relating to the 1998 Annual Meeting of Stockholders and all similar
filings (including any and all amendments thereto) made by the Corporation
since January 1, 1996 (the "Filings"), have been made available or delivered to
TIG.
3.4 TIG has had an opportunity to ask of the Corporation, or a person
or persons acting on its behalf, any and all relevant questions of and received
answers from the Corporation which TIG considers to be responsive to such
questions, and has received copies of all documents requested by TIG, in
connection with any aspect of the Corporation and the terms and conditions of
this investment. TIG acknowledges that it has made its own investigation
concerning the business and affairs of the Corporation.
3.5 The Note purchased by TIG, including the Shares, are being
acquired solely for TIG's own account for investment and are not being
purchased with a view to or for the resale, distribution, transfer,
fractionalization or other disposition thereof, and TIG has no present plans to
enter into any such contract, undertaking, agreement or arrangement with
respect thereto.
3.6 TIG acknowledges and is aware of the following:
(i) the Note is non-negotiable and non-transferable, and there will be
substantial restrictions on the transferability of any Shares.
(ii) the Note will be subordinated to the rights of any bank,
commercial lender, or other financial institution of the Corporation lending
money to the Corporation as set forth in the Note.
(iii) no representation, guarantee or warranty has been made to TIG by
the Corporation, its officers, directors, agents, or employees or any other
person, expressly or by implication, as to the profitability of the Corporation
or with respect to the Note or the Shares, except for those representations and
warranties set forth herein and in that certain Security Agreement between TIG
and the Corporation, dated July 24, 1998.
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3.7 TIG further acknowledges that:
(i) it has been advised that the Note being purchased hereunder and
any Shares subsequently issued upon conversion of the Note, have not been and
will not be registered under the Securities Act in reliance upon an exemption
from registration provided in Section 4(2) of the Securities Act and Regulation
D thereunder.
(ii) the Note and the Shares may not be sold, pledged, assigned or
otherwise transferred by TIG in absence of registration under the Securities
Act or exemption from registration. In particular, TIG is aware that the Note
and the Shares will be "restricted securities", as such term is defined in Rule
144 promulgated under the Securities Act ("Rule 144"), and that they may not be
sold pursuant to Rule 144 until the conditions thereof are met.
(iii) the following legend shall be placed on the Note and any
certificate(s) evidencing the Shares:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (the "ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST
THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT
THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, OR (2) THE CORPORATION RECEIVES AN OPINION
OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL
AND OPINION ARE REASONABLY SATISFACTORY TO THE CORPORATION,
THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED
OR TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE
STATE SECURITIES LAWS.
(iv) the following legend shall be placed on any certificate(s)
evidencing the Shares:
THE SALE, PLEDGE OR TRANSFER OF THE SHARES REPRESENTED BY
THIS CERTIFICATE ARE SUBJECT TO A STOCKHOLDERS AGREEMENT
DATED NOVEMBER __, 1998 AMONG THE CORPORATION AND CERTAIN
STOCKHOLDERS OF THE CORPORATION.
(v) the Corporation may place a stop transfer order on its transfer
books against the Shares.
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3.8 TIG is making the foregoing representations and warranties with
the intent that they may be relied upon by the Corporation in determining the
suitability of the sale of the Note to TIG for purposes of federal and state
securities laws.
4. Representations, Warranties and Agreements of the Corporation. The
Corporation represents, warrants, covenants, and agrees as follows:
4.1. Existence and Corporate Authority. The Corporation is a
corporation duly organized and validly existing under the laws of the State of
Delaware. The Corporation has the corporate power and authority to make, sign,
deliver and perform its obligations hereunder, and this Agreement has been
authorized and approved by all required action of the Corporation. This
Agreement has been duly executed and delivered by the Corporation and is a
legal, valid and binding obligation of the Corporation, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy and other laws of general application relating to creditors' rights
or general principles of equity.
4.2. Certificate of Incorporation; By-Laws. Attached hereto as
Exhibits E-1 and E-2, respectively, are true and correct copies of the
Certificate of Incorporation and By-Laws of the Corporation as amended to date.
4.3. Capital Stock. The Corporation has an authorized capitalization
consisting of 25,000,000 shares of common stock, $.01 par value, of which
9,000,000 shares are issued and outstanding. All such outstanding shares have
been duly authorized and validly issued and are fully paid and non-assessable.
The Shares issued upon conversion of the Note will be duly authorized, validly
issued, fully paid and non-assessable shares. No options, warrants or other
rights to purchase common stock of the Corporation granted to employees,
officers or directors, or consultants or advisors to the Corporation or any
subsidiary thereof, pursuant to the 1994 Stock Option Plan, have an exercise
price that is less than fair market value of the Corporation's common stock on
the date of grant, and no shares of such common stock of the Corporation sold
to eligible participants under the 1994 Plan have been sold for less than fair
market value.
4.4. Governmental Authorizations. To the best of the Corporation's
knowledge, after reasonable investigation, no authorization, approval, or other
action by, and no notice to or filing with, any governmental or regulatory body
(except the Securities and Exchange Commission and the Nasdaq Stock Market) is
required for the execution, delivery or performance of this Agreement by the
Corporation.
4.5. No Conflicts or Defaults. To the best of the Corporation's
knowledge, after reasonable investigation, the execution by the Corporation of
this Agreement will not violate or create a default under any material
agreement to which it is a party.
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4.6. Compliance with Laws. To the best of the Corporation's knowledge,
after reasonable investigation, the execution, delivery and performance of this
Agreement by the Corporation do not materially violate any law or any order of
any court, governmental authority or arbitrator.
4.7. Securities Laws. The Filings do not, as of the date made, contain
any untrue statement of a material fact or omit to state a material fact,
pursuant to the requirements of such Filings under the Securities Act and the
Securities Exchange Act of 1934, as amended, necessary in order to make the
statement made, in light of the circumstances under which they were made, not
misleading. Except for certain demand registration rights granted at the time
of the initial public offering of the Corporation dated February 13, 1995, the
Corporation has granted no other demand registration rights.
4.8 Financial Information. The financial information contained in the
Filings are complete, accurate and correct in all material respects, at the
respective dates thereof.
5. Covenants of the Corporation. So long as the principal amount of
the Note remains outstanding, without the consent of TIG:
(i) The Corporation will not alter, amend or modify in any respect the
rights, preferences or privileges of the Note.
(ii) The Corporation will not incur any indebtedness for consideration
other than cash or incur in excess of an aggregate of $5,000,000 of additional
indebtedness outstanding at any time beyond indebtedness shown or reflected on
the Corporation's balance sheet at June 30, 1998 and the principal amount of
the Note. (For the purposes hereof, "indebtedness" shall not include accounts
payable to trade creditors created or assumed in the ordinary course of
business in connection with obtaining materials or services or amounts owed to
employees of the Corporation in the ordinary course of business.)
(iii) Except as set forth in the Corporation's Annual Report on Form
10-K for the fiscal year ended June 30, 1998 and the Notice of Meeting and
Proxy Statement relating to the 1998 Annual Meeting of Stockholders, the
Corporation is not currently engaged in and shall not enter into any
transaction with a related party, whether or not reportable pursuant to
Regulation S-K promulgated by the Securities and Exchange Commission; provided
that, TIG shall not unreasonably withhold or delay its consent to any such
transaction.
(iv) The Corporation shall not sell, transfer or otherwise dispose of
intellectual property of the Corporation for consideration received in excess
of $500,000, singly or in the aggregate; provided that, TIG shall not
unreasonably withhold or delay its consent to any such disposition. (For the
purposes hereof, "intellectual property" means rights in any patent, copyright,
trademark, trade dress and trade name, including any such rights related to
applications in the online, interactive or multimedia environments.)
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(v) The Corporation shall not sell, transfer or otherwise dispose of
any assets of the Corporation, other than in the ordinary course of business,
if such disposition, together with any and all other such dispositions after
the Closing, constitute more than $2,000,000 of the Corporation's assets (i) as
shown or reflected in the Corporation's most recent balance sheet, or (ii)
valued at fair market value at the time of disposition, whichever is greater.
(vi) The Corporation will not issue options to purchase stock of the
Corporation or restricted stock to directors, officers, or employees of the
Corporation in consideration of services rendered, except for grants or awards
pursuant to the 1994 Stock Option Plan as proposed to be amended at the 1998
Annual Meeting of Shareholders. The Corporation will provide a copy to TIG of
any proposed amendments to the 1994 Plan prior to disclosure of such amendments
to the Corporation's shareholders.
(vii) The Corporation will not make any distribution of stock or stock
rights of the Corporation to shareholders, if made at the election of any of
the shareholders of the Corporation and such distribution would result in
taxable income to TIG pursuant to Section 305 of the Internal Revenue Code, as
amended.
(viii) The Corporation will not redeem or repurchase any of the
outstanding Common Stock of the Corporation, except as provided in the Note and
the Stockholders Agreement.
(ix) The Corporation will not merge or consolidate with, or acquire
the stock or assets of, any other entity, or otherwise effect a reorganization
of the Corporation, in which (in any such transaction) the outstanding Common
Stock of the Corporation is issued; provided that, the foregoing shall not
apply to any merger, consolidation or reorganization among any of the
Corporation's subsidiaries or between the Corporation and any subsidiary,
unless such consent is required pursuant to another subparagraph of this
Section 5.
(x) The Corporation will not expand the size of the Board of Directors
to more than eight directors.
6. Covenants of the Parties.
6.1 Restrictions. TIG and the Corporation shall not, and will not
cause or induce any of their Affiliates to, directly or indirectly during the
twenty (20) trading days immediately preceding each Reset Date (as such term is
defined in the Note), sell, or enter an order to sell, assign, transfer,
pledge, encumber, or purchase or enter orders to buy for the Common Stock of
the Corporation. For purposes of this Agreement, an "Affiliate" of, or person
affiliated with a specified person is a person that (i) directly or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, the person specified; or (ii) is related by blood or
marriage, and any entity in which such person and/or other Affiliates own, in
the aggregate, ten percent (10%) or more of the voting power or equity interest
in such entity.
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6.2 Board Representation. Within 90 days after the Closing, the
Corporation shall cause to be held a special meeting of the Board of Directors
for the purpose of (i) increasing the total number of directors to eight (8)
directors, and (ii) filling the newly created directorship resulting from such
increase, pursuant to the By-Laws of the corporation. TIG shall have the right
to designate, and the Corporation will use its best efforts to cause the
election of, a person reasonably acceptable to the Board of Directors to fill
such newly created directorship, to hold office until the next annual meeting
of Stockholders and until his successor, if any, is elected and qualified.
6.3 Confidentiality. Except to the extent required by law, each party
to this Agreement will not disclose to any third party any material
confidential information concerning the other party. The obligations of the
parties hereunder shall not apply to any confidential information of the other
party which was in the public domain at the time it was disclosed, or to
confidential information which subsequently enters the public domain, other
than due to a breach of this Agreement by either party. This obligation will
survive termination of this Agreement.
7. Miscellaneous.
7.1. Amendment. This Agreement, the Exhibits and Schedule hereto may
not be amended except by an instrument in writing signed by or on behalf of
each of the parties hereto.
7.2. Waiver. Any agreement on the part of a party hereto to any
extension or waiver shall be valid only if set forth in an instrument in
writing signed by or on behalf of such party.
7.3. Governing Law. The interpretation and construction of this
Agreement, and all matters relating hereto, shall be governed by the laws of
the State of New York.
7.4. Captions. The Section captions used herein are for reference
purposes only, and shall not in any way affect the meaning or interpretation of
this Agreement.
7.5. Publicity. The parties hereto agree to use good faith efforts to
coordinate any disclosure relating to, connected with, or arising out of this
Agreement or the matters contained herein. Each party will provide a copy to or
inform the other party of any press release or the making of a public statement
prior to publication of any such press release or the making of any such public
statement.
7.6. Notices. Any notice required hereunder shall be in writing and
shall be sufficiently given if delivered or sent by reputable overnight courier
or facsimile transmission (in each case with evidence of receipt), addressed to
the Corporation at its principal office and to TIG at the address first set
forth above. Any party may change such address by like notice. If sent by
courier, such notice shall be deemed to have been given as of the next business
day after it was deposited with the courier service and if sent by facsimile
such notice shall be deemed to have been given when transmitted.
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7.7. Parties in Interest. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, successors and assigns.
7.8. Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
7.9. Entire Agreement. This Agreement, including the other documents
referred to herein which form a part hereof, contains the entire understanding
of the parties hereto with respect to the subject matter contained herein and
therein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter.
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IN WITNESS WHEREOF, each of the Corporation and TIG has
caused this Agreement to be executed by its officer thereunto duly authorized,
all as of the day and year first above written.
TECHNOLOGY INVESTORS
GROUP, LLC DUALSTAR TECHNOLOGIES CORPORATION
By: /s/ Brad Singer By: /s/ Elven M. Tangel
---------------------- ----------------------------
Name: Brad Singer Name: Elven M. Tangel
Title: Manager Title: Chairman
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EXHIBIT A
SUBORDINATED CONVERTIBLE NOTE
SEE ATTACHED.
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EXHIBIT B
STOCKHOLDERS AGREEMENT
SEE ATTACHED.
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EXHIBIT C
REGISTRATION RIGHTS AGREEMENT
SEE ATTACHED.
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EXHIBIT D
LETTER AGREEMENT
SEE ATTACHED.
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EXHIBIT E-1
CERTIFICATE OF INCORPORATION
SEE ATTACHED.
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EXHIBIT E-2
BY-LAWS OF THE CORPORATION
SEE ATTACHED.
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REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") dated November 25,
1998 among DUALSTAR TECHNOLOGIES CORPORATION, a Delaware corporation having its
principal office at 11-30 47th Avenue, Long Island City, New York 11101 (the
"Corporation"); the stockholders of the Corporation set forth on Schedule 1
hereto (the "Stockholders"); and TECHNOLOGY INVESTORS GROUP, LLC, a Delaware
limited liability company ("TIG").
WHEREAS, in connection with a Note Purchase Agreement dated the date
hereof (the "Note Purchase Agreement"), the Corporation has agreed to sell its
Subordinated Convertible Note to TIG (the "Note");
WHEREAS, the Corporation has agreed to provide certain registration
rights under the Securities Act of 1933, as amended (the "Act");
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants and agreements contained herein, the parties agree as follows:
1. Registration Rights.
1.1. Piggyback Registration Rights.
1.1.1. Right to Piggyback. If the Corporation proposes to
register any shares of its common stock (or securities convertible into or
exchangeable or exercisable for common stock) (the "Common Stock") under the
Act (a "Proposed Registration") and the registration form to be used may be
used for the registration of the Registrable Securities as defined in Section
1.5.6 below (a "Piggyback Registration"), the Corporation will give prompt
written notice to all holders of Registrable Securities of its intention to
effect such a registration and will, subject to Section 1.1.2 below, include in
such Piggyback Registration all Registrable Securities with respect to which
the Corporation has received written requests for inclusion therein within
fifteen (15) days after receipt of the Corporation's notice; provided that, the
maximum number of Registrable Securities that may be registered by TIG pursuant
to any such Piggyback Registration (the "TIG Maximum") shall not exceed the
percentage of TIG's total Registrable Securities equal to the percentage that
the total number of shares offered by the Corporation in the Proposed
Registration bears to the total number of issued and outstanding shares of the
Corporation. In the case of an underwritten offering, Registrable Securities
with respect to which such request for registration has been received will be
registered by the Corporation pursuant to this Section 1 on the same terms and
subject to the same conditions applicable to the stock to be sold by the
Corporation or by other persons selling under such Proposed Registration.
Holders of Registrable Securities will be entitled to include shares pursuant
to this Section 1.1.1 in (A) demand registrations of any shareholder of the
Corporation, or (B) registrations of the Corporation, other than a registration
statement on Form S-4 or S-8.
<PAGE>
1.1.2. Priority on Piggyback Registrations. If the managing
underwriter or underwriters advise the Corporation in writing that in its or
their opinion (with respect to which opinion, the Company shall act in good
faith), (i) the number of securities proposed to be sold in a Proposed
Registration exceeds the number which can be sold in such offering, the
Corporation will include in such registration the number of securities which,
in the opinion of such underwriter or underwriters, can be sold as follows: (A)
first, the shares of Common Stock the Corporation proposes to sell, (B) second,
the shares of Common Stock requested to be included in such registration
pursuant to a demand registration right, if any, (C) third, the Registrable
Securities requested to be included in such registration, pro rata among the
holders of Registrable Securities to be included therein, and (D) fourth, other
shares of Common Stock requested to be included in such registration, or (ii)
it is inadvisable to include any Registrable Securities in such a Proposed
Registration, then no Registrable Securities shall be included in any such
registration.
1.1.3 Registration on Request. If, pursuant to Section 1.1.2
above, the TIG Maximum is reduced by more than twenty-five percent (25%),
thereafter, TIG shall have the right to require the Corporation upon its
written request to effect the registration of any remaining Registrable
Securities owned by TIG ("Demand Registration"); provided that, (i) the
Corporation shall not be obligated to effect more than one Demand Registration;
(ii) the Corporation shall be entitled to postpone for a reasonable period (but
not exceeding 135 days) the filing of any registration statement otherwise
required to be filed pursuant to this Section 1.1.3 if the Corporation
determines, in its sole discretion, that such registration or offering pursuant
thereto could interfere with any financing, acquisition, corporate
reorganization, or other material transaction or event involving the
Corporation, or would require premature disclosure thereof; and (iii) the
Corporation shall not be required to file any such registration statement at
any time when the Corporation would be required to undergo an interim audit or
to prepare financial statements other than the regular quarterly or annual
statements in order to comply with the requirements of such registration
statement with respect to financial information.
1.1.4. Selection of Underwriters. If any Proposed
Registration is an underwritten offering, the Corporation will select a
managing underwriter or underwriters to administer the offering.
1.2. Registration Procedures. With respect to any Piggyback
Registration or Demand Registration, the Corporation will, subject to Sections
1.1.2 and 1.1.3, as expeditiously as practicable:
1.2.1. prepare and file with the Commission a Registration
Statement which includes the Registrable Securities and use its best efforts to
cause such Registration Statement to become effective;
1.2.2. prepare and file with the Commission such amendments
and post-effective amendments to the Registration Statement as may be necessary
to keep the Registration Statement effective for a period of not less than
three (3) months (or such shorter period which
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will terminate when all Registrable Securities covered by such Registration
Statement have been sold or withdrawn, but not prior to the expiration of the
forty-day period referred to in Section 4(3) of the Act and Rule 174
thereunder, if applicable); cause the Prospectus to be supplemented by any
required Prospectus supplement; and cause such supplement to be filed pursuant
to Rule 424 under the Act;
1.2.3. furnish to any person holding Registrable Securities
included in such Registration Statement and the underwriter or underwriters, if
any, without charge, at least one copy of the Registration Statement and any
post-effective amendment thereto, upon request, and such number of conformed
copies thereof and such number of copies of the Prospectus (including the
preliminary Prospectus) and any amendments or supplements thereto, and any
document incorporated by reference therein, as such person or underwriter may
reasonably request in order to facilitate the disposition of the Registrable
Securities being sold by such person, (it being understood that the Corporation
consents to the use of the Prospectus and any amendment or supplement thereto
by each person holding Registrable Securities covered by the Registration
Statement and the underwriter or underwriters, if any, in connection with the
offering and sale of the Registrable Securities covered by the Prospectus or
any amendment or supplement thereto);
1.2.4. notify each person holding Registrable Securities
included in such Registration Statement, at any time when a Prospectus relating
thereto is required to be delivered under the Act, when the Corporation becomes
aware of the happening of any event as a result of which the Prospectus
included in such Registration Statement (as then in effect) contains any untrue
statement of a material fact or omits to state a material fact necessary to
make the statements therein not misleading and, as promptly as practicable
thereafter, prepare and file with the Commission and furnish a supplement or
amendment to such Prospectus so that, as thereafter delivered to the purchasers
of such Registrable Securities, such Prospectus will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading;
1.2.5. make generally available to its security holders an
earnings statement satisfying the provisions of Section 11(a) of the Act no
later than ninety (90) days after the end of the twelve-month period beginning
with the first month of the Corporation's first fiscal quarter commencing after
the effective date of the Registration Statement, which statement shall cover
said twelve-month period; and
1.2.6. use its reasonable best efforts to obtain the
withdrawal of any order suspending the effectiveness of the Registration
Statement.
Each holder of Registrable Securities, upon receipt of any notice from
the Corporation of the happening of any event of the kind described in Section
1.2.4, will forthwith discontinue disposition of the Registrable Securities
until such holder's receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 1.2.4 or until it is advised in
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writing (the "Advice") by the Corporation that the use of the Prospectus may be
resumed, and has received copies of any additional or supplemental filings
which are incorporated by reference in the Prospectus, and, if so directed by
the Corporation, such holder will, or will request the managing underwriter or
underwriters, if any, to deliver to the Corporation (at the Corporation's
expense) all copies, other than permanent file copies then in such holder's
possession, of the Prospectus covering such Registrable Securities current at
the time of receipt of such notice. In the event the Corporation shall give any
such notice, the time periods mentioned in Section 1.2.2 shall be extended by
the number of days during the period from and including the date of the giving
of such notice to and including the date when each seller of Registrable
Securities covered by such Registration Statement shall have received the
copies of the supplemented or amended Prospectus contemplated by Section 1.2.4
or the Advice.
1.3. Restrictions on Public Sale. Each person holding Registrable
Securities included in a Registration Statement, if requested by the managing
underwriter or underwriters of any underwritten Proposed Registration, agrees
not to effect any public sale or distribution of Registrable Securities under
the Act during the five (5) business days prior to and during the sixty-day
period beginning on the effective date of such Proposed Registration (except as
part of such Proposed Registration) (or such earlier time as all the shares of
Common Stock included in such Registration Statement have been disposed of
pursuant thereto).
1.4. Registration Expenses. All of the costs and expenses of each
registration hereunder will be borne by the Corporation, including the fees and
expenses of counsel and accountants for the Corporation, and all other costs
and expenses of the Corporation incident to the preparation, printing and
filing under the Act of the Registration Statement (and all amendments and
supplements thereto) and furnishing copies thereof and of the Prospectus
included therein, and the costs and expenses incurred by the Corporation in
connection with the qualification of the Registrable Securities under the state
securities or "blue-sky" laws of various jurisdictions; provided that, the
Corporation shall not bear costs and expenses of any holders of Registrable
Securities, including, but not limited to, underwriters' commissions, brokerage
fees, transfer taxes, transaction fees, or the fees and expenses of any
counsel, accountants or other representatives retained by any holder.
1.5. Indemnification.
1.5.1. Indemnification by the Corporation. The Corporation
agrees to indemnify, to the full extent permitted by law, each holder of
Registrable Securities, its officers and directors and each person who controls
such holder (within the meaning of either Section 15 of the Act or Section 20
of the Exchange Act), against all losses, claims, damages, liabilities and
expenses caused by any untrue or alleged untrue statement of a material fact
contained in any Registration Statement, Prospectus or preliminary Prospectus
or any omission or alleged omission to state therein a material fact necessary
to make the statements therein (in the case of the Prospectus or any
preliminary Prospectus, in light of the circumstances under which they were
made) not misleading, except insofar as the same are caused by or contained in
any information with respect
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to such holder furnished in writing to the Corporation by or on behalf of such
holder for use therein or by such holder's failure to deliver a copy of the
Registration Statement or Prospectus or any amendments or supplements thereto
after the Corporation has furnished such holder with a sufficient number of
copies of the same.
1.5.2. Indemnification by Holders of Registrable Securities.
In connection with any Registration Statement in which a holder of Registrable
Securities is participating, each such holder will furnish to the Corporation
in writing such information and affidavits with respect to such holder as the
Corporation reasonably requests for use in connection with any Registration
Statement or Prospectus and agrees to indemnify, to the full extent permitted
by law, the Corporation, its directors and officers and each person who
controls the Corporation (within the meaning of either Section 15 of the Act or
Section 20 of the Exchange Act) against any losses, claims, damages,
liabilities and expenses resulting from any untrue or alleged untrue statement
of a material fact or any omission or alleged omission to state a material fact
necessary to make the statements in the Registration Statement or Prospectus or
preliminary Prospectus (in the case of the Prospectus or any preliminary
Prospectus, in light of the circumstances under which they were made) not
misleading, to the extent that such untrue statement or omission is contained
in any information or affidavit with respect to such holder so furnished in
writing by or on behalf of such holder for inclusion in any Prospectus or
Registration Statement. The Corporation shall be entitled to receive
indemnification from underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, to the
same extent as provided above with respect to information with respect to such
persons so furnished in writing by such persons specifically for inclusion in
any Prospectus or Registration Statement.
1.5.3. Conduct of Indemnification Proceedings. Any person
entitled to indemnification hereunder will (i) give prompt written notice to
the indemnifying party of any claim with respect to which it seeks
indemnification, and (ii) unless in the indemnifying party's reasonable
judgment a conflict of interest may exist between such indemnified and
indemnifying parties with respect to such claim, permit such indemnifying party
to assume the defense of such claim with counsel reasonably satisfactory to the
indemnified party. Whether or not such defense is assumed by the indemnifying
party, the indemnifying party will not be subject to any liability for any
settlement made without its consent. No indemnifying party will consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect of such claim or
litigation. An indemnifying party who is not entitled to, or elects not to,
assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable
judgment of the indemnifying party a conflict of interest may exist between
such indemnified party and any other of such indemnified parties with respect
to such claim, in which event the indemnifying party shall be obligated to pay
fees and expenses of such additional counsel or counsels.
5
<PAGE>
1.5.4. Contribution. If for any reason the indemnification
provided for in Sections 1.5.2 and 1.5.3, respectively, is unavailable to an
indemnified party, then the indemnifying party shall contribute to the amount
paid or payable by the indemnified party as a result of such loss, claim,
damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnified party and the indemnifying party, as well as
any other relevant equitable consideration. The relative fault of such
indemnifying party and indemnified parties shall be determined by reference to,
among other things, whether any action in question, including any untrue and
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified parties, and the parties relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 1.5.3, any legal or
other fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 1.5.4 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding
paragraph. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
1.5.5. Participation in Underwritten Registrations. No holder
of Registrable Securities may participate in any underwritten registration
hereunder unless such holder (i) agrees to sell its Registrable Securities on
the basis provided in any underwriting arrangements, and (ii) completes and
executes all questionnaires, powers of attorney, underwriting agreements and
other documents customarily required under the terms of such underwriting
arrangements.
1.5.6. Definitions. "Registrable Securities" means the shares
of DualStar Technologies Corporation Common Stock held by the Stockholders or
issued upon conversion of the Note and held by TIG, only so long as any share
of Common Stock continues to be a "Restricted Security." A share shall be
deemed to be a Restricted Security (i) until such share has been effectively
registered under the Act, or (ii) unless such share may be sold pursuant to
Rule 144(k) (or any similar provision then in force) under the Act.
1.5.7. Amendments and Waivers. Nothing contained herein shall
alter, modify or affect anything contained in the Stockholders Agreement dated
the date hereof. The provisions of this Section 1, including the provisions of
this sentence, may not be amended, modified or supplemented, and waivers of or
consents to departures from the provisions hereof may not be given unless the
Corporation has obtained the written consent of entities or individuals holding
more than fifty percent (50%) of the outstanding Registrable Securities.
6
<PAGE>
1.5.8. Termination. This Section 1 shall continue in full
force and effect until none of the shares are Registrable Securities; provided,
however, that the rights set forth in this Section 1 shall only inure to the
benefit of the Stockholders and TIG.
2. Miscellaneous.
2.1. Governing Law. The interpretation and construction of this
Agreement, and all matters relating hereto, shall be governed by the laws of
the State of New York.
2.2. Captions. The Section captions used herein are for reference
purposes only, and shall not in any way affect the meaning or interpretation of
this Agreement.
2.3. Publicity. None of the parties hereto shall issue any press
release or make any other public statement, in each case relating to or
connected with or arising out of this Agreement or the matters contained
herein, without obtaining the prior approval of the other parties to the
contents and the manner of presentation and publication thereof, except such
reports or other notices that the party issuing or making same has been advised
by counsel are required pursuant to applicable law or regulation.
2.4. Notices. Any notice required hereunder shall be in writing and
shall be sufficiently given if delivered or sent by reputable overnight courier
or facsimile transmission (in each case with evidence of receipt), addressed to
the Corporation at its principal office first set forth above, and to the
Stockholders and TIG, respectively, at the addresses set forth on Schedule 1
hereto. Any party may change such address by like notice. If sent by courier,
such notice shall be deemed to have been given as of the next business day
after it was deposited with the courier service and if sent by facsimile such
notice shall be deemed to have been given when transmitted.
2.5. Parties in Interest. Subject to Sections 1.5.7 and 1.5.8 above,
this Agreement shall not be assignable or transferable by any of the parties.
2.6. Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
2.7. Entire Agreement. This Agreement, including the other documents
referred to herein which form a part hereof, contains the entire understanding
of the parties hereto with respect to the subject matter contained herein and
therein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter.
7
<PAGE>
IN WITNESS WHEREOF, each of the Corporation and TIG has caused this
Agreement to be executed by its officer thereunto duly authorized, and each of
the Stockholders has executed this Agreement, all as of the day and year first
above written.
TECHNOLOGY INVESTORS
GROUP, LLC DUALSTAR TECHNOLOGIES CORPORATION
By: /s/ Brad Singer By: /s/ Elven M. Tangel
------------------------- ----------------------------
Name: Brad Singer Name: Elven M. Tangel
Title: Manager Title: Chairman
/s/ Gregory Cuneo
---------------------------------
Gregory Cuneo
/s/ Ronald Fregara
---------------------------------
Ronald Fregara
/s/ Stephen J. Yager
---------------------------------
Stephen J. Yager
8
<PAGE>
SCHEDULE 1
NAMES AND ADDRESSES
1. Stockholders
Gregory Cuneo
4823 Bay Parkway
Brooklyn, NY 11230
Ronald Fregara
246 Westend Avenue
Massapequa, NY 11758
Stephen J. Yager
65 Jefferson Avenue
Kearney, NJ 07032
2. Technology Investors Group, LLC
25 Coligni Avenue
New Rochelle, New York 10801
9
<PAGE>
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT (the "Agreement") made the 25th day of
November, 1998, by and among DUALSTAR TECHNOLOGIES CORPORATION, a Delaware
corporation (the "Corporation"), and the persons or entities listed on Schedule
A annexed to this Agreement (such persons or entities are hereinafter referred
to individually as a "Stockholder" or collectively as the "Stockholders",
unless otherwise individually named).
WHEREAS, the Stockholders are stockholders, or may hereafter become
stockholders upon conversion of outstanding securities, of the Corporation, and
the Stockholders desire to make certain arrangements among them and with the
Corporation.
NOW, THEREFORE, in consideration of the foregoing premise and the
covenants and agreements contained herein, the parties agree as follows:
1. Nomination of Directors. Commencing for the 1999 Annual Meeting of
Stockholders of the Corporation, each Stockholder shall recommend to the Board
of Directors of the Corporation the nomination of, for election as a Director
of the Corporation, (i) one (1) person designated by each of Gregory Cuneo,
Ronald Fregara, and Stephen Yager, (ii) two (2) persons designated by Gregory
Cuneo, Ronald Fregara, and Stephen Yager, collectively, and (iii) one (1)
person designated by Technology Investors Group, LLC (collectively, the
"Initial Nominees"), provided, however, that the Initial Nominee of Technology
Investors Group, LLC and any nominee of the other Stockholders other than the
Directors of the Corporation elected at the 1998 Annual Meeting of Stockholders
must be reasonably acceptable to the other parties (for the purposes hereof, an
Initial Nominee shall not be "reasonably acceptable" if disclosure with respect
to such Initial Nominee would be required pursuant to Item 401(f) of Regulation
S-K of the Securities and Exchange Commission (the "Commission")). In the event
the Corporation reports a net loss from operations in the fiscal year ending
June 30, 1999, each Stockholder shall recommend to the Board of Directors of
the Corporation the nomination of, for election as a Director of the
Corporation, one (1) additional person (the "Additional Nominee") designated by
Technology Investors Group, LLC ("TIG"). The Additional Nominee also must be
reasonably acceptable to the other parties. The Initial Nominees and the
Additional Nominee shall be referred to collectively hereinafter as the
"Nominee(s)". For purposes of this Section 1, "net loss from operations" shall
be calculated using income from continuing operations based on the audited
financial statements, as audited by the Corporation's independent auditors
(and, for this purpose, as adjusted by excluding amortization, depreciation,
and the cumulative effect of accounting changes).
2. Voting. Each Stockholder will vote, or direct the voting of, all of
the shares of stock of the Corporation ("Stock") as to which such Stockholder
now or hereafter has voting power (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) at all
meetings of stockholders for the election of Directors, or shall express or
direct the expression of consent to any such action of stockholders taken
without a meeting, for the election as a Director of each Nominee. If a Nominee
shall not be nominated by the Board of Directors or stand for
<PAGE>
election or shall cease to act for any reason as a Director, the person or
persons who designated such Nominee shall have the exclusive right to recommend
to the Board of Directors the nomination of a successor to such Nominee.
3. Restrictions on Transfer of Stock.
3.1. Without the prior written consent in his or its discretion of
each party to this Agreement (other than the Corporation), no Stockholder shall
sell, assign, transfer, pledge, encumber or in any way dispose of any Stock
owned by such Stockholder on the date of this Agreement, or issued to any
Stockholder upon conversion of the Subordinated Convertible Note (the "Note")
sold by the Corporation to TIG on the date of this Agreement (current ownership
is set forth on Schedule A attached hereto), nor shall any such Stock be
transferable on the books of the Corporation or its transfer agent for the
Stock (except for a transfer permitted by Section 3.2 below).
3.2. Notwithstanding anything to the contrary provided herein, an
individual Stockholder may at any time during his lifetime transfer all or part
of his Stock to his spouse, children or grandchildren or to a trust for their
benefit, or upon his death any of such Stock may be transferred to his spouse,
children or grandchildren or to a trust for their benefit by bequest or
otherwise under his will or pursuant to the laws of descent and distribution;
provided that, any transferee of Stock pursuant to the above shall agree in
writing, as a condition of transfer, to hold such Stock subject to the terms of
this Agreement as if such transferee were a party to this Agreement as a
Stockholder.
3.3. Nothing contained in this Agreement shall affect any other
restrictions pursuant to federal or state securities law on transfer of any
Stock issued upon conversion.
4. Term. This Agreement shall terminate on the earlier of: (i) thirty
(30) months from the date of this Agreement, or (ii) such date following
conversion of the Note that the voting power of TIG amounts to less than five
percent (5%) of the then outstanding shares of stock of the Corporation
entitled to vote for election of Directors. Subject to the foregoing, Sections
1 and 2 will not apply to TIG in any fiscal year immediately following two (2)
consecutive fiscal years in which the Corporation incurs a net loss from
operations (as defined in Section 1 above); provided, however, that this
Agreement will apply again to TIG in any fiscal year following any fiscal year
in which the Corporation has a profit.
5. Miscellaneous.
5.1. Amendment. This Agreement and the Schedule hereto may not be
amended except by an instrument in writing signed by or on behalf of each of
the parties hereto.
5.2. Waiver. Any agreement on the part of a party hereto to any
extension or waiver shall be valid only if set forth in an instrument in
writing signed by or on behalf of such party.
5.3. Governing Law. The interpretation and construction of this
Agreement, and all matters relating hereto, shall be governed by the laws of
the State of New York.
2
<PAGE>
5.4. Captions. The Section captions used herein are for reference
purposes only, and shall not in any way affect the meaning or interpretation of
this Agreement.
5.5. Publicity. None of the parties hereto shall issue any press
release or make any other public statement, in each case relating to or
connected with or arising out of this Agreement or the matters contained
herein, without obtaining the prior approval of the other parties to the
contents and the manner of presentation and publication thereof, except such
reports or other notices that the party issuing or making same has been advised
by counsel are required pursuant to applicable law or regulation.
5.6. Notice. Any notice required hereunder shall be in writing and
shall be sufficiently given if delivered or sent by reputable overnight courier
or facsimile transmission (in each case with evidence of receipt), addressed to
the Corporation at its principal office and to TIG, and the Stockholders,
respectively, at the addresses set forth on Schedule A hereto. Any party may
change such address by like notice. If sent by courier, such notice shall be
deemed to have been given as of the next business day after it was deposited
with the courier service and if sent by facsimile such notice shall be deemed
to have been given when transmitted.
5.7. Parties in Interest. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, successors and assigns.
5.8. Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
5.9. Entire Agreement. This Agreement, including the Schedule referred
to herein, which forms a part hereof, contains the entire understanding of the
parties hereto with respect to the subject matter contained herein and therein.
This Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
3
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement on
the date first set forth above.
TECHNOLOGY INVESTORS DUALSTAR TECHNOLOGIES CORPORATION
GROUP, LLC
By: /s/ Brad Singer By: /s/ Elven M. Tangel
----------------------------- ------------------------------
Name: Name: Elven M. Tangel
Title: Title: Chairman
/s/ Gregory Cuneo
----------------------------------
Gregory Cuneo, individually
/s/ Ronald Fregara
----------------------------------
Ronald Fregara, individually
/s/ Stephen J. Yager
----------------------------------
Stephen J. Yager, individually
4
<PAGE>
SCHEDULE A
NAMES, ADDRESSES AND
STOCK OWNERSHIP OF THE CORPORATION
Name and Address Common Stock Ownership
- ---------------- ----------------------
DualStar Technologies Corporation N/A
11-47 47th Avenue
Long Island City, New York 11101
Fax No. 718-340-6659
Gregory Cuneo 435,000
4823 Bay Parkway
Brooklyn, NY 11230
Ronald Fregara 435,000
246 Westend Avenue
Massapequa, NY 11758
Stephen J. Yager 435,000
65 Jefferson Avenue
Kearney, NJ 07032
Technology Investors Group LLC N/A
25 Coligni Avenue
New Rochelle, New York 10801
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 2,509,179 2,509,179
<SECURITIES> 0 0
<RECEIVABLES> 19,108,999 19,108,999
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 28,915,683 28,915,683
<PP&E> 3,249,118 3,249,118
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 34,871,978 34,871,978
<CURRENT-LIABILITIES> 26,298,887 26,298,887
<BONDS> 0 0
0 0
0 0
<COMMON> 90,000 90,000
<OTHER-SE> 14,995,836 14,995,836
<TOTAL-LIABILITY-AND-EQUITY> 34,871,978 34,871,978
<SALES> 21,150,276 41,089,481
<TOTAL-REVENUES> 21,150,276 41,089,481
<CGS> 19,254,155 37,066,695
<TOTAL-COSTS> 19,254,155 37,066,695
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (242,903) (231,828)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (242,903) (231,828)
<EPS-PRIMARY> (0.03) (0.03)
<EPS-DILUTED> (0.03) (0.03)
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