<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 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 (IRS Employer
incorporation or organization) Identification No.)
11-30 47TH AVENUE, LONG ISLAND CITY, NEW YORK 11101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 340-6655
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 Par Value
Class A Warrants
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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant as of September 24, 1998 was $10,327,350,
based upon the closing price ($1.50) for such Common Stock on such date.
The number of shares outstanding of Registrant's Common Stock, as of September
24, 1998, was 9,000,000.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference in the respective
Part of this Form 10-K noted below:
1. Registrant's definitive Proxy Statement, to be filed in
connection with its Annual Meeting of Shareholders scheduled
to be held on November 11, 1998, is incorporated by reference
in Part III hereof.
<PAGE>
PART I
ITEM 1 - BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS.
DualStar Technologies Corporation ("DualStar") was incorporated in the
State of Delaware on June 17, 1994. In August, 1994, DualStar acquired
Centrifugal Associates, Inc., ("Associates"), Centrifugal Service, Inc.,
("Service") and Mechanical Associates, Inc., ("Mechanical") in an exchange of
securities, and Associates, Service, and Mechanical each became wholly owned
subsidiaries of DualStar. Associates began operations in 1964, Mechanical in
1989, and Service in 1992.
DualStar formed Trident Mechanical Systems, Inc., ("Trident") and The
Automation Group, Inc., ("TAG") in May, 1995; Property Control, Inc., ("PCI")
and Centrifugal/Mechanical Associates, Inc., ("CMA") in June, 1995; High-Rise
Electric, Inc., ("High-Rise") in July, 1995; Grace Systems Technologies, Inc.,
("Grace") and DualStar Communications, Inc., ("DCI") in February, 1996;
Integrated Controls Enterprises, Inc., ("ICE") in August, 1996; and HR
Electrical Systems, Inc. ("HRES") in June, 1998. (DualStar, Associates,
Mechanical, Service, Trident, TAG, PCI, CMA, High-Rise, Grace, DCI, ICE and
HRES are hereinafter collectively referred to as the "Company", unless
otherwise specified.) Each subsidiary is directly and wholly owned by DualStar,
except that CMA is owned 50% by Associates and 50% by Mechanical.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company does not presently have more than one segment and,
accordingly, no financial information relating to industry segments is set
forth herein.
(C) NARRATIVE DESCRIPTION OF BUSINESS.
Associates, Mechanical and Service engage in mechanical contracting
services. Service's engagements are generally performed under short-term
service contracts, and Associates' and Mechanical's engagements are generally
performed under fixed price long-term contracts undertaken with general
contractors, with the lengths of such long-term contracts varying, but
typically ranging from one to two years.
High-Rise designs and installs sophisticated electrical systems for
newly constructed residential and commercial high-rise buildings. Some of the
work performed by High-Rise (e.g., installation of control wiring) was
previously subcontracted by the Company to other non-DualStar companies.
Trident provides medium-sized institutions, and commercial buildings
and tenants with heating, ventilation and air conditioning ("HVAC") systems,
generally pursuant to contracts valued at less than $2 million. In addition,
Trident provides HVAC service and maintenance.
DCI is a single source provider of systems and services for local,
regional and long distance telephone, high-speed Internet access, cable and
direct broadcast satellite television, and security to multiple dwelling units.
It is a Competitive Local Exchange Carrier (CLEC), an Internet Service Provider
(ISP), and a Direct Broadcast Satellite System Operator (DBS/SO). DCI bundles
and delivers custom-tailored information, communication, entertainment, and
security services to its subscribers via the CyberBuilding(TM) system that it
designs and installs in new and existing high-rise residential buildings.
-1-
<PAGE>
Grace develops and maintains sophisticated security, video intercom,
communications, fire/smoke alarm and building control systems for high-rise
buildings and businesses.
TAG provides network administration, performs system and application
programming, directs advanced technologies, and delivers interactive services
to the Company.
ICE supplies, installs and services facility management, building
automation, and commercial temperature control systems. In general, ICE acts as
a subcontractor to mechanical subcontractors, including those of the Company.
ICE also works directly for real property owners and general contractors.
HRES was formed to design and install electrical systems on contracts
generally valued at up to $3 million, and will specialize on work such as fiber
optics, local area networks, security and fire alarm systems, HVAC controls and
building management systems. In addition, HRES will perform conventional
electrical installations of lighting and power on new construction and
alteration projects.
PCI owns or manages the Company's fixed asset or office peripheral
needs, e.g., ownership and maintenance of real property. PCI also monitors
supplies among the Company's divisions, and is responsible for keeping all
DualStar facilities in compliance with OSHA regulations.
CMA acts as a common paymaster for Mechanical, Associates and Service
in order to facilitate the utilization of employees covered by collective
bargaining agreements.
Major Customers. The Company's customers, which are concentrated in
the New York Tri-State region, include various general contractors, banks,
hospitals, hotels, insurance companies, securities exchanges, governmental
agencies, and subcontractors. For the year ended June 30, 1998, revenue derived
from three customers (Lehrer McGovern Bovis, Inc., HRH Construction Corp., and
Rockrose Construction Corp.) amounted to approximately 24%, 12%, and 10%,
respectively, of the Company's total revenue. For the year ended June 30, 1997,
revenue derived from three customers (Lehrer McGovern Bovis, Inc., Visy Papers
(NY) Inc., and HRH Construction Corp.) amounted to approximately 25%, 16%, and
13%, respectively, of the Company's total revenue.
Manufacturing. The Company's production and engineering facilities are
capable of fabricating and assembling mechanical and electromechanical systems
and subsystems. The Company maintains a comprehensive engineering test and
inspection program to ensure that such systems meet customer requirements for
performance and quality workmanship. In addition, pipe fabrication and machine
shops allow for the manufacture of both prototype and production hardware. To
support its internal operation and to extend its overall capacity, the Company
purchases a wide variety of components, assemblies and services from outside
manufacturers, distributors and service organizations.
Marketing and Sales. For Associates, Mechanical, Service and
High-Rise, the Company's marketing strategy has focused on cultivating
long-term relationships with developers, mechanical and electrical engineers
and general contractors. As a result of its limited and focused target market,
the Company's marketing efforts rely primarily on direct sales efforts
(including engineering presentations) which emphasize the Company's quality
control and value engineering. The relatively high dollar value of each
contract (generally ranging from $5 million to $10 million, except for
Service's contracts which are generally less than $1 million), combined with
the technically complex nature of the projects covered by the Company's
contracts result in an in-depth and complex purchase decision process for each
contract. The selling cycle
-2-
<PAGE>
for the Company's contracts typically lasts approximately 90 days. Sales
activities are handled by a combination of direct sales personnel and
independent sales representatives, who may also sell products of the Company's
competitors. Due to the depth of analysis involved in the customer's purchase
decision, management emphasizes frequent interaction between the direct sales
staff, its independent sales representatives and the buyer throughout the
selling process.
Trident's marketing strategy has focused on the solicitation of
property owners, general contractors, commercial tenants and property
management companies. TAG's, Grace's and DCI's strategy has been to provide the
Company's existing clients with services and products not previously offered by
the Company. ICE solicits property owners, general contractors, and mechanical
contractors in addition to serving the mechanical subsidiaries of DualStar.
HRES intends to solicit general contractors, building owners and industry
consultants, in addition to performing electrical contracting work for the
Company's other subsidiaries.
Sources of Supply and Backlog. The raw materials, such as pipe,
fittings and valves, and electrical components used in the development and
manufacture of the Company's mechanical and electromechanical engineering
products are generally available from domestic suppliers at competitive spot
prices; fabrication of certain major components may be subcontracted for on an
as-needed basis. The Company does not have any long term contracts for its raw
materials. The Company has not experienced any significant difficulty in
obtaining adequate supplies to perform under its contracts.
At fiscal year ending June 30, 1998, the Company's backlog was
approximately $42 million as contrasted with approximately $78 million at June
30, 1997. The Company believes that most of its backlog at June 30, 1998 will
be completed prior to December 31, 1999, but no assurances can be given with
respect thereto. Backlog represents the total value of unrealized revenue on
all contracts awarded on or before a specified date. The Company does not
believe that its backlog at any particular time is necessarily indicative of
its future business or performance.
Customer Service and Support. Given the high cost of downtime, it is
imperative that any malfunction in one of the Company's products or systems,
regardless of cause, be addressed in the shortest possible time. The Company
therefore provides a 24-hour a day phone service which can be used to request
service support. The Company's service organization consists of technicians,
mechanics and engineers reporting to customer service managers who are familiar
with its own products, and with other system components. Additionally, the
Company has made arrangements with many of its component suppliers whereby they
have agreed to provide service specialists within 24 hours should the need
arise. Such calls are coordinated through the Company's service manager who is
assisted by a full-time service administrator. The Company's service personnel
have their formal training augmented by direct participation in testing of
systems at the Company's facility and also in the installation and acceptance
tests at the customer's facility.
Patent, Trademark, Servicemark, Copyright and Proprietary Rights.
Currently, the Company has four trademark applications (Building Area Network,
CyberView, DualStar, and DualStar Technologies) and four servicemark
applications (CyberCierge, DualStar, DualStar Communications, and DualStar
Technologies) pending with the U.S. Patent & Trademark Office ("USPTO"). Three
servicemarks, Global Hiring Hall, CyberBuilding and CyberBuilders, were
registered with the USPTO on July 29, 1997, August 25, 1998 and September 1,
1998, respectively. One trademark, CyberBuilding, was registered with the USPTO
on August 4, 1998. The Company has not made any patent or copyright
applications. The Company may in the future file patent or copyright
applications, or additional trademark or servicemark applications, relating to
certain of the Company's mechanical, electrical, electronic and control,
environmental,
-3-
<PAGE>
information technology, security, entertainment and telecommunication products
and services. Nevertheless, if patents are issued, or trademarks, servicemarks
or copyrights are registered, there can be no assurance as to the extent of the
protection that will be granted to the Company as a result of having such
patents, trademarks, servicemarks or copyrights or that the Company will be
able to afford the expenses of any complex litigation which may be necessary to
enforce their proprietary rights. Failure of any future or existing patents,
trademark, servicemark and copyright applications may have a material adverse
impact on the Company's business since the Company may not otherwise be able to
protect the proprietary or trade secret aspects of its business and operations,
thereby diluting the Company's ability to compete in the marketplace. Except as
may be required by the filing of patent, trademark, servicemark and copyright
applications, the Company will attempt to keep all other proprietary
information secret and to take such actions as may be necessary to insure the
results of its development activities are not disclosed and are protected under
the common law concerning trade secrets. Such steps may include the execution
of nondisclosure agreements by key Company personnel and may also include the
imposition of restrictive agreements on purchasers of the Company's products
and services. There is no assurance that the execution of such agreements will
be effective to protect the Company, that the Company will be able to enforce
the provisions of such nondisclosure agreements or that technology and other
information acquired by the Company pursuant to its development activities will
be deemed to constitute trade secrets by any court of competent jurisdiction.
Regulation. Substantial environmental laws have been enacted in the
United States and in the New York Tri-State region in response to public
concern over the environment. These federal, state and local laws and the
implementing regulations affect nearly every customer of the Company. Efforts
to comply with the requirements of these laws have increased demand for the
Company's services, and the Company believes there will be a trend toward
increasing regulation and government enforcement in the environmental area. The
necessity that the Company's clients comply with these laws and implementing
regulations subjects the Company to substantial liability. The Company believes
that, to the best of its information and knowledge, it is in compliance with
all material federal, state and local laws and regulations governing its
operations.
Potential Liability and Insurance. The Company's operations involve
mechanical, electrical, electronic and control, environmental, information
technology, security, entertainment and telecommunications infrastructure
contracting of major residential, commercial and institutional buildings and
facilities. The Company therefore is exposed to a significant risk of liability
for damage and personal injury. The Company maintains quality control programs
in an attempt to reduce the risk of potential damage to persons and property
and any associated potential liability. In addition, the Company maintains
approximately $12 million of general liability insurance (in the aggregate)
covering damage resulting from bodily injury or property damage to third
parties. The policy, however, does not include coverage for comprehensive
environmental impairment or professional liability which may be caused by the
Company's actions.
The Company endeavors contractually to limit its potential liability
to the amount and terms of its insurance policy and to be indemnified by its
clients from potential liability to third parties. However, the Company is not
always able to obtain such limitations on liability or indemnification, and
such provisions, when obtained, may not adequately shelter the Company from
liability. Consequently, a partially or completely uninsured claim, if
successful and of sufficient magnitude, may have a material adverse effect on
the Company and its financial condition.
-4-
<PAGE>
Competition. The mechanical, electrical, electronic and control,
environmental, information technology, security, entertainment and
telecommunications infrastructure systems and service industries involve rapid
technological change and are characterized by intense and substantial
competition. The Company's competitors range from small firms to large
multinational companies. Competition for private sector work generally is based
on several factors, including quality of work, reputation, price and marketing
approach. The Company believes that it is established in the mechanical,
electronic and control, electrical and environmental industries and will be
able to maintain a strong competitive position in its areas of expertise by
adhering to its basic philosophy of delivering high-quality work in a timely
fashion within client budget constraints.
In both the private and public sectors, the Company, acting either as
a prime contractor or as a subcontractor, occasionally joins with other firms
to form a team that competes for contracts by submitting a jointly prepared
proposal. Because a team of firms will usually offer a stronger set of
qualifications than any single firm, teaming arrangements are generally
advantageous to the Company's success. These teaming relationships, however,
generate risk to the Company in the event that a non-DualStar team member
experiences financial difficulty or is otherwise unable to fulfill its
responsibilities on the project. The Company maintains a large network of
business relationships with other companies and has drawn repeatedly upon these
relationships to form winning teams. Moreover, each DualStar subsidiary may
market its services independently, with the potential to offer in concert with
other DualStar subsidiaries, comprehensive and complementary services on
multi-million dollar construction projects.
Most of the Company's contracts with public sector clients are awarded
through a competitive bidding process that places no limit on the number or
type of offerors that may compete. The process usually begins with a government
Request for Proposal (RFP) that delineates the size and scope of the proposed
contract. Proposals submitted by the Company and others are evaluated by the
government on the basis of technical merit, response to mandatory solicitation
provisions, corporate and personnel qualifications and experience, management
capabilities and cost. While each RFP sets out specific criteria for the choice
of a successful offeror, RFP selection criteria in the government services
market often tend to weigh the technical merit of the proposal more heavily
than cost. The Company believes that its experience and ongoing work strengthen
its technical qualifications and thereby enhance its ability to compete
successfully for future government work. However, the Company can make no
assurances that it may be able to continue to successfully bid and compete in
its marketplace.
Employees. As of June 30, 1998, the Company employed 404 employees,
including the five founding officers of the Company, all of whom are full-time
employees. Of these full-time employees, 18 are engaged in administration and
finance, 371 in manufacturing, engineering and production, 12 in marketing and
sales and 3 in operations and development. Many of the Company's employees have
overlapping responsibilities in these job descriptions.
Biographical information, including the age, position held with the
Company, term of office as officer, employment during the past five years, and
certain other directorships is set forth below for each officer of the Company
who does not serve on the Board of Directors:
Robert J. Birnbach; 33, Vice President and Chief Financial Officer
(since December 1996); and Director of Corporate Development (from August 1994
to December 1996) of the Company; Coopers & Lybrand (from 1991 to August 1994).
-5-
<PAGE>
Joseph C. Chan; 37, Vice President and Chief Accounting Officer (since
December 1996); and Controller (from November 1994 to December 1996) of the
Company; Konigsberg, Wolf & Co., P.C. (from October 1987 to November 1994).
The Company believes that its future success will depend, in part,
upon its continued ability to recruit and retain qualified technical personnel.
Competition for qualified technical personnel is significant, particularly in
the geographic areas in which DualStar and its subsidiaries are located. The
Company depends upon its ability to retain the services of key employees. The
loss of services of one or more key employees could have a material adverse
impact on the Company. Approximately 340 of its employees are represented by a
labor organization. The Company has never experienced a work stoppage.
Management of the Company believes that its relationship with its employees is
good.
-6-
<PAGE>
NOTE ON FORWARD-LOOKING STATEMENTS
When used in this Report on Form 10-K and other reports filed with the
Securities and Exchange Commission and in other communications by the Company,
the words "believes," "anticipates," "expects" and similar expressions are
intended to identify in certain circumstances forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
include, for example, results of operations, and statements of management's
plans and objectives, and are based on the beliefs and expectations of
management. Such statements are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those projected,
including the risks discussed in the "Risk Factors" set forth below. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. The Company also undertakes no
obligation to update forwardlooking statements.
RISK FACTORS
AN INVESTMENT IN THE COMPANY'S SECURITIES INVOLVES A HIGH DEGREE OF
RISK AND SHOULD BE CONSIDERED ONLY BY INVESTORS WHO CAN AFFORD THE RISK
OF LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE INVESTING IN THE
COMPANY'S SECURITIES. SEE ALSO "NOTE ON FORWARD-LOOKING STATEMENTS."
OPERATING LOSSES AND LIMITED OPERATING HISTORY
Although certain of the Company's subsidiaries have conducted
operations for a considerable period, the Company began operations in August
1994 and has only a limited operating history. The Company incurred significant
operating losses in the years ended June 30, 1997 and 1996. The Company also
has experienced significant increases in expenses associated with its becoming
a public company and with the development and expansion of its businesses.
There can be no assurance that the Company will sustain profitability or
positive cash flows from future operations. If the Company is not able to
sustain profitability or positive cash flow, it may not be able to meet its
working capital requirements which could have a material adverse effect on the
Company. See "Significant Capital Requirements."
NO ASSURANCE OF FUTURE PROFITABILITY OR PAYMENT OF DIVIDENDS
No assurance can be given that the future operations of the Company
will be profitable. Should the future operations of the Company be profitable,
it is likely that the Company would retain much or all of its earnings in order
to finance future growth and expansion. As a result, the Company does not
presently intend to pay dividends and it is not likely that any dividends will
be paid in the foreseeable future.
SIGNIFICANT CAPITAL REQUIREMENTS
Although the Company had net income of approximately $556,000 for the
year ended June 30, 1998, the Company experienced losses of approximately $6.5
million and $3.8 million for the years ended June 30, 1997 and 1996,
respectively. At June 30, 1998 and 1997, working capital was approximately
$364,000 and $263,000, respectively. To improve working capital, the Company
continues to consolidate certain subsidiaries' operations and is considering
the sale of certain subsidiaries. In addition, the Company's mechanical
contracting and service businesses reorganized its engineering, drafting and
project management
-7-
<PAGE>
departments so that overhead can be reduced and project costs can be controlled
better. The Company believes that based on the foregoing, current cash on hand,
and future cash from operating and investing activities should be sufficient to
cover current operations. There can be no assurance, however, that the Company
will achieve these plans. In the event that additional working capital becomes
necessary to fund operations, there can be no assurance that the Company will
be able to obtain financing on terms satisfactory to it.
SUBSTANTIAL AND INCREASING COMPETITION
Mechanical and electrical contracting, which represent the Company's
core businesses, involve rapid technological change and are characterized by
intense and substantial competition. As a result of the increasing competition
in those areas, the bidding process whereby the Company seeks to obtain new
contracts has also become more competitive and the profit margins capable of
being achieved through such contracts have continued to compress.
Also as a result of this increasing competition, the Company has
sought to expand its core businesses into markets outside of the New York
Tri-State region. There can be no assurance that the Company will be able to
successfully compete in these new markets.
The Company is also entering new areas of business such as the
telecommunications field in which it has limited prior experience. See "Entry
into New Lines of Business." In entering these new fields, the Company will
encounter substantial competition from companies that are substantially larger
and have substantially greater financial, marketing and technical resources and
greater name recognition than the Company and which are established providers
of these services. There can be no assurance that the Company with its more
limited resources and experience will be able to successfully compete in these
new fields.
DEPENDENCE UPON INTERNAL EXPANSION.
The Company's present intention is to expand its new lines of business
through internal growth rather than by acquisition. The Company has implemented
this strategy by establishing nine new subsidiaries over the last three and a
half years with the intent that each subsidiary is to focus on a different line
of business. See "Narrative Description of Business." This strategy necessarily
involves an investment by the Company in the costs associated with establishing
these new businesses and financing the start up of their operations without the
benefit of an established customer base or the assurance that the anticipated
revenues will be generated. Although some of these new subsidiaries are
operating at a profit, there can be no assurance that they will continue to
operate at a profit, or that the other new subsidiaries will be able to operate
at a profit.
ENTRY INTO NEW LINES OF BUSINESS
The Company has entered into new lines of business such as
telecommunications, Internet and cable television services in which the Company
and its management has had limited experience. Due to continued and increasing
competitive pressures in the Company's core businesses, management of the
Company believes that the future success of the Company will be dependent to a
significant extent upon its ability to successfully enter these new lines of
business. Entry by the Company into these new lines of business involves
significant expenditures by the Company of its management and financial
resources. In entering these new lines of business, the Company is competing
against other companies with substantially greater financial, marketing and
technical resources and greater name recognition and experience than the
Company.
-8-
<PAGE>
There can be no assurance that the Company will be able to successfully compete
in these new lines of business.
The telecommunications business in particular is highly competitive.
The Company faces intense competition from local exchange carriers, including
the regional bell operating companies which currently dominate their local
telecommunications markets. The Company also competes with long distance
carriers in the provision of long distance services. The long distance market
is dominated by three major competitors, AT&T, MCI and Sprint. Hundreds of
other companies also compete in the long distance marketplace. Other
competitors of the Company include cable television companies, competitive
access providers, Internet service providers, microwave and satellite carriers
and private networks owned by large end users.
The Company believes that the Telecommunications Act of 1996, as well
as recent transactions and proposed transactions between telephone companies,
long distance carriers and cable companies, increase the likelihood that
barriers to local exchange competition will be substantially reduced or
removed. These initiatives include requirements that the regional bell
operating companies permit entities such as the Company to interconnect to the
existing telephone network, to purchase, at cost-based rates, access to
unbundled network elements, to enjoy dialing parity, to access rights of way
and to resell services offered by the incumbent local exchange carriers.
However, incumbent local exchange carriers also have new competitive
opportunities. For example, the Telecommunications Act removes prior
restrictions relating to the provision of long distance service by the regional
bell operating companies and also provides them with increased pricing
flexibility. Under this legislation, these regional bell operating companies
may be able to offer similar one-stop integrated telecommunications services
being offered by the Company. If the incumbent local exchange carriers charge
alternate providers such as the Company unreasonably high fees for
interconnection to the exchange carrier's network, significantly lower their
rates for access and private line services or offer significant volume and term
discount pricing options to their customers, the Company may be at a
competitive disadvantage.
DEPENDENCE ON MAJOR CUSTOMERS
The Company's customers include various general contractors,
government agencies, hospitals, hotels, insurance companies, securities
exchanges and subcontractors. For the year ended June 30, 1998, total revenue
derived from three customers (Lehrer McGovern Bovis, Inc., HRH Construction
Corp., and Rockrose Construction Corp.) amounted to approximately 24%, 12%, and
10%, respectively of the Company's revenue. The dependence on major customers
subjects the Company to significant financial risks in the operation of its
business should a major customer terminate, for any reason, its business
relationship with the Company. In such event, the financial condition of the
Company may be adversely affected and the Company may be required to seek
additional financing.
DEPENDENCE ON MANAGEMENT
The Company's business is dependent upon a small number of key
executives. The loss of the services of key executives or the inability of the
Company to attract additional qualified personnel could have a material adverse
effect on the Company.
POTENTIAL LIABILITY AND POSSIBLE INSUFFICIENT INSURANCE
The Company's operations involve the mechanical, electronic and
control, environmental, electrical, information technology, security,
entertainment and telecommunications systems, services and solutions for
-9-
<PAGE>
major commercial, institutional and residential facilities. The Company is
therefore exposed to a significant risk of liability for damage and personal
injury. A material adverse effect on the Company's financial condition may
result in the event that it experiences an uninsured or underinsured claim.
ENVIRONMENTAL RISK FACTORS
Substantial environmental laws have been enacted in the United States
and in the New York Tri-State region in response to public concern over the
environment. These federal, state and local laws and the implementing
regulations affect nearly every customer of the Company. Efforts to comply with
the requirements of these laws have increased demand for the Company's
services, and the Company believes that there will be a trend toward increasing
regulation and government enforcement in the environmental area. The necessity
that the Company's clients comply with these laws and implementing regulations
subjects the Company to substantial liability. The Company believes that, to
the best of its information and knowledge, it is in compliance with all
material federal, state and local laws and regulations governing its
operations. See "Business-Regulation."
CHANGES TO NASDAQ LISTING REQUIREMENTS
On August 22, 1997, the Securities and Exchange Commission approved
the Nasdaq Stock Market's changes to the entry standards and maintenance
standards necessary to qualify for listing on both the Nasdaq National Market
(the "National Market") and the Nasdaq SmallCap Market (the "SmallCap Market").
Although, as of June 30, 1998, the Company met the new maintenance
standards, there can be no assurance that the Company will be able to meet such
standards in the future.
DELISTING OF SECURITIES TO ADVERSELY AFFECT MARKET
In the event that the Company's securities are to no longer meet
applicable Nasdaq requirements and are delisted from Nasdaq, the Company would
attempt to have its securities traded in the over-the-counter market via the
Electronic Bulletin Board or the "pink sheets." However, holders of the
Company's securities would likely encounter greater difficulty in disposing of
these securities and/or in obtaining accurate quotations as to the prices of
the Company's securities.
ITEM 2 - PROPERTIES
The Company leases approximately 5,000 square feet of manufacturing
and office space, on a month-to-month basis, at 141 47th Street, Brooklyn, New
York 11232. In August 1996, the Company acquired real property, which includes
a building containing approximately 22,000 square feet of office and warehouse
space, at 11-30 47th Avenue, Long Island City, New York 11101. The cost of the
real property was $1,109,000, of which $900,000 was financed by a mortgage
loan. The Company believes that the productive use of its current facilities
represents approximately 75 percent of capacity. Total rental expense for the
Company for recent periods is as follows:
PERIOD EXPENSE
Year ended June 30, 1998..................................$25,000
Year ended June 30, 1997.................................$124,000
-10-
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
On September 29, 1997, Associates filed a complaint in the Supreme
Court of the State of New York, Kings County, against DAK Electric Contracting
Corp. ("DAK") and two of DAK's officers, Donald Kopec and Al Walker, for breach
of contract in the amount of $4.1 million.
In prior years, Associates was a partner in a joint venture that
performed mechanical and electrical services for a general contractor on the
Lincoln Square project. Associates was responsible for the mechanical portion
of the contract, and its co-venturer, DAK, was responsible for the electrical
portion. The joint venture's work on this project has been completed. The joint
venture received demands for payment from certain vendors used by the
co-venturer of Associates. These vendors filed liens and/or made demands
against the joint venture payment bond amounting to approximately $1.7 million.
Some of these vendors also filed lawsuits against the joint venture, the joint
venture partners and the related bonding companies, to secure payment on their
claims. These claims were based on the alleged failure of the joint venture
partner to pay for electrical goods provided to it as the electrical
subcontractor of the joint venture. The joint venture's bonding companies
proposed settling with the claimants; the bonding companies would then seek
indemnification from the joint venture. It was management's opinion that it
would cost the Company less if this settlement process was managed and
completed by the Company.
The general contractor on the Lincoln Square project advanced funds
directly to Associates' joint venture partner. The general contractor later
stated that such advances would be deducted from the payments owed to the joint
venture for mechanical work that Associates performed on the project. During
the course of the project, Associates also incurred additional costs to finish
the electrical portion of the project on behalf of its co-venturer. Management
was of the opinion that there was substantial doubt as to the collectibility of
such receivable or additional costs.
Based on these developments, the Company wrote off in fiscal 1996
approximately $2.3 million with respect to accounts and loans receivable, and
$1.4 million of claims and other costs that the Company incurred on behalf of
Associates' co-venturer in fulfillment of the electrical co-venturer's
obligations under the contract on the Lincoln Square project. As of June 30,
1996, all of the known claims and liens were settled and discharged, and all of
the vendor lawsuits which arose out of these claims were also settled.
The Company has instituted the foregoing claim in an attempt to
recover such costs.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year covered by this Report.
-11-
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Class A Warrants are traded on the
Nasdaq National Market System under the symbols DSTR and DSTRW, respectively.
Set forth below are the high and low sales prices for the Common Stock of the
Company for fiscal year 1997 and for fiscal year 1998.
Fiscal 1997 High Low
- ----------- ---- ---
First Quarter $ 1 5/32 $ 9/16
Second Quarter $ 1 3/16 $ 11/32
Third Quarter $ 15/16 $ 15/32
Fourth Quarter $ 1 $ 15/32
Fiscal 1998 High Low
- ----------- ---- ---
First Quarter $ 2 9/16 $ 19/32
Second Quarter $ 1 31/32 $ 1 3/32
Third Quarter $ 1 19/32 $ 5/8
Fourth Quarter $ 3 9/16 $ 15/16
As of September 21, 1998, there were approximately 110 record holders
of the Company's Common Stock.
The Company has not declared any dividends since its incorporation in
June 1994. The Company does not anticipate the declaration or payment of
dividends in the foreseeable future. Future dividend policy will be subject to
the discretion of the Board of Directors and will be contingent upon future
earnings, the Company's financial condition, capital requirements, general
business conditions and other factors.
-12-
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
DUALSTAR TECHNOLOGIES CORPORATION
SELECTED FINANCIAL DATA (1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS
ENDED JUNE 30, YEAR ENDED JUNE 30,
------------------------ ----------------------------------------------------
1993 1994 1995 1996 1997 1998
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Contract revenue $27,001 $29,167 $65,126 $66,232 $73,618 $94,280
Income (loss) from
operations 336 847 1,280 (5,769) (6,468) 597
Net income (loss) 11 (3,774) (6,512) 556
Pro forma net income (2) 181 457
Cash dividends (3) 68 230 600 - - -
Basic income (loss) per share - $(0.42) $(0.72) $0.06
Diluted income (loss) per share - $(0.42) $(0.72) $0.06
Pro forma net income per
common share (4) $0.04 $0.10
Supplemental pro form net
income per common share (5) $0.05 $0.10
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ---------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 2,190 $13,955 $ 9,091 $ 263 $ 365
Total assets 15,345 29,275 28,381 26,577 33,345
Shareholders' equity 2,957 15,097 11,323 4,811 5,367
</TABLE>
(1) The Selected Financial Data represent the consolidated data for the years
ended June 30, 1998, 1997, 1996 and 1995, and combined historical data from the
wholly owned subsidiaries for the nine months ended June 30, 1993 and 1994.
(2) Pro forma income reflects the historical combined net income, adjusted for
pro forma income taxes. Pro forma income taxes reflect an additional provision
for income taxes at the effective statutory federal and New York State tax
rates applied to the Company's financial statement income in each period. This
will result in an overall effective income tax rate of approximately 47% for
all periods.
(3) The Company's subsidiaries had historically paid cash dividends to their
shareholders for the purpose of funding the income taxes on S Corporation
taxable income which were paid personally by the shareholders. In connection
with the revocation of the S Corporation status of the Company's subsidiaries,
effective August 1, 1994, the subsidiaries have declared dividend distributions
in the aggregate of $600,000. Other than the foregoing, the Company does not
anticipate the declaration or payment of cash dividends in the foreseeable
future.
(4) Pro forma income per share was calculated based upon the outstanding shares
of DualStar after the merger with Centrifugal and Mechanical.
(5) Supplemental pro forma income per share attributable to the impact of
assuming 857,000 shares of additional common stock are outstanding and the
proceeds from those shares are being used to retire $3,000,000 of debt.
-13-
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
DualStar Technologies Corporation, incorporated in the State of Delaware on
June 17, 1994, through its wholly owned subsidiaries provides comprehensive,
integrated mechanical, electrical, electronic and control, environmental,
security, information technology, entertainment, and telecommunication systems,
services and solutions to a wide range of customers primarily in the New York
Tri-State area.
In addition to the eleven existing wholly owned subsidiaries, DualStar
Technologies formed a new wholly owned subsidiary during fiscal 1998, HR
Electrical Systems, Inc., which acts as an electrical contractor. DualStar
Technologies and its twelve wholly owned subsidiaries are hereafter referred to
as the "Company".
CAPITAL RESOURCES AND LIQUIDITY
Cash balances at June 30, 1998 and 1997 were approximately $1.4 million and
$1.1 million, respectively. The Company's operations provided approximately
$1.2 million and used approximately $1.0 million of cash during fiscal 1998 and
fiscal 1997, respectively. Further, during fiscal 1998 the Company acquired
capital assets of approximately $868,000, substantially all of which
represented investments in telecommunication infrastructure systems for
high-rise buildings in return for rights to provide telephone, cable television
and high-speed Internet services to the buildings' residents.
During fiscal 1997, the Company acquired capital assets of approximately $1.6
million, which included the acquisition and improvements of real property
located in Long Island City, N.Y. for the purpose of centralizing and
consolidating its operations. The cost of the real property was approximately
$1.1 million of which $900,000 was financed by a ten-year mortgage loan; in
addition, the Company invested approximately $1.1 million in renovation of the
real property. Furthermore, the Company invested approximately $498,000, of
which $431,000 was financed by a capital lease, in telecommunication
infrastructure systems for two high-rise buildings in return for rights to
provide telephone, cable television and high-speed Internet services to the
buildings' residents.
During each of the fiscal years 1998 and 1997, the Company repaid approximately
$41,000 of the mortgage payable. As of June 30, 1998 and 1997, in addition to
ordinary trade accounts payable, the Company had a mortgage payable of
approximately $818,000 and $859,000 respectively, of which $45,000 was
classified as current liabilities.
-14-
<PAGE>
Fiscal 1997 Compared to Fiscal 1996
Revenue increased 11.2% in 1997 to $73.6 million, up $7.4 million from 1996.
The increase was due primarily to the revenue generated by the new subsidiaries
formed in 1995 and 1996.
Gross profit was $2.2 million or 3.0% in 1997, compared to gross profit of $4.8
million or 7.2% in 1996. The decrease in gross profit was attributable
primarily to cost overruns on the Visy Paper and the Mount Sinai Medical Center
projects by the Company's mechanical contracting business. These projects
accounted for $11.8 million of contract revenues and $13.4 million of costs of
revenues. Excluding these projects, contract revenues were $61.8 million and
gross profit was $3.8 million or 6.1% in 1997. In addition, there has been
substantial and increasing competition in this business, which has compressed
job profit margins.
Consolidated backlog at June 30, 1997 was approximately $78.1 million, compared
to $40.9 million at June 30, 1996. The Company continues to bid on projects of
all sizes and bid volume remains active. Opportunities to obtain large projects
exist and therefore backlog could substantially increase. However, it is very
difficult to predict the nature and timing of large projects upon which the
Company has bid and the outcome of the bidding process. Therefore, the Company
cannot predict with certainty future contracts and revenue.
General and administrative expenses increased by $431,000 or 5.2% in 1997. The
increase was due primarily to the abandonment of leasehold improvements of
offices that the Company vacated and the increase in revenues. As a percentage
of revenue, general and administrative expenses decreased from 12.5% in 1996 to
11.8% in 1997.
Before provision for income taxes, loss in 1997 was approximately $6.5 million,
of which approximately $735,000 was generated by the new subsidiaries formed in
fiscal years 1995 through 1997. Before benefits for income taxes, the Company
had a loss of approximately $5.8 million in 1996; however, the new subsidiaries
formed in fiscal years 1996 and 1995 showed a profit before taxes of
approximately $31,000.
-15-
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements following Item 14 herein.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-16-
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required hereunder with respect to Directors of the
Company is incorporated by reference to the caption "Election of Directors" in
the Company's definitive proxy statement to be filed in connection with its
Annual Meeting of Shareholders scheduled to be held on November 11, 1998. The
information required hereunder with respect to executive officers of the
Company is set forth in Item 1 "Business."
ITEM 11 - EXECUTIVE COMPENSATION
The information required hereunder is incorporated by reference to the
caption "Executive Compensation" in the Company's definitive proxy statement to
be filed in connection with its Annual Meeting of Shareholders scheduled to be
held on November 11, 1998.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required hereunder is incorporated by reference to the
caption "Security Ownership" in the Company's definitive proxy statement to be
filed in connection with its Annual Meeting of Shareholders scheduled to be
held on November 11, 1998.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required hereunder is incorporated by reference to the
caption "Certain Transactions" in the Company's definitive proxy statement to
be filed in connection with its Annual Meeting of Shareholders scheduled to be
held on November 11, 1998.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
1. Financial Statements and Financial Statement Schedules
See the Index to Financial Statements appearing on page F-1 of this
Report following this Item 14. No financial statement schedules are included in
this Report.
2. Exhibits
Set forth below is a list of exhibits being filed with this Report.
The management contracts or compensatory plans or arrangements required to be
filed as an Exhibit pursuant to Item 14(c) are Exhibits 4.5 and 10.4 - 10.8.
Exhibit No. and Description in the Exhibit List for this Report
-17-
<PAGE>
<TABLE>
<CAPTION>
NUMBER TITLE
- ------ -----
<S> <C>
3.1 Certificate of Incorporation, filed June 14, 1994, as restated. (1)
3.2 By-Laws. (1)
4.1 Specimen Copy of Common Stock Certificate. (1)
4.2 Form of Class A Warrant Certificate and Form of Exercise Agreement. (1)
4.3 Form of Class A Warrant Agreement.(1)
4.4 Unit Purchase Option in favor of Daniel Porush, dated July 21, 1995, and Transfer Form from
Stratton Oakmont, Inc. to Daniel Porush, dated July 21, 1995.(2)
4.5 DualStar Technologies Corporation 1994 Stock Option Plan.(1)
10.1 Share Acquisition Agreement by and among the Registrant and Centrifugal Associates, Inc., et al.,
dated August 1, 1994. (1)
10.2 Share Acquisition Agreement by and among the Registrant and Mechanical Associates, Inc., et al.,
dated August 1, 1994. (1)
10.3 Mechanical Service Network Agreement by and between Centrifugal Associates, Inc. and E.I.
DuPont de Nemours and Company, dated July 18, 1995.(2)
10.4 Employment Agreement between the Registrant and Elven M. Tangel, dated August 31, 1994. (1)
10.5 Employment Agreement between the Registrant and Gregory Cuneo, dated August 31, 1994. (1)
10.6 Employment Agreement between the Registrant and Stephen J. Yager, dated August 31, 1994. (1)
10.7 Employment Agreement between the Registrant and Armando Spaziani, dated August 31, 1994. (1)
10.8 Employment Agreement between the Registrant and Ronald Fregara, dated August 31, 1994. (1)
10.9 Agreements between Lehrer McGovern Bovis, Inc. and Centrifugal Associates, Inc., dated August
18, 1992 and September 28, 1992. (1)
10.10 Agreements between Morse Diesel International, Inc. and Centrifugal Associates, Inc., dated June
10, 1993 and November 19, 1990. (1)
10.11 Agreements between HRH Construction Corporation and Mechanical
Associates, Inc., dated August 28, 1991, May 14, 1993 and August 5,
1992. (1)
10.12 Agreement with Morse Diesel International, Inc. by Centrifugal Associates, Inc., dated February 13,
1995.(2)
10.13 Loan Agreement (i.e., Non-Negotiable Term Note and Pledge Agreement) between the Registrant
and Stephen J. Drescher, dated October 20, 1995.(3)
10.14 Purchase and Sale Agreement for 11-26 47th Avenue, Long Island City, New York 11101, between
Property Control, Inc. (assigned from DualStar Technologies Corp.) and Lawrence Mitchell, Trustee,
Intermediary (assigned from William Calomiris), dated March 20, 1996.(3)
10.15 Secured Promissory Note and Security Agreement between the Registrant
and Technology Investors Group, LLC, dated July 24, 1998.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP, dated September 15, 1998, with respect
to Form S-8 filing (File No. 33-97708), effective October 3, 1995.
27.1 Financial Data Schedule (electronic filings only).
</TABLE>
-18-
<PAGE>
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-1, File No. 33-83722, ordered effective by the Securities and Exchange
Commission on February 13, 1995.
(2) Incorporated herein by reference to Registrant's Annual Report on Form 10-K
(File No. 0-25552) for the fiscal year ended June 30, 1995.
(3) Incorporated herein by reference to Registrant's Annual Report on Form 10-K
(File No. 0-25552) for the fiscal year ended June 30, 1996.
(B) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed during the last quarter of
the period covered by this Report.
(C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
The exhibits listed under (a)(2) of this Item 14, are filed with this
Report.
(D) FINANCIAL STATEMENT SCHEDULES REQUIRED BY REGULATION S-X WHICH ARE
EXCLUDED FROM THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS FOR THE
FISCAL YEAR ENDED JUNE 30, 1998
None.
-19-
<PAGE>
DualStar Technologies Corporation and Subsidiaries
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statement of Shareholders Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9 - F-22
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of DualStar
Technologies Corporation and Subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of DualStar
Technologies Corporation and Subsidiaries as of June 30, 1998 and 1997 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
September 15, 1998
F-2
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-----------------------------------
ASSETS 1998 1997
------------- --------------
CURRENT ASSETS
<S> <C> <C>
Cash $1,356,228 $ 1,110,615
Contracts receivable - net of allowance for doubtful
accounts of $194,000 in 1998 and $179,000 in 1997 19,321,514 15,815,168
Retainage receivable 4,574,252 2,863,049
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,507,471 622,951
Deferred tax asset - current 178,000 178,000
Prepaid expenses and sundry receivable 427,725 319,942
-------------- --------------
Total current assets 27,365,190 20,909,725
PROPERTY AND EQUIPMENT - net of accumulated
depreciation 3,400,470 3,443,777
OTHER ASSETS
Deferred tax asset - long-term 924,000 924,000
Other 1,655,099 1,299,254
------------- -------------
$33,344,759 $26,576,756
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
-------------- ------------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $19,086,827 $15,559,135
Billings in excess of costs and estimated earnings on
uncompleted contracts 3,882,797 2,741,542
Accrued expenses and other current liabilities 4,030,890 2,346,001
------------ ------------
Total current liabilities 27,000,514 20,646,678
MORTGAGE PAYABLE - net of current portion 772,500 813,750
OTHER LIABILITIES 204,576 305,005
------------ ------------
Total liabilities 27,977,590 21,765,433
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - par value, $.01 per share; 25,000,000 shares authorized;
9,000,000 shares issued
and outstanding 90,000 90,000
Additional paid-in capital 14,995,836 14,995,836
Deficit (9,718,667) (10,274,513)
------------ ------------
5,367,169 4,811,323
------------ ------------
$33,344,759 $26,576,756
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Contract revenues earned $94,280,300 $73,618,336 $66,232,311
Cost of revenues earned 85,557,968 71,375,515 61,454,959
------------- ------------- ------------
Gross profit 8,722,332 2,242,821 4,777,352
General and administrative expenses 8,125,486 8,710,487 8,279,701
Bad debt in connection with joint venture - - 2,266,662
------------- ------------- ------------
Income (loss) before provision
(benefit) for income taxes 596,846 (6,467,666) (5,769,011)
Provision (benefit) for income taxes
Current tax provision (benefit) 41,000 44,000 (977,000)
Deferred tax benefit - - (1,018,000)
------------- ------------- ------------
41,000 44,000 (1,995,000)
------------- ------------- ------------
NET INCOME (LOSS) $ 555,846 $ (6,511,666) $ (3,774,011)
============= ============= =============
Basic income (loss) per share:
Net income (loss) per share $0.06 $(0.72) $(0.42)
Weighted average shares outstanding 9,000,000 9,000,000 9,000,000
Diluted income (loss) per share:
Net income (loss) per share $0.06 $(0.72) $(0.42)
Weighted average shares outstanding 9,742,127 9,000,000 9,000,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additional (Deficit)
Common paid-in retained
stock capital earnings
----------- -------------- --------------
<S> <C> <C> <C>
Balance - June 30, 1995 $90,000 $14,995,836 $ 11,164
Net loss for the year ended June 30, 1996 - - (3,774,011)
----------- -------------- --------------
Balance - June 30, 1996 90,000 14,995,836 (3,762,847)
Net loss for the year ended June 30, 1997 - - (6,511,666)
----------- -------------- --------------
Balance - June 30, 1997 90,000 14,995,836 (10,274,513)
Net income for the year ended June 30, 1998 - - 555,846
----------- -------------- --------------
Balance - June 30, 1998 $90,000 $14,995,836 $(9,718,667)
=========== ============== ==============
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 555,846 $(6,511,666) $(3,774,011)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities
Depreciation 529,048 689,569 202,947
Deferred income taxes -- -- (1,018,000)
(Increase) decrease in assets
Contracts receivable (3,506,346) (2,594,886) 2,700,103
Retainage receivable (1,711,203) 1,684,052 (608,432)
Costs and estimated earnings in
excess of billings on uncompleted
contracts (884,520) 2,140,100 (2,637,918)
Income taxes receivable -- 1,225,532 (1,225,532)
Prepaid expenses (107,783) (108,527) (73,817)
Other assets 26,901 (1,045,621) 134,498
Increase (decrease) in liabilities
Accounts payable 3,527,692 4,543,211 1,224,812
Billings in excess of costs and
estimated earnings on
uncompleted contracts 1,141,255 (735,923) 1,629,343
Accrued expenses and other
current liabilities 1,637,452 (279,081) 942,854
Income taxes payable -- -- (916,153)
----------- ----------- -----------
Net cash provided by (used in) operating
activities 1,208,342 (993,240) (3,419,306)
----------- ----------- -----------
Cash flows from investing activities
Capital expenditures (868,486) (1,628,795) (503,241)
Proceeds from marketable securities -- 910,029 4,944,118
Decrease (increase) in sundry receivable -- 1,070,435 (1,070,435)
----------- ----------- -----------
Net cash (used in) provided by
investing activities (868,486) 351,669 3,370,442
----------- ----------- -----------
</TABLE>
F-7
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities
Repayment of mortgage payable $ (41,250) $ (41,250) $ --
Payments on capital lease obligations (52,993) (230,556) --
----------- ----------- -----------
Net cash used in financing activities (94,243) (271,806) --
----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH 245,613 (913,377) (48,864)
Cash at beginning of year 1,110,615 2,023,992 2,072,856
----------- ----------- -----------
Cash at end of year $ 1,356,228 $ 1,110,615 $ 2,023,992
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 133,417 $ 90,000 $ 44,000
Income taxes 19,644 2,000 994,000
</TABLE>
Non-cash financing transactions:
In August 1996, the Company acquired real property which was financed by a
$900,000 mortgage loan.
The Company acquired telephone switch systems which were financed by a
$119,000 lease in December 1996 and a $431,000 lease in April 1997.
These leases are classified as capital leases.
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
Background and Financial Statement Presentation
DualStar Technologies Corporation ("DualStar") is a holding company which
was incorporated on June 17, 1994. Effective August 1, 1994, DualStar
entered into share acquisition agreements with Centrifugal Associates,
Inc. ("Associates") and Centrifugal Service, Inc. ("Service")
(collectively, "Centrifugal"), and Mechanical Associates, Inc.
("Mechanical"), whereby 2,610,000 shares of DualStar were issued to the
shareholders of Centrifugal and Mechanical in exchange for all of the
stock of Centrifugal and Mechanical and these companies became wholly
owned subsidiaries of DualStar. In fiscal years 1995 through 1998,
DualStar formed nine new wholly owned subsidiaries: Trident Mechanical
Systems, Inc., Centrifugal/Mechanical Associates, Inc., The Automation
Group, Inc., Property Control, Inc., High-Rise Electric, Inc., Grace
Systems Technologies, Inc., DualStar Communications, Inc., Integrated
Controls Enterprises, Inc. and HR Electrical Systems, Inc.
The accompanying financial statements for the years ended June 30, 1998,
1997 and 1996 reflect the consolidated operations of DualStar Technologies
Corporation and subsidiaries (collectively the "Company"). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The Company primarily engages in mechanical and electrical contracting.
The engagements are generally performed under fixed price long-term
contracts undertaken with general contractors or under short-term service
contracts. The lengths of the long-term contracts vary but typically range
from one to two years. In accordance with the operating cycle concept and
construction industry practice, the Company classifies all
contract-related assets and liabilities as current items.
Although the Company had net income of approximately $556,000 for the year
ended June 30, 1998, the Company experienced losses of approximately $6.5
million and $3.8 million for the years ended June 30, 1997 and 1996,
respectively. At June 30, 1998 and 1997, working capital was approximately
$364,000 and $263,000, respectively. To improve working capital, the
Company continues to consolidate certain subsidiaries' operations and is
considering the sale of certain subsidiaries. In addition, the Company's
mechanical contracting and service businesses reorganized its engineering,
drafting and project management departments so that overhead can be
reduced and project costs can be controlled better. The Company believes
that based on the foregoing, current cash on hand, and future cash from
operating and
F-9
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A (CONTINUED)
investing activities should be sufficient to cover current operations.
There can be no assurance, however, that the Company will achieve these
plans. In the event that additional working capital becomes necessary to
fund operations, there can be no assurance that the Company will be able
to obtain financing on terms satisfactory to it.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows:
1. Revenue and Cost Recognition
Revenues on long-term contracts are accounted for by the
percentage-of-completion method, whereby revenue is recognized based
on the estimated percentage of costs incurred to date to the estimated
total costs of each individual contract. This method is used because
management considers costs to be the best available measure of
progress on these contracts. Revenue on service contracts is recorded
on the accrual basis as services are performed.
Contract costs include all direct materials and labor costs. General
and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job
performance, job conditions, and estimated profitability, including
those arising from final contract settlements, may result in revisions
to costs and income, and such changes are recognized in the period in
which the revisions are determined. An amount equal to contract costs
attributable to job change orders is included in revenues when
realization is probable and the amount of such orders can be reliably
estimated.
The asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of
amounts billed. The liability "Billings in excess of costs and
estimated earnings on uncompleted contracts" represents billings in
excess of revenues recognized.
2. Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-10
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A (CONTINUED)
3. Fair Value of Financial Instruments
The carrying amount of cash, contracts and retainage receivable,
accounts payable and current maturities of long-term debt approximates
fair value, principally because of the short-term maturity of these
items. The fair value of the Company's long-term debt approximates
carrying value as the debt was taken at the Company's current
borrowing rate.
4. Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their
estimated service lives, which range from three to fifteen years.
5. Income Taxes
The Company files consolidated federal, state and local income tax
returns. Deferred income taxes are principally the result of net
operating loss carryforwards and differences related to different
bases of accounting for financial accounting and tax reporting
purposes.
6. Per Share Data
The computation of net income (loss) per share is based on the
weighted average number of shares of common stock outstanding. When
dilutive, stock options and warrants are included as share equivalents
using the treasury stock method.
The weighted average number of shares outstanding for the years
presented is as follows:
1998 1997 1996
--------- --------- ---------
Basic shares 9,000,000 9,000,000 9,000,000
Dilution (options) 742,127 -- --
--------- --------- ---------
Diluted shares 9,742,127 9,000,000 9,000,000
========= ========= =========
F-11
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A (CONTINUED)
Options and warrants to purchase 4,777,000 shares of common stock were
not included in the 1998 computation of diluted net income per share
because the exercise price of those options and warrants was greater
than the average market price of the common stocks. In 1997 and 1996,
options and warrants to purchase 6,672,000 and 4,777,000,
respectively, were not included in the computation of diluted net
loss per share because the effect would be antidilutive.
NOTE B - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the
following:
June 30,
----------------------------
1998 1997
------------ ------------
Costs incurred on uncompleted contracts $ 75,818,648 $ 25,619,921
Estimated earnings 9,240,880 2,987,114
------------ ------------
85,059,528 28,607,035
Less billings to date 87,434,854 30,725,626
------------ ------------
$ (2,375,326) $ (2,118,591)
============ ============
Costs and estimated earnings on uncompleted contracts are included in the
accompanying consolidated balance sheets as follows:
June 30,
--------------------------
1998 1997
----------- -----------
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 1,507,471 $ 622,951
Billings in excess of costs and estimated
earnings on uncompleted contracts (3,882,797) (2,741,542)
----------- -----------
$(2,375,326) $(2,118,591)
=========== ===========
F-12
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
June 30,
-----------------------
1998 1997
---------- ----------
Accrued compensation $2,216,088 $1,397,138
Current portion of mortgage payable 45,000 45,000
Other 1,769,802 903,863
---------- ----------
$4,030,890 $2,346,001
========== ==========
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
June 30,
--------------------------
1998 1997
----------- -----------
Building and building improvements $ 1,759,802 $ 1,749,908
Automobiles 325,566 324,360
Machinery and equipment 1,034,884 775,406
Computer equipment 846,586 702,929
Furniture and fixtures 141,711 141,711
Leasehold improvements -- 26,860
----------- -----------
4,108,549 3,721,174
Less accumulated depreciation (1,023,079) (592,397)
----------- -----------
3,085,470 3,128,777
Land 315,000 315,000
----------- -----------
$ 3,400,470 $ 3,443,777
=========== ===========
F-13
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - MORTGAGE PAYABLE
In August 1996, the Company acquired real property located in Long Island
City, New York for the purpose of centralizing and consolidating its
operations. The cost of the real property was approximately $1,109,000 of
which $900,000 was financed by a ten-year mortgage loan. The mortgage
bears interest at a fixed rate of 9.25% per annum for the first five
years, and then for the last five years, at a fixed rate per annum equal
to 1% above the Prime Rate in effect thereof. The mortgage includes a
final balloon payment in the amount of $453,750 which is due on August 1,
2006.
At June 30, 1998, principal payments under the mortgage loan are as
follows:
1999 $ 45,000
2000 45,000
2001 45,000
2002 45,000
Thereafter 637,500
---------
817,500
Less: current portion (45,000)
---------
$772,500
=========
The mortgage loan agreement requires the Company to comply with certain
covenants, including maintaining certain net working capital and tangible
net worth amounts. If the Company fails to meet any of the requirements,
the loan shall become immediately due and payable. At June 30, 1997, the
lender waived the net working capital and the tangible net worth
requirements. Effective July 1, 1997, the lender reduced the net working
capital and the tangible net worth requirements to $263,000 and
$4,811,000, respectively.
NOTE F - SHAREHOLDERS' EQUITY
In February 1995, in connection with the Company's initial public
offering, the Company issued 4,600,000 Class A warrants to shareholders.
The warrants are exercisable for 4,600,000 shares of common stock at $4.00
per share. The warrants became exercisable in February 1996 and will
expire in February 2000. The warrants are redeemable by the Company for
$.05 per warrant at any time after February 1997, upon thirty days prior
written notice if the average closing price of the common stock equals or
exceeds $9.00 per share, for any twenty consecutive trading days within a
period of thirty days ending within ten days of the notice of redemption.
At June 30, 1998, all warrants are outstanding.
F-14
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G - INCOME TAXES
Deferred income taxes reflect the impact of "temporary differences"
between the amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws, and relate primarily to
the net operating loss carryforward, allowance for doubtful accounts and
accumulated depreciation.
The following is a summary of the items giving rise to deferred tax
benefits at June 30, 1998 and 1997:
June 30,
--------------------------
1998 1997
----------- -----------
Current
Allowance for doubtful accounts $ 105,000 $ 1,322,000
----------- -----------
Long-term
Net operating loss carryforward 4,539,000 3,239,000
Accumulated depreciation 20,000 (26,000)
----------- -----------
4,559,000 3,213,000
----------- -----------
Total deferred tax assets 4,664,000 4,535,000
Less: valuation allowance (3,562,000) (3,433,000)
----------- -----------
Net deferred tax assets $ 1,102,000 $ 1,102,000
=========== ===========
Management believes that the Company will more than likely generate
sufficient taxable earnings or utilize tax planning opportunities to
ensure realization of the tax benefits of $1,102,000, but will less than
likely realize the benefit on the balance of the deferred tax assets, and
therefore, has recorded a valuation allowance.
The provision (benefit) for income taxes differs from the amount computed
by applying the statutory federal income tax rate to income (loss) before
provision (benefit) for income taxes due to the following:
F-15
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G (CONTINUED)
June 30,
---------------------------
1998 1997
----------- ------------
Statutory federal income tax (benefit) $ 189,000 $(2,214,000)
State and local income taxes 41,000 39,000
Net operating loss carryforward (1,489,000) 824,000
Valuation allowance 129,000 2,508,000
Allowance for doubtful accounts 1,217,000 (1,160,000)
Accumulated depreciation (46,000) 42,000
Prior year underaccrual - 5,000
----------- ------------
$ 41,000 $ 44,000
=========== ============
The Company has available for federal income tax purposes, net operating
losses of approximately $7,925,000 and for state and local tax purposes,
net operating losses of approximately $9,236,000, expiring in the years
2011 to 2013. The Company's ability to utilize net operating losses to
offset future taxable income may be limited if the Company changes control
as defined in Internal Revenue Code Section 382.
In 1998, no federal income tax expense was recorded as a result of a
benefit of $189,000 for the utilization of a portion of the net operating
loss carryforward for financial accounting purposes.
At June 30, 1995, included in income taxes payable in the consolidated
balance sheet was an amount that the Company expected to pay when it filed
its June 30, 1996 income tax returns. In accordance with the Internal
Revenue Code, one-half of the cash-to-accrual differences recognized by
the Company upon the revocation of the S Corporation status of certain of
its subsidiaries would be payable with the Company's June 30, 1996 income
tax returns. At June 30, 1995, this liability amounted to approximately
$272,000, which was reversed at June 30, 1996 due to the net operating
losses.
F-16
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under operating leases expiring at
various dates through July 2002. At June 30, 1998, minimum rental
commitments under noncancellable operating leases are as follows:
1999 $211,000
2000 152,000
2001 106,000
2002 13,000
----------
$482,000
==========
Equipment rent for the years ended June 30, 1998, 1997 and 1996 was
$282,000, $277,000, and $127,000, respectively.
In 1994, the Company entered into employment agreements with five founding
officers. The agreements expired in 1997 and required minimum annual
salaries of $150,000 for each officer with subsequent increases not to
exceed $150,000 during the first three years following the effective date
of the offering. Among other items, the agreements provided for a
discretionary bonus of up to 45% of salary, the payment of certain
disability benefits of the officers and discretionary incentive bonuses.
The agreements were automatically renewed for an additional three-year
term in 1997.
The Company contributes to multiemployer pension plans for employees
covered by collective bargaining agreements. These plans are not
administered by the Company and contributions are determined in accordance
with provisions of the agreements. Information with respect to the
Company's proportionate share of the excess, if any, of the actuarially
computed value of vested benefits over the total of the pension plans' net
assets is not available from the plans' administrators. For the years
ended June 30, 1998, 1997 and 1996, the Company contributed $3,518,000,
$1,859,000 and $1,344,000, respectively.
The Multiemployer Pension Plan Administration Act of 1980 (the "Act")
significantly increased the pension responsibilities of participating
employers. Under the provisions of the Act, if the plans are terminated or
the Company withdraws, the Company could be subject to a substantial
"withdrawal liability."
The Company is contingently liable to sureties under a general indemnity
agreement. The Company agrees to indemnify the sureties for any payments
made on contracts of suretyship, guarantee or indemnity. Management
believes that all such contingent liabilities will be satisfied by
performance on the specific bonded contracts.
F-17
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - (CONTINUED)
In prior years, Associates was a partner in a joint venture that performed
mechanical and electrical services for a general contractor on the Lincoln
Square project. Associates was responsible for the mechanical portion of
the contract, and its co-venturer was responsible for the electrical
portion. The joint venture's work on this project has been completed. The
joint venture received demands for payment from certain vendors used by
the co-venturer of Associates. These vendors filed liens and/or made
demands against the joint venture payment bond amounting to approximately
$1.7 million. Some of these vendors also filed lawsuits against the joint
venture, the joint venture partners and the related bonding companies, to
secure payment on their claims. These claims were based on the alleged
failure of the joint venture partner to pay for electrical goods provided
to it as the electrical subcontractor of the joint venture. The joint
venture's bonding companies proposed settling with the claimants; the
bonding companies would then seek indemnification from the joint venture.
It was management's opinion that it would cost the Company less if this
settlement process was managed and completed by the Company.
The general contractor on the Lincoln Square project advanced funds
directly to Associates' joint venture partner. The general contractor
later stated that such advances would be deducted from the payments owed
to the joint venture for mechanical work that Associates performed on the
project. During the course of the project, Associates also incurred
additional costs to finish the electrical portion of the project on behalf
of its co-venturer. Management was of the opinion that there was
substantial doubt as to the collectibility of such receivable or
additional costs.
Based on these developments, the Company wrote off in fiscal 1996
approximately $2.3 million with respect to accounts and loans receivable,
and $1.4 million of claims and other costs that the Company incurred on
behalf of Associates' co-venturer in fulfillment of the electrical
co-venturer's obligations under the contract on the Lincoln Square
project. As of June 30, 1996, all of the known claims and liens were
settled and discharged, and all of the vendor lawsuits which arose out of
these claims were also settled.
In September 1997, Associates filed a complaint in the Supreme Court of
the State of New York, King's County, against the co-venturer and two of
the co-venturer's officers for breach of contract in the amount of $4.1
million.
F-18
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I - RELATED PARTY TRANSACTIONS
At June 30, 1997, the Company had a loan to a former member of its Board
of Directors of approximately $73,000. The loan was collateralized by
65,250 shares of the Company's common stock, bore interest at 8.75% per
annum. The principal and interest of the loan was repaid in September
1997.
The Company leases shop space on a month-to-month basis from a company in
which certain officers own a majority interest. Rent expense for the years
ended June 30, 1998, 1997 and 1996 was $25,000, $66,000 and $65,000,
respectively.
At June 30, 1998, the Company had a loan from an officer of $185,000. The
loan is due on demand.
NOTE J - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash, trade accounts
receivable and retainage receivable.
The Company maintains its cash in accounts which exceed federally insured
limits. It has not experienced any losses to date resulting from this
policy.
The Company performs construction contracts for, and extends credit to,
private owners and general contractors located in the New York Tri-State
area. The Company is directly affected by the well-being of these entities
and the construction industry as a whole. For the year ended June 30,
1998, revenue from three customers amounted to approximately 24%, 12% and
10% of total revenue, respectively. For the year ended June 30, 1997,
revenue from three customers amounted to approximately 25%, 16% and 13% of
total revenue, respectively. For the year ended June 30, 1996, revenue from
three customers amounted to approximately 33%, 18% and 15% of total
revenue, respectively.
F-19
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K - STOCK OPTION PLAN
In 1994, the Company adopted a stock option plan accounted for under APB
No. 25. The plan allows the Company to grant options to employees for up
to 2.2 million shares of common stock. In general, the options have a term
of seven years from the date of grant and vest at the end of the third
year. For all options granted to date, the exercise price of each option
is higher than the market price of the Company's stock on the date of
grant.
Pursuant to the Company's founding officers' employment agreements, the
founding officers may be given options under the plan, which will be
shared equally, to purchase shares of the Company's common stock at fair
market value on the date of grant, if Company pretax earning criteria are
met. Through June 30, 1998, none of the pre-determined criteria were met
and no stock options were granted to the officers.
Effective July 1, 1996, the Company adopted the provisions of Statement
No. 123, Accounting for Stock-Based Compensation. As permitted by the
Statement, the Company has chosen to continue to account for stock-based
compensation using the intrinsic value method. Accordingly, no
compensation cost has been recognized for the plan. Had compensation cost
of the plan been determined based on the fair value of the options at the
grant dates consistent with the method of SFAS 123, the Company's net
income (loss) and income (loss) per share would have been:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $555,846 $(6,511,666) $(3,774,011)
Pro forma $271,596 $(7,364,516) $(3,774,011)
Basic income (loss) As reported $0.06 $(0.72) $(0.42)
per share Pro forma $0.03 $(0.82) $(0.42)
Diluted income (loss) As reported $0.06 $(0.72) $(0.42)
per share Pro forma $0.03 $(0.82) $(0.42)
</TABLE>
This pro forma impact only takes into account options granted since July
1, 1995 and is likely to increase in future years as additional options
are granted and amortized ratably over the vesting periods. The fair
market value of each option grant is estimated on the date of granting
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in fiscal 1997 and fiscal
1995 respectively: risk-free interest rate of 6.08%, expected life of
seven years, volatility of 113.5% and no dividend yield.
F-20
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K - (CONTINUED)
A summary of information relative to the Company's stock option plan
follows:
Weighted
Number of Shares Average Price
---------------- -------------
Outstanding at June 30, 1995 and 1996 177,000 $ 3.00
Granted in fiscal 1997 1,895,000 $ 0.75
---------
Outstanding at June 30, 1997 and 1998 2,072,000 $ 0.94
=========
The following information applies to options outstanding at June 30, 1998:
Number outstanding 2,072,000
Range of exercise prices $0.75 TO $3.00
Weighted average exercise price $0.94
Weighted average remaining contractual life 7 YEARS
Number exercisable 2,033,000
Weighted average exercise price $0.86
NOTE L - EMPLOYEE BENEFIT PLAN
In 1995, the Company adopted a defined contribution retirement plan
(commonly referred to as a 401(k) plan) which satisfies the requirements
for qualification under Section 401(k) of the Internal Revenue Code. The
Company's contribution to the plan is based entirely on management's
discretion. For the years ended June 30, 1998, 1997 and 1996, the Company
made no contribution to the plan.
F-21
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M - NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130), and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). The Company will implement SFAS 130 and SFAS 131 as required
in fiscal 1999, which require the Company to report and display certain
information related to comprehensive income and operating segments,
respectively. Adoption of SFAS 130 and SFAS 131 will not impact the
Company's financial position or results of operations.
NOTE N - SUBSEQUENT EVENT
In July 1998, the Company entered a $1 million loan agreement with an
investment group. The loan and any unpaid interest is due and payable on
demand and bears an interest rate of 10% per annum. The loan is
collateralized by the Company's building, subordinate to the building's
first mortgage, in addition to the Company's cash and accounts receivable.
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ GREGORY CUNEO
-------------------------
Gregory Cuneo
President and Chief
Executive Officer
Dated: September 25, 1998
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following persons on behalf
of the Company and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ GREGORY CUNEO President, Chief Executive September 25,1998
- ---------------------- Officer and Director
Gregory Cuneo
/s/ ROBERT BIRNBACH Vice President and September 25, 1998
- ---------------------- Chief Financial Officer
Robert Birnbach [Principal Financial Officer]
/s/ JOSEPH C. CHAN Vice President and September 25, 1998
- ---------------------- Chief Accounting Officer
Joseph C. Chan [Principal Accounting Officer]
/s/ GARY DELUCA Director September 25, 1998
- ----------------------
Gary DeLuca
/s/ RONALD FREGARA Director September 25, 1998
- ----------------------
Ronald Fregara
/s/ ELVEN M. TANGEL Director September 25, 1998
- ----------------------
Elven M. Tangel
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ ARMANDO SPAZIANI Director September 25, 1998
- --------------------------
Armando Spaziani
/s/ MICHAEL J. ABATEMARCO Director September 25, 1998
- --------------------------
Michael J. Abatemarco
/s/ STEPHEN J. YAGER Executive Vice President, September 25, 1998
- -------------------------- Secretary and Director
Stephen J. Yager
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
EXHIBITS TO
FORM 10-K
Commission file number 0-25552
DUALSTAR TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3776834
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11-30 47th Avenue, Long Island City, New York 11101
(Address of principal executive offices) (Zip Code)
(718) 340-6655
(Registrant's telephone number, including area code)
<PAGE>
Although the Company had net income of approximately $556,000 for the year
ended June 30, 1998, the Company experienced losses of approximately $6.5
million and $3.8 million for the years ended June 30, 1997 and 1996,
respectively. At June 30, 1998 and 1997, working capital was approximately
$364,000 and $263,000, respectively. To improve working capital, the Company
continues to consolidate certain subsidiaries' operations and is considering
the sale of certain subsidiaries. In addition, the Company's mechanical
contracting and service businesses reorganized its engineering, drafting and
project management departments so that overhead can be reduced and project
costs can be controlled better. The Company believes that based on the
foregoing, current cash on hand, and future cash from operating and investing
activities should be sufficient to cover current operations. There can be no
assurance, however, that the Company will achieve these plans. In the event
that additional working capital becomes necessary to fund operations, there can
be no assurance that the Company will be able to obtain financing on terms
satisfactory to it.
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
information systems compliance. Phase I is to identify those systems with 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
1998. Phase III, to be completed by mid-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) third-party
relationships.
The Company, in accordance with Phase I of the program, is in the process of
conducting an internal review of all systems and contacting all software
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 Y2K compliant but were already
scheduled for replacement by the end of 1998. In the third-party area, the
Company has contacted most of its major third parties. Most of these parties
state that they intend to be Y2K compliant by 2000.
The Company believes the replacement and labor costs to bring the core
financial, reporting and informational system applications into compliance will
not have a material effect on the Company's financial statements in fiscal 1999
and 2000. The Company has yet to determine what costs will be incurred in
connection with the third party area.
<PAGE>
INFLATION
The Company has continued to experience the benefits of a low inflation economy
in the New York Tri-State area. In general, the Company enters into long-term
fixed price contracts which are largely labor intensive. Accordingly, future
wage rate increases may affect the profitability of its long-term contracts.
Short-term contracts are less susceptible to inflationary conditions.
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997
Contract revenues increased 28.1% in 1998 to $94.3 million, up $20.7 million
from 1997. The increase was due primarily to the improvement in the New York
City Metropolitan area's economy and the implementation of the Company's
business plan to create a larger group of related and integrated businesses.
Gross profit increased $6.5 million in 1998 to $8.7 million from 1997. The
gross profit margins were 9.3% and 3.0% for the years ended June 30, 1998 and
1997, respectively. The increases in gross profit and gross profit margins were
attributable to increases in revenues, increased control over project costs and
higher margins on new projects.
Consolidated backlog at June 30, 1998 was approximately $42.2 million, compared
to $78.1 million at June 30, 1997. The Company continues to bid on projects of
all sizes and bid volume remains active. Opportunities to obtain large projects
exist and therefore backlog could substantially increase. However, it is very
difficult to predict the nature and timing of large projects upon which the
Company has bid and the outcome of the bidding process. In addition, the
Company's businesses are competitive and cyclical in nature. Therefore, the
Company cannot predict with certainty future contracts, revenue and gross
profit.
Even though contract revenues increased substantially in 1998, general and
administrative expenses decreased from 1997. The Company recorded a one-time
write-off of $400,000 of leasehold improvements due to the relocation of the
Company's headquarters in 1997. Excluding the write-off in 1997, general and
administrative expenses decreased 2.1% in 1998 to $8.1 million, down $185,000
from 1997; therefore, as a percentage of revenue, general and administrative
expenses decreased to 8.6% for 1998 from 11.8% for 1997. The improvements were
due primarily to the reorganization and overhead reduction of the Company's
mechanical contracting and service businesses undertaken in the latter part of
fiscal 1997 and in fiscal 1998.
<PAGE>
INDEX EXHIBITS
--------------
<TABLE>
<CAPTION>
NUMBER TITLE PAGE HEREIN
- ------ ----- -----------
<S> <C> <C>
3.1 Certificate of Incorporation, filed June 14, 1994, as restated. (1)
3.2 By-Laws. (1)
4.1 Specimen Copy of Common Stock Certificate.(1)
4.2 Form of Class A Warrant Certificate and Form of Exercise Agreement. (1)
4.3 Form of Class A Warrant Agreement.(1)
4.4 Unit Purchase Option in favor of Daniel Porush, dated July 21, 1995, and
Transfer Form from Stratton Oakmont, Inc. to Daniel Porush, dated July 21,
1995.(2)
4.5 DualStar Technologies Corporation 1994 Stock Option Plan. (1)
10.1 Share Acquisition Agreement by and among the Registrant and Centrifugal
Associates, Inc., et al., dated August 1, 1994. (1)
10.2 Share Acquisition Agreement by and among the Registrant and Mechanical
Associates, Inc., et al., dated August 1, 1994. (1)
10.3 Mechanical Service Network Agreement by and between Centrifugal
Associates, Inc. and E.I. DuPont de Nemours and Company, dated July 18,
1995.(2)
10.4 Employment Agreement between the Registrant and Elven M. Tangel, dated
August 31, 1994.(1)
10.5 Employment Agreement between the Registrant and Gregory Cuneo, dated
August 31, 1994.(1)
10.6 Employment Agreement between the Registrant and Stephen J. Yager, dated
August 31, 1994.(1)
10.7 Employment Agreement between the Registrant and Armando Spaziani,
dated August 31, 1994.(1)
10.8 Employment Agreement between the Registrant and Ronald Fregara, dated
August 31, 1994. (1)
<PAGE>
NUMBER TITLE PAGE HEREIN
- ------ ----- -----------
10.9 Agreements between Lehrer McGovern Bovis, Inc. and Centrifugal
Associates, Inc., dated August 18, 1992 and September 28, 1992. (1)
10.10 Agreements between Morse Diesel International, Inc. and Centrifugal
Associates, Inc., dated June 10, 1993 and November 19, 1990. (1)
10.11 Agreements between HRH Construction Corporation and Mechanical
Associates, Inc., dated August 28, 1991, May 14, 1993 and August
5, 1992.
(1)
10.12 Agreement with Morse Diesel International, Inc. by Centrifugal Associates,
Inc., dated February 13, 1995.(2)
10.13 Loan Agreement (i.e., Non-Negotiable Term Note and Pledge Agreement)
between the Registrant and Stephen J. Drescher, dated October 20, 1995.(3)
10.14 Purchase and Sale Agreement for 11-26 47th Avenue, Long Island City, New
York 11101, between Property Control, Inc. (assigned from DualStar
Technologies Corp.) and Lawrence Mitchell, Trustee, Intermediary (assigned
from William Calomiris), dated March 20, 1996.(3)
10.15 Secured Promissory Note and Security Agreement between the
Registrant and Technology Investors Group, LLC, dated July 24,
1998.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP, dated September 15, 1998, with
respect to Form S-8 filing (File No. 33-97708), effective October
3, 1995.
27.1 Financial Data Schedule (electronic filings only).
</TABLE>
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-1, File No. 33- 83722, ordered effective by the Securities and Exchange
Commission on February 13, 1995.
(2) Incorporated herein by reference to Registrant's Annual Report on Form 10-K
(File No. 0-25552) for the fiscal year ended June 30, 1995.
(3) Incorporated herein by reference to Registrant's Annual Report on Form 10-K
(File No. 0-25552) for the fiscal year ended June 30, 1996.
- ii -
<PAGE>
EXHIBIT 10.15
NON-NEGOTIABLE
NON-TRANSFERABLE
SECURED PROMISSORY NOTE
$1,000,000.00 July 24, 1998
DUALSTAR TECHNOLOGIES CORPORATION, a Delaware corporation (the
"Company"), for value received, hereby promises to pay to TECHNOLOGY INVESTORS
GROUP, LLC, a Delaware limited liability corporation ("TIG"), on demand at any
time on or after August 24, 1998, the principal amount of One Million Dollars
and 00/100 ($1,000,000.00) (or as much thereof as shall not have been prepaid),
in lawful currency of the United States of America, at the principal office of
TIG, together with interest on the unpaid principal amount from the date hereof
at the rate of ten percent (10%) per annum. The interest rate shall be computed
on the basis of a 360-day year of twelve 30-day months.
The Company may prepay the principal or interest on this Note in full
at any time or in part from time to time, without premium or penalty, provided
that interest accrued on any principal amount prepaid is also paid to the date
of such prepayment.
This Note is secured by a mortgage (the "Mortgage") dated the date
hereof encumbering certain premises located at 11-30 47th Avenue, Long Island
City, New York 11101. The terms, conditions and covenants of the Mortgage are
incorporated herein as if the same were set forth in full herein. This Note is
also secured by the cash and accounts receivable of the Company pursuant to a
Security Agreement dated the date hereof, the terms, conditions and covenants
of which are incorporated herein as if the same were set forth in full herein.
In the event that the Mortgage value and the amount of the cash and accounts
receivable of the Company are insufficient to secure the full amount of this
Note, TIG shall have the right to require, in addition to its other rights at
law or under the Mortgage or the Security Agreement, the Company to furnish
additional collateral as further security for this Note. The Company shall
notify TIG immediately in the event that United States Fidelity and Guaranty
Company, Fidelity and Guaranty Insurance Company, or Fidelity and Guaranty
Insurance Underwriters, Inc. (collectively, the "Surety") assert a claim
pursuant to a Master Surety Agreement dated November 3, 1997 between the Surety
and the Company.
This Note may not be negotiated, assigned or transferred by TIG, nor
may the Company negotiate, assign or transfer its obligations hereunder.
IN WITNESS WHEREOF, the Company has caused this Note to be executed by
its officers thereunto duly authorized on the date first above written.
DUALSTAR TECHNOLOGIES CORPORATION
By
---------------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.15
SECURITY AGREEMENT
THIS SECURITY AGREEMENT ("Agreement") made this ___ day of July, 1998
by and among DUALSTAR TECHNOLOGIES CORPORATION, a Delaware corporation (the
"Corporation"), whose chief place of business is located at 11-30 47th Avenue,
Long Island City, New York, 11101, and TECHNOLOGY INVESTORS GROUP, LLC, a
Delaware limited liability company ("TIG"), 25 Coligni Avenue, New Rochelle,
New York 10801.
WHEREAS, TIG, subject to the terms and conditions set forth herein,
agreed to purchase from the Corporation a secured promissory note in the
principal amount of $1,000,000 (the "Note");
WHEREAS, the Note is secured by a second mortgage encumbering certain
premises owned by the Corporation (the "Property") located at 11-30 47th
Avenue, Long Island City, New York 11101 (the "Mortgage") and by the collateral
granted hereunder;
NOW THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements herein contained, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Grant of Security Interest. The Corporation grants to TIG a continuing
general lien and security interest in all accounts receivable, instruments, and
chattel paper (hereinafter "Accounts"), now or hereafter owned or acquired by
the Corporation, however the same shall arise or be acquired, and all proceeds
and collections thereof and all of the Corporation's cash, including cash held
in the bank, money market or cash management accounts (the "Collateral"). The
security interest in the Collateral granted hereunder is given to secure the
Corporation's payment and performance of all its obligations under the Note,
the Mortgage and this Agreement (the "Obligations").
2. Secured Obligation. The security interest in the Collateral secures the
payment and performance of the obligations in favor of TIG arising under the
Note. In the event of a default by the Corporation under the Note, full
recourse shall be made by TIG only in the following sequence: first against the
cash before any rights may be exercised against the accounts receivable and the
Mortgage, second against the accounts receivable before any rights may be
exercised against the Mortgage, and finally to the Mortgage.
3. Release. Upon payment in full of the Note, TIG, promptly upon request by the
Corporation, shall release the security interest granted herein and execute
such termination statements as may be necessary therefor.
<PAGE>
4. Representations and Warranties. The Corporation represents and warrants as
follows:
4.1 Good Standing, The Corporation is duly organized and existing
under the laws of the state of Delaware and is duly qualified and in good
standing in every other state in which the nature of its business requires such
qualification.
4.2 Accuracy of Books and Records. All books, records, and documents
relating to the Accounts are and will be genuine and in all material respects
what they purport to be; the amount of the Accounts shown on the books and
records of the Corporation represented as owing or to be owing at maturity by
each account debtor is and will be correct and accurate in all material
respects; the Corporation has no knowledge of any fact that would impair the
validity or collectibility of any of the Accounts.
4.3 No Conflicts or Defaults. The Corporation currently is not in
default under the Master Surety Agreement dated November 3, 1997 between the
Corporation and the United States Fidelity and Guaranty Insurance Company,
Fidelity and Guaranty Insurance Company and Fidelity and Guaranty Insurance
Underwriters, Inc. (the "Master Surety Agreement"). Based on conversations with
a representative of Independence Savings Bank, the execution by the Corporation
of the Note and/or the Mortgage will not violate or create a default under the
terms of any existing mortgage on the Property held by Independence Savings
Bank. The Corporation is not currently in default under the Master Surety
Agreement or any other material agreement to which it is a party.
4.4 Absence of Debt. The Corporation's only outstanding long-term
debt, other than the Note (when executed and delivered), is the Mortgage and
Security Agreement, dated August 14, 1996, by and between Property Control,
Inc. and Independence Savings Bank referenced in the Mortgage.
4.5 Continuing Representations. All covenants, representations and
warranties contained in this Agreement shall be true and correct at the time of
the execution of this Agreement and shall be deemed continuing for as long as
the Note remains outstanding.
4.6 Financial Information. All information furnished by the
Corporation to TIG concerning the Collateral and proceeds thereof, its
financial condition or otherwise, is and will be complete, accurate and correct
in all material respects at the time the same is furnished.
4.7 Binding Obligation. This Agreement has been duly executed and
delivered by the Corporation and is the 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.
4.8 Ownership of Collateral. The Corporation owns the Collateral,
whether now owned or after-acquired, free and clear of all material liens,
restrictions and limitations, except
2
<PAGE>
those liens, restrictions, or limitations set forth on Exhibit A.
4.9 Governmental Authorizations. No authorization, approval, or other
action by, and no notice to or filing with, any governmental authority or
regulatory body is required either for the grant by the Corporation of a
security interest in the Collateral or for the execution, delivery or
performance of this Agreement by the Corporation.
4.10 Perfection. The grant of a security interest in the Collateral to
TIG pursuant to this Agreement creates a valid, security interest in favor of
TIG in the Collateral securing payment of the Note.
5. Covenants.
5.1 Other Documents and Actions. The Corporation will take such action
and execute such additional documents as TIG may reasonably request in
connection with this Agreement or to enforce TIG's rights hereunder. Without
limiting the generality of the foregoing, the Corporation will, at its own
expense, execute and file such financing or continuation statements, or
amendments thereto, and such other instruments and notices, as may be necessary
or desirable, or as TIG may reasonably request, in order to perfect and
preserve the security interest granted or purported to be granted hereby. A
carbon, photographic or other reproduction of this Agreement or any financing
statement covering the Collateral or any part thereof will be sufficient as a
financing statement where permitted by law.
5.2 Records of Collateral. The Corporation will keep full and accurate
books and records relating to the Collateral in accordance with generally
accepted accounting principles.
5.3 Liens on Collateral. The Corporation shall not directly or
indirectly, whether voluntarily, involuntarily, by operation of law or
otherwise, create or permit to exist any charges, security interests,
encumbrances, adverse claims, or liens on or with respect to the Collateral
(collectively, the "Claims"), except for (i) the lien in favor of TIG, (ii)
such Claims as are set forth on Exhibit A hereto, and (iii) such Claims that
may arise in the ordinary course of business. Other than the existing first
mortgage on the Property, and the Mortgage, the Corporation shall not directly
or indirectly, whether voluntarily, involuntarily, by operation of law or
otherwise, create or permit to exist any mortgage, lien, encumbrance or other
adverse claims against the Property.
6. Events of Default. The occurrence of any of the following events will
constitute an event of default ("Event of Default") hereunder and the Note
shall become immediately due and payable without notice or demand by TIG:
6.1 Defaults. The Corporation shall fail to make any payment or
perform any of the Obligations when due, or shall be in default under the
Master Surety Agreement.
3
<PAGE>
6.2 Dissolution. The cessation of the Corporation as a going concern,
including without limitation, insolvency, business failure or the commencement
of any proceeding under any bankruptcy or insolvency law.
6.3 Misrepresentation. Any warranty, representation, or statement made
or furnished to TIG by or on behalf of the Corporation shall have been false in
any material respect when made or furnished or shall become false with the
passage of time.
7. Remedies. If any Event of Default shall have occurred and be continuing, TIG
will have all of the rights, powers and privileges of a secured party under the
Uniform Commercial Code in force and effect from time to time with respect to
the security interest granted by this Agreement.
8. Miscellaneous.
8.1 Amendment. This Agreement and the Exhibit hereto may not be
amended except by an instrument in writing signed by or on behalf of each of
the parties hereto.
8.2 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.
8.3 Governing Law. The interpretation and construction of this
Agreement, and all matters relating thereto, shall be governed by the laws of
the State of New York.
8.4 Severability. If any provision of this Agreement is held or deemed
to be or is, in fact, inoperable or unenforceable as applied in any particular
case because it conflicts with any other provision or provisions hereof or any
constitution or statute or rule of public policy, or for any other reason, such
circumstances shall not have the effect of rendering the provision in question
inoperative or unenforceable.
8.5 Attorney's Fees. In the event of any litigation to enforce the
provision of this Agreement, the Note or the Mortgage, the prevailing party in
such litigation shall be entitled to recover the reasonable costs and expenses,
including reasonable attorney's fees, as fixed by the courts or arbitrator.
8.6 Captions. The captions used herein are for reference purposes
only, and shall not in any way affect the meaning or interpretation of this
Agreement.
8.7 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 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
4
<PAGE>
deemed to have been given when transmitted.
8.8. Parties in Interest. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, successors and assigns.
8.9 Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
8.10 Entire Agreement. This Agreement, the Exhibit and the Schedule
hereto contain 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.
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:_________________________ By:________________________________
Name: Name:
Title: Title:
5
<PAGE>
EXHIBIT A
LIENS, RESTRICTIONS, AND LIMITATIONS.
1. The Master Surety Agreement dated November 3, 1997 between DualStar
Technologies Corporation and United States Fidelity and Guaranty
Company, Fideltiy and Guaranty Insurance Company and Fidelity and
Guaranty Insurance Underwriters, Inc.
6
<PAGE>
SCHEDULE A
ADDRESSES
DualStar Technologies Corporation
11-30 47th Avenue
Long Island City, New York 11101
Attention: Chief Financial Officer
Technology Investors Group LLC
25 Coligni Avenue
New Rochelle, New York 10801
Attention: Chief Financial Officer
7
<PAGE>
EXHIBIT 21.1
Jurisdiction and
Name of Subsidiary Date of Incorporation
- ------------------ ---------------------
Centrifugal Associates, Inc. New Jersey, 10/20/64
Mechanical Associates, Inc. New York, 3/31/89
Centrifugal Service, Inc. New York, 9/4/92
The Automation Group, Inc. Delaware, 5/25/95
Trident Mechanical Systems, Inc. Delaware, 5/25/95
Centrifugal/Mechanical Associates, Inc. Delaware, 6/9/95
Property Control, Inc. Delaware, 6/9/95
High-Rise Electric, Inc. Delaware, 7/5/95
Grace Systems Technologies, Inc. Delaware, 2/2/96
DualStar Communications, Inc. Delaware, 2/2/96
Integrated Controls Enterprises, Inc. Delaware, 8/30/96
HR Electrical Systems, Inc. Delaware, 6/10/98
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated September 15, 1998, accompanying the
consolidated financial statements included in the Annual Report of DualStar
Technologies Corporation on Form 10-K for the year ended June 30, 1998. We
hereby consent to the incorporation by reference of said report in the
Registrant Statement of DualStar Technologies Corporation on Form S-8 (File No.
33-97708, effective October 3, 1995).
GRANT THORNTON LLP
New York, New York
September 15, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1356228
<SECURITIES> 0
<RECEIVABLES> 19321514
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27365190
<PP&E> 3400470
<DEPRECIATION> 0
<TOTAL-ASSETS> 33344759
<CURRENT-LIABILITIES> 27000712
<BONDS> 0
0
0
<COMMON> 90000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 33344759
<SALES> 94280300
<TOTAL-REVENUES> 94280300
<CGS> 85557968
<TOTAL-COSTS> 85557968
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 596846
<INCOME-TAX> 41000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 555846
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
