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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, 1999
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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11-30 47TH AVENUE, LONG ISLAND CITY, NEW YORK 11101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 340-6655
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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 .
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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, 1999 was $58,083,375, based
upon the closing price ($6.125) for such Common Stock on such date.
The number of shares outstanding of Registrant's Common Stock, as of September
24, 1999, was 10,791,000.
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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 December 8, 1999, is
incorporated by reference in Part III hereof.
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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") and Mechanical Associates, Inc.
("Mechanical") in an exchange of securities, and Associates and Mechanical each
became wholly owned subsidiaries of DualStar. Associates began operations in
1964 and Mechanical in 1989.
DualStar formed Trident Mechanical Systems, Inc. ("Trident") 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;
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, Trident, PCI, CMA,
High-Rise, 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 has engaged in two business segments: contracting and
communications. For financial information concerning the two segments, see Note
M - "Segment Information" of the Notes to the Financial Statements referred to
in Item 8 hereof.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
Associates, Mechanical and CMA engage in mechanical contracting services.
Their 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 unaffiliated 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 $3 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 Private Cable Operator (PCO). As an integrated communications provider,
DCI bundles and delivers custom-tailored information, communication,
entertainment and security services to its subscribers via the CyberBuilding(R)
system that it designs and installs in multiple dwelling units (MDUs).
ICE supplies, installs and services facility management, energy 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.
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HRES designs and installs electrical systems on contracts generally valued
at up to $3 million, and specializes on work such as fiber optics, local area
networks, security and fire alarm systems, HVAC controls and building management
systems. In addition, HRES performs 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 Company
facilities in compliance with OSHA regulations.
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, 1999, revenue derived from four
customers (Lehrer McGovern Bovis, Inc., HRH Construction Corp., Tishman
Construction Corp. of NY and Turner Construction Co., and/or their respective
affiliates) amounted to approximately 19%, 19%, 12% and 8%, respectively, of the
Company's total revenue. 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.
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, CMA 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 $15 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 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. DCI's strategy has been to solicit property owners, associations,
developers and management companies. ICE solicits property owners, general
contractors, and mechanical contractors in addition to serving the mechanical
subsidiaries of DualStar. HRES solicits 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.
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At fiscal year ending June 30, 1999, the Company's backlog was
approximately $93 million as contrasted with approximately $42 million at June
30, 1998. The Company believes that most of its backlog at June 30, 1999 will be
completed prior to December 31, 2000, 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, Service Mark, Copyright and Proprietary Rights.
Currently, the Company has four trademark applications (Building Area Network,
DualStar, DualStar Technologies and Home Area Network) pending with the U.S.
Patent & Trademark Office ("USPTO"). Seven service marks, Global Hiring Hall,
CyberBuilding, CyberBuilders, CyberCierge, DualStar Communications, DualStar
and DualStar Technologies, were registered with the USPTO on July 29, 1997 and
August 25, 1998, September 1, 1998, March 9, 1999, May 11, 1999, June 29, 1999
and July 13, 1999, respectively. Two trademarks, CyberBuilding and CyberView,
were registered with the USPTO on August 4, 1998 and July 20, 1999,
respectively.
The following are common law trademarks and/or service marks of the
Company: Building Area Network, Citywide Area Network, Community Area Network,
CyberBuilders, CyberBuilding, CyberCierge, CyberCommunity, CyberHearth,
CyberHome, CyberHotel, CyberModel, CyberOfferings, CyberResident, CyberScraper,
CyberServices, CyberTenant, CyberTown, CyberView, DualStar, DualStar
Communications, DualStar Technologies, Global Hiring Hall, Home Area Network,
InfoStructors and InfoStructure.
The Company may in the future file patent or copyright applications, or
additional trademark or service mark applications, relating to certain of the
Company's mechanical, electrical, electronic, control, environmental,
information technology, security, entertainment and communications products and
services. Nevertheless, if patents are issued, or trademarks, service marks 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, service marks or copyrights, or that the Company will be
able to afford the expenses of any complex litigation which may be necessary to
enforce its proprietary rights. Failure of any future or existing patents,
trademark, service mark 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, service mark 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.
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The Company has registered the following eleven domain names on the
Internet: cyberbuilding.com, cyberbuilding.org, cybercierge.com,
cyberresident.com, cybertenant.com, dualstar.com, dualstar.net, dualstar.org,
gracesystems.com, integratedcontrols.com and taghome.com.
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, control, environmental, information
technology, security, telephone, Internet and television 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 general
liability insurance 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.
Competition. The mechanical, electrical, electronic, control,
environmental, information technology, security, telephone, Internet and
television 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,
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
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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, 1999, the Company employed 391 full-time
employees. Of these full-time employees, 23 are engaged in administration and
finance, 357 in manufacturing, engineering and production, 9 in marketing and
sales, and 2 in operations and development. Many of the Company's employees have
overlapping responsibilities in these job descriptions.
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 328 of its employees are represented by
labor organizations. The Company has never experienced a work stoppage.
Management of the Company believes that it has a healthy relationship with its
employees.
Executive Officers of the Registrant. 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 executive officer of the Company who does not serve on the Board of
Directors:
Joseph C. Chan; 38, 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).
See Item 10 for executive officers who also serve on the Board of Directors.
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NOTE ON FORWARD-LOOKING STATEMENTS
When used in th is 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, readers are cautioned not to place undue reliance on such
forward-looking statements. The Company also undertakes no obligation to update
or publicly release any revision to these forward looking statements.
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. READERS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS WITH RESPECT TO THEIR INVESTMENTS IN THE COMPANY'S SECURITIES. SEE ALSO
"NOTE ON FORWARD-LOOKING STATEMENTS."
OPERATING LOSSES
Although certain of the Company's subsidiaries have conducted operations
for a considerable period, the Company began operations in August 1994. 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 it being 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 $1.3 million and $0.6
million for the years ended June 30, 1999 and 1998 respectively, 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, 1999 and 1998, working
capital was approximately $3.8 million and $0.4 million, 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
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cash from operating and financing 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 fluctuate based upon competitive and economic conditions.
There can be no assurance that the Company will continue to obtain new contracts
with satisfactory profit margins.
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 has entered new areas of business such as the telephone,
Internet and television fields in which it has had limited prior experience. See
"Entry into New Lines of Business." In entering these new fields, the Company
has encountered 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 subsidiaries over the last four 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 telephone,
Internet and 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 succeed in 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. 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
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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 WorldCom and
Sprint. Hundreds of other companies also compete in the long distance
marketplace. Other competitors of the Company include cable and satellite
television companies, competitive access providers, Internet service providers,
competitive local exchange carriers, integrated communications providers,
wireless, 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, Internet service providers, integrated communications
providers 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, 1999, revenue derived from four
customers (Lehrer McGovern Bovis, Inc., HRH Construction Corp., Tishman
Construction Corp. of NY and Turner Construction Co., and/or their respective
affiliates) amounted to approximately 19%, 19%, 12% and 8%, respectively, of the
Company's total 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, electrical, electronic,
control, environmental, information technology, security, telephone, Internet
and television systems, services and solutions for 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.
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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 most of the Company's customers. 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, 1999, 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 80 percent of capacity. Total rental expense for the
Company for recent periods is as follows:
PERIOD EXPENSE
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Year ended June 30, 1999 .................................. $46,000
Year ended June 30, 1998 .................................. $25,000
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ITEM 3 - LEGAL PROCEEDINGS
(a) 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.
As of the date of this Report, this matter is proceeding through discovery.
(b) High-Rise is a defendant in two lawsuits filed in April 1999. The
plaintiffs are seeking $5,000,000 and $2,000,000, respectively, for claims
related to bodily injuries on job sites where High-Rise and other trades were
working. Management of High-Rise believes that the plaintiffs' claims are
without merit and, in any event, are covered under the Company's general and
umbrella liability insurance policies.
(c) On August 11, 1999, Triangle Sheet Metal Works, Inc. ("Triangle"), a
subcontractor of CMA and its divisions, filed a petition under Chapter 11 of
Title 11 of the United States Code in the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court"). Triangle is a sheet
metal subcontractor for CMA on six projects in New York City (the "Subcontractor
Projects"). CMA is also the subcontractor of Triangle on one additional project
in New York City (the "Contractor Project"). Prior to Triangle's Chapter 11
filing, Triangle ceased operation and defaulted on its obligations under the
Subcontractor Projects and Contractor Project. In pleadings filed with the
Bankruptcy Court, Triangle alleges, among other things, that CMA is indebted to
Triangle in an amount ranging between $1,400,000 and $3,000,000. Triangle also
suggested in such pleadings that there may exist potential causes of action by
Triangle against DualStar and/or CMA, including breach of contract, tortious
interference and unfair competition. Triangle has not commenced any formal legal
actions or proceedings with respect to any of such allegations (other than
seeking
12
<PAGE>
to obtain discovery from CMA and DualStar). CMA and DualStar dispute Triangle's
allegations in toto and believe that they are wholly without merit. CMA has
claims and counterclaims against Triangle for breaches and defaults in respect
of the Subcontractor Projects and the Contractor Project. Although such claims
and counterclaims are unliquidated and cannot be ascertained at this time, CMA
believes that it will setoff and/or recoup part of the damages by offsetting any
monies owed by CMA to Triangle. The Company can make no assurances, however,
that such recoupment will be sufficient to cover all of CMA's damages resulting
from Triangle's defaults under the Subcontractor Projects and Contractor
Project. Based upon currently available information, it appears that a
significant portion of CMA's claims against Triangle may not be recoverable
after such setoff and/or recoupment.
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.
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 1999 and for fiscal year 1998.
Fiscal 1999 High Low
- ----------- ---- ---
First Quarter $ 2 $ 1 1/8
Second Quarter $ 1 7/8 $ 1 5/16
Third Quarter $ 1 1/2 $ 1
Fourth Quarter $ 7 21/32 $ 1 1/8
Fiscal 1998 High Low
- ----------- ---- ---
First Quarter $ 2 9/16 $ 1 9/32
Second Quarter $ 1 31/32 $ 1 3/32
Third Quarter $ 1 19/32 $ 5/8
Fourth Quarter $ 3 9/16 $ 1 5/16
As of September 24, 1999, there were 81 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.
13
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
DUALSTAR TECHNOLOGIES CORPORATION
SELECTED FINANCIAL DATA (1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Contract revenue $65,126 $66,232 $73,618 $94,280 $92,650
Income (loss) from operations 1,280 (5,769) (6,468) 597 703
Net income (loss) 11 (3,774) (6,512) 556 1,322
Cash dividends (2) 600 -- -- -- --
Basic income (loss) per share -- $(0.42) $(0.72) $0.06 $0.14
Diluted income (loss) per share -- $(0.42) $(0.72) $0.06 $0.13
<CAPTION>
JUNE 30,
------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $13,955 $ 9,091 $ 263 $ 365 $ 3,818
Total assets 29,275 28,381 26,577 33,345 38,595
Shareholders' equity 15,097 11,323 4,811 5,367 6,689
</TABLE>
(1) The Selected Financial Data represent the consolidated data for the years
ended June 30, 1999, 1998, 1997, 1996 and 1995.
(2) 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 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.
14
<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, through its wholly owned subsidiaries,
provides mechanical, electrical, electronic, control, environmental, security,
communications, telephone, Internet and television systems, services and
solutions to a wide range of customers primarily in the New York Tri-State area.
DualStar Technologies Corporation and its subsidiaries are hereafter referred to
as the "Company".
CAPITAL RESOURCES AND LIQUIDITY
Cash balances at June 30, 1999 and 1998 were approximately $0.6 million and $1.4
million, respectively. During fiscal 1999, the Company used approximately $3.9
million of net cash in its operating activities. This cash was used primarily to
pay trade payables. During fiscal 1998, the Company's operations provided
approximately $1.2 million of cash. Further, during fiscal 1999, the Company
acquired capital assets of approximately $423,000, of which $157,000 was
financed by capital leases, primarily for investment in communications
infrastructure systems for high-rise buildings in return for rights to provide
telephone, Internet, television and other services to the buildings' residents.
During fiscal 1998, the Company acquired capital assets of approximately
$868,000, primarily for investment in communications infrastructure systems for
two high-rise buildings in return for rights to provide telephone, Internet,
television and other services to the buildings' residents.
During fiscal 1999 and 1998, the Company repaid approximately $49,000 and
$41,000, respectively, of the mortgage payable. As of June 30, 1999 and 1998,
the Company had a mortgage payable of approximately $769,000 and $818,000
respectively, of which $45,000 was classified as current liabilities.
In July and November 1998, the Company entered into a $1 million subordinated
note agreement and a $2.5 million subordinated convertible note agreement,
respectively, with an investment group.
15
<PAGE>
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
will be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
In 1998, the Company developed a three-phase program for Y2K compliance. Phase I
is the identification of those systems through which the Company has exposure to
Y2K issues. Phase II is the development and implementation of action plans to be
Y2K compliant in all areas by October 1999. Phase III, to be completed by
November 1999, is the final testing of each major area of exposure to ensure
compliance. The Company has identified two major areas determined to be critical
for successful Y2K compliance: (1) financial and informational system
applications, and (2) system and software suppliers.
The Company, in accordance with Phase I of the program, conducted an internal
review of its systems and contacted suppliers to determine major areas of
exposure to Y2K issues. In the financial and informational systems area, a
number of applications have been identified as Y2K compliant due to their recent
implementation. The Company's core financial and reporting systems have been
upgraded and tested to be Y2K compliant. The Company's informational systems,
except one system, have been upgraded to be Y2K compliant. The non-compliant
system is scheduled for upgrade by October 1999. All the informational systems
are scheduled for final testing by November 1999 to ensure Y2K compliance.
Should the informational systems continue to be non-compliant after testing, the
information can be obtained in a less efficient manner. The Company believes the
currently estimated replacement and labor costs to bring the informational
systems into compliance should not have a material adverse effect on the
Company's financial condition in fiscal 2000, although there can be no assurance
of this.
The Company has contacted its major suppliers with regards to Y2K compliance.
These suppliers state that they are, or intend to be, Y2K compliant by January
1, 2000. There can be no assurance of such a result and the Company cannot
predict the outcome if the suppliers do not become Y2K compliant by January 1,
2000. Should the Company have a non-compliant supplier, the Company believes
that it will be able to utilize alternate supplier.
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.
16
<PAGE>
RESULTS OF OPERATIONS
Fiscal 1999 Compared to Fiscal 1998
Contract revenues decreased 1.7% in 1999 to $92.6 million, down $1.6 million
from 1998. The decrease was due primarily to the Company's marketing plan of
being more selective in bidding new contracts to meet certain profitability
criteria.
Gross profit increased $1.6 million in 1999 to $10.4 million from 1998. The
gross profit margins were 11.19 and 9.3% for the years ended June 30, 1999 and
1998, respectively. The improvements in gross profit and gross profit margin
were primarily due to the implementation of the Company's marketing plan to
emphasize contracts that return higher profit margins.
Consolidated backlog at June 30, 1999 was approximately $93.2 million, compared
to $42.2 million at June 30, 1998. The Company continues to bid on projects, and
bid volume remains active. Opportunities to obtain large projects exist and
therefore backlog could increase substantially. It is very difficult, however,
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 or gross profit.
General and administrative expenses increased $1.5 million in 1999 to $9.7
million from 1998. The increase was primarily due to accrual of potential
liabilities in connection with sales tax audits of $345,000, buyout of two
officers' employment agreements of $329,000, interest expense of $160,000
incurred for the notes the Company issued in July and November 1998, increase in
other interest expense of $163,000, and increase in professional fees of
$145,000. As a percentage of revenue, general and administrative expenses
increased to 10.4% for 1999 from 8.6% in 1998.
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.
17
<PAGE>
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. As of June
30, 1999, the Company had debt of $4.2 million with various fixed interest rates
from 7.5% to 10.0%. Subsequent to June 30, 1999, $2.5 million of debt was
converted into the equity of the Company. The remaining fixed rate debt may have
its fair value adversely affected if interest rates decline; however, the amount
is not expected to be material.
18
<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.
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 December 8, 1999. The
information required hereunder with respect to executive officers of the Company
is set forth in Item 1 under the caption "Executive Officers of the Registrant."
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 December 8, 1999.
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 December 8, 1999.
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 December 8, 1999.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
19
<PAGE>
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
NUMBER TITLE
- ------ -----
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, as amended.
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.(4)
20
<PAGE>
10.16 Non-Negotiable, Non-Transferable Subordinated, Convertible Promissory
Note, dated November 25, 1998.(5)
10.17 Note Purchase Agreement, dated as of November 25, 1998, relating to the
purchase of a subordinated convertible note.(5)
10.18 Registration Rights Agreement, dated as of November 25, 1998, relating
to the purchase and sale of the subordinated convertible note.(5)
10.19 Stockholders' Agreement, dated as of November 25, 1998, relating to the
purchase and sale of the subordinated convertible note.(5)
21.1 Subsidiaries of the Registrant.(4)
23.1 Consent of Grant Thornton LLP .
27.1 Financial Data Schedule (electronic filings only).
(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.
(4) Incorporated herein by reference to Registrant's Annual Report on Form 10-K
(File No. 0-25552) for the fiscal year ended June 30, 1998.
(5) Incorporated herein by reference to Registrant's Annual Report on Form 10-Q
(File No. 0-25552) for the quarter ended December 31, 1998.
(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, 1999
None.
21
<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-4
Consolidated Statement of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8 - F-26
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, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 1999. 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, 1999 and 1998 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
September 21, 1999
F-2
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 583,995 $ 1,356,228
Contracts receivable - net of allowance for doubtful accounts of
$277,000 and $194,000 in 1999 and 1998, respectively 23,653,712 19,321,514
Retainage receivable 6,213,201 4,574,252
Costs and estimated earnings in excess of billings on uncompleted 1,360,412 1,507,471
contracts
Deferred tax asset 178,000 178,000
Prepaid expenses and sundry receivable 303,713 427,725
------------ ------------
Total current assets 32,293,033 27,365,190
PROPERTY AND EQUIPMENT - net of accumulated depreciation 3,147,068 3,400,470
OTHER ASSETS
Deferred tax asset 1,574,000 924,000
Other 1,580,486 1,655,099
------------ ------------
$38,594,587 $33,344,759
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $21,053,418 $19,086,827
Billings in excess of costs and estimated earnings on uncompleted 2,994,996 3,882,797
contracts
Subordinated note payable 1,000,000 --
Accrued expenses and other current liabilities 3,426,508 4,030,890
------------ ------------
Total current liabilities 28,474,922 27,000,514
SUBORDINATED CONVERTIBLE NOTE 2,500,000 --
MORTGAGE PAYABLE - net of current portion 723,750 772,500
OTHER LIABILITIES 206,498 204,576
------------ ------------
Total liabilities 31,905,170 27,977,590
------------ ------------
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 (8,396,419) (9,718,667)
------------ ------------
6,689,417 5,367,169
------------ ------------
$38,594,587 $33,344,759
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
F-3
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Contract revenues earned $92,649,578 $94,280,300 $73,618,336
Cost of revenues earned 82,281,340 85,557,968 71,375,515
------------ ------------ ------------
Gross profit 10,368,238 8,722,332 2,242,821
General and administrative expenses 9,664,990 8,125,486 8,710,487
------------ ------------ ------------
Income (loss) before provision
(benefit) for income taxes 703,248 596,846 (6,467,666)
Provision (benefit) for income taxes
Current tax provision 31,000 41,000 44,000
Deferred tax benefit (650,000) -- --
------------ ------------ ------------
(619,000) 41,000 44,000
------------ ------------ ------------
NET INCOME (LOSS) $ 1,322,248 $ 555,846 $(6,511,666)
============ ============ ============
Basic income (loss) per share:
Net income (loss) per share $0.15 $0.06 $(0.72)
Weighted average shares outstanding 9,000,000 9,000,000 9,000,000
Diluted income (loss) per share:
Net income (loss) per share $ 0.13 $ 0.06 $ (0.72)
Weighted average shares outstanding 10,993,860 9,742,127 9,000,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additional
Common paid-in
stock Capital (Deficit)
---------- ------------ ------------
<S> <C> <C> <C>
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)
Net income for the year ended June 30, 1999 -- -- 1,322,248
---------- ------------ ------------
Balance - June 30, 1999 $ 90,000 $ 14,995,836 $ (8,396,419)
========== ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 1,322,248 $ 555,846 $(6,511,666)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities
Depreciation and amortization 561,261 529,048 689,569
Deferred income taxes (650,000) -- --
(Increase) decrease in assets
Contracts receivable (4,332,198) (3,506,346) (2,594,886)
Retainage receivable (1,638,949) (1,711,203) 1,684,052
Costs and estimated earnings in excess
of billings on uncompleted contracts 147,059 (884,520) 2,140,100
Income taxes receivable -- -- 1,225,532
Prepaid expenses 124,012 (107,783) (108,527)
Other assets 189,396 26,901 (1,045,621)
Increase (decrease) in liabilities
Accounts payable 1,966,591 3,527,692 4,543,211
Billings in excess of costs and estimated earnings
on uncompleted contracts (887,801) 1,141,255 (735,923)
Accrued expenses and other current liabilities (663,757) 1,637,452 (279,081)
----------- ----------- -----------
Net cash (used in) provided by operating activities (3,862,138) 1,208,342 (993,240)
----------- ----------- -----------
Cash flows from investing activities
Capital expenditures (265,851) (868,486) (1,628,795)
Proceeds from marketable securities -- -- 910,029
Decrease in sundry receivable -- -- 1,070,435
----------- ----------- -----------
Net cash (used in) provided by investing activities (265,851) (868,486) 351,669
----------- ----------- -----------
</TABLE>
F-6
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended June 30,
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -------
<S> <C> <C> <C>
Cash flows from financing activities
Proceed from subordinated convertible note $2,500,000 $ -- $ --
Proceed from subordinated note 1,000,000 -- --
Repayment of mortgage payable (48,750) (41,250) (41,250)
Payments on capital lease obligations (95,494) (52,993) (230,556)
----------- ----------- -----------
Net cash provided by (used in) financing activities 3,355,756 (94,243) (271,806)
----------- ----------- -----------
Net (decrease) increase in cash (772,233) 245,613 (913,377)
Cash at beginning of year 1,356,228 1,110,615 2,023,992
----------- ----------- -----------
Cash at end of year $ 583,995 $1,356,228 $1,110,615
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 330,757 $ 133,417 $ 90,000
Income taxes 14,910 19,644 2,000
</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 Company acquired Internet equipment which are financed by leases in the
total amount of $157,000 during the fiscal year ended June 30, 1999. These
leases are classified as capital leases.
The accompanying notes are an integral part of these statements.
F-7
<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, 1999,
1998 and 1997 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.
In June 1999, the Company signed a letter of intent to sell High-Rise
Electric, Inc. ("High-Rise") to Hydro-Electric Associates, Inc. for $11
million, subject to certain adjustments. The transaction is subject to the
execution of a definitive purchase agreement, arrangement of financing by
Hydro-Electric Associates, and approval by the Company's Board of Directors.
The closing of the transaction has been delayed due to Hydro-Electric
Associates' request for additional time to secure financing for the
transaction. The expected closing date of the transaction is currently
unknown. There is no assurance that this transaction will be completed;
therefore, the consolidated financial statements include the accounts of
High-Rise.
F-8
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A (CONTINUED)
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-9
<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 debt approximates fair value, principally
because of the short-term maturity of these items. The fair value of the
Company's long-term debts approximates carrying value as the interest
rates on the related debts approximate 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 basic net income (loss) per share is based on the
weighted average number of shares of common stock outstanding. For
diluted net income per share, when dilutive, stock options and warrants
are included as share equivalents using the treasury stock method, and
shares available for conversion under the convertible note are included
as if converted at the date of issuance.
F-10
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A (CONTINUED)
The weighted average number of shares and earnings (loss) per share for the
years presented is as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ----------------- -------------
<S> <C> <C> <C>
Year Ended June 30, 1999:
BASIC EARNING PER SHARE
Net income $1,322,248 9,000,000 $0.15
EFFECT OF DILUTIVE SECURITIES
Options 949,110
Subordinated convertible note 112,663 1,044,750
---------- ----------- ------
DILUTED EARNING PER SHARE
Net income $1,434,911 10,993,860 $0.13
========== =========== ======
Year Ended June 30, 1998:
BASIC EARNING PER SHARE
Net income $555,846 9,000,000 $0.06
EFFECT OF DILUTIVE SECURITIES
Options 742,127
--------- ----------- ------
DILUTED EARNING PER SHARE
Net income $555,846 9,742,127 $0.06
========= =========== ======
Year Ended June 30, 1997:
BASIC LOSS PER SHARE
Net loss $(6,511,666) 9,000,000 $(0.72)
----------- ----------- ------
DILUTED LOSS PER SHARE
Net loss $(6,511,666) 9,000,000 $(0.72)
=========== =========== ======
</TABLE>
In 1999, warrants to purchase 4,600,000 shares of common stock were not
included in the computation of diluted net income per share because the
exercise price of those warrants was greater than the average market
price of the common stocks. In 1998, options and warrants to purchase
4,777,000 shares of common stock were not included in the computation of
diluted net income per share because the exercise prices of those
options and warrants were greater than the average market price of the
common stocks. In 1997, options and warrants to purchase 6,672,000 were
not included in the computation of diluted net loss per share because
the effect would be antidilutive.
F-11
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the
following:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts $57,945,386 $75,818,648
Estimated earnings 6,854,992 9,240,880
------------ ------------
64,800,378 85,059,528
Less billings to date 66,434,962 87,434,854
------------ ------------
$ (1,634,584) $ (2,375,326)
============= =============
</TABLE>
Costs and estimated earnings on uncompleted contracts are included in the
accompanying consolidated balance sheets as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
----------- --------
<S> <C> <C>
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 1,360,412 $ 1,507,471
Billings in excess of costs and estimated
Earnings on uncompleted contracts (2,994,996) (3,882,797)
----------- -----------
$(1,634,584) $(2,375,326)
============ =============
</TABLE>
NOTE C - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1998
------------ ------------
<S> <C> <C>
Accrued compensation $2,194,353 $2,216,088
Current portion of mortgage payable 45,000 45,000
Other 1,187,155 1,769,802
---------- ----------
$3,426,508 $4,030,890
=========== ===========
</TABLE>
F-12
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1998
------------ ------------
<S> <C> <C>
Building and building improvements $ 1,759,802 $ 1,759,802
Automobiles 242,464 325,566
Machinery and equipment 1,285,704 1,034,884
Computer equipment 813,149 846,586
Furniture and fixtures 116,385 141,711
----------- ----------
4,217,504 4,108,549
Less accumulated depreciation (1,385,436) (1,023,079)
----------- ----------
2,832,068 3,085,470
Land 315,000 315,000
----------- -----------
$ 3,147,068 $ 3,400,470
============ ============
</TABLE>
NOTE E - DEBT
1. 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.
F-13
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E (CONTINUED)
At June 30, 1999, principal payments under the mortgage loan are as
follows:
2000 $ 45,000
2001 45,000
2002 45,000
2003 45,000
Thereafter 588,750
--------
768,750
Less: current portion (45,000)
$723,750
========
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. In addition, the lender acknowledged and
consented to the $1 million subordinated note and the $2.5 million
subordinated convertible note that the Company sold to an investment
group in July and November 1998, respectively.
2. Subordinated Convertible Note
On November 25, 1998, the Company sold to an investment group a
subordinated convertible note in the principal amount of $2.5 million,
due and payable on May 25, 2001. The note and unpaid interest bear an
interest rate of 7.5% per annum and is payable semi-annually at the
option of the Company. Interest that is not paid is added to the
principal. In the event of default, the lender may declare the principal
and unpaid interest immediately due and payable, and the outstanding
amount will bear an interest rate of 12.5% per annum thereafter.
The note is subordinated to the first mortgage of the Company's building
and to the rights of financial institutions lending money to the Company.
F-14
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E (CONTINUED)
During the term of the note, the lender has an option to convert the note
into fully-paid and nonassessable shares of the Company's common stock.
The number of shares issued upon the conversion shall not exceed
1,791,000 shares, or 19.9% of the Company's outstanding shares on
November 25, 1998. Initially, the conversion price is $1.40 per share and
can be reset on the 180th day following closing and every 90 days
thereafter. The reset conversion price is the lower of: (i) the average
closing price of the Company's common stock on the 20 trading days
immediately preceding the reset date or (ii) the initial conversion price
of $1.40. At June 30, 1999, the conversion price was $1.40. The number of
shares that can be received upon conversion will be adjusted
proportionately for certain transactions, such as stock dividends and
splits, and stockholder distributions.
If the number of shares issued upon the conversion times the conversion
price is less than the note principal and unpaid interest, the
difference, at the Company's option, is payable in cash or a one-year
term note. The term note will be secured by the Company's assets and bear
an interest rate of 12.5% per annum.
The Company can require the lender to convert the note into shares of the
Company's common stock at the applicable conversion price in effect on
such date if, at anytime after the 181st day following closing, the
closing price of the common stock, for 20 consecutive days, is $3.00 or
more per share. In July 1999, the Company required the lender to convert
the note into 1,791,000 shares of the Company's common stock and will
issue an one-year note payable of $105,000 to the lender.
Under the $2.5 million note agreement, the Company had certain
restrictions on certain transactions, as defined, such as acquisition of
additional indebtedness, related party transactions, transfer and
disposition of assets, issuance of stock options, stock dividends and
splits, and stock repurchases.
The Company also agreed to the designation by the investment group of one
member to the Company's Board of Directors. In February 1999, the
investment group's nominee was elected to the Company's Board of
Directors.
3. Subordinated Note
In July 1998, the Company sold to an investment group a $1 million
subordinated note. The note bears an interest rate of 10% per annum and
is collateralized by the Company's building, subordinate to the
building's first mortgage, in addition to the Company's cash and accounts
receivable. The note and any interest were due and payable on demand.
F-15
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E (CONTINUED)
On November 25, 1998, in connection with the $2.5 million subordinated
convertible note, the maturity date of the $1 million subordinated note
was extended to November 25, 1999 and provisions relating to events of
default were added.
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, 1999, all warrants were outstanding.
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.
F-16
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G (CONTINUED)
The following is a summary of the items giving rise to deferred tax benefits
at June 30, 1999 and 1998:
June 30,
--------------------------
1999 1998
----------- -----------
Current
Allowance for doubtful accounts $ 178,000 $ 105,000
----------- -----------
Long-term
Net operating loss carryforward 3,307,000 4,539,000
Accumulated depreciation 20,000 20,000
3,327,000 4,559,000
----------- -----------
Total deferred tax assets 3,505,000 4,664,000
Less: valuation allowance (1,753,000) (3,562,000)
----------- -----------
Net deferred tax assets $ 1,752,000 $ 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 $1,752,000, 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:
June 30,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Statutory federal income tax $ 239,000 $ 189,000 $(2,214,000)
State and local income taxes 31,000 41,000 39,000
Net operating loss carryforward (239,000) (1,489,000) 824,000
Valuation allowance (650,000) 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
----------- ----------- -----------
$ (619,000) $ 41,000 $ 44,000
=========== =========== ===========
F-17
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G (CONTINUED)
The Company has available for federal income tax purposes, net operating
losses of approximately $7,056,000, and for state and local tax purposes,
net operating losses of approximately $8,223,000, 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 1999 and 1998, no federal income tax expense was recorded as a result of
a benefit of $239,000 and $189,000, respectively, for the utilization of a
portion of the net operating loss carryforward for financial accounting
purposes.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under operating leases expiring at
various dates through July 2002. At June 30, 1999, minimum rental
commitments under noncancellable operating leases are as follows:
2000 $165,000
2001 120,000
2002 18,000
----------
$303,000
Equipment rent for the years ended June 30, 1999, 1998 and 1997 was
$201,000, $282,000 and $277,000, 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 and performance-based bonuses. The
agreements were automatically renewed for an additional three-year term in
1997. In June 1999, the Company bought out two founding officers' employment
agreements in the amounts of $210,000 and $119,000, respectively.
F-18
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H (CONTINUED)
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, 1999, 1998 and
1997, the Company contributed $12,042,000, $10,702,000 and $10,773,000,
respectively, for various union employee benefits, including pension
benefit, and medical and workers' compensation insurance.
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.
High-Rise is a defendant in two lawsuits filed in April 1999. The plaintiffs
are seeking $5,000,000 and $2,000,000, respectively, for claims related to
bodily injuries on job sites where High-Rise and other trades were working.
Management of High-Rise believes that the plaintiffs' claims are without
merit and, in any event, are covered under the Company's general and
umbrella liability insurance policies.
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 and bore interest at 8.75% per annum.
The principal and interest of the loan was repaid in full 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, 1999, 1998 and 1997 was $46,000, 25,000 and $66,000,
respectively.
F-19
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I (CONTINUED)
At June 30, 1998, the Company had an unsecured loan from an officer of
$185,000. The principal and interest of the loan was repaid in full in June
1999.
At June 30, 1999, the Company had loans to two employees in the amounts of
$151,000 and $50,000, respectively. The $151,000 loan is due on demand, with
an unstated interest rate. The $50,000 loan is due in February 2000 and
bears an interest rate of 7.75% per annum.
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 generally 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, 1999, revenue from three customers amounted to approximately 19%, 19%
and 12% of total revenue, respectively. 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.
NOTE K - STOCK OPTION PLAN
In 1994, the Company adopted a stock option plan accounted for under the
intrinsic value method of APB No. 25. The plan allows the Company to grant
options to employees for up to 2.2 million shares of common stock. In
December 1998, the Company's shareholders approved an amendment of the stock
option plan to increase the number of shares available for grant to 3.5
million, and to add directors of the Company as persons eligible for grant
of options.
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.
F-20
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K (CONTINUED)
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, 1999, 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>
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C> <C>
Net income (loss) As reported $1,322,248 $555,846 $(6,511,666)
Pro forma $1,322,248 $271,596 $(7,364,516)
Basic income (loss) As reported $0.15 $0.06 $(0.72)
per share Pro forma $0.15 $0.03 $(0.82)
Diluted income (loss) As reported $0.13 $0.06 $(0.72)
per share Pro forma $0.13 $0.03 $(0.82)
</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: risk-free interest rate of
6.08%, expected life of seven years, volatility of 113.5% and no dividend
yield.
F-21
<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, 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
Forfeited as of June 30, 1999 (396,000) $0.75
---------
Outstanding at June 30, 1999 1,676,000 $0.99
=========
The following information applies to options outstanding at June 30, 1999:
Number outstanding and exercisable 1,676,000
Range of exercise prices $0.75 TO $3.00
Weighted average exercise price $0.99
Weighted average remaining contractual life 6 YEARS
In August 1999, the Company's Board of Directors granted an additional
829,000 options to various employees and directors. In general, these
options vest over 5 years and have an option exercise price of $4.00.
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, 1999, 1998 and 1997, the Company
made no contribution to the plan.
F-22
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M - SEGMENT INFORMATION
The Company has the following two reportable segments: contracting and
communications. The contracting segment engages primarily in mechanical and
electrical contracting services in the United States. The communications
segment installs primarily communication systems and provides telephone,
Internet, television and other services to multiple dwelling units in New
York City.
The accounting policies used to develop segment information correspond to
those described in the summary of significant accounting policies. The
Company does not allocate certain corporate expenses to its segments.
Segment profit (loss) is based on profit (loss) from operations before
income taxes (benefits). Sales and transfers between segments are accounted
for at cost. The reportable segments are distinct business units operating
in different industries. They are separately managed, with separate
marketing systems.
<TABLE>
<CAPTION>
REPORTABLE SEGMENT INFORMATION CONTRACTING COMMUNICATIONS TOTALS
- -----------------------------------------------------------------------------------------------
FISCAL 1999
<S> <C> <C> <C>
Revenues from external customers $90,444,936 $2,204,642 $92,649,578
Intersegment revenues 1,347,199 55,000 1,402,199
Depreciation and amortization 244,016 154,070 398,086
Interest expense 88,440 86,857 175,297
Segment profit (loss) 2,472,486 (813,573) 1,658,913
Segment assets 34,496,662 3,732,849 38,229,511
Expenditure for segment assets -- 404,894 397,738
FISCAL 1998
Revenues from external customers $92,789,681 $1,490,619 $94,280,300
Intersegment revenues 227,354 50,098 277,452
Depreciation and amortization 258,132 121,566 379,698
Interest expense 15,420 20,745 36,165
Segment profit (loss) 1,716,311 (1,003,852) 712,459
Segment assets 30,088,397 3,075,150 33,163,547
Expenditure for segment assets 45,593 897,379 942,972
</TABLE>
F-23
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M (CONTINUED)
<TABLE>
<CAPTION>
REPORTABLE SEGMENT INFORMATION CONTRACTING COMMUNICATIONS TOTALS
- -----------------------------------------------------------------------------------------------
FISCAL 1997
<S> <C> <C> <C>
Revenues from external customers $73,366,635 $ 251,701 $73,618,336
Intersegment revenues 1,195,141 74,309 1,269,450
Depreciation and amortization 586,162 25,336 611,498
Interest expense 3,958 1,944 5,902
Segment loss (4,207,717) (549,444) (4,757,161)
Segment assets 23,080,535 2,032,669 25,113,204
Expenditure for segment assets 979,922 138,852 1,118,774
</TABLE>
<TABLE>
<CAPTION>
RECONCILIATION TO CONSOLIDATED AMOUNTS
FISCAL
-------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES
Total revenues for reportable segments $94,051,777 $94,557,752 $74,887,786
Elimination of intersegment revenues (1,402,199) (277,452) (1,269,450)
-------------------------------------------
Total consolidated revenues $92,649,578 $94,280,300 $73,618,336
===========================================
PROFIT (LOSS)
Total profit (loss) for reportable segments $ 1,658,913 $ 712,459 $(4,757,161)
Elimination of intersegment profits (30,391) (84,380) (142,629)
Unallocated amounts:
Corporate (925,274) (31,233) (1,567,876)
--------------------------------------------
Total consolidated income from operations $ 703,248 $ 596,846 $(6,467,666)
============================================
ASSETS
Total assets for reportable segments $38,229,511 $33,163,547
Elimination of intersegment profits on capitalized
assets (257,300) (226,909)
Elimination of intersegment balance (3,223,995) (2,822,652)
Unallocated amounts:
Corporate 3,846,371 3,230,773
-----------------------------
Total consolidated assets $38,594,587 $33,344,759
=============================
</TABLE>
F-24
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M (CONTINUED)
OTHER SIGNIFICANT ITEMS:
<TABLE>
<CAPTION>
INTERSEGMENT
SEGMENT PROFITS CONSOLIDATED
TOTALS CORPORATE ELIMINATION TOTALS
--------------------------------------------------------------------------
<S> <C> <C> <C>
FISCAL 1999
Depreciation and amortization $398,086 $163,175 -- $561,261
Interest expense 175,297 267,244 -- 442,541
Expenditure for segment assets 397,738 55,296 $(30,391) 422,643
FISCAL 1998
Depreciation and amortization 379,698 149,350 -- 529,048
Interest expense 36,165 82,374 -- 118,539
Expenditure for segment assets 942,972 9,894 (84,380) 868,486
FISCAL 1997
Depreciation and amortization 611,498 78,071 -- 689,569
Interest expense 5,902 29,871 -- 35,773
</TABLE>
NOTE N - SUBSEQUENT EVENTS
(a) In August 1999, the Company entered into an agreement with an investment
group, under which the investment group will invest $15.3 million in the
Company through the purchase of common stock and a convertible note and will
grant the Company residential, commercial and hotel access rights nationwide
in exchange for warrants. The agreement is subject to the execution of
definitive documentation containing customary terms and conditions.
The right-of-entry agreement grants the Company the right to sell
communications and related services to over 100,000 multiple dwelling units
("MDUs"), 2,000,000 square feet of commercial space, and 1,000 hotel rooms
owned or controlled by the investment group. The services to be provided by
the Company include telephone, Internet, television and other services. In
exchange, the investment group will receive warrants to purchase 1,000,000
shares of the Company's common stock at an exercise price of $0.10 per
share. The investment group also has agreed to purchase 1,000,000 shares of
the Company's common stock at a price of $5.30 per share, and to lend the
Company $10 million on favorable terms, subject to certain conditions and
secured by certain assets. Subject to the Company's shareholder approval,
the loan shall be convertible, at the option of the investment group, into
the Company's common stock at a conversion price of $5.15 per share. The
Company expects to use the net proceeds from the stock and convertible note
sale to expand its communications and related businesses.
F-25
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N (CONTINUED)
The agreement also provides for certain registration rights, a shareholders
agreement, and designation by the investment group of one member to the
Company's Board of Directors. In September 1999, the investment group's
nominee was elected to the Company's Board of Directors.
(b) On August 11, 1999, Triangle Sheet Metal Works, Inc. ("Triangle"), a
subcontractor of Centrifugal/Mechanical Associates, Inc. and its divisions
("CMA"), filed a petition under Chapter 11 of Title 11 of the United States
Code in the United States Bankruptcy Court for the Southern District of New
York (the "Bankruptcy Court"). Triangle is a sheet metal subcontractor for
CMA on six projects in New York City (the "Subcontractor Projects"). CMA is
also the subcontractor of Triangle on one additional project in New York
City (the "Contractor Project"). Prior to Triangle's Chapter 11 filing,
Triangle ceased operation and defaulted on its obligations under the
Subcontractor Projects and Contractor Project. In pleadings filed with the
Bankruptcy Court, Triangle alleges, among other things, that CMA is indebted
to Triangle in an amount ranging between $1,400,000 and $3,000,000. Triangle
also suggested in such pleadings that there may exist potential causes of
action by Triangle against DualStar and/or CMA, including breach of
contract, tortious interference and unfair competition. Triangle has not
commenced any formal legal actions or proceedings with respect to any of
such allegations (other than seeking to obtain discovery from CMA and
DualStar). CMA and DualStar dispute Triangle's allegations in toto and
believe that they are wholly without merit. CMA has claims and counterclaims
against Triangle for breaches and defaults in respect of the Subcontractor
Projects and the Contractor Project. Although such claims and counterclaims
are unliquidated and cannot be ascertained at this time, CMA believes that
it will setoff and/or recoup part of the damages by offsetting any monies
owed by CMA to Triangle. The Company can make no assurances, however, that
such recoupment will be sufficient to cover all of CMA's damages resulting
from Triangle's defaults under the Subcontractor Projects and Contractor
Project. Based upon currently available information, it appears that a
significant portion of CMA's claims against Triangle may not be recoverable
after such setoff and/or recoupment.
F-26
<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
Chairman of the Board, President and
Chief Executive Officer
Dated: September 27, 1999
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 Chairman of the Board, President September 27, 1999
- -------------------- and Chief Executive Officer
Gregory Cuneo
/s/ ROBERT BIRNBACH Executive Vice President, Chief September 27, 1999
- -------------------- Financial Officer [Principal Financial
Robert Birnbach Officer] and Director
/s/ JOSEPH C. CHAN Vice President and Chief September 27, 1999
- -------------------- Accounting Officer [Principal
Joseph C. Chan Accounting Officer]
/s/ RONALD FREGARA Executive Vice President September 27, 1999
- -------------------- and Director
Ronald Fregara
/s/ RAYMOND L. STEELE Director
- ----------------------- September 27, 1999
Raymond L. Steele
/s/ LLOYD I. MILLER, III Director September 27, 1999
- -------------------------
Lloyd I. Miller, III
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ MICHAEL F. WHALEN, JR. Director September 27, 1999
- --------------------------
Michael F. Whalen, Jr.
/s/ MICHAEL J. ABATEMARCO Director September 27, 1999
- --------------------------
Michael J. Abatemarco
/s/ JARED E. ABBRUZZESE Director September 27, 1999
- --------------------------
Jared E. Abbruzzese
/s/ STEPHEN J. YAGER Executive Vice President, September 27, 1999
- -------------------------- 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)
For the Fiscal Year Ended June 30, 1999
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>
INDEX EXHIBITS
--------------
NUMBER TITLE
- ------ -----
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, as
amended.
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.(4)
10.16 Non-Negotiable, Non-Transferable Subordinated, Convertible
Promissory Note, dated November 25, 1998.(5)
10.17 Note Purchase Agreement, dated as of November 25, 1998, relating to
the purchase of the subordinated convertible note.(5)
10.18 Registration Rights Agreement, dated as of November 25, 1998,
relating to the purchase and sale of the subordinated convertible
note.(5)
10.19 Stockholders' Agreement, dated as of November 25, 1998, relating to
the purchase and sale of the subordinated convertible note.(5)
21.1 Subsidiaries of the Registrant.(4)
23.1 Consent of Grant Thornton LLP .
27.1 Financial Data Schedule (electronic filings only).
<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.
(4) Incorporated herein by reference to Registrant's Annual Report on Form 10-K
(File No. 0-25552) for the fiscal year ended June 30, 1998.
(5) Incorporated herein by reference to Registrant's Annual Report on Form 10-Q
(File No. 0-25552) for the quarter ended December 31, 1998.
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION
1994 STOCK OPTION PLAN, AS AMENDED
SECTION 1. Purpose.
The purpose of the DualStar Technologies Corporation 1994 Stock Option Plan
is to advance the interests of DualStar Technologies Corporation (the "Company")
be enabling officers, employees and consultants of the Company and its
Affiliates to participate in the Company=s future and to enable the Company to
attract and retain such persons by offering them proprietary interests in the
Company.
SECTION 2. Definitions.
For purposes of the Plan, the following terms are defined as set forth
below:
a. "Affiliate" means a corporation or other entity controlled directly, or
indirectly through one or more intermediaries, by the Company and designated by
the Committee as such.
b. "Award" means an award granted to a Participant in the form of a Stock
Appreciation Right, Stock Option, or Restricted Stock, or any combination of the
foregoing.
c. "Board" means the Board of Directors of the Company.
d. "Cause" shall have the meaning set forth in Section 8.
e. "Change in Control" shall have the meaning set forth in Section 11.
f. "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
g. "Commission" means the Securities and Exchange Commission or any
successor agency.
h. "Committee" means the Committee referred to in Section 5.
i. "Common Stock" means common stock, $.01 per share par value, of the
Company.
j. "Company" means DualStar Technologies Corporation, a Delaware
corporation.
k. "Disability" means permanent and total disability as determined under
procedures established by the Committee for purposes of the Plan.
1
<PAGE>
l. "Disinterested Person" shall mean a director who is not, during the one
year prior to service as an administrator of the Plan, or during such service,
granted or awarded equity securities pursuant to the Plan or any other plan of
the Company or any of its affiliates, except as permitted by Rule 16b-3(c)(2),
as promulgated by the Commission under the Exchange Act, or as such term is
defined under any successor rule adopted by the Commission.
m. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
n. "Fair Market Value" means the average, as of any given date, between the
highest and lowest reported closing bid and asked prices of the Stock on NASDAQ
or the closing sale price as of any given date if the Stock is listed on a
national securities exchange or the NASDAQ National Market System. If there is
no regular public trading-market for such Stock under circumstances specified
above, the Fair Market Value of the Stock shall be determined by the Committee
in good faith.
o. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "incentive stock option" within the meaning of Section 422 of
the Code.
p. "Non-qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
q. "Normal Retirement" means retirement from active employment, with the
Company or an Affiliate at or after age 65 or at such other age as may be
specified by the Committee.
r. "Participant" means an employee or consultant of the Company or of an
Affiliate to whom an Award has been granted which has not terminated, expired or
been fully exercised.
s. "Plan" means the DualStar Technologies Corporation 1994 Stock Option
Plan, as set forth herein and as hereinafter amended from time to time.
t. "Restricted Period" means the period of time, which may be a single
period or multiple periods, during which Restricted Stock awarded to a
Participant remains subject to the restrictions imposed on such Stock, as
determined by the Committee.
u. "Restrictions" means the restrictions and conditions imposed on
Restricted Stock awarded to a Participant, as determined by the Committee, which
must be satisfied in order for the Restricted Stock to vest, in whole or in
part, in the Participant.
v. "Restricted Stock" means an Award of Stock on which are imposed
Restriction Period(s) and Restrictions whereby the Participant=s rights to full
enjoyment of the Stock are conditioned upon the future performance of
substantial services by any individual or are otherwise subject to a
"substantial risk of forfeiture" within the meaning of Section 83 of the Code,
2
<PAGE>
as amended.
w. "Restricted Stock Agreement" means a written agreement between a
Participant and the Company evidencing an award of Restricted Stock.
x. "Restricted Stock Award Date" means the date on which the Committee
awarded Restricted Shares to the Participant.
y. "Retirement" means Normal Retirement or early retirement if a defined
benefit or 401(K) retirement plan of the Company provides for same.
z. "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission granted
under Section 16(b) of the Exchange Act, as amended from time to time.
aa. "Stock" means the Common Stock.
bb. "Stock Appreciation Right" means a right granted under Section 9.
cc. "Stock Option" or "Option" means an option granted under Section 8.
dd. "Termination of Employment" means the termination of the Participant=s
employment with the Company and any Affiliate. A Participant employed by an
Affiliate shall also be deemed to incur a Termination of Employment if the
Affiliate ceases to be an Affiliate and the Participant does not immediately
thereafter become an employee of the Company or another Affiliate.
In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.
SECTION 3. Effective Date.
The effective date of the Plan shall be the date upon which the Plan is
approved by the stockholders of the Company.
SECTION 4. Stock Subject to Plan.
The total number of shares of Stock reserved and available for distribution
pursuant to Awards under the Plan shall be 3,500,000 shares of Common Stock.
Such shares may consist, in whole or in part, of unauthorized and unissued
shares or treasury shares.
If any shares of Stock that have been Optioned cease to be subject to a
Stock Option, if any shares of Stock that are subject to any Award are forfeited
or if any Award otherwise terminates without a distribution being made to the
Participant in the form of Stock, such shares shall again be available for
distribution in connection with Awards under the Plan. In addition, any stock
purchased by a Participant upon exercise of an Option under the Plan which is
subsequently
3
<PAGE>
repurchased by the Company pursuant to the terms of such Option may again be the
subject of an Option under the Plan.
In the event of any merger, reorganization, consolidation, recapitalization
(including but not limited to the issuance of Stock or any securities
convertible into Stock in exchange for securities of the Company), stock
dividend, stock split or reverse stock split, extraordinary distribution with
respect to the Stock or other similar change in corporate structure affecting
the Stock, such substitution or adjustments shall be made in the aggregate
number of shares reserved for issuance under the Plan, in the number and Option
price of shares subject to outstanding Stock Options and Stock Appreciation
Rights, and in the number of shares subject to other outstanding Awards granted
under the Plan as may be determined to be appropriate by the Committee, in its
sole discretion; provided, however, that the number of shares subject to any
Award shall always be a whole number. Such adjusted Option price shall also be
used to determine the amount payable by the Company upon the exercise of any
Stock Appreciation Right associated with any Stock Option.
SECTION 5. Administration.
The Plan shall be administered by the Stock Award Committee ("Committee")
of the Board or such other committee of the Board, composed of not less than two
directors both of whom shall be Disinterested Persons unless otherwise
determined by the Board. Each member of the Committee shall be appointed by and
serve at the pleasure of the Board. If at any time no Committee shall be in
place, the functions of the Committee specified in the Plan shall be exercised
by the Board.
The Committee shall have plenary authority to grant Awards to officers,
employees, and consultants of the Company or an Affiliate.
Among other things, the Committee shall have the authority, subject to the
terms of the Plan:
(a) to select the officers, employees and consultants to whom Awards may
from time to time be granted;
(b) to determine whether and to what extent Incentive Stock Options,
Non-qualified Stock Options, Stock Appreciation Rights and Restricted Stock, or
any combination thereof are to be granted hereunder;
(c) to determine the number of shares of Stock to be covered by each Award
granted hereunder;
(d) to determine the terms and conditions of any Award granted hereunder
(including, but not limited to, the Option price, any vesting restrictions or
limitation, any repurchase rights in favor of the Company and any vesting
acceleration or forfeiture waiver regarding any Award and the shares of Stock
relating thereto, based on such factors as the Committee shall determine);
4
<PAGE>
(e) to adjust the terms and conditions, at any time or from time to time,
of any Award, including with respect to performance goals and measurements
applicable to performance-based Awards pursuant to the terms of the Plan;
(f) to determine under what circumstances an Award may be settled in cash
or Stock;
(g) if appropriate, to determine Fair Market Value; and
(h) to substitute new Stock Options for previously granted Stock Options,
including previously granted Stock Options having higher Option prices.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any agreement relating thereto)
and to otherwise supervise the administration of the Plan.
The Committee may act only by a majority of its members then in office,
except that the members thereof may authorize any one or more of their number or
any officer of the Company to execute and deliver documents on behalf of the
Committee.
Any determination made by the Committee pursuant to the provisions of the
Plan with respect to any Award shall be made in its sole discretion at the time
of the grant of the Award or, unless in contravention of any express term of the
Plan, at any time thereafter. All decisions made by the Committee pursuant to
the provisions of the Plan shall be final and binding on all persons, including
the Company and Participants.
SECTION 6. Eligibility.
Officers, directors, employees and consultants of the Company and its
Affiliates who are responsible for or contribute to the management, growth and
profitability of the business of the Company and its Affiliates are eligible to
be granted Awards under the Plan. Any person who files with the Committee, in a
form satisfactory to the Committee, a written waiver of eligibility to receive
any Award under the Plan shall not be eligible to receive an Award under the
Plan for the duration of the waiver.
SECTION 7. Duration of the Plan.
The Plan shall terminate ten (10) years from the effective date specified
in Section 3 of the Plan, unless terminated earlier pursuant to Section 12
hereto, and no Options may be granted thereafter.
SECTION 8. Stock Options.
Stock options granted under the Plan may be of two types: Incentive Stock
options and Non-qualified Stock Options. Any Stock Option granted under the Plan
shall be in such form
5
<PAGE>
as the Committee may from time to time approve.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, Non-qualified Stock Options or both types of Stock Options (in
each case with or without Stock Appreciation Rights). Incentive Stock Options
may be granted only to employees of the Company and its subsidiaries (within the
meaning of Section 424(f) of the Code). To the extent that any Stock Option is
not designated as an Incentive Stock Option or even if so designated does not
qualify as an Incentive Stock Option, it shall constitute a Non-qualified Stock
Option.
Stock Options shall be evidenced by Option agreements, the terms and
provisions of which may differ. An Option agreement shall indicate on its face
whether it is an agreement for an Incentive Stock Option or a Non-qualified
Stock Option. The grant of a Stock Option shall occur on the date the Committee
by resolution selects an individual to be a participant in any grant of a Stock
Option, determines the number of shares of Stock to be subject to such Stock
Option to be granted to such individual and specifies the terms and provisions
of the Option agreement. The Company shall notify a Participant of any grant of
a Stock Option, and a written Option agreement or agreements shall be duly
executed and delivered by the Company to the Participant, which among other
things, will make appropriate arrangements with respect to the Company=s tax
withholding obligations. Such agreement or agreements shall become effective
upon execution by the participant.
Anything in the Plan to the contrary notwithstanding, no term of the Plan
relating to Incentive Stock Options shall be interpreted, amended or altered nor
shall any discretion or authority granted under the Plan be exercised so as to
disqualify the Plan under Section 422 of the Code or, without the consent of the
optionee affected, to disqualify any Incentive Stock Option under such Section
422.
Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions as the
Committee shall deem desirable:
(a) Option Price. The Option price per share of Stock purchasable under an
Option shall be determined by the Committee and set forth in the Option
agreement, and shall not be less than the Fair Market Value of the Stock subject
to the Option on the date of grant in the case of Incentive Stock Options and
not less than 50% of the Fair Market Value of the Stock subject to the Option on
the date of grant in the case of Non-Qualified Stock Options.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than10 years
after the date of grant; and no Non-Qualified Stock Option shall be exercisable
more than10 years and one day after the date the Stock Option is granted.
(c) Exercisability. Subject to Section 12, Stock Options shall otherwise be
exercisable at such time or times and subject to such terms and conditions as
shall be determined by the Committee. If the Committee provides that any Stock
Option is exercisable only in installments, the Committee may at any time waive
such installment exercise provisions, in whole or in part, based on such factors
as the Committee may determine. In addition, the Committee may at any time
accelerate the exercisability of any Stock Option.
6
<PAGE>
(d) Methods of Exercise. Subject to the provisions of this Section 8, Stock
Options may be exercised, in whole or in part, at any time during the Option
period by giving written notice of exercise to the Company specifying the number
of shares of Stock subject to the Stock Option to be purchased.
Such notice shall be accompanied by payment in full of the purchase price
by certified or bank check or such other instrument as the Company may accept.
If approved by the Committee, payment in full or in part may also be made in the
form of unrestricted Stock already owned by the optionee of the same class as
the Stock subject to the Stock Option provided, however, that, in the case of an
Incentive Stock Option, the right to make a payment in the form of already owned
shares of Stock of the same class as the Stock subject to the Stock option shall
be authorized only at the time the Stock Option is granted.
An optionee shall have all of the rights of a stockholder of the Company
holding the class or series of Stock that is subject to such Stock Option
(including, if applicable, the right to vote the shares and the right to receive
dividends), when the optionee has given written notice of exercise, and has paid
in full for such shares. In the discretion of the Committee, payment for any
Stock subject to an option may also be made by delivering a properly executed
exercise notice to the Company together with a copy of irrevocable instructions
to a broker to deliver promptly to the Company the amount of sale or loan
proceeds to pay the purchase price. To facilitate the foregoing, the Company may
enter into agreements for coordinated procedures with one or more brokerage
firms. The value of previously owned Stock exchanged in full or partial payment
for the shares purchased upon the exercise of an Option shall be equal to the
aggregate Fair Market Value of such shares on the date of the exercise of such
Option.
(e) Non-transferability of options. No Stock Option shall be transferable
by the optionee other than by will or by the laws of descent and distribution,
and all Stock Options shall be exercisable, during the optionee=s lifetime, only
by the optionee or by the guardian or legal representative of the optionee, it
being understood that the terms "holder" and "optionee" include the guardian and
legal representative of the optionee named in the Option agreement and any
person to whom an Option is transferred by will or the laws of descent and
distribution.
(f) Termination by Death. If an optionee=s employment terminates by reason
of death, any Stock Option held by such optionee may thereafter be exercised, to
the extent then exercisable or on such accelerated basis as the Committee may
determine, for a period of one year and one day (or such other period as the
Committee may specify) from the date of such death or until the expiration of
the stated term of such Stock Option, whichever period is the shorter.
(g) Termination by Reason of Disability. If any optionee=s employment
terminates by reason of Disability, any Stock Option held by such optionee may
thereafter be exercised by the optionee, to the extent it was exercisable at the
time of termination or on such accelerated basis as the Committee may determine,
for a period or one year and one day (or such shorter period as the Committee
may specify at grant) from the date of such termination of employment or until
the expiration of the stated term of such Stock Option, whichever period is the
7
<PAGE>
shorter; provided, however, that if the optionee dies within such one year and
one day period (or such shorter period ending upon the expiration of the stated
term of the Stock Option), any unexercised Stock Option held by such optionee
shall, notwithstanding the expiration of such one year and one day period,
continue to be exercisable to the extent to which it was exercisable at the time
of death for a period of one year and one day from the date of such death or
until the expiration of the stated term of such Stock Option, whichever period
is the shorter. In the extent of termination of employment by reason of
disability, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of the Code, such
Stock Option will thereafter be treated as a Non-qualified Stock Option.
(h) Other Termination. Unless otherwise determined by the Committee and
subject to the provisions of Section 11 of the Plan, if an optionee incurs a
Termination of Employment for any reason other than death or Disability, any
Stock Option held by such optionee shall thereupon terminate, except that such
Stock Option, to the extent then exercisable, may be exercised for the lesser of
three months and one day from the date of such Termination of Employment or the
balance of such Stock Option=s term if such Termination of Employment of the
optionee is involuntary and without Cause. Unless otherwise determined by the
Committee, for the purposes of the Plan "Cause" shall have the same meaning as
that set forth in any employment or severance agreement in effect between the
Company and the Participant. Otherwise, it shall mean (1) the conviction of the
optionee for committing a felony under Federal law or the law of the state in
which such action occurred, (2) dishonesty in the course of fulfilling the
optionee=s employment duties or (3) willful and deliberate failure on the part
of the optionee to perform his employment duties in any material respect.
(i) Cashing Out of Option. On receipt of written notice of exercise, the
Committee may, in its sole discretion, elect to cash out all or part of any
Stock Option to be exercised by paying the optionee an amount, in cash or Stock,
equal to the excess of the Fair Market Value of the Stock that is the subject of
the Option over the Option price times the number of shares of Stock subject to
the option on the effective date of such cash out.
Cash outs relating to Options held by optionees who are actually or
potentially subject to Section 16(b) of the Exchange Act shall comply with the
"window period" provisions of Rule 16b-3, to the extent applicable, and, in the
case of cash outs of Non-qualified Stock Options held by such optionees, the
Committee may determine Fair Market Value with reference to the pricing
provision of Section 9(b)(ii)(2).
SECTION 9. Stock Appreciation Rights.
(a) Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Non-qualified Stock Option, such rights may be granted either at or
after the time of grant of such Stock Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of grant of such Stock
Option. A Stock Appreciation Right shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option.
8
<PAGE>
A Stock Appreciation Right may be exercised by an optionee in accordance
with Section 9(b) by surrendering the applicable portion of the related Stock
Option in accordance with the procedures established by the Committee. Upon such
exercise and surrender, the optionee shall be entitled to receive on amount
determined in the manner prescribed in Section 9(b). Stock Options which have
been so surrendered shall no longer be exercisable to the extent the related
Stock Appreciation Rights have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions as shall be determined by the Committee, including the
following:
(i) Stock Appreciation Rights shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate are
exercisable in accordance with the provisions of Section 8 and this Section 9;
provided, however, that a Stock Appreciation Right shall not be exercisable
during the first six months of its term by an optionee who is actually or
potentially subject to Section 16(b) of the Exchange Act, except that this
limitation shall not apply in the event of death or Disability of the optionee
prior to the expiration of the six-month period.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee shall
be entitled to receive an amount in cash, shares of Stock or both equal in value
to the excess of the Fair Market Value of one share of Stock over the option
price per share specified in the related Stock Option multiplied by the number
of shares in respect of which the Stock Appreciation Right shall have been
exercised, with the Committee having the right, in its sole discretion, to
determine the form of payment.
In the case of Stock Appreciation Rights relating to Stock Options held
by optionees who are actually or potentially subject to Section 16(b) of the
Exchange Act, the Committee:
(1) may require that such Stock Appreciation Rights be exercised
only in accordance with the applicable "window period" provisions of Rule
16b-3; and
(2) in the case of Stock Appreciation Rights relating to
Non-qualified Stock Options, may provide that the amount to be paid upon
exercise of such Stock Appreciation Rights during a Rule 16b-3 "window
period" shall be based on the highest mean sales price of the Stock on
NASDAQ, or on such national securities exchange upon which the Stock may be
traded, on any day during such "window period".
(iii) Stock Appreciation Rights shall be transferable only when and to
the extent that the underlying Stock Option would be transferable under Section
8(e).
(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option
or part thereof to which such Stock Appreciation Right is related shall be
deemed to have been exercised for the purpose of determining the number of
shares of Stock available for issuance under
9
<PAGE>
the Plan in accordance with Section 5 of the Plan, but only to the extent of the
number of shares resulting from dividing the value of the Stock Appreciation
Right at the time of exercise by the Fair Market Value of one share of Stock
determined in accordance with this Section 9.
SECTION 10. Terms of Restricted Stock Awards.
Subject to and consistent with the provisions of the Plan, with respect to
each Award of Restricted Stock to a Participant, the Committee shall determine:
(a) the terms and conditions of the Restricted Stock Agreement between the
Company and the Participant evidencing the Award;
(b) the Restricted Period for all or a portion of the Award;
(c) the Restrictions applicable to the Award, including but not limited to,
continuous employment with the Company for a specified term or the attainment of
specific corporate, divisional or individual performance standards or goals,
which Restricted Period and Restrictions may differ with respect to each
Participant;
(d) whether the Participant shall receive the dividends and other
distributions paid with respect to an award of the Restricted Stock as declared
and paid to the holders of Stock during the Restricted Period or shall be
withheld by the Company for the account of the Participant until the Restricted
Periods have expired or the Restrictions have been satisfied, and whether
interest shall be paid on such dividends and other distributions withheld, and
if so, the rate of interest to be paid;
(e) the percentage of the Award which shall vest in the Participant in the
event of death, Disability or Retirement prior to the expiration of the
Restricted Period or the satisfaction of the Restrictions applicable to an award
of Restricted Stock; and
(f) notwithstanding the Restricted Peri9od and the Restrictions imposed on
the Restricted Shares, as set forth in the Restricted Stock Agreement, whether
to shorten the Restricted Period or waive any Restrictions, if the Committee
concludes that it is in the best interests of the Company to do so.
Upon an award of Restricted Stock to a Participant, the stock certificate
representing the Restricted Stock shall be issued and transferred to and in the
name of the Participant, whereupon the Participant shall become a stockholder of
the Company with respect to such Restricted Stock and shall be entitled to vote
the Stock. Such stock certificates shall be held in custody by the Company,
together with stock powers executed by the Participant in favor of the Company,
until the Restricted Period expires and the Restrictions imposed on the
Restricted Stock are satisfied.
SECTION 11. Change of Control.
(a) Upon the occurrence of an event of "Change of Control", as defined
below
10
<PAGE>
and subject to such additional conditions and restrictions as the Committee may
determine at the time of the granting of the Award:
(i) any and all outstanding Options shall become immediately
exercisable;
(ii) the Restricted Period and Restrictions imposed on the Restricted
Stock shall lapse, and the Restricted Stock shall vest in the Participant to the
extent determined by the Committee; and
(iii) within ten business days after the occurrence of a Change of
Control, the certificates representing the Restricted Stock so vested, without
any restrictions or legend thereon, other than as required by law, shall be
delivered to the Participant, and any dividends and distributions paid with
respect to the Restricted Stock which were escrowed during the Restricted Period
and the earnings thereon shall be paid to the Participant.
(b) A "Change of Control" shall occur when, in addition to the occurrence
of such other events as the Committee may determine at the time of the grant of
the Award, one or more of the following events occurs:
(i) any "Person" (which term, when used in this Section11, shall mean
two or more persons acting as a partnership, limited partnership, syndicate or
other group for the purpose of acquiring, holding or disposing of securities of
the issuer or shall have such other meaning assigned to it in a successor
provision to Section 13(d) of the Exchange Act) is or becomes without the
approval of a majority of the Continuing Directors (as defined below) the
"Beneficial Owner" (which term, when used in this Section 11, shall include any
person who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares (i) voting power which
includes the power to vote or to direct the voting of such security; and/or (ii)
investment power which includes the power to dispose or to direct the
disposition of such security, or such other meaning assigned to it in a
successor provision to Rule 13d-3 promulgated under the Exchange Act), directly
or indirectly, of Voting Stock (as defined below) representing twenty percent
(20%) or more of the votes entitled to be cast by the holders of all then
outstanding Shares of the Company; or
(ii) the stockholders of the Company approve a definitive agreement or
plan to merge or consolidate the Company with or into another corporation, or to
sell, or otherwise dispose of, all or substantially all of the Company=s
property and assets, or to liquidate the Company or the business of the Company
for which the Participant=s services are principally performed is disposed of by
the Company pursuant to a sale of assets (including stock of a subsidiary of the
Company), a merger or consolidation or otherwise; or
(iii) the individuals who are Continuing Directors of the Company cease
without the approval of a majority of the Continuing Directors for any reason to
constitute at least a majority of the Board of the Company.
11
<PAGE>
The term "Continuing Director" means (i) any member of the Board who is a
member of the Board on November 1,1994, or (ii) any person who subsequently
becomes a member of the Board whose nomination for election or election to the
Board is recommended or approved by a two-thirds majority of the Continuing
Directors. The term "Voting Stock" means all capital stock of the Company which
by its terms may be voted on all matters submitted to stockholders of the
Company generally.
SECTION 12. Amendments and Termination.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would (i) impair the rights of
an Award theretofore granted without the Participant's consent, except such an
amendment made to cause the Plan to qualify for the exemption provided by Rule
16b-3, or (ii) disqualify the Plan from the exemption provided by Rule 16b-3. In
addition, no such amendment shall be made without the approval of the Company's
stockholders to the extent such approval is required by law or agreement.
The Committee may amend the terms of any Stock Option or other Award
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights of any holder without the holder's consent except such an
amendment made to cause the Plan or Award to qualify for the exemption provided
by Rule 16b-3. The Committee may also substitute new Stock Options for
previously granted Stock Options, including previously granted Stock Options
having higher option prices.
Subject to the above provisions, the Board shall have authority to amend
the Plan to take into account changes in law and tax and accounting rules, as
well as other developments and to grant Awards which qualify for beneficial
treatment under such rules without shareholder approval.
SECTION 13. General Provisions.
(a) Nothing contained in the Plan shall prevent the Company or an Affiliate
from adopting other or additional compensation arrangements for its employees.
(b) The Plan shall not confer upon any employee any right to continued
employment nor shall it interfere in any way with the right of the Company or an
Affiliate to terminate the employment of any employee at any time.
(c) No later than the date as of which an amount first becomes includible
in the gross income of the Participant for Federal income tax purposes with
respect to any Award under the Plan, the Participant shall pay to the Company,
or make arrangements satisfactory to the Company regarding the payment of, any
Federal, state, local or foreign taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Company, withholding obligations may be settled with Stock, including Stock that
is part of the Award that gives rise to the withholding requirement. The
obligations of the Company under the Plan shall be conditional on such payment
or arrangements, and the Company and its Affiliates shall, to the extent
12
<PAGE>
permitted by law, have the right to deduct any such taxes from any payment
otherwise to the participant.
(d) The Committee shall establish such procedures as it deems appropriate
for a Participant to designate a beneficiary to whom any amounts payable in the
event of the participant's death are to be paid.
(e) Agreements entered into by the Company and Participants relating to
Awards under the Plan, in such form as may be approved by the Committee from
time to time, to the extent consistent with or permitted by the Plan shall
control with respect to the terms an conditions of the subject Award. If any
provisions of the Plan or any agreement entered into pursuant to the Plan shall
be held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions of the Plan or the subject agreement.
(f) The Plan and all Awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware.
13
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated September 21, 1999, accompanying the
consolidated financial statements included in the Annual Report of DualStar
Technologies Corporation on Form 10-K for the year ended June 30, 1999. We
hereby consent to the incorporation by reference of said report in the
Registration 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 21, 1999
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