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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, 1997
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to __________
Commission file number 0-25552
DualStar Technologies Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3776834
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11-30 47th Avenue, Long Island City, New York 11101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 340-6655
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
Class A Warrants
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of September 11, 1997 was $11,622,000,
based upon the closing price ($1.69) for such Common Stock on such date.
The number of shares outstanding of Registrant's Common
Stock, as of September 11, 1997, was 9,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference in the
respective Part of this Form 10-K noted below:
1. Registrant's definitive Proxy Statement, to be
filed in connection with its Annual Meeting of
Shareholders scheduled to be held on November 12,
1997, is incorporated by reference in Part III
hereof.
PART I
ITEM 1 - BUSINESS
(a) General Development of Business.
DualStar Technologies Corporation ("DualStar") was
incorporated in the State of Delaware on June 17, 1994. In August, 1994,
DualStar acquired Centrifugal Associates, Inc., ("Associates"), Centrifugal
Service, Inc., ("Service") and Mechanical Associates, Inc., ("Mechanical") in
an exchange of securities, and Associates, Service, and Mechanical each became
wholly owned subsidiaries of DualStar. Associates began operations in 1964,
Mechanical in 1989, and Service in 1992.
DualStar formed Trident Mechanical Systems, Inc.,
("Trident") and The Automation Group, Inc., ("TAG") in May of 1995. DualStar
formed Property Control, Inc., ("PCI") and Centrifugal/Mechanical Associates,
Inc., ("CMA") in June of 1995. DualStar formed High-Rise Electric, Inc.,
("High-Rise") in July of 1995. DualStar formed Grace Systems Technologies,
Inc., ("Grace") and DualStar Communications, Inc., ("DCI") in February of
1996. DualStar formed Integrated Controls Enterprises, Inc., ("ICE") in August
1996.(DualStar, Associates, Mechanical, Service, Trident, TAG, PCI, CMA,
High-Rise, Grace, DCI and ICE are hereinafter collectively referred to as the
"Company.") Each subsidiary is a wholly owned subsidiary of DualStar, except
that CMA is owned 50% by Associates and 50% by Mechanical.
(b) Financial Information About Industry Segments.
The Company does not presently have more than one segment
and, accordingly, no financial information relating to industry segments is
set forth herein.
(c) Narrative Description of Business.
Associates, Mechanical and Service engage in mechanical
contracting services. Service's engagements are generally performed under
short-term service contracts, whereas Associates' and Mechanical's engagements
are generally performed under fixed price long-term contracts undertaken with
general contractors, with the lengths of such long-term contracts varying, but
typically ranging from one to two years. Service also engages in activities
relating to the retrofitting of equipment to eliminate the use of
chlorofluorocarbon (CFC) refrigerants.
High-Rise designs and installs sophisticated electrical
systems for newly constructed residential high-rise buildings. Some of the
work performed by High-Rise (e.g., installation of control
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wiring) was previously subcontracted by the Company to other non-DualStar
companies.
Trident provides medium-sized institutions, and commercial
buildings and tenants with heating, ventilation and air conditioning ("HVAC")
systems, generally pursuant to contracts valued at less than $1 million. In
addition, Trident provides HVAC service and maintenance.
TAG provides network administration, performs system and
application programming, directs advanced technologies, and delivers
interactive services to its clients and the Company.
Grace develops and maintains sophisticated security, video
intercom, communications, fire/smoke alarm and building control systems for
high-rise buildings and businesses.
DCI designs and installs state-of-the-art information
technology infrastructure in high-rise buildings and provides services (e.g.,
telephone, cable tv and Internet) that utilize such infrastructure.
ICE supplies, installs and services facility management,
building automation, and commercial temperature control systems. In general,
ICE acts as a subcontractor to mechanical subcontractors, including those of
the Company. ICE also works directly for real property owners and general
contractors.
PCI owns or manages the Company's fixed asset or office
peripheral needs, e.g., ownership and maintenance of real property. PCI will
also monitor supplies among the Company's divisions, and will be responsible
for keeping all DualStar facilities in compliance with OSHA regulations.
CMA acts as a common paymaster for Mechanical, Associates
and Service in order to facilitate the utilization of employees covered by
collective bargaining agreements.
(d) Recent Developments.
The Company has recently received an unsolicited expression
of interest in acquiring DualStar's mechanical businesses. Preliminary
discussions have occurred in connection with this expression of interest and
the Company is considering whether such a sale would be in the long term best
interests of the stockholders. No agreement as to price or structure has been
reached and there can be no assurance that such an agreement can be reached or
that, if reached, that such a transaction can be successfully consummated.
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Major Customers. The Company's customers, which are
concentrated in the New York Tri-State area, include various general
contractors, banks, hospitals, hotels, insurance companies, securities
exchanges, state and local governmental agencies, and subcontractors. For the
year ended June 30, 1997, revenue derived from four customers (Lehrer McGovern
Bovis, Inc., Visy Papers (NY) Inc., HRH Construction Corp. and Gotham
Construction Corp.) amounted to approximately 25%, 16%, 13% and 7%,
respectively. For the year ended June 30, 1996, revenue derived from five
customers (Lehrer McGovern Bovis, Inc., Morse Diesel International, Inc., HRH
Construction Corp., Gotham Construction Corp. and Morgan Guaranty Trust Co. of
NY) amounted to approximately 33%, 18%, 15%, 6% and 6%, respectively.
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 all
systems meet exacting customer requirements for performance and quality
workmanship. In addition, pipe fabrication and machine shops allow for the
manufacture of both prototype and production hardware. To support its internal
operation and to extend its overall capacity, the Company purchases a wide
variety of components, assemblies and services from outside manufacturers,
distributors and service organizations.
Marketing and Sales. For Associates, Mechanical, Service and
High-Rise, the Company's marketing strategy has focused on cultivating
long-term relationships with developers, mechanical and electrical engineers
and general contractors. As a result of its limited and focused target market,
the Company's marketing efforts rely primarily on direct sales efforts
(including engineering presentations) which emphasize the Company's quality
control and value engineering. The relatively high dollar value of each
contract (approximately $5 million, except for Service's contracts which are
generally less than $1 million), combined with the technically complex nature
of the projects covered by the Company's contracts result in an in-depth and
complex purchase decision process for each contract. The selling cycle for the
Company's contracts typically lasts approximately 90 days. Sales activities
are handled by a combination of direct sales personnel and independent sales
representatives, who may also sell products of the Company's competitors. Due
to the depth of analysis involved in the customer's purchase decision,
management emphasizes frequent interaction between the direct sales staff, its
independent sales representatives and the buyer throughout the selling
process.
Trident's marketing strategy has focused on the solicitation
of property owners, general contractors, commercial tenants and property
management companies. TAG's, Grace's and DCI's strategy has been to provide
the Company's existing clients with
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services and products not previously offered by the Company. ICE solicits
property owners, general contractors, and mechanical contractors in addition
to serving the mechanical subsidiaries of DualStar.
Sources of Supply and Backlog. The raw materials, such as
pipe, fittings and valves, and electrical components used in the development
and manufacture of the Company's mechanical and electromechanical engineering
products are generally available from domestic suppliers at competitive spot
prices; fabrication of certain major components may be subcontracted for on an
as-needed basis. The Company does not have any long term contracts for its raw
materials. The Company has not experienced any significant difficulty in
obtaining adequate supplies to perform under its contracts.
At fiscal year ending June 30, 1997, the Company's backlog
was approximately $78 million as contrasted with approximately $41 million at
June 30, 1996. The Company believes that most of its backlog at June 30, 1997
will be completed prior to December 31, 1998, but no assurances can be given
with respect thereto. In general, backlog represents the total value of
unbilled 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 not only are intimately familiar with its own
products, but also with other system components. Additionally, the Company has
made arrangements with many of its component suppliers whereby they have
agreed to provide service specialists within 24 hours should the need arise.
Such calls are coordinated through the Company's service manager who is
assisted by a full-time service administrator. The Company's service personnel
have their formal training augmented by direct participation in testing of
systems at the Company's facility and also in the installation and acceptance
tests at the customer's facility.
Patent, Trademark, Servicemark, Copyright and Proprietary
Rights. Currently, the Company has six trademark applications (DualStar,
DualStar Technologies, CyberBuilding, Building Area Network, CyberView and
CyberScraper) and seven servicemark applications (DualStar, DualStar
Technologies, DualStar Communications, CyberBuilding, CyberBuilders,
CyberCierge and CyberScraper) pending with the U.S. Patent & Trademark Office
- 4 -
("USPTO"). One servicemark (Global Hiring Hall) was registered with the USPTO
on July 29, 1997. The Company has not made any patent or copyright
applications. The Company may file patent or copyright applications, or
additional trademark or servicemark applications, relating to certain of the
Company's mechanical, electrical, electronic and control, environmental,
information technology and telecommunication products and services.
Nevertheless, if patents are issued, or trademarks, servicemarks or copyrights
are registered, there can be no assurance as to the extent of the protection
that will be granted to the Company as a result of having such patents,
trademarks, servicemarks or copyrights or that the Company will be able to
afford the expenses of any complex litigation which may be necessary to
enforce their proprietary rights. Failure of any future or existing patents,
trademark, servicemark and copyright applications may have a material adverse
impact on the Company's business since the Company may not otherwise be able
to protect the proprietary or trade secret aspects of its business and
operations, thereby diluting the Company's ability to compete in the
marketplace. Except as may be required by the filing of patent, trademark,
servicemark and copyright applications, the Company will attempt to keep all
other proprietary information secret and to take such actions as may be
necessary to insure the results of its development activities are not
disclosed and are protected under the common law concerning trade secrets.
Such steps may include the execution of nondisclosure agreements by key
Company personnel and may also include the imposition of restrictive
agreements on purchasers of the Company's products and services. There can be
no assurance that the execution of such agreements will be effective to protect
the Company, that the Company will be able to enforce the provisions of such
nondisclosure agreements or that technology and other information acquired by
the Company pursuant to its development activities will be deemed to
constitute trade secrets by any court of competent jurisdiction.
Regulation. Substantial environmental laws have been enacted
in the United States and in New York in response to public concern over
environmental deterioration. These federal, state and local laws and the
implementing regulations affect nearly every customer of the Company. Efforts
to comply with the requirements of these laws have increased demand for the
Company's services, and the Company believes that under the leadership of the
current federal administration 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, knowledge and belief, it is in compliance with
all material federal, state and local laws and regulations governing its
operations.
In July 1995, the Company entered into an updated teaming
and license agreement with E.I. DuPont de Nemours ("DuPont") whereby
- 5 -
the Company has agreed to use DuPont's new CFC replacement products, which are
in constant development, in exchange for certain DuPont marketing information
and information regarding prospective industrial, commercial and institutional
customers that desire to have retrofits or equipment replacement performed at
their locations. The Company's retrofit or equipment replacement operations
may subject the Company to possible liabilities for environmental damage under
the Clean Air Act of 1970, among other federal, state or local laws and
regulations, should CFCs be released inadvertently in the atmosphere as a
result of such operations.
Potential Liability and Insurance. The Company's operations
involve mechanical, electrical, electronic and control, environmental,
information technology and telecommunications infrastructure contracting of
major residential, commercial and institutional buildings and facilities. The
Company therefore is exposed to a significant risk of liability for damage and
personal injury. The Company maintains quality control programs in an attempt
to reduce the risk of potential damage to persons and property and any
associated potential liability. In addition, the Company maintains up to $11
million of general liability insurance (in the aggregate) covering damages
resulting from negligent acts in rendering or failing to render its services.
The policy, however, does not include coverage for comprehensive environmental
impairment 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 and
control, environmental, information technology and telecommunications
infrastructure systems and service industries involve rapid technological
change and are characterized by intense and substantial competition. The
Company's competitors range from small firms to large multinational companies.
Except for the telecommunications service industry, the Company believes that
no single firm or group of firms dominates its markets. 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 firmly established in the mechanical, electronic and control, electrical
and environmental industries and will be able to maintain a strong competitive
position in its areas of expertise by adhering to its basic
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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 sometimes
advantageous to the Company's success. These teaming relationships, however,
generate risk to the Company in the event that a non-DualStar team member
experiences financial difficulty or is otherwise unable to fulfill its
responsibilities on the project. The Company maintains a large network of
business relationships with other companies and has drawn repeatedly upon
these relationships to form winning teams. Moreover, each DualStar subsidiary
may market its services independently, with the potential to offer in concert
with other DualStar subsidiaries, comprehensive and complementary services on
multi-million dollar construction projects.
Most of the Company's contracts with public sector clients
are awarded through a competitive bidding process that places no limit on the
number or type of offerors that may compete. The process usually begins with a
government Request for Proposal (RFP) that delineates the size and scope of
the proposed contract. Proposals submitted by the Company and others are
evaluated by the government on the basis of technical merit, response to
mandatory solicitation provisions, corporate and personnel qualifications and
experience, management capabilities and cost. While each RFP sets out specific
criteria for the choice of a successful offeror, RFP selection criteria in the
government services market often tend to weight 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, 1997, the Company employed 294
employees, including the five founding officers of the Company, all of whom
are full-time employees. Of these full-time employees, 19 are engaged in
administration and finance, 258 in manufacturing, engineering and production,
14 in marketing and sales, and 3 in operations and development. Many of the
Company's employees have overlapping responsibilities in these job
descriptions.
Biographical information, including the age, position held
with the Company, term of office as officer, employment during the past five
years, and certain other directorships is set forth below for each officer of
the Company who does not serve on the Board of Directors:
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Robert Birnbach, 32, Vice President and Chief Financial
Officer (since December 1996); and Director of Corporate Development (from
August 1994 to December 1996) of the Corporation; Coopers & Lybrand (from 1991
to August 1994).
Joseph C. Chan, 36, Vice President and Chief Accounting
Officer (since December 1996); and Controller (from November 1994 to December
1996) of the Corporation; Konigsberg, Wolf & Co., P.C. (from October 1987 to
November 1994).
The Company believes that its future success will depend, in
part, upon its continued ability to recruit and retain qualified technical
personnel. Competition for qualified technical personnel is significant,
particularly in the geographic areas in which DualStar and its subsidiaries
are located. The Company depends upon its ability to retain the services of
key employees. The loss of services of one or more key employee could have a
material adverse impact on the Company. The Company has never experienced a
work stoppage and approximately 225 of its employees are represented by a
labor organization. Management of the Company believes that its relationship
with its employees is good.
- 8 -
NOTE ON FORWARD-LOOKING STATEMENTS
When used in reports filed with the Securities and Exchange
Commission and in other communications by DualStar Technologies Corporation
(the "Company"), the words "believes," "anticipates," "expects" and similar
expressions are intended to identify in certain circumstances forwardlooking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those projected,
including the risks discussed in the "Risk Factors" set forth below. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward looking statements. The Company also undertakes no
obligation to update forward-looking statements.
RISK FACTORS
AN INVESTMENT IN THE COMPANY'S SECURITIES INVOLVES A HIGH
DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY INVESTORS WHO CAN AFFORD THE
RISK OF LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE INVESTING IN THE
COMPANY'S SECURITIES. SEE ALSO "NOTE ON FORWARD-LOOKING STATEMENTS."
Limited Operating History; Operating Losses and Negative Cash Flow from
Operations
Although certain of the Company's subsidiaries have
conducted operations for a considerable period, the Company began operations
in August 1994 and has only a limited operating history upon which investors
may base an evaluation of its performance. The Company has incurred
significant operating losses during the period of its operation. The Company
experienced losses of approximately $6.5 million and $3.8 million in the years
ended June 30, 1997 and 1996, respectively. The Company also has experienced
significant increases in expenses associated with its becoming a public
company and with the development and expansion of its businesses. There can be
no assurance that the Company will achieve or sustain profitability or
positive cash flows from future operations. If the Company is not able to
achieve 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
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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
The Company experienced losses of approximately $6.5 million
and $3.8 million in the years ended June 30, 1997 and 1996, respectively. The
Company also had a reduction of working capital of approximately $8.8 million
for the year ended June 30, 1997. The Company is considering the
consolidation, close-out or sale of certain subsidiaries in order to improve
working capital and profitability. Also, in addition to performing on existing
backlog, the Company is implementing a marketing plan to emphasize those
contracts which return higher margins than the Company has experienced overall
in the past two years. The Company's mechanical contracting business is also
reorganizing 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 plans, current cash on hand, and future cash
from operating and investing activities should be sufficient to cover current
operations. There can be no assurance, however, that the Company will achieve
its plans. In addition, in the event that additional working capital becomes
necessary to fund current operations, there can be no assurance that the
Company will be able to obtain financing on terms satisfactory to it.
Substantial and Increasing Competition
Mechanical and electrical contracting, which represent the
Company's core businesses, involve rapid technological change and are
characterized by intense and substantial competition. As a result of the
increasing competition in those areas, the bidding process whereby the Company
seeks to obtain new contracts has also become more competitive and the profit
margins capable of being achieved through such contracts have continued to
compress.
Also as a result of this increasing competition, the Company
has sought to expand its core businesses into markets outside of the New York
metropolitan area. There can be no assurance that the Company will be able to
successfully compete in these new markets.
The Company is also entering new areas of business such as
the telecommunications field in which it has limited prior experience. See
"Entry into New Lines of Business." In entering these new fields, the Company
will encounter substantial competition from companies that are substantially
larger and have substantially greater financial, marketing and technical
resources and greater name recognition than the Company and which are
established
- 10 -
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 rather than through Acquisitions.
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 eight new subsidiaries over the
last two 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 companies 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's business plan contemplates the entry into new
lines of business such as telecommunications services in which the Company and
its management have limited experience. Due to continued and increasing
competitive pressures in the Company's core businesses, management of the
Company believes that the future success of the Company will be dependent, to
a significant extent, upon its ability to successfully enter these new lines
of business. Entry by the Company into these new lines of business are likely
to involve significant expenditures by the Company of its resources. In
entering these new lines of business, the Company will be 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 enter
these new lines of business.
The telecommunications business in particular is highly
competitive. The Company faces intense competition from local exchange
carriers, including the regional bell operating companies which currently
dominate their local telecommunications markets. The Company also competes
with long distance carriers in the provision of long distance services. The
long distance market is dominated by three major competitors, AT&T, MCI and
Sprint. Hundreds of other companies also compete in the long distance
marketplace. Other competitors of the Company may include cable television
companies, competitive access providers, Internet service providers, microwave
and satellite carriers and private networks owned by large end users.
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The Company believes that the Telecommunications Act of
1996, as well as recent transactions and proposed transactions between
telephone companies, long distance carriers and cable companies, increase the
likelihood that barriers to local exchange competition will be substantially
reduced or removed. These initiatives include requirements that the regional
bell operating companies permit entities such as the Company to interconnect
to the existing telephone network, to purchase, at cost-based rates, access to
unbundled network elements, to enjoy dialing parity, to access rights of way
and to resell services offered by the incumbent local exchange carriers.
However, incumbent local exchange carriers also have new competitive
opportunities. For example, the Telecommunications Act removes prior
restrictions relating to the provision of long distance service by the
regional bell operating companies and also provides them with increased
pricing flexibility. Under this legislation, these regional bell operating
companies will be able to offer the same 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 carriers' networks,
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 state and local
government agencies, hospitals, hotels, insurance companies, securities
exchanges and contractors. For the year ended June 30, 1997, revenues derived
from four customers (Lehrer McGovern Bovis, Inc., Visy Papers (NY) Inc., HRH
Construction Corp. and Gotham Construction Corp.) amounted to approximately
25%, 16%, 13% and 7%, respectively. 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 Insufficiency of Insurance
The Company's operations involve the mechanical, electronic
and control, environmental, electrical and information
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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.
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 the balance sheet date, the Company met
the new maintenance standards, there can be no assurance that the Company will
be able to maintain such criteria in the future.
Delisting of Securities to Adversely Affect Market
In the event that the Company's securities were to no longer
meet applicable Nasdaq requirements and were 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." In such event, 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.
Environmental Risk Factors
Substantial environmental laws have been enacted in the
United States and in New York in response to public concern over environmental
deterioration. These federal, state and local laws and the implementing
regulations affect nearly every customer of the Company. Efforts to comply
with the requirements of these laws have increased demand for the Company's
services, and the Company believes that under the leadership of the current
federal administration 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, knowledge and belief, it is in compliance with all
material federal, state and local laws and regulations governing its
operations. See "Business-Regulation."
ITEM 2 - PROPERTIES
The Company leases approximately 5,000 square feet of
manufacturing and office space, on a month-to-month basis, at 141
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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 65 percent
of capacity. Total rental expense for the Company for recent periods is as
follows:
Period Expense
------ -------
Year ended June 30, 1997 $124,000
Year ended June 30, 1996 $164,000
ITEM 3 - LEGAL PROCEEDINGS
On September 29, 1997, Associates filed a complaint in the
Supreme Court of the State of New York, Kings County, against DAK Electric
Contracting Corp. ("DAK"), Donald Kopec and Al Walker for breach of contract
in the amount of $4.1 million.
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 DAK, Associates' co-venturer, was responsible for the electrical
portion. The joint venture's work on this project has been completed. The
joint venture received demands for payment from certain vendors used by the
co-venturer of Associates. These vendors filed liens and/or made demands
against the joint venture payment bond amounting to approximately $1.7 million.
Some of these vendors also filed lawsuits against the joint venture, the joint
venture partners and the related bonding companies, to secure payment on their
claims. These claims were based on the alleged failure of the joint venture
partner to pay for electrical goods provided to it as the electrical
subcontractor of the joint venture. The joint venture's bonding companies
proposed settling with the claimants; the bonding companies would then seek
indemnification from the joint venture. It was management's opinion that it
would cost the Company less if this settlement process was managed and
completed by the Company.
The general contractor on the Lincoln Square project
advanced funds directly to Associates' joint venture partner. The general
contractor later stated that such advances would be deducted from the payments
owed to the joint venture for mechanical work that Associates performed on the
project. During the course of the project, Associates also incurred additional
costs to finish the electrical portion of the project on behalf of its
co-venturer.
- 14 -
Management was of the opinion that there was substantial doubt as to the
collectibility of such receivable or additional costs.
Based on these developments, the Company wrote off in fiscal
1996 approximately $2.3 million with respect to accounts and loans receivable,
and $1.4 million of claims and other costs that the Company incurred on behalf
of Associates' co-venturer in fulfillment of the electrical co-venturer's
obligations under the contract on the Lincoln Square project. As of June 30,
1996, all of the known claims and liens were settled and discharged, and all
of the vendor lawsuits which arose out of these claims were also settled.
The Company has instituted the foregoing claim in an attempt
to recover such costs.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during
the fourth quarter of the Company's fiscal year covered by this Report.
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 1996 and for fiscal year 1997.
Fiscal 1996 High Low
- ----------- ---- ---
First Quarter $ 5 1/2 $ 2 3/8
Second Quarter $ 3 1/2 $ 13/16
Third Quarter $ 1 7/8 $ 13/16
Fourth Quarter $ 1 5/16 $ 15/16
Fiscal 1997 High Low
- ----------- ---- ---
First Quarter $ 1 5/32 $ 9/16
Second Quarter $ 1 3/16 $ 11/32
Third Quarter $ 15/16 $ 15/32
Fourth Quarter $ 1 $ 15/32
As of September 19, 1997, there were approximately 132
record holders of the Company's Common Stock.
- 15 -
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.
- 16 -
ITEM 6 - SELECTED FINANCIAL DATA(1)
Year Ended Nine months Year ended
September 30, ended June 30, June 30,
------------- ------------------ ---------------------------
1993 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- -----
Statement of Operations Data:
Contract revenue $38,032 $27,001 $29,167 $65,126 $66,232 $73,618
(Loss) earnings from 760 336 847 1,280 (5,769) (6,468)
operations
Net (loss) income 11 (3,774) (6,512)
Pro forma net income(2) 411 181 457
Cash dividends(3) 91 68 230 600 -- --
Net loss per common share -- ($0.42) ($0.72)
Pro forma net income per $0.09 $0.04 $0.10
common share(4)
Supplemental pro forma net $0.10 $0.05 $0.10
income per common share(5)
September 30, June 30,
------------- -----------------------------------------------------------
1993 1994 1995 1996 1997
---------- --------- ---------- ---------- ------
Balance Sheet Data:
Working capital $1,570 $2,190 $13,955 $9,091 263
Total assets 11,783 15,345 29,275 28,381 26,577
Shareholders' equity 2,307 2,957 15,097 11,323 4,811
(1) The Selected Financial Data represent the consolidated data for the
years ended June 30, 1997, 1996 and 1995 and combined historical data
from the wholly owned subsidiaries for the year ended September 30,
1993 and the nine months ended June 30, 1993 and 1994. Information for
the September 30 year-end period includes the similar year ended
December 31 of Mechanical Associates, Inc., a subsidiary. As a result,
Mechanical's fourth quarter 1993 results are included in both the 1993
annual data and the 1994 interim data. Included in both periods are
contract revenues of approximately $2,583,000, earnings from
operations of approximately $144,000, pro forma net income of
approximately $78,000, and pro forma net income per common share of
$.02.
(2) Pro forma income reflects the historical combined net income, adjusted
for pro forma income taxes. Pro forma income taxes reflect an
additional provision for income taxes at the effective statutory
federal and New York State tax rate applied to the Company's financial
statement income in each period. This will result in an overall
effective income tax rate of approximately 47% for all periods.
(3) The Company's subsidiaries had historically paid cash dividends to
their shareholders for the purpose of funding the income taxes on S
Corporation taxable income which were paid personally by the
shareholders. In connection with the revocation of the S Corporation
status of the Company's subsidiaries, effective August 1, 1994, the
subsidiaries declared dividend distributions in the aggregate of
$600,000. Other than the foregoing, the Company does not anticipate
the declaration or payment of cash dividends in the foreseeable
future.
(4) Pro forma income per share was calculated based upon the outstanding
shares of DualStar after the merger with Centrifugal and Mechanical.
(5) Supplemental pro forma income per share attributable to the impact of
assuming 857,000 shares of additional common stock are outstanding and
the proceeds from those shares being used to retire $3,000,000 of
debt.
- 17 -
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
DualStar Technologies Corporation, incorporated in the State
of Delaware on June 17, 1994, through its wholly owned subsidiaries provides
comprehensive, integrated mechanical, electrical, electronic and control,
environmental, information technology and telecommunication services and
solutions to a wide range of customers primarily in the New York Tri-State
area.
During fiscal 1997, in addition to the ten existing wholly
owned subsidiaries, DualStar Technologies formed a new wholly owned
subsidiary, Integrated Controls Enterprises, Inc., which acts as a provider
and installer of automated temperature control systems. DualStar Technologies
and its wholly owned subsidiaries are hereafter referred to as the "Company".
CAPITAL RESOURCES AND LIQUIDITY
Prior to the Company's initial public offering ("IPO") in
February 1995, the Company financed its operations and working capital needs
through internally generated funds, bank borrowings and loans from certain
shareholders. The proceeds to the Company from the IPO were $16,100,000, of
which approximately $3,375,000 was used to cover IPO costs and $3,000,000 was
used to repay all of the Company's then outstanding loans.
Cash balances at June 30, 1997 and 1996 were approximately
$1,111,000 and $2,024,000, respectively. The Company's operations used
approximately $993,000 and $3,419,000 of cash during fiscal 1997 and fiscal
1996 respectively. Further, during fiscal 1997 the Company acquired capital
assets of approximately $1,629,000, which included the acquisition and
improvements of real property located in Long Island City, N.Y. for the
purpose of centralizing and consolidating its operations. The cost of the real
property was approximately $1,109,000 of which $900,000 was financed by a
ten-year mortgage loan; in addition, the Company invested approximately
$1,085,000 in renovation of the real property. Furthermore, the Company
invested approximately $498,000, of which $431,000 was financed by a capital
lease in telephone switch systems for two high-rise buildings in return for
long-term rights to provide telephone, cable TV and high-speed Internet
services to the buildings' residents.
During fiscal 1996, the Company acquired capital assets of
approximately $503,000, substantially all of which represented investment in
computer hardware and software.
- 18 -
During fiscal 1997, the Company repaid approximately $41,000
of the mortgage payable. As of June 30, 1997, in addition to ordinary trade
accounts payable, the Company had a mortgage payable of approximately
$859,000, of which $45,000 was classified as current liabilities.
The Company experienced losses of approximately $6.5 million
and $3.8 million in the years ended June 30, 1997 and 1996, respectively. The
Company also had a reduction of working capital of approximately $8.8 million
for the year ended June 30, 1997. The Company is considering the
consolidation, close-out or sale of certain subsidiaries in order to improve
working capital and profitability. Also, in addition to performing on existing
backlog, the Company is implementing a marketing plan to emphasize those
contracts which return higher margins than the Company has experienced overall
in the past two years. The Company's mechanical contracting business is also
reorganizing 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 plans, current cash on hand, and future
cash from operating and investing activities should be sufficient to cover
current operations. There can be no assurance, however, that the Company will
achieve its plans. In addition, in the event that additional working capital
becomes necessary to fund current operations, there can be no assurance that
the Company will be able to obtain financing on terms satisfactory to it.
INFLATION
The Company has continued to experience the benefits of a
low inflation economy in the New York Tri-State area. In general, the Company
enters into long-term fixed price contracts which are largely labor intensive.
Accordingly, future wage rate increases may affect the profitability of its
long-term contracts. Short-term contracts are less susceptible to inflationary
conditions.
RESULTS OF OPERATIONS
Fiscal 1997 Compared to Fiscal 1996
Revenue increased 11.2% in 1997 to $73.6 million, up $7.4
million from 1996. The increase was due primarily to the revenue generated by
the new subsidiaries formed in 1995 and 1996.
Gross profit was $2.2 million or 3.0% in 1997, compared to
gross profit of $4.8 million or 7.2% in 1996. The decrease in gross profit was
attributable primarily to cost overruns on the Visy Paper and the Mount Sinai
Medical Center projects by the Company's mechanical contracting business.
These projects accounted for $11.8 million of the contract revenues and $13.4
million of costs of revenues. Excluding these projects, contract revenues were
$61.8
- 19 -
million and gross profit was $3.8 million or 6.1% in 1997. In addition,
there has been substantial and increasing competition in this business, which
has compressed job profit margins.
Consolidated backlog at June 30, 1997 was approximately
$78.1 million, compared to $40.9 million at June 30, 1996. The Company
continues to bid on projects of all sizes and bid volume remains active.
Opportunities to obtain large projects exist and therefore backlog could
substantially increase. However, it is very difficult to predict the nature
and timing of large projects upon which the Company has bid and the outcome of
the bidding process. Therefore, the Company cannot predict with certainty
future contracts and revenue.
General and administrative expenses increased by $431,000 or
5.2% in 1997. The increase was due primarily to the abandonment of leasehold
improvements of offices that the Company vacated and the increase in revenues.
As a percentage of revenue, general and administrative expenses decreased from
12.5% in 1996 to 11.8% in 1997.
Before provision for income taxes, loss in 1997 was
approximately $6.5 million, of which approximately $735,000 was generated by
the new subsidiaries formed in fiscal years 1995 through 1997. Before benefits
for income taxes, the Company had a loss of approximately $5.8 million in
1996; however, the new subsidiaries formed in fiscal years 1996 and 1995
showed a profit before taxes of approximately $31,000.
Fiscal 1996 Compared to Fiscal 1995
Revenue increased by approximately $1,107,000 or 1.7% in
1996. The modest growth in revenue was due primarily to the Company either
completing or beginning several large, multi-million dollar contracts. Since
such revenue streams typically peak during the middle of a project, this also
temporarily depressed contract revenues in 1996.
Cost of revenues earned increased by approximately
$3,194,000 or 5.5% in 1996. In 1996, cost of revenues earned included
approximately $1,410,000 of additional costs to finish the electrical portion
of a project on behalf of a co-venturer of a joint venture. Gross profit
decreased by approximately $2,088,000 or 30% in 1996. Gross profit as a
percentage of revenue also decreased from 10.5% in 1995 to 7.2% in 1996.
However, excluding the additional costs in connection with the joint venture,
gross profit only decreased by $678,000 and gross profit as a percentage of
revenue was 9.3%. The reduction in gross profit as a percentage of revenue was
due to increasing competitive pressure on contracts
- 20 -
and overruns on lump sum contracts begun in prior years and substantially
completed in 1996.
Consolidated backlog at June 30, 1996 was approximately
$40,855,000, compared to $41,303,000 at June 30, 1995.
General and administrative expenses increased by $2,695,000
or 48% in 1996, of which approximately $1,808,000 was attributable to the
formation and initial growth of the new subsidiaries. Furthermore,
approximately $336,000 of the increase was also attributable to increased
public reporting requirements following the Company's initial public offering.
As a percentage of revenue, general and administrative expenses increased from
9% in 1995 to 13% in 1996.
Bad debt in connection with the joint venture amounted to
approximately $2,267,000 in 1996. Centrifugal Associates, Inc., a wholly owned
subsidiary, was a co-venturer in the joint venture that performed mechanical
and electrical services for a general contractor on the Lincoln Square
project. The general contractor advanced funds directly to the other
co-venturer and later stated that such advances would be deducted from the
payments owed to the joint venture for work that Centrifugal Associates, Inc.
performed on the project. Management was of the opinion that there was
substantial doubt as to the collectibility of such accounts and loans
receivable and wrote off the receivable and loan as a bad debt in 1996.
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
November 12, 1997. The information required hereunder with respect to
executive officers of the Company is set forth in Note 1 - "Business."
- 21 -
ITEM 11 - EXECUTIVE COMPENSATION
The information required hereunder is incorporated by
reference to the caption "Executive Compensation" in the Company's definitive
proxy statement to be filed in connection with its Annual Meeting of
Shareholders scheduled to be held on November 12, 1997.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required hereunder is incorporated by
reference to the caption "Security Ownership" in the Company's definitive
proxy statement to be filed in connection with its Annual Meeting of
Shareholders scheduled to be held on November 12, 1997.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required hereunder is incorporated by
reference to the caption "Certain Transactions" in the Company's definitive
proxy statement to be filed in connection with its Annual Meeting of
Shareholders scheduled to be held on November 12, 1997.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements and Financial Statement Schedules
See the Index to Financial Statements appearing on page F-1
of this Report following this Item 14. No financial statement schedules are
included in this Report.
2. Exhibits
Set forth below is a list of exhibits being filed with this
Report. The management contracts or compensatory plans or arrangements
required to be filed as an Exhibit pursuant to Item 14(c) are Exhibits 4.5 and
10.4 - 10.8.
Exhibit No. and Description in the Exhibit List for this Report
NUMBER TITLE
3.1 Certificate of Incorporation, filed June 14, 1994, as
restated. (1)
- 22 -
3.2 By-Laws. (1)
4.1 Specimen Copy of Common Stock Certificate. (1)
4.2 Form of Class A Warrant Certificate and Form of Exercise
Agreement. (1)
4.3 Form of Class A Warrant Agreement.(1)
4.4 Unit Purchase Option in favor of Daniel Porush, dated July
21, 1995, and Transfer Form from Stratton Oakmont, Inc. to
Daniel Porush, dated July 21, 1995.(2)
4.5 DualStar Technologies Corporation 1994 Stock Option Plan.(1)
10.1 Share Acquisition Agreement by and among the Registrant and
Centrifugal Associates, Inc., et al., dated August 1, 1994.
(1)
10.2 Share Acquisition Agreement by and among the Registrant and
Mechanical Associates, Inc., et al., dated August 1, 1994.
(1)
10.3 Mechanical Service Network Agreement by and between
Centrifugal Associates, Inc. and E.I. DuPont de Nemours and
Company, dated July 18, 1995.(2)
10.4 Employment Agreement between the Registrant and Elven M.
Tangel, dated August 31, 1994. (1)
10.5 Employment Agreement between the Registrant and Gregory
Cuneo, dated August 31, 1994. (1)
10.6 Employment Agreement between the Registrant and Stephen J.
Yager, dated August 31, 1994. (1)
10.7 Employment Agreement between the Registrant and Armando
Spaziani, dated August 31, 1994. (1)
10.8 Employment Agreement between the Registrant and Ronald
Fregara, dated August 31, 1994. (1)
10.9 Agreements between Lehrer McGovern Bovis, Inc. and
Centrifugal Associates, Inc., dated August 18, 1992 and
September 28, 1992. (1)
10.10 Agreements between Morse Diesel International, Inc. and
Centrifugal Associates, Inc., dated June 10, 1993 and
November 19, 1990. (1)
- 23 -
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)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP, dated September 30, 1997,
with respect to Form S-8 filing (File No. 33-97708),
effective October 3, 1995.
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.
(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.
- 24 -
(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, 1997
None.
- 25 -
DualStar Technologies Corporation and Subsidiaries
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statement of Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9 - F-23
F-1
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, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended June 30, 1997.
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, 1997 and 1996 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
September 30, 1997
F-2
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
-----------------------------------
ASSETS 1997 1996
------------- -------------
CURRENT ASSETS
Cash $ 1,110,615 $ 2,023,992
Marketable securities -- 910,029
Contracts receivable - net of allowance for doubtful
accounts of $179,000 in 1997 and $297,000 in 1996 15,815,168 13,220,282
Retainage receivable 2,863,049 4,547,101
Costs and estimated earnings in excess of billings on
uncompleted contracts 622,951 2,763,051
Income taxes receivable -- 1,225,532
Deferred tax asset - current 178,000 178,000
Prepaid expenses and sundry receivable 319,942 1,281,850
-------------- -------------
Total current assets 20,909,725 26,149,837
PROPERTY AND EQUIPMENT - net of accumulated
depreciation 3,443,777 1,054,010
OTHER ASSETS
Deferred tax asset - long-term 924,000 924,000
Other 1,299,254 253,633
------------- --------------
$26,576,756 $28,381,480
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------ ------------
CURRENT LIABILITIES
Accounts payable $15,559,135 $11,015,924
Billings in excess of costs and estimated earnings on
uncompleted contracts 2,741,542 3,477,465
Accrued expenses and other current liabilities 2,346,001 2,565,102
------------ ------------
Total current liabilities 20,646,678 17,058,491
MORTGAGE PAYABLE - net of current portion 813,750 --
OTHER LIABILITIES 305,005 --
------------ ------------
Total liabilities 21,765,433 17,058,491
------------ ------------
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 (10,274,513) (3,762,847)
------------- -------------
4,811,323 11,322,989
------------- ------------
$26,576,756 $28,381,480
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
1997 1996 1995
------------ ------------ ------------
Contract revenues earned $73,618,336 $66,232,311 $65,125,796
Cost of revenues earned 71,375,515 61,454,959 58,260,462
------------ ------------ ------------
Gross profit 2,242,821 4,777,352 6,865,334
General and administrative expenses 8,710,487 8,279,701 5,585,170
Bad debt in connection with joint venture -- 2,266,662 --
------------ ------------ ------------
(Loss) income before provision
(benefit) for income taxes (6,467,666) (5,769,011) 1,280,164
Provision (benefit) for income taxes
Current tax provision (benefit) 44,000 (977,000) 711,800
Effect of S Corporation revocation -- -- 751,000
Deferred tax benefit -- (1,018,000) (193,800)
------------ ------------ ------------
44,000 (1,995,000) 1,269,000
------------ ------------ ------------
NET (LOSS) INCOME $ (6,511,666) $ (3,774,011) $ 11,164
============= ============= ============
Per share data:
Primary $(0.72) $(0.42) $ --
======= ======= ========
Weighted average number of common
shares outstanding 9,000,000 9,000,000 6,125,000
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-5
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended June 30, 1997, 1996 and 1995
Additional (Deficit)
Common paid-in retained
stock capital earnings
------- ------------- -------------
Balance - June 30, 1994 $20,750 $ 232,100 $ 2,704,445
Distributions -- -- (600,000)
Issuance of 2,610,000 shares of common
stock to acquire subsidiaries' stock 26,100 2,081,195 (2,104,445)
Less elimination of subsidiaries' capital (2,850) -- --
Issuance of 4,600,000 shares of common stock 46,000 16,054,000 --
Issuance of stock rights -- 4,000 --
Initial public offering costs -- (3,375,459) --
Net income for the year ended June 30, 1995 -- -- 11,164
------- ------------- -------------
Balance - June 30, 1995 90,000 14,995,836 11,164
Net loss for the year ended June 30, 1996 -- -- (3,774,011)
------- ------------- -------------
Balance - June 30, 1996 90,000 14,995,836 (3,762,847)
Net loss for the year ended June 30, 1997 -- -- (6,511,666)
------- ------------- -------------
Balance - June 30, 1997 $90,000 $14,995,836 $(10,274,513)
======= ============= =============
The accompanying notes are an integral part of this statement.
F-6
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
1997 1996 1995
------------ ------------- ------------
Cash flows from operating activities
Net (loss) income $(6,511,666) $(3,774,011) $ 11,164
Adjustments to reconcile net (loss) income
to net cash used in operating activities
Depreciation 689,569 202,947 109,962
Deferred income taxes -- (1,018,000) (193,800)
(Increase) decrease in assets
Contracts receivable (2,594,886) 2,700,103 (6,912,266)
Retainage receivable 1,684,052 (608,432) (1,920,198)
Costs and estimated earnings in
excess of billings on uncompleted
contracts 2,140,100 (2,637,918) 1,396,783
Income taxes receivable 1,225,532 (1,225,532) --
Prepaid expenses (108,527) (73,817) (105,676)
Other assets (1,045,621) 134,498 (36,286)
Increase (decrease) in liabilities
Accounts payable 4,543,211 1,224,812 2,553,495
Billings in excess of costs and
estimated earnings on
uncompleted contracts (735,923) 1,629,343 451,267
Accrued expenses and other
current liabilities (279,081) 942,854 29,111
Income taxes payable -- (916,153) 916,053
------------------ ------------- ------------
Net cash used in operating activities (993,240) (3,419,306) (3,700,391)
------------------ ------------- ------------
Cash flows from investing activities
Proceeds from (investment in)
marketable securities 910,029 4,944,118 (5,800,849)
Decrease (increase) in sundry receivable 1,070,435 (1,070,435) --
Capital expenditures (1,628,795) (503,241) (449,088)
Advances from shareholders -- -- (50,256)
------------------- ---------------- ------------
Net cash provided by (used in)
investing activities 351,669 3,370,442 (6,300,193)
------------------ ------------- ------------
F-7
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
1997 1996 1995
------------ -------------- --------------
Cash flows from financing activities
Repayment of mortgage payable $ (41,250) $ -- $ --
Payments on capital lease obligations (230,556) -- --
Proceeds from initial public offering -- -- 16,100,000
Initial public offering costs paid -- -- (3,375,459)
Repayment of shareholders' loan -- -- (1,000,000)
Repayment of bank loan -- -- (1,000,000)
Distribution to former shareholders of
wholly owned subsidiaries -- -- (600,000)
Proceeds from stock subscription receivable -- -- 250,000
Proceeds from issuance of stock rights -- -- 4,000
------------------ ------------------ --------------
Net cash (used in) provided by
financing activities (271,806) -- 10,378,541
------------------ ------------------ --------------
NET (DECREASE) INCREASE
IN CASH (913,377) (48,864) 377,957
Cash at beginning of year 2,023,992 2,072,856 1,694,899
------------------ ------------------ --------------
Cash at end of year $ 1,110,615 $ 2,023,992 $ 2,072,856
================== ================== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 90,000 $ 44,000 $ 268,000
Income taxes 2,000 994,000 639,000
Non-cash financing transactions:
In August 1996, the Company acquired real property which is financed by a
$900,000 mortgage loan.
The Company acquired telephone switch systems which are financed by a
$119,000 and a $431,000 lease in December 1996 and April 1997
respectively. These leases are classified as capital leases.
The accompanying notes are an integral part of these statements.
F-8
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 1997,
DualStar formed eight 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. and Integrated
Controls Enterprises, Inc. In 1995, these new subsidiaries had no
significant operations and therefore had no significant impact on the
accompanying 1995 consolidated financial statements.
The accompanying financial statements for the years ended June 30, 1997,
1996 and 1995 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.
The Company experienced losses of approximately $6.5 million and
$3.8 million in the years ended June 30, 1997 and 1996, respectively.
The Company also had a reduction of working capital of approximately
$8.8 million for the year ended June 30, 1997. The Company is considering
the consolidation, close-out or sale of certain subsidiaries in order to
improve working capital and profitability. Also, in addition to performing
on existing backlog, the Company is implementing a marketing plan to
emphasize those contracts which return higher margins than
F-9
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A (CONTINUED)
the Company has experienced overall in the past two years. The Company's
mechanical contracting business is also reorganizing 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 plans, current cash on hand, and future cash from
operating and investing activities should be sufficient to cover current
operations. There can be no assurance, however, that the Company will
achieve its plans. In addition, in the event that additional working
capital becomes necessary to fund current operations, there can be no
assurance that the Company will be able to obtain financing on terms
satisfactory to it.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows:
1. Revenue and Cost Recognition
Revenues on long-term contracts are accounted for by the
percentage-of-completion method, whereby revenue is recognized based
on the estimated percentage of costs incurred to date to the
estimated total costs of each individual contract. This method is
used because management considers costs to be the best available
measure of progress on these contracts. Revenue on service contracts
is recorded on the accrual basis as services are performed.
Contract costs include all direct materials and labor costs. General
and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job
performance, job conditions, and estimated profitability, including
those arising from final contract settlements, may result in
revisions to costs and income, and such changes are recognized in the
period in which the revisions are determined. An amount equal to
contract costs attributable to job change orders is included in
revenues when realization is probable and the amount of such orders
can be reliably estimated.
The asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of
amounts billed. The liability "Billings in excess of costs and
estimated earnings on uncompleted contracts" represents billings in
excess of revenues recognized.
F-10
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A (CONTINUED)
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.
3. Fair Value of Financial Instruments
The carrying amount of cash, marketable securities, contracts and
retainage receivable, accounts payable and current maturities of
long-term debt approximates fair value, principally because of the
short-term maturity of these items. The fair value of the Company's
long-term debt approximates carrying value as the debt was taken at
the Company's current borrowing rate. Marketable securities are
stated at quoted market value.
4. Marketable Securities
Marketable securities represent investments which mature in one year
or less, are available for sale, and are valued at market value which
approximates cost.
5. 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.
6. 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.
F-11
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A (CONTINUED)
As a result of the share acquisition agreements, commencing August 1,
1994, Centrifugal's and Mechanical's S Corporation elections ceased
to be in effect and the Company is taxed as a C Corporation. As of
August 1, 1994, for income tax purposes, the Company recognized
additional taxable income as a result of the cumulative differences
between financial accounting and income tax purposes of approximately
$1,981,000. Accordingly, the Company incurred additional income tax
liability of approximately $751,000 in 1995.
7. Per Share Data
The computation of net (loss) income per share is based on the
weighted average number of shares of common stock outstanding. When
dilutive, stock options and warrants are included as share
equivalents using the treasury stock method.
NOTE B - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the
following:
June 30,
--------------------------------------
1997 1996
----------- -------------
Costs incurred on uncompleted contracts $25,619,921 $77,306,927
Estimated earnings 2,987,114 8,332,641
------------ -------------
28,607,035 85,639,568
Less billings to date 30,725,626 86,353,982
------------ -------------
$ (2,118,591) $ (714,414)
============= ==============
F-12
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B (CONTINUED)
Costs and estimated earnings on uncompleted contracts are included in the
accompanying consolidated balance sheets as follows:
June 30,
--------------------------------------
1997 1996
------------ --------------
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 622,951 $ 2,763,051
Billings in excess of costs and estimated
earnings on uncompleted contracts (2,741,542) (3,477,465)
------------- ------------
$(2,118,591) $ (714,414)
============= =============
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
June 30,
--------------------------------------
1997 1996
----------- ------------
Building and building improvements $1,749,908 $ --
Automobiles 324,360 235,214
Machinery and equipment 775,406 194,091
Computer equipment 702,929 622,699
Furniture and fixtures 141,711 41,531
Leasehold improvements 26,860 486,246
------------ ----------
3,721,174 1,579,781
Less accumulated depreciation (592,397) (525,771)
------------ ----------
3,128,777 1,054,010
Land 315,000 --
------------ ----------
$3,443,777 $1,054,010
========== ==========
F-13
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
June 30,
--------------------------------------
1997 1996
--------------------------------------
Accrued compensation $1,397,138 $2,111,183
Current portion of mortgage payable 45,000 --
Other 903,863 453,919
------------ ------------
$2,346,001 $2,565,102
============ ============
NOTE E - MORTGAGE PAYABLE
In August 1996, the Company acquired real property located in Long Island
City, New York for the purpose of centralizing and consolidating its
operations. The cost of the real property was approximately $1,109,000 of
which $900,000 was financed by a ten-year mortgage loan. The mortgage
bears interest at a fixed rate of 9.25% per annum for the first five
years, and then for the last five years, at a fixed rate per annum equal
to 1% above the Prime Rate in effect thereof. The mortgage includes a
final balloon payment in the amount of $453,750 which is due on August 1,
2006.
At June 30, 1997, principal payments under the mortgage loan are as
follows:
1998 $ 45,000
1999 45,000
2000 45,000
2001 45,000
2002 45,000
Thereafter 633,750
---------
858,750
Less: current portion (45,000)
---------
$813,750
=========
F-14
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E (CONTINUED)
The mortgage loan agreement requires the Company to comply with certain
covenants, including maintaining certain net working capital and tangible
net worth amounts. If the Company fails to meet any of the requirements,
the loan shall become immediately due and payable. At June 30, 1997, the
lender waived the net working capital and the tangible net worth
requirements. Effective July 1, 1997, the lender reduced the net working
capital and the tangible net worth requirements to $263,000 and
$4,811,000, respectively.
NOTE F - SHAREHOLDERS' EQUITY
In February 1995, in connection with the Company's initial public
offering, the Company issued 4,600,000 Class A warrants to shareholders.
The warrants are exercisable for 4,600,000 shares of common stock at
$4.00 per share. The warrants became exercisable in February 1996 and
will expire in February 2000. The warrants are redeemable by the Company
for $.05 per warrant at any time after February 1997, upon thirty days
prior written notice if the average closing price of the common stock
equals or exceeds $9.00 per share, for any twenty consecutive trading
days within a period of thirty days ending within ten days of the notice
of redemption. At June 30, 1997, all warrants are 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-15
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, 1997 and 1996:
June 30,
---------------------------------
1997 1996
---------------------------------
Current
Allowance for doubtful accounts $1,322,000 $ 162,000
---------- -----------
Long-term
Net operating loss carryforward 3,239,000 1,849,000
Accumulated depreciation (26,000) 16,000
---------- -----------
3,213,000 1,865,000
---------- -----------
Total deferred tax assets 4,535,000 2,027,000
Less: valuation allowance (3,433,000) (925,000)
---------- -----------
Net deferred tax assets $1,102,000 $1,102,000
========== ===========
Management believes that the Company will more than likely generate
sufficient taxable earnings or utilize tax planning opportunities to
ensure realization of the tax benefits of $1,102,000, but will less than
likely realize the benefit on the balance of the deferred tax assets, and
therefore, has recorded a valuation allowance.
F-16
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G (CONTINUED)
The provision (benefit) for income taxes differs from the amount computed
by applying the statutory federal income tax rate to (loss) income before
provision (benefit) for income taxes due to the following:
June 30,
---------------------------------------
1997 1996
---------------------------------------
Statutory federal income tax (benefit) $(2,214,000) $(1,962,000)
State and local income taxes 39,000 75,000
Net operating loss carryback limitation -- 1,289,000
Net operating loss carryforward 824,000 (1,849,000)
Valuation allowance 2,508,000 925,000
Allowance for doubtful accounts (1,160,000) (88,000)
Accumulated depreciation 42,000 (6,000)
S Corporation revocation
Cash-to-accrual basis -- (272,000)
Prior year underaccrual (overaccrual) 5,000 (107,000)
------------- ----------
$ 44,000 $(1,995,000)
============= ===========
The Company has available for federal income tax purposes, net operating
losses of approximately $5,455,000 and for state and local tax purposes,
net operating losses of approximately $6,895,000, expiring in the years
2011 to 2012. 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.
At June 30, 1995, included in income taxes payable in the consolidated
balance sheet was an amount that the Company expected to pay when it
filed its June 30, 1996 income tax returns. In accordance with the
Internal Revenue Code, one-half of the cash-to-accrual differences
recognized by the Company upon the revocation of the S Corporation status
of certain of its subsidiaries would be payable with the Company's June
30, 1996 income tax returns. At June 30, 1995, this liability amounted to
approximately $272,000, which was reversed at June 30, 1996 due to the
net operating losses.
F-17
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under operating leases expiring at
various dates through July 2001. At June 30, 1997, minimum rental
commitments under noncancellable operating leases are as follows:
1998 $246,000
1999 202,000
2000 145,000
2001 104,000
2002 13,000
----------
$710,000
==========
Equipment rent for the years ended June 30, 1997, 1996 and 1995 was
$277,000, $127,000, and $86,000, respectively.
In 1994, the Company entered into employment agreements with five
founding officers. The agreements expired in 1997 and required minimum
annual salaries of $150,000 for each officer with subsequent increases
not to exceed $150,000 during the first three years following the
effective date of the offering. Among other items, the agreements
provided for a discretionary bonus of up to 45% of salary, the payment of
certain disability benefits of the officers and discretionary incentive
bonuses. The agreements were automatically renewed for an additional
three-year term in 1997.
The Company contributes to multiemployer pension plans for employees
covered by collective bargaining agreements. These plans are not
administered by the Company and contributions are determined in
accordance with provisions of the agreements. Information with respect to
the Company's proportionate share of the excess, if any, of the
actuarially computed value of vested benefits over the total of the
pension plans' net assets is not available from the plans'
administrators. For the years ended June 30, 1997, 1996 and 1995, the
Company contributed $1,859,000, $1,344,000 and $1,021,000, respectively.
The Multiemployer Pension Plan Administration Act of 1980 (the "Act")
significantly increased the pension responsibilities of participating
employers. Under the provisions of the Act, if the plans are terminated
or the Company withdraws, the Company could be subject to a substantial
"withdrawal liability."
F-18
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H (CONTINUED)
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.
In 1995, Associates was involved as a defendant in litigation proceedings
with a subcontractor who claimed approximately $207,000 for work
performed. The court had ordered Associates to establish an irrevocable
letter of credit in favor of the subcontractor in the amount of $207,000.
The letter of credit was collateralized by a $210,000 certificate of
deposit. In March 1996, the court issued a final judgment in favor of the
subcontractor. In April 1996, the subcontractor cashed in the letter of
credit and the claim of $207,000 was satisfied.
Associates was a partner in a joint venture that performed mechanical and
electrical services for a general contractor on the Lincoln Square
project. Associates was responsible for the mechanical portion of the
contract, and its co-venturer was responsible for the electrical portion.
The joint venture's work on this project has been completed. The joint
venture received demands for payment from certain vendors used by the
co-venturer of Associates. These vendors filed liens and/or made demands
against the joint venture payment bond amounting to approximately $1.7
million. Some of these vendors also filed lawsuits against the joint
venture, the joint venture partners and the related bonding companies, to
secure payment on their claims. These claims were based on the alleged
failure of the joint venture partner to pay for electrical goods provided
to it as the electrical subcontractor of the joint venture. The joint
venture's bonding companies proposed settling with the claimants; the
bonding companies would then seek indemnification from the joint venture.
It was management's opinion that it would cost the Company less if this
settlement process was managed and completed by the Company.
The general contractor on the Lincoln Square project advanced funds
directly to Associates' joint venture partner. The general contractor
later stated that such advances would be deducted from the payments owed
to the joint venture for mechanical work that Associates performed on the
project. During the course of the project, Associates also incurred
additional costs to finish the electrical portion of the project on
behalf of its co-venturer. Management was of the opinion that there was
substantial doubt as to the collectibility of such receivable or
additional costs.
F-19
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H (CONTINUED)
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.
NOTE I - RELATED PARTY TRANSACTIONS
At June 30, 1997, the Company had a loan to a member of its Board of
Directors of approximately $73,000. The loan was collateralized by 65,250
shares of the Company's common stock, bore interest at 8.75% per annum.
The principal and interest of the loan was repaid in September 1997.
Mechanical 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, 1997, 1996 and 1995 was $66,000, $65,000 and
$53,000, respectively.
Associates had loans payable to its former shareholders in the amount of
$1,000,000 which were subordinated to its bank debt, were
uncollateralized, and bore interest at the same rate as Associates' money
market fund rate. The loans were fully repaid in February 1995. Interest
expense related to these loans for the year ended June 30, 1995 was
$17,000.
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, marketable
securities, 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.
F-20
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - (CONTINUED)
The Company performs construction contracts for, and extends credit to,
private owners and general contractors located in the New York Tri-State
area. The Company is directly affected by the well-being of these
entities and the construction industry as a whole. For the year ended
June 30, 1997, revenue from three customers amounted to approximately
25%, 16%, and 13% of total revenue respectively. For the year ended June
30, 1996, revenue from three customers amounted to approximately 33%, 18%
and 15% of total revenue respectively. For the year ended June 30, 1995,
revenue from two customers amounted to approximately 39% and 28% of total
revenue respectively.
NOTE K - STOCK OPTION PLAN
The Company adopted a stock option plan accounted for under APB No. 25.
The plan allows the Company to grant options to employees for up to 2.2
million shares of common stock. In general, the options have a term of
seven years from the date of grant and vest at the end of the third year.
For all options, the exercise price of each option is higher than the
market price of the Company's stock on the date of grant.
Under the plan, the Company's founding officers may be given options,
which will be shared equally, to purchase shares of the Company's common
stock at fair market value on the date of grant, if pre-determined
Company's pretax earning criteria are met. Through June 30, 1997, none of
the 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
loss and loss per share would have been:
F-21
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K - (CONTINUED)
1997 1996
------------- ------------
Net loss As reported $(6,511,766) $(3,774,011)
Pro forma $(7,364,516) $(3,774,011)
Primary loss per share As reported $(0.72) $(0.42)
Pro forma $(0.82) $(0.42)
Fully diluted loss per share As reported $(0.72) $(0.42)
Pro forma $(0.82) $(0.42)
This pro forma impact only takes into account options granted since July
1, 1995 and is likely to increase in future years as additional options
are granted and amortized ratably over the vesting periods. The fair
market value of each option grant is estimated on the date of granting
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in fiscal 1997 and fiscal
1995 respectively: risk-free interest rate of 6.08%, expected life of
seven years, volatility of 113.5% and no dividend yield.
A summary of information relative to the Company's stock option plan
follows:
Weighted
Number of Shares Average Price
---------------- -------------
Outstanding at June 30, 1994 --
Granted 177,000 $3.00
----------
Outstanding at June 30, 1995 and 1996 177,000 $3.00
GRANTED 1,895,000 $0.75
----------
OUTSTANDING AT JUNE 30, 1997 2,072,000 $0.94
==========
The following information applies to options outstanding at June 30,
1997:
Number outstanding 2,072,000
Range of exercise prices $0.75 TO $3.00
Weighted average exercise price $0.94
Weighted average remaining contractual life 7 YEARS
Number exercisable 1,427,500
Weighted average exercise price $1.03
F-22
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1997, 1996 and 1995, the Company
made no contribution to the plan.
NOTE M - NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share,
which is effective for financial statements for both interim and annual
reports ending December 15, 1997. Early adoption of the new standard is
not permitted. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted
earnings per share together with disclosure of how the earnings per share
amounts were computed. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the
weighted-average common shares outstanding for the period. Diluted
earnings per share reflects the weighted-average common shares
outstanding plus the potential dilutive effect of securities or contracts
which are convertible to common shares, such as options, warrants, and
convertible preferred stock. The adoption of this new standard is not
expected to have a material impact on the disclosure of earnings per
share in the financial statements.
F-23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
DUALSTAR TECHNOLOGIES CORPORATION
By /s/ GREGORY CUNEO
-------------------------------
Gregory Cuneo
President and Chief
Executive Officer
Dated: October 10, 1997
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.
Signature Title Date
- --------- ----- ----
/s/ GREGORY CUNEO President, Chief October 10, 1997
- ---------------------- Executive Officer
Gregory Cuneo and Director
/s/ ROBERT BIRNBACH Vice President and October 10, 1997
- ---------------------- Chief Financial
Robert Birnbach Officer [Principal
Financial Officer]
/s/ JOSEPH C. CHAN Vice President and October 10, 1997
- ---------------------- Chief Accounting Officer
Joseph C. Chan [Principal Accounting
Officer]
/s/ GARY DELUCA Director October 10, 1997
- ----------------------
Gary DeLuca
/s/ RONALD FREGARA Director October 10, 1997
- ----------------------
Ronald Fregara
/s/ ELVEN M. TANGEL Director October 10, 1997
- ----------------------
Elven M. Tangel
Signature Title Date
- --------- ----- ----
/s/ ARMANDO SPAZIANI Director October 10, 1997
- --------------------------
Armando Spaziani
/s/ MICHAEL J. ABATEMARCO Director October 10, 1997
- --------------------------
Michael J. Abatemarco
/s/ STEPHEN J. YAGER Executive Vice October 10, 1997
- -------------------------- President, Secretary
Stephen J. Yager and Director
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
EXHIBITS TO
FORM 10-K
Commission file number 0-25552
DUALSTAR TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3776834
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11-30 47th Avenue, Long Island City, New York 11101
(Address of principal executive offices) (Zip Code)
(718) 340-6655
(Registrant's telephone number, including area code)
INDEX EXHIBITS
NUMBER TITLE PAGE HEREIN
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3.1 Certificate of Incorporation, filed June 14, 1994,
as restated. (1)
3.2 By-Laws. (1)
4.1 Specimen Copy of Common Stock Certificate.(1)
4.2 Form of Class A Warrant Certificate and Form of
Exercise Agreement. (1)
4.3 Form of Class A Warrant Agreement.(1)
4.4 Unit Purchase Option in favor of Daniel Porush,
dated July 21, 1995, and Transfer Form from
Stratton Oakmont, Inc. to Daniel Porush, dated July
21, 1995.(2)
4.5 DualStar Technologies Corporation 1994 Stock Option
Plan. (1)
10.1 Share Acquisition Agreement by and among the
Registrant and Centrifugal Associates, Inc., et
al., dated August 1, 1994. (1)
10.2 Share Acquisition Agreement by and among the
Registrant and Mechanical Associates, Inc., et al.,
dated August 1, 1994. (1)
10.3 Mechanical Service Network Agreement by and between
Centrifugal Associates, Inc. and E.I. DuPont de
Nemours and Company, dated July 18, 1995.(2)
10.4 Employment Agreement between the Registrant and
Elven M. Tangel, dated August 31, 1994.(1)
10.5 Employment Agreement between the Registrant and
Gregory Cuneo, dated August 31, 1994.(1)
10.6 Employment Agreement between the Registrant and
Stephen J. Yager, dated August 31, 1994.(1)
10.7 Employment Agreement between the Registrant and
Armando Spaziani, dated August 31, 1994.(1)
10.8 Employment Agreement between the Registrant and
Ronald Fregara, dated August 31, 1994. (1)
NUMBER TITLE PAGE HEREIN
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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)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP, dated September 30, 1997,
with respect to Form S-8 filing (File No. 33-97708),
effective October 3, 1995.
27.1 Financial Data Schedule (electronic filings only).
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(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.
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