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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, 2002
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to __________
COMMISSION FILE NUMBER 0-25552
DUALSTAR TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3776834
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
11-30 47TH AVENUE, LONG ISLAND CITY, NEW YORK 11101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 340-6655
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant as of September 19, 2002 was approximately
$2,680,514 based upon the closing price ($0.20) for such Common Stock on such
date. The number of shares outstanding of Registrant's Common Stock, as of
September 19, 2002, was 16,501,568.
PART I
The statements contained in this Annual Report on Form 10-K, including the
exhibits hereto, relating to operations of DualStar Technologies Corporation and
its subsidiaries (DualStar or the Company) may constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Please note that the words intends, expects, plans, estimates,
projects, believes, anticipates and similar expressions are intended to identify
forward-looking statements. Actual results of the Company may differ materially
from those in the forward-looking statements and may be affected by a number of
factors including the Company's ability to continue operations, including if
Madeleine L.L.C. were to call its loan, the ability of OnTera, Inc., a wholly
owned subsidiary of the Company, to continue to implement its cost reduction
plan, the ability of the Company to raise and provide the capital resources to
fund the continuing communications operating losses, the Company's ability to
continue to obtain insurance and suretyship coverage, regulatory or legislative
changes, the Company's dependence on key personnel, and the Company's ability to
manage growth, in addition to those risk factors set forth below and in the
section captioned Risk Factors and the assumptions, risks and uncertainties set
forth below in the section captioned Management's Discussion and Analysis of
Financial Condition and Results of Operations, as well as other factors
contained herein and in DualStar's other filings with the SEC. The Company can
give no assurance that its plans, intentions, and expectations will be achieved
and actual results could differ materially from forecasts and estimates.
ITEM 1 - BUSINESS
OVERVIEW
DualStar Technologies Corporation ("DualStar" or the "Company"), through its
wholly owned subsidiaries, operates two separate lines of business: (a)
construction and (b) communications. As a result of the limited availability of
capital and a significant change in market conditions, in December 2000 the
Company's board of directors determined to refocus its communications business
efforts by concentrating on core communications assets located in the New York
City and Los Angeles areas and by operating subscription video provider,
ParaComm Inc., in several southern and western states.
The Company incurred significant losses in the last several fiscal years,
primarily in the communications segment, and it expects that the communications
segment will continue to incur losses going forward and will require additional
capital to fund those losses. The Company has implemented and will continue to
implement cost reductions designed to minimize such losses. There can be no
assurance that these efforts will be successful or that the construction segment
will sustain profitability or positive cash flow from future operations or that
any positive cash flow will be sufficient to offset continued losses from the
communications segment. Given the current U.S. economic climate and market
conditions and the financial condition of the Company, there is a substantial
likelihood that the Company will be unable to raise additional funds on terms
satisfactory to it, if at all, to fund the expected operating losses. Moreover,
the Company presently owes Madeleine L.L.C. ("Madeleine") over $15 million and
is in default under the loan. Madeleine may call the loan due and payable at any
time, and, if it is not paid, foreclose on significant assets of the Company's
subsidiaries that secure such loan. If the Company cannot raise additional funds
or if Madeleine demands payment on its loan, the Company will likely be forced
to cease operations. Accordingly, there is substantial doubt about the Company's
ability to continue as a going concern.
In fiscal year 2002, the Company decided to further limit its communications
business efforts and resources to the Internet and subscription video businesses
in the New York City metropolitan area and in Florida. The Company's
communications segment discontinued its telephone business in New York City and,
in April 2002, informed their telephone customers and the FCC that telephone
services would be phased out starting June 2002. The Company has not yet
received final regulatory approval for its discontinuance of the provision of
voice service. In addition, the Company decided to sell certain communications
assets in locations outside of the New York City metropolitan area and Florida.
In April 2002, the Company sold certain communications assets for $0.4 million.
The transaction resulted in a loss of $0.5 million. In August 2002, the Company
sold certain access agreements on properties located in the Los Angeles area and
the communications assets located in the properties for $0.4 million. The
transaction resulted in a gain of $0.1 million.
Due to the Company's continuing re-focus of its communications business efforts
and resources, a $2.5 million charge for the impairment of certain remaining
communications assets was recorded in fiscal year 2002.
On November 8, 2000, the Company consummated a $12.5 million senior secured loan
transaction with Madeleine, an affiliate of Blackacre Capital Management L.L.C.
("Blackacre"). The loan, which is due and payable on November 8, 2007, bears
interest at a fixed rate of 11% per annum. The loan is a senior secured
obligation of the Company and is guaranteed by certain subsidiaries of the
Company, including OnTera, which have pledged substantially all of their
respective assets to collateralize such guarantee. In connection with the loan,
the Company issued warrants to purchase 3,125,000 shares of common stock at an
exercise price of $4.00 per share, subject to antidilution provisions, expiring
in December 2007, to an affiliate of Madeleine. A portion of the $12.5 million
loan proceeds was used to retire existing indebtedness of the Company in the
principal amount of $7 million owed to Madeleine and to pay expenses of
obtaining the loan. The remaining proceeds were used for the Company's working
capital purposes. No value was allocated to the warrants because the value was
deemed immaterial.
Since March 2001, the Company has not made regularly scheduled interest payments
to Madeleine pursuant to the $12.5 million loan agreement. In addition, the
de-listing of the Company's common shares from the Nasdaq National Market
created a default under the loan agreement. In August 2002, the Company,
Blackacre and Madeleine began negotiating to eliminate the loan by selling
certain of the Company's communications assets to Blackacre at fair market value
and by converting the remaining loan balance to stock of the Company. There is
no assurance that the Company, Blackacre and Madeleine will be able to reach
agreement on valuation issues, or that they will reach final agreement to
eliminate or reduce the loan. The Company presently owes Madeleine over $15
million and is in default under the loan agreement. Madeleine has the right to
call the loan due and payable at any time. If Madeleine were to demand payment,
the Company would be unable to make such payment. In such an event, Madeleine
would have the right to foreclose on significant assets of the Company that
collateralize the loan. Such foreclosure would result in the Company being
unable to continue in business. See also Note A - Company Background and
significant Accounting Policies of the Notes to the Financial Statements
referred to in Item 8 hereof.
DualStar is a Delaware corporation. Its principal place of business is located
at 11-30 47th Avenue, Long Island City, New York 11101. DualStar's telephone
number is (718) 340-6655.
DualStar's common stock, par value $.01 per share (the Common Stock), trades on
the Over-the-Counter Bulletin Board under the symbol DSTR. As of September 19,
2002, there were 16,501,568 shares of Common Stock issued and outstanding.
BUSINESS AND OPERATING STRATEGIES
DualStar Historical Background. DualStar was incorporated in the State of
Delaware on June 17, 1994. The construction-related subsidiaries of DualStar
consist of Centrifugal/Mechanical Associates, Inc. (CMA), formed in June 1995;
High-Rise Electric, Inc. (High-Rise), formed in July 1995, Integrated Controls
Enterprises, Inc. (ICE), formed in August 1996, and BMS Electric, Inc. (BMS),
formed in July 2000. Property Control, Inc. (PCI) was formed in June 1995. The
communications-related subsidiaries of DualStar consist of OnTera, Inc. (OnTera)
(formerly known as DualStar Communications, Inc.), formed in February 1996, and
ParaComm, Inc. (ParaComm), acquired by DualStar in May 2000. DualStar wholly
owns each subsidiary.
The Company historically has engaged in two business segments: construction and
communications. For financial information concerning the two segments, see Note
N - Segment Information of the Notes to the Financial Statements referred to in
Item 8 hereof.
CONSTRUCTION BUSINESS AND OPERATING STRATEGIES.
Overview. High-Rise designs and installs sophisticated electrical systems for
newly constructed residential and commercial high-rise buildings. CMA engages in
mechanical contracting services, i.e. heating, ventilation and air conditioning
(HVAC) services. High-Rise's and CMA'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.
ICE supplies, installs and services facility management, energy management,
building automation, and commercial temperature control systems. In general, ICE
acts as a subcontractor to mechanical subcontractors, including those of the
Company. ICE also works directly for real property owners and general
contractors. BMS installs and services electrical systems, concentrating on
low-voltage work in the areas of building management systems and controls, and
fire and security, mostly in new construction.
PCI owns or manages the Company's fixed asset or office peripheral needs, e.g.,
ownership and maintenance of real property.
Major Customers. The Company's construction customers, which are concentrated in
the New York Metropolitan area, include various general contractors, real estate
developers, hotels, governmental agencies, and subcontractors. For the year
ended June 30, 2002, revenue from one customer (Bovis Lend Lease, Inc. (formerly
Lehrer McGovern Bovis, Inc.)) amounted to approximately 64% of the Company's
total revenues. For the year ended June 30, 2001, revenue from two customers
(Bovis Lend Lease, Inc. and Rockrose Construction Corp.) amounted to
approximately 60% and 15% of the Company's total revenues, respectively. For the
year ended June 30, 2000, revenue from two customers (Bovis Lend Lease, Inc. and
HRH Construction Corporation) amounted to approximately 49%
and 16% of the Company's total revenue, respectively. In addition, for the
fiscal years ended June 30, 2002 and 2001, approximately 0.2% and 2.0% of the
Company's total revenues, respectively, derived from HRH Construction Corp.
DualStar's President and Chief Executive Officer is also the Chairman of HRH
Construction Corp. HRH Construction Corp. is an affiliate of Blackacre. In
addition, as of June 30, 2002 and 2001, contract and retainage receivable from
Bovis Lend Lease, Inc. amounted to approximately 52% and 58% of the Company's
total contract and retainage receivable, respectively.
Manufacturing. The Company's production facilities are capable of fabricating
and assembling mechanical and electrical systems and subsystems. The Company
maintains a test and inspection program to ensure that such systems meet
customer requirements for performance and quality workmanship. In addition, pipe
fabrication and machine shops allow for the manufacture of both prototype and
production hardware. To support its internal operation and to extend its overall
capacity, the Company purchases a wide variety of components, assemblies and
services from outside manufacturers, distributors and service organizations.
Marketing and Sales. For High-Rise and CMA, the Company's marketing strategy has
focused on cultivating and maintaining long-term relationships with developers,
general contractors, electrical and mechanical engineers and architects. The
relatively high dollar value of each contract (generally ranging from $2 million
to $15 million), combined with the technically complex nature of the projects
covered by the Company's contracts result in an in-depth and complex purchase
decision process for each contract. The selling cycle for the Company's
contracts may last approximately 90 days. In general, sales activities are
handled by senior management or direct sales personnel. Due to the depth of
analysis involved in the customer's purchase decision, management must often
maintain frequent interaction with the buyer throughout the selling process.
ICE solicits property owners, general contractors, and mechanical contractors in
addition to serving CMA. BMS sells most of its services to ICE. For ICE and BMS,
some work is performed for unaffiliated entities such as mechanical contractors,
general contractors and owners directly.
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 electrical systems and subsystems 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 June 30, 2002, the backlog of the Company's construction business was
approximately $38 million as contrasted with approximately $62 million at June
30, 2001. The Company believes that most of its backlog at June 30, 2002 will be
completed prior to December 31, 2003, but no assurances can be given with
respect thereto. Backlog represents the total value of unrealized revenue on all
contracts awarded on or before a specified date. The Company does not believe
that its backlog at any particular time is necessarily indicative of its future
business or performance.
Competition. The electrical, mechanical, electronic, control and environmental
businesses are characterized by intense and substantial competition. The
Company's construction competitors range from small firms to large multinational
companies. Competition for private sector work generally is based on several
factors, including quality of work, reputation, price and marketing approach.
The Company believes that it is established in the electrical and mechanical
contracting industries, and will be able to maintain a strong competitive
position in its areas of expertise by adhering to its basic philosophy of
delivering high-quality work in a timely fashion within client budget
constraints.
In both the private and public sectors, the Company, acting either as a prime
contractor or as a subcontractor, occasionally joins with other firms to form a
team that competes for contracts by submitting a jointly prepared proposal.
Because a team of firms will usually offer a stronger set of qualifications than
any single firm, teaming arrangements are generally advantageous to the
Company's success. These teaming relationships, however, generate risk to the
Company in the event that a non-DualStar team member experiences financial
difficulty or is otherwise unable to fulfill its responsibilities on the
project. The Company maintains a large network of business relationships with
other companies and has drawn repeatedly upon these relationships to form
winning teams. Moreover, each DualStar subsidiary may market its services
independently, with the potential to offer in concert with other DualStar
subsidiaries, comprehensive and complementary services on multi-million dollar
construction projects.
Most of the Company's construction contracts with public sector clients are
awarded through a competitive bidding process that places no limit on the number
or type of bidders that may compete. The process usually begins with a
government Request for Proposal (RFP) that delineates the size and scope of the
proposed contract. Proposals submitted by the Company and others are evaluated
by the government on the basis of technical merit, response to mandatory
solicitation provisions, corporate and personnel qualifications and experience,
management capabilities and cost. While each RFP sets out specific criteria for
the choice of a successful offeror, RFP selection criteria in the government
services market often tend to weigh the technical merit of the proposal more
heavily than cost. The Company believes that its experience and ongoing work
strengthen its technical qualifications and thereby enhance its ability to
compete successfully for future government work. However, the Company can make
no assurances that it may be able to continue to successfully bid and compete in
its marketplace.
COMMUNICATIONS BUSINESS AND OPERATING STRATEGY.
Overview. The Company's communications businesses are conducted through OnTera
and ParaComm. OnTera was originally launched as a retail provider of integrated
communications services to the MDU market in the metropolitan New York area. In
furtherance of this, OnTera is a Competitive Local Exchange Carrier (CLEC), an
Internet Service Provider (ISP), and a provider of subscription television
services. ParaComm is also a provider of subscription television services.
OnTera offers a variety of services utilizing several delivery techniques and
technologies. High-speed Internet access services are offered via Ethernet and
Digital Subscriber Line (DSL). Subscription television services offerings
consist of DirecTV, Dish Network or a satellite master antenna television system
for basic and premium channels, which are combined with local programming by
OnTera for the MDU.
OnTera faces substantial competition for the services provided to residential
consumers in the metropolitan New York area. OnTera's main competitors in the
metropolitan New York area include (1) Internet service providers (ISPs) and
cable companies providing high-speed Internet and data access services, such as
Verizon Avenue, AOL, AT&T and RCN; and (2) cable franchise operators, such as
TimeWarner. OnTera attempts to differentiate itself in this highly competitive
environment by improving the MDU's communications infrastructure, providing
responsive support for property owners and residents, and by providing residents
a single source for a variety of services. Many of OnTera's competitors are well
financed, have significant market share and significantly more resources than
are available to OnTera. There can be no assurance that OnTera will be able to
successfully compete with respect to the services that it currently provides.
OnTera uses a DSL-based infrastructure in MDUs at which it has right of entry
agreements, in combination with satellite-based subscription television service.
OnTera believes that its infrastructure results in a lower cost to provide
service to an MDU than fiber- or coaxial cable-based providers. The DSL-based
infrastructure offers property owners the selling advantages of faster Internet
access, along with in-building sales and marketing support and the flexibility
to address an owner's entire residential portfolio. Moreover, OnTera believes
that its infrastructure is designed to be flexible enough to be upgraded in the
future to provide extremely high-speed services.
OnTera believes that the MDU market continues to be under-served by current
communications service providers, with a majority of MDUs being restricted to
(i) cable television service from franchise cable operators, and (ii) possible
high-speed Internet access service provided by second- and third-tier carriers
and cable overbuilders.
Due to significantly increased demand for high-speed data access fueled by the
explosive growth of the Internet, DualStar had previously announced its
intention to expand its communications businesses aggressively. Specifically,
DualStar had sought to become principally an access provider of broadband
communications services to residential and commercial properties. The expansion
would have required significant capital expenditures to construct and operate
the infrastructure necessary to provide access services for broadband
communications services, and to acquire access rights to provide such services
in residential and commercial buildings. However, as a result of the limited
availability of capital and a significant change in market conditions, in
December 2000 the Company's board of directors determined to refocus its
communications business efforts by concentrating on core communications assets
located in the New York City and Los Angeles areas and by operating subscription
video provider, ParaComm Inc. In connection with this effort, the Company's
communications segment have implemented and will continue to implement cost
reductions, including reductions in personnel, infrastructure and capital
expenditures. There can be no assurance that the Company will be able to
implement this cost-reduction plan in a commercially successful manner. Given
the current U.S. economic climate and market conditions and the financial
condition of the Company, there is a substantial likelihood that the Company
will be unable to raise additional funds on terms satisfactory to it, if at all,
to fund the expected operating losses. There can also be no assurance that the
Company will be able to attract or retain the communications service providers
to deliver communications services over the Company's infrastructure. There can
be no assurance that the Company will obtain such financing on sufficiently
favorable terms and conditions. Should the Company be unable to secure such
additional capital, the Company may have to discontinue its communications
operations.
In fiscal year 2002, the Company decided to further limit its communications
business efforts and resources to the Internet and subscription video businesses
in the New York City metropolitan area and in Florida. The Company's
communications segment discontinued its telephone business in New York City and,
in April 2002, informed their telephone customers and the FCC that telephone
services would be phased out starting June 2002. The Company has not yet
received final regulatory approval for its discontinuance of the provision of
voice service. In addition, the Company decided to sell certain communications
assets in locations outside of the New York City metropolitan area and Florida.
Due to the Company's continuing re-focus of its communications business efforts
and resources, a $2.5 million charge for the impairment of certain remaining
communications assets was recorded in the three months ended March 31, 2002.
In April 2002, the Company sold certain communications assets for $0.4 million.
The transaction resulted in a loss of $0.5 million. In addition, in August 2002,
the Company sold certain access agreements on properties located in the Los
Angeles area and the communications assets located in the properties for $0.4
million. The transaction resulted in a gain of $0.1 million.
Competition. OnTera's remaining lines of business are highly competitive. While
OnTera believes that its market and product plans acknowledge the current state
of competition in the consumer communications market and take advantage of the
latest technologies, OnTera cannot provide assurance that it will be able to
compete successfully with the companies providing all or some of the services
provided by the Company. Several of OnTera's competitors are much larger,
established companies, having significantly more resources than are currently
available to the Company.
While OnTera believes that it may benefit from new and advanced technologies for
video and data access that are in various stages of development, these
technologies are also being developed and supported by entities having
significantly greater financial and other resources than the Company. New
technologies and/or the competition faced by OnTera from one of the types of
competitors identified above could have a materially adverse affect on the
ability of OnTera to enter into access agreements with MDU owners. The Company
cannot assure that it will be able to compete successfully with existing
competitors or new entrants in the market for video and data access services.
PATENT, TRADEMARK, SERVICE MARK, COPYRIGHT AND PROPRIETARY RIGHTS.
Seven service marks, Global Hiring Hall, CyberBuilding, CyberBuilders,
CyberCierge, DualStar Communications, DualStar and DualStar Technologies, were
registered with the U.S. Patent & Trademark Office (USPTO) from 1997 through
1999. Three trademarks, CyberBuilding, CyberView and Building Area Network, were
registered with the USPTO in 1998 and 1999.
On June 30, 2000, OnTera filed with the USPTO a Provisional Patent Application
respecting the structure, applications and processes used in the nation-wide
network that OnTera had intended to build to deliver its Broadband Access
Services. On June 29, 2001 OnTera filed a patent application with reference to
the previously filed provisional application. All rights to the patent have been
assigned by the inventor, OnTera's current president, to OnTera. On September
12, 2001, an Official Filing Receipt was received from the USPTO.
The Company has the authority to and utilizes trademarks, logos and other
intellectual property owned or controlled by third parties in the promotion of
the Company's video offerings.
The Company may in the future file patent or copyright applications, or
additional trademark or service mark applications, relating to certain of the
Company's mechanical, electrical, electronic, control, environmental,
information technology, security, entertainment and communications products and
services. Nevertheless, if patents are issued, or trademarks, service marks or
copyrights are registered, there can be no assurance as to the extent of the
protection that will be granted to the Company as a result of having such
patents, trademarks, service marks or copyrights, or that the Company will be
able to afford the expenses of any complex litigation which may be necessary to
enforce its proprietary rights. Failure of any future or existing patents,
trademark, service mark and copyright applications may have a material adverse
impact on the Company's business since the Company may not otherwise be able to
protect the proprietary or trade secret aspects of its business and operations,
thereby diluting the Company's ability to compete in the marketplace. Except as
may be required by the filing of patent, trademark, service mark and copyright
applications, the Company will attempt to keep all other proprietary information
secret and to take such actions as may be necessary to insure the results of its
development activities are not disclosed and are protected under the common law
concerning trade secrets. Such steps may include the execution of nondisclosure
agreements by key Company personnel and may also include the imposition of
restrictive agreements on purchasers of the Company's products and services.
There is no assurance that the execution of such agreements will be effective to
protect the Company, that the Company will be able to enforce the provisions of
such nondisclosure agreements or that technology and other information acquired
by the Company pursuant to its development activities will be deemed to
constitute trade secrets by any court of competent jurisdiction.
CONSTRUCTION BUSINESSES REGULATION.
Substantial environmental laws have been enacted in the United States and in the
New York Metropolitan area in response to public concern over the environment.
These federal, state and local laws and the implementing regulations affect
nearly every customer of the Company. Efforts to comply with the requirements of
these laws may increase demand for the Company's construction services, and the
Company believes there will be a trend toward increasing regulation and
government enforcement in the environmental area. The necessity that the
Company's clients comply with these laws and implementing regulations subjects
the Company to substantial liability. The Company believes that, to the best of
its information and knowledge, it is in compliance with all material federal,
state and local laws and regulations governing its construction operations.
COMMUNICATIONS BUSINESSES REGULATION.
Overview. OnTera's services are subject to federal, state and sometimes local
government regulation. For all OnTera services, federal regulation as well as
state regulation affects OnTera's access to inside wiring in the MDUs that make
up primary target market. OnTera's access to inside wiring can be affected by
(1) definitions of the point dividing inside wiring ownership between the
traditional telephone company and the property owner or (2) regulatory decisions
regulating the telephone company's unbundled network elements (UNEs) (i.e.,
various portions of a traditional telephone company's network that a CLEC needs
to build or fill in missing parts of its facilities network). The jurisdictional
reach of the various federal, state, and local authorities is subject to ongoing
controversy and judicial review. The outcome of such reviews cannot be
predicted.
Federal Regulation. OnTera must comply with the requirements of the
Communications Act of 1934, as amended by the 1996 Telecommunications Act, as
well as applicable FCC regulations. The applicable FCC regulations impose on the
traditional telephone companies various requirements that are intended to foster
competition by entrants such as OnTera.
Local Regulation. To the extent OnTera provides regulated intrastate services or
decides to otherwise submit itself to the jurisdiction of the relevant state
telecommunications regulatory commission, OnTera is and could be subject to such
jurisdiction. There are many state commission proceedings now underway to
determine the rates, charges and terms and conditions for UNEs and, in some
cases, owner control of inside wiring. If a decision increases the cost of UNEs
or restricts a property owner's ability to make inside wiring available to
OnTera, OnTera's business could be negatively affected. The effect of state
regulation on OnTera's business varies from state to state. For instance, states
(or municipalities) sometimes accord to the franchised cable companies (that are
OnTera's competitors not only for its television services but also potentially
for data, including Internet Access) rights of access to MDUs, which could
reduce OnTera's penetration rates and may adversely affect its business.
Like OnTera, ParaComm's business is potentially affected by the state or
municipal actions granting rights of access to franchised cable companies and by
FCC and state regulation respecting inside wiring. Additionally, federal
legislation that confers rights on tenants to purchase and operate their own
satellite signal reception equipment can result in tenant bypass of ParaComm's
services and could, in some cases, adversely affect penetration rates.
In fiscal year 2002, the Company decided to further limit its communications
business efforts and resources to the Internet and subscription video businesses
in the New York City metropolitan area and in Florida. The Company's
communications segment discontinued its telephone business in New York City and,
in April 2002, informed their telephone customers and the FCC that telephone
services would be phased out starting June 2002. The Company has not yet
received final regulatory approval for its discontinuance of the provision of
voice service.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation affecting the telecommunications
industry or that could affect OnTera. Judicial review of existing regulations,
legislative hearings, legislation, and administrative proposals could negatively
influence U.S. communications companies' operations, including OnTera's
operations. Additionally, OnTera cannot predict the impact, if any, that future
regulation or regulatory changes may have on its business and does not offer
assurance that such future regulation or regulatory changes will not harm
OnTera's business.
EMPLOYEES.
As of June 30, 2002, the Company employed 316 full-time employees, of which 26
are engaged in administration and finance. Of the remaining full-time employees,
276 are employed by the various construction subsidiaries of the Company, with
275 engaged in manufacturing, engineering and production and 1 in marketing and
sales. The remaining 14 employees are engaged in the communications business of
the Company, with 11 engaged in network development, 2 in marketing and sales,
and 1 in operations and development. Many of the Company's employees have
overlapping responsibilities in these job descriptions.
The Company believes that its future success will depend, in part, upon its
continued ability to recruit and retain qualified management, technical and
communications personnel. Competition for qualified personnel is significant,
particularly in the geographic areas in which DualStar and its subsidiaries are
located. The Company depends upon its ability to retain the services of key
employees. The loss of services of one or more key employees could have a
material adverse impact on the Company. As of June 30, 2002, the Company had 259
employees that were represented by labor organizations. The Company has never
experienced a work stoppage. Management of the Company believes that it has a
healthy relationship with its employees.
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.
THE COMPANY MAY BE UNABLE TO CONTINUE OPERATIONS
The Company incurred significant losses in the last several fiscal years,
primarily in the communications segment, and it expects that the communications
segment will continue to incur losses going forward and will require additional
capital to fund those losses. The Company has implemented and will continue to
implement cost reductions designed to minimize such losses. There can be no
assurance that these efforts will be successful or that the construction segment
will sustain profitability or positive cash flow from future operations or that
any positive cash flow will be sufficient to offset continued losses from the
communications segment. Given the current U.S. economic climate and market
conditions and the financial condition of the Company, there is a substantial
likelihood that the Company will be unable to raise additional funds on terms
satisfactory to it, if at all, to fund the expected operating losses. Moreover,
the Company presently owes Madeleine over $15 million and is in default under
the loan. Madeleine may call the loan due and payable at any time, and, if it is
not paid, foreclose on significant assets of the Company's subsidiaries that
secure such loan. If the Company cannot raise additional funds or if Madeleine
demands payment on its loan, the Company will likely be forced to cease
operations. Accordingly, there is substantial doubt about the Company's ability
to continue as a going concern.
THE COMPANY IS IN DEFAULT ON THE MADELEINE LOAN
The Company owes Madeleine over $15 million and is presently in default under
the loan documents. Madeleine has the right to call the loan due and payable at
any time. If Madeleine were to demand payment, the Company would be unable to
make such payment. In such an event, Madeleine would have the right to foreclose
on significant assets of the Company that collateralize the loan. Such
foreclosure would result in the Company being unable to continue in business.
OPERATING LOSSES AND CAPITAL REQUIREMENTS
The Company incurred significant losses in fiscal years 2002 and 2001,
especially in the communications segment, and expects the communications segment
will continue to incur losses going forward. The communications segment has
implemented and will continue to implement cost reductions to minimize such
losses. There can be no assurance either that the Company will be able to raise
and provide the capital resources to fund the expected communications losses or
that the construction segment will sustain profitability or positive cash flow
from future operations. In order to continue operations, the Company must raise
additional working capital. If it cannot, the Company believes it may have to
discontinue its communications operations.
NO ASSURANCE OF FUTURE PROFITABILITY OR PAYMENT OF DIVIDENDS
No assurance can be given that the future operations of the Company will be
profitable. Should the future operations of the Company be profitable, it is
likely that the Company would retain much or all of its earnings in order to
finance future growth and expansion. As a result, the Company does not presently
intend to pay dividends and it is not likely that any dividends will be paid in
the foreseeable future.
SUBSTANTIAL COMPETITION
Electrical and mechanical contracting, which represent the Company's core
businesses, are characterized by intense and substantial competition. As a
result of the competition in those areas, the bidding process whereby the
Company seeks to obtain new contracts has also become more competitive and the
profit margins capable of being achieved through such contracts fluctuate based
upon competitive and economic conditions. There can be no assurance that the
Company will continue to obtain new contracts with satisfactory profit margins.
The businesses of Company's communications segment involve rapid technological
change and are also characterized by intense and substantial competition. In
this communications segment, the Company has encountered substantial competition
from companies that are substantially larger and have substantially greater
financial, marketing and technical resources and greater name recognition than
the Company and which are established providers of these services. The Company
faces intense competition from local exchange carriers, including the regional
bell operating companies which currently dominate their local telecommunications
markets. Other competitors of the Company include cable and satellite television
companies, competitive access providers, Internet service providers, competitive
local exchange carriers, integrated communications providers, wireless,
microwave and satellite carriers and private
networks owned by large end users. There can be no assurance that the Company,
with its more limited resources and experience, will be able to successfully
compete in these fields.
SURETY BONDS
As a result of the recent turmoil in corporate America, the bonding industry is
under increased scrutiny. In general, the bonding market has tightened. As a
result, it may be more difficult for the Company to secure surety bonds in the
future. The Company's ability to obtain bonds may be adversely affected by its
financial position as well as by overall market conditions. If the Company is
unable to obtain surety bonds as needed, this is likely to have a material
adverse affect on the Company.
SOCIAL, POLITICAL AND ECONOMIC RISKS AFFECTING OPERATIONS
Recent acts of terrorism have caused major instability in the U.S. and other
financial markets. There could be further acts of terrorism in the United States
or elsewhere that could have a similar impact. Leaders of the U.S. government
have announced their intention to actively pursue and take military and other
action against those behind the September 11, 2001 attacks and to initiate
broader action against national and global terrorism. Armed hostilities or
further acts of terrorism would cause further instability in financial markets
and could directly impact the Company's financial condition and results of
operations. Furthermore, the recent terrorist attacks and future developments
may result in reduced demand from the Company's customers for its services or
may negatively impact the Company's customers' demand for its services. These
developments will subject the Company's operations to increased risks and,
depending on their magnitude, could have a material adverse effect on the
Company's business. There can be no assurance as to the future effect of changes
in social, political and economic conditions on the Company's business or
financial condition.
DEPENDENCE ON MAJOR CUSTOMERS
The Company's customers include various general contractors, government
agencies, hospitals, hotels, insurance companies, securities exchanges and
subcontractors. For the year ended June 30, 2002, revenue from one customer
(Bovis Lend Lease, Inc. (formerly Lehrer McGovern Bovis, Inc.)) amounted to
approximately 64% of the Company's total revenues. In addition, as of June 30,
2002, contract and retainage receivable from Bovis Lend Lease, Inc. amounted to
approximately 52% of the Company's total contract and retainage receivable. 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 INSURANCE
The Company's operations involve electrical, mechanical, electronic, control,
environmental, information technology, security, Internet and television
infrastructure contracting of major residential, commercial and institutional
buildings and facilities. The Company is exposed to a significant risk of
liability for damage and personal injury. The Company maintains quality control
programs in an attempt to reduce the risk of potential damage to persons and
property and any associated potential liability. In addition, the Company
maintains general liability insurance covering damage resulting from bodily
injury or property damage to third parties. The policy, however, does not
include coverage for comprehensive environmental impairment or professional
liability which may be caused by the Company's actions.
The Company endeavors contractually to limit its potential liability to the
amount and terms of its insurance policy and to be indemnified by its clients
from potential liability to third parties. However, the Company is not always
able to obtain such limitations on liability or indemnification, and such
provisions, when obtained, may not adequately shelter the Company from
liability. Consequently, a partially or completely uninsured claim, if
successful and of sufficient magnitude, may have a material adverse effect on
the Company and its financial condition.
ENVIRONMENTAL RISK FACTORS
Substantial environmental laws have been enacted in the United States and in the
New York metropolitan area in response to public concern over the environment.
These federal, state and local laws and the implementing regulations affect
nearly every customer of the Company. Efforts to comply with the requirements of
these laws may increase demand for the Company's services, and the Company
believes that there will be a trend toward increasing regulation and government
enforcement in the environmental area. The
necessity that the Company's clients comply with these laws and implementing
regulations subjects the Company to substantial liability. The Company believes
that, to the best of its information and knowledge, it is in compliance with all
material federal, state and local laws and regulations governing its operations.
ITEM 2 - PROPERTIES
In August 1996, PCI acquired real property, including 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 mortgage loan
was refinanced on November 22, 1999, thereby increasing the loan balance to
$1.75 million.
CMA leases, on a month-to-month basis, approximately 7,500 square feet of
manufacturing space located at 88 Dobbins Street, Brooklyn, New York 11222.
Previously, CMA had leased, on a month-to-month basis, approximately 5,000
square feet of manufacturing space located at 141 47th Street, Brooklyn, New
York 11232 from FIS Management, Inc. in which Messrs. Cuneo and Fregara own an
interest. That lease was terminated in March 2002.
OnTera sublets, on a month-to-month basis, office space in New York, NY from
Starrett Corporation (of which the Company's president and Chief Executive
Officer is (non-Director) Chairman and the Company's Chief Financial Officer was
director, president and Chief Executive Officer). Starrett is majority owned by
Blackacre and an affiliate of HRH Construction Corporation. Additionally, OnTera
and ParaComm lease, on a month-to-month basis, office space in Clermont,
Florida.
The Company believes that adequate office and warehouse space is available in
each of the markets in which it currently transacts its construction and
communications business and in the markets in which it intends to transact
business. The Company further believes that the productive use of its current
facilities represents approximately 70 percent of capacity. Total rental expense
for the Company for recent periods is as follows:
PERIOD EXPENSE
----------- -------------
Year ended June 30, 2002.......................$440,000
Year ended June 30, 2001.......................$502,000
ITEM 3 - LEGAL PROCEEDINGS
(a) Until 1995, Centrifugal was a partner with DAK Electric Contracting Corp.
("DAK") in a joint venture that performed mechanical and electrical services for
a general contractor on a construction project in Manhattan known as the Lincoln
Square project. Centrifugal was responsible for the mechanical portion of the
contract, and its co-venturer, DAK, was responsible for the electrical portion.
In 1995, DAK became insolvent, thereby obligating Centrifugal to complete the
work on this project. As a result, in fiscal 1996 the Company wrote off
approximately $3.7 million with respect to accounts receivable, loans
receivable, claims and other costs that the Company incurred on behalf of DAK in
fulfillment of DAK's obligations under the contract on the Lincoln Square
project.
As of June 30, 1996, all of the known claims and liens of subcontractors of the
joint venture were settled and discharged, and all of the vendor lawsuits which
arose out of these claims were also settled with the exception of the following:
The joint venture's bonding companies have claims over for indemnity against
Centrifugal and under a guarantee agreement against the Company in the event
that a judgment is rendered against the bonding companies in a suit brought by
an employee benefit fund for DAK's employees' union seeking contributions to the
fund which the fund claims were due but not paid by DAK. The complaint alleges
several causes of action against several defendants in connection with several
projects and seeks a total of approximately $450,000 in damages on all of these
causes against the named defendants; however, only one of the several causes of
action, which seeks an unspecified portion of the total damages demanded,
relates to the Company. The Company has been informed that plaintiff will assert
that more than half of the total sums it seeks is due under the bond which the
Company provided, with the remainder of the sums demanded due on the claims
unrelated to the Company. The Company may also be exposed for interest.
Additionally, it may be exposed to such legal fees and other expenses as the
Company's bonding company may incur in its defense against plaintiff's claims;
however, many years into this matter, no demand for any of these sums has been
made. The bonding companies, Centrifugal and the Company have asserted, among
other defenses, that such contributions were not guaranteed under the terms of
the joint venture's bonds.
(b) On August 11, 1999, Triangle Sheet Metal Works, Inc. ("Triangle"), a
subcontractor of Centrifugal/Mechanical Associates, Inc. ("CMA"), filed a
petition under Chapter 11 of Title 11 of the United States Code in the United
States Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court"). Triangle's Chapter 11 case was subsequently converted to a case under
Chapter 7 of the Bankruptcy Code and a Chapter 7 trustee was appointed to
administer Triangle's estate. Triangle was a sheet metal subcontractor for CMA
on six projects in New York City (the "Subcontractor Projects"). CMA was also
the subcontractor of Triangle on one additional project in New York City (the
"Contractor Project"). Prior to Triangle's Chapter 11 filing, Triangle ceased
operation and defaulted on its obligations under the Subcontractor Projects and
the Contractor Project. On or about January 18, 2000, Triangle's Chapter 7
trustee made a written request to CMA stating that Triangle's records reflected
that CMA was indebted to Triangle in the aggregate sum of $2.4 million based
upon work performed by Triangle on the Subcontractor Projects. Triangle's
Chapter 7 trustee stated CMA was not entitled, under applicable law, to offset
amounts owed to CMA on particular Subcontractor Projects against amounts owed by
CMA to Triangle on other Subcontractor Projects. CMA had claims and
counterclaims against Triangle for breaches, defaults, completion costs and
damages in respect of the Subcontractor Projects and the Contractor Project. CMA
believed that it was entitled setoff and/or recoup part of the damages by
offsetting any monies owed by CMA to Triangle.
Subsequently, Triangle's Chapter 7 trustee commenced five (5) lawsuits against
CMA, Trident Mechanical Systems, Inc. ("Trident") (a dormant, wholly owned
subsidiary of the Company) and CMA's bonding company arising from the various
Subcontractor Projects and the Contractor Project, and claimed CMA owed Triangle
a total of $2.9 million. CMA and its bonding company asserted counterclaims
claiming damages in the aggregate amount of $9.6 million arising from the
Subcontractor Projects.
To minimize legal and other costs in connection with these claims, in April
2002, CMA paid $220,000 to settle with Triangle and, in return, mutual releases
from liability were given by the parties, including Trident and CMA's bonding
company.
(c) In 2000, OnTera purchased various items of equipment from Nokia and in 2001,
OnTera executed a promissory note to Nokia in the face amount of $668,000
covering the outstanding balance due on the purchased items. In August 2002,
Nokia filed suit in the District Court of Dallas County, Texas claiming damages
of $607,000 plus interest, costs and attorneys on the promissory note.
(d) In 1999, ParaComm purchased from Golden Sky Systems (GSS) GSS's contract
with DirecTV which authorized it to be a DirecTV Master Systems Operator (MSO).
Along with the contract so purchased, ParaComm acquired a GSS contract with one
of its System Operators, Cable America, Inc. In May, 2002 Cable America, Inc.
filed suit in the Circuit Court of Cook County, Illinois against ParaComm,
OnTera, DirecTV, GSS and Pegasus Communications Inc., which had subsequently
acquired GSS. The suit claims damages for allegedly unpaid commissions in the
claimed amount of $339,000 and also seeks an accounting. The Company believes
the suit to be without merit and intends to contest it.
(e) In July 2002, plaintiff Harvey Wayne, as an alleged shareholder of the
Company, filed a verified shareholders' derivative complaint against directors
and officers of the Company, various other entities and the Company as a nominal
defendant, in the United States District Court for the Eastern District of New
York. The complaint alleges breach of fiduciary duties and seeks to compel the
Company to hold a shareholders meeting for the election of directors. The
complaint seeks injunctive relief and unspecified damages. Neither the Company
nor any officer or director of the Company has been served with a complaint in
this matter.
(f) In the ordinary course of business, the Company is involved in claims
concerning personal injuries and property damage, all of which the Company
refers to its insurance carriers. The Company believes that no loss to the
Company is probable and the claims are covered under its liability policies. No
provision for such claims has been made in the accompanying financial
statements.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the NASD Over-the-Counter
(OTC) Bulletin Board under the symbol DSTR. The Company's Common Stock was
previously traded on the Nasdaq National Market, but was delisted on June 13,
2001.
The following table sets forth, on a per share basis, the high and low sale
prices of the Company's Common Stock on NASDAQ National Market for the fiscal
year ended June 30, 2001 (through June 13, 2001). The following table also sets
forth, on a per share basis, the range of reported high and low bid quotations
on the OTC Bulletin Board, as derived from publicly available sources on the
Internet, for the period from June 13, 2001 to June 30, 2001, for the fiscal
year ended June 30, 2002 and for the first quarter (through September 19, 2002)
of the Company's fiscal year ending June 30, 2003. Such quotations reflect
inter-dealer prices, without retail mark-up, mark- down or commission and may
not necessarily reflect actual transactions.
Sale Prices
-----------
High Low
---- ---
Fiscal 2001
- -----------
First Quarter $4.375 $1.1875
Second Quarter $1.9375 $0.06
Third Quarter $0.8125 $0.25
Fourth Quarter (through June 12, 2001) $0.85 $0.3125
Bid Quotations
--------------
High Low
---- ---
Fiscal 2001
- -----------
Fourth Quarter (June 13, 2001 through June 30, 2001) $0.60 $0.30
Fiscal 2002
- -----------
First Quarter $0.37 $0.23
Second Quarter $0.33 $0.18
Third Quarter $0.27 $0.20
Fourth Quarter $0.26 $0.10
Fiscal 2003
- -----------
First Quarter (through September 19, 2002) $0.28 $0.06
As of September 19, 2002, there were 118 record holders of the Company's Common
Stock.
The Company has not declared any dividends since its incorporation. 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.
ITEM 6 - SELECTED FINANCIAL DATA
DUALSTAR TECHNOLOGIES CORPORATION
SELECTED FINANCIAL DATA(1)
(Dollars in thousands, except per share data)
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenue $81,181 $83,218 $87,285 $92,650 $94,280
(Loss) income from operations (5,883) (14,176) (8,056) 703 597
Net (loss) income (9,583) (15,713) (8,651) 1,322 556
Basic (loss) income per share $(0.58) $(0.95) $(0.67) $0.15 $0.06
Diluted (loss) income per share $(0.58) $(0.95) $(0.67) $0.13 $0.06
JUNE 30,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $(4,274) $13,836 $16,404 $ 3,818 $365
Total assets 37,440 43,573 58,400 38,595 33,345
Long-term liabilities 14,850 14,340 1,921 3,430 977
Stockholders' equity (deficit) (603) 8,778 24,605 6,689 5,367
(1) The Selected Financial Data represent the consolidated data for the years
ended June 30, 2002, 2001, 2000, 1999 and 1998.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
DualStar Technologies Corporation ("DualStar" or the "Company"), through its
wholly owned subsidiaries, operates two separate lines of business: (a)
construction and (b) communications. As a result of the limited availability of
capital and a significant change in market conditions, in December 2000 the
Company's board of directors determined to refocus its communications business
efforts by concentrating on core communications assets located in the New York
City and Los Angeles areas and by operating subscription video provider,
ParaComm Inc., in several southern and western states.
In fiscal 2002, the Company decided to further limit its communications business
efforts and resources to the Internet and subscription video businesses in the
New York City metropolitan area and in Florida. The Company's communications
segment discontinued its telephone business in New York City and, in April 2002,
informed their telephone customers and the FCC that telephone services would be
phased-out starting June 2002. In addition, the Company decided to sell certain
communications assets in locations outside of the New York City metropolitan
area and Florida. Due to the Company's continuing re-focus of its communications
business efforts and resources, a $2.5 million charge for the impairment of
certain remaining communications assets was recorded in the three months ended
March 31, 2002.
In April 2002, the Company sold certain communications assets for $0.4 million.
The transaction resulted in a loss of $0.5 million. In addition, in August 2002,
the Company sold certain access agreements on properties located in the Los
Angeles area and the communications assets located in the properties for $0.4
million. The transaction resulted in a gain of $0.1 million.
In January 2001, the Company's board of directors determined not to divest most
of DualStar's construction-related businesses, which it had previously decided
to do. Accordingly, the financial position of such businesses as of June 30,
2001, and their financial results and cash flows for the fiscal years ended June
30, 2001 and 2000 are no longer presented as discontinued operations in the
accompanying audited consolidated financial statements. In addition, certain
reclassifications have been made to prior year amounts to conform to the June
30, 2002 presentation.
CAPITAL RESOURCES AND LIQUIDITY
The Company incurred significant losses in the last several fiscal years,
primarily in the communications segment, and it expects that the communications
segment will continue to incur losses going forward and will require additional
capital to fund those losses. The Company has implemented and will continue to
implement cost reductions designed to minimize such losses. There can be no
assurance that these efforts will be successful or that the construction segment
will sustain profitability or positive cash flow from future operations or that
any positive cash flow will be sufficient to offset continued losses from the
communications segment. Given the current U.S. economic climate and market
conditions and the financial condition of the Company, there is a substantial
likelihood that the Company will be unable to raise additional funds on terms
satisfactory to it, if at all, to fund the expected operating losses. Moreover,
the Company presently owes Madeleine L.L.C. ("Madeleine") over $15 million and
is in default under the loan. Madeleine may call the loan due and payable at any
time, and, if it is not paid, foreclose on significant assets of the Company's
subsidiaries that secure such loan. If the Company cannot raise additional funds
or if Madeleine demands payment on its loan, the Company will likely be forced
to cease operations. Accordingly, there is substantial doubt about the Company's
ability to continue as a going concern.
Cash balances at June 30, 2002 and 2001 were approximately $2.5 million and $3.7
million, respectively. In fiscal 2002, 2001 and 2000, the Company used
approximately $1.6 million, $12.7 million and $12.1 million, respectively, of
net cash in its operating activities. These net uses of cash were primarily to
pay trade payables and fund operating losses incurred in the Company's
communications businesses.
During fiscal 2002, the Company acquired capital assets of approximately $0.4
million, primarily for investment in communications infrastructure systems for
multiple dwelling unit ("MDU") buildings in return for rights to provide
Internet and television services to the buildings' residents in Florida. During
fiscal 2001, the Company acquired capital assets of approximately $3.3 million,
of which approximately $0.7 million was financed by a note. During fiscal 2000,
the Company acquired capital assets of approximately $1.2 million, of which
approximately $0.2 million was financed by capital leases. The capital assets
acquired during fiscal 2001 and 2000 were primarily for investment in
communications infrastructure systems for MDU buildings in return for rights to
provide telephone, Internet, television and other services to the buildings'
residents in various states.
As a result of the recent turmoil in corporate America, the bonding industry is
under increased scrutiny. In general, the bonding market has tightened. As a
result, it may be more difficult for the Company to secure surety bonds in the
future. The Company's ability to obtain bonds may be adversely affected by its
financial position as well as by overall market conditions. If the Company is
unable to obtain surety bonds as needed, this is likely to have a material
adverse effect on the Company.
Senior Secured Promissory Note
On November 8, 2000, the Company consummated a $12.5 million senior secured loan
transaction with Madeleine, an affiliate of Blackacre Capital Management L.L.C.
("Blackacre"). The loan, which is due and payable on November 8, 2007, bears
interest at a fixed rate of 11% per annum. The loan is a senior secured
obligation of the Company and is guaranteed by certain subsidiaries of the
Company, including OnTera, which have pledged substantially all of their
respective assets to collateralize such guarantee. In connection with the loan,
the Company
issued warrants to purchase 3,125,000 shares of common stock at an exercise
price of $4.00 per share, subject to antidilution provisions, expiring in
December 2007, to an affiliate of Madeleine. A portion of the $12.5 million loan
proceeds was used to retire existing indebtedness of the Company in the
principal amount of $7 million owed to Madeleine and to pay expenses of
obtaining the loan. The remaining proceeds were used for the Company's working
capital purposes. No value was allocated to the warrants because the value was
deemed immaterial.
Since March 2001, the Company has not made regularly scheduled interest payments
to Madeleine pursuant to the $12.5 million loan agreement. In addition, the
de-listing of the Company's common shares from the Nasdaq National Market
created a default under the loan agreement. In August 2002, the Company,
Blackacre and Madeleine began negotiating to eliminate the loan by selling
certain of the Company's communications assets to Blackacre at fair market value
and by converting the remaining loan balance to stock of the Company. There is
no assurance that the Company, Blackacre and Madeleine will be able to reach
agreement on valuation issues, or that they will reach final agreement to
eliminate or reduce the loan.
The Company presently owes Madeleine over $15 million and is in default under
the loan agreement. Madeleine has the right to call the loan due and payable at
any time. If Madeleine were to demand payment, the Company would be unable to
make such payment. In such an event, Madeleine would have the right to foreclose
on significant assets of the Company that collateralize the loan. Such
foreclosure would result in the Company being unable to continue in business.
Mortgage payable
In November 1999, the Company refinanced its mortgage loan, borrowing an
additional $1 million, thereby increasing the loan balance to $1.75 million. The
new mortgage loan will expire on December 1, 2004 and can be renewed for an
additional five years. The mortgage loan bears interest at a fixed rate of 8.5%
per annum for five years, and is secured by the related building. Interest
during the renewal term will be paid at a fixed rate per annum equal to the
prime rate in effect on November 1, 2004. Principal of the loan is amortized on
a 25-year basis. 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,
2002, the Company failed to maintain the tangible net worth and working capital
requirements. Accordingly, the mortgage payable of $1.7 million was reclassified
as a current liability. The Company has not been notified of any intention by
the bank to accelerate such repayments. The Company is current with monthly
payment obligations.
CHANGE OF INDEPENDENT ACCOUNTANTS
On April 30, 2002, the Company dismissed Grant Thornton LLP ("Grant Thornton")
as the Company's independent accountants. As previously reported in a Current
Report on Form 8-K filed with the Securities and Exchange Commission on May 6,
2002 (SEC File No. 000-25552) (to which reference is made), Grant Thornton's
reports on the financial statements of the Company for either of the fiscal
years ended June 30, 2001 or June 30, 2000 did not contain an adverse opinion or
a disclaimer of opinion; they were not qualified or modified as to uncertainty,
audit scope, or accounting principles; and there were no reportable events or
disagreements with Grant Thornton on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreement(s), if not resolved to the
satisfaction of Grant Thornton, would have caused Grant Thornton to make
reference to the subject matter of such disagreement(s) in connection with their
report. On May 2, 2002, the Company engaged Grassi & Co., CPAs, P.C. as the
Company's independent accountants to review the Company's financial statements
for the quarter ended March 31, 2002 and to audit the Company's financial
statements for the fiscal year ended June 30, 2002.
INFLATION
The Company has continued to experience the benefits of a low inflation economy
in the New York metropolitan area. In general, the Company's
construction-related businesses enter 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
The Company incurred significant losses in the last several fiscal years,
primarily in the communications segment, and it expects that the communications
segment will continue to incur losses going forward and will require additional
capital to fund those losses. The Company has implemented and will continue to
implement cost reductions designed to minimize such losses. There can be no
assurance that these efforts will be successful or that the construction segment
will sustain profitability or positive cash flow from future operations or that
any positive cash flow will be sufficient to offset continued losses from the
communications segment. Given the current U.S. economic climate and market
conditions and the financial condition of the Company, there is a substantial
likelihood that the Company will be unable to raise additional funds on terms
satisfactory to it, if at all, to fund the expected operating losses. Moreover,
the Company presently owes Madeleine over $15 million and is in default under
the loan. Madeleine may call the loan due and payable at any time, and, if it is
not paid, foreclose on significant assets of the Company's subsidiaries that
secure such loan. If the Company cannot raise additional funds or if Madeleine
demands payment on its loan, the Company will likely be forced to cease
operations. Accordingly, there is substantial doubt about the Company's ability
to continue as a going concern.
NET REVENUES BY SEGMENT
2002 2001 2000
---- ---- ----
% of % of % of
Segments ($ million) Total ($ million) Total ($ million) Total
---------------------------------------------------------------------------------
Construction 77.9 95.9 79.8 95.9 85.3 97.7
Communications 3.3 4.1 3.4 4.1 2.0 2.3
---------------------------------------------------------------------------------
Total revenues 81.2 100.0 83.2 100.0 87.3 100.0
=================================================================================
OPERATING (LOSS) INCOME BY SEGMENT
2002 2001 2000
---- ---- ----
% of % of
Segments ($ million) Total ($ million) % of Total ($ million) Total
---------------------------------------------------------------------------------
Construction 2.4 (48.0) 0.5 (4.3) (1.0) 16.7
Communications (7.4) 148.0 (12.1) 104.3 (5.0) 83.3
=================================================================================
Total operating (loss) income (5.0) 100.0 (11.6) 100.0 (6.0) 100.0
=================================================================================
Fiscal 2002 Compared to Fiscal 2001
Construction revenue decreased $1.9 million or 2.4% from $79.8 million in 2001
to $77.9 million in 2002. The decrease was primarily due to fewer construction
contracts started in 2002.
Revenues on long-term construction contracts are recognized under the
percentage-of-completion method. Under this method, progress towards completion
is recognized according to engineering estimates. This method is used because
management considers this method the most appropriate in the circumstances.
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 costs incurred attributable to
pending change orders is included in revenues when recovery is probable.
Management determines these estimates quarterly through discussions with the
construction managers of each contract and with customers for changes and final
contract settlement. These estimates require the best judgment by management
utilizing the information available, and it is possible that final results could
be materially different than those estimated.
Cost of construction revenue decreased $3.0 million or 4.2% from $71.8 million
in 2001 to $68.8 million in 2002. In addition to the decrease in construction
revenue, the decrease in costs in 2002 over 2001 was due primarily to higher
profit margin of construction contracts started in 2002. Gross margin percentage
increased to 11.7% in 2002 from 10.0% in 2001. The improvement in gross margin
percentage was due primarily to better control of direct costs.
Construction operating income increased $1.9 million or 380.0% from $0.5 million
in 2001 to $2.4 million in 2002. The improvement was due primarily to the
increase in gross profit margin in 2002. There can be no assurance that the
construction segment will sustain profitability or positive cash flow from
future operations.
Communications revenue decreased $0.1 million or 2.9% from $3.4 million in 2001
to $3.3 million in 2002. The decrease was primarily due to the Company's
decision to discontinue telephone services in New York City starting June 2002.
Cost of communications revenue decreased $0.4 million or 18.2% from $2.2 million
in 2001 to $1.8 million in 2002. The decrease was primarily due to the closing
of Internet facility locations in various states and the elimination of
associated costs.
Consequently, gross profit margin percentage increased to 45.5% in 2002 from
35.3% in 2001.
In 2001, due to the expected future losses in the communications businesses and
the decreasing market values of subscriber list and access rights, the Company
wrote down by $1.2 million the carrying values of goodwill, subscriber list and
access rights capitalized in May 2000 in connection with the purchase of
ParaComm.
In 2002, the Company decided to further limit its communications business
efforts and resources to the Internet and subscription video businesses in the
New York City metropolitan area and in Florida. The Company's communications
segment discontinued its telephone business in New York City and, in April 2002,
informed their telephone customers and the FCC that telephone services would be
phased out starting June 2002. In addition, the Company decided to sell certain
communications assets in locations outside of the New York City metropolitan
area and
Florida. Due to the Company's continuing refocus of its communications business
efforts and resources, a $2.5 million charge for the impairment of certain
remaining communications assets was recorded in 2002.
Excluding the $2.5 million and $1.2 million charges for impairment of assets in
2002 and 2001, respectively, the operating loss of the communications segment
decreased $6.0 million or 55.0% from ($10.9) million in 2001 to ($4.9) million
in 2002. The improvements were due primarily to decreases in general and
administrative expenses as a result of a restructuring of the communications
businesses commenced in the second half of fiscal 2001; however, operating
losses are expected to continue.
In April 2002, the Company sold certain communications assets for $0.4 million.
The transaction resulted a loss of $0.5 million. In addition, in August 2002,
OnTera sold certain access agreements on properties located in the Los Angeles
area and the communications assets located in the properties for $0.4 million.
The transaction resulted a gain of $0.1 million.
As a result of a restructuring of the communications businesses commenced in the
second half of 2001, on a consolidated basis, the general and administrative
expenses decreased $8.0 million or 40.0% from $20.0 million in 2001 to $12.0
million in 2002. The decrease in general and administrative expenses included a
$5.2 million decrease in payroll and related costs, a $1.9 million decrease in
professional fees, a $0.4 million decrease in travel, meals and entertainment, a
$0.3 million decrease in rent, and a $0.2 million decrease in office supplies
and telephone.
Depreciation and amortization decreased $0.2 million or 9.1% from $2.2 million
in 2001 to $2.0 million in 2002. The decrease was primarily due to the $2.5
million and $1.2 million charges for impairment of assets recorded in 2002 and
2001, respectively.
Interest income decreased $0.4 million or 66.7% from $0.6 million in 2001 to
$0.2 million in 2002. The decrease was due to a decrease in investment of the
Company's excess cash that was used instead to fund the operating losses of the
communications businesses.
Interest expense increased $0.5 million or 35.7% from $1.4 million in 2001 to
$1.9 million in 2002. The increases were due primarily to the Company's issuance
of a $12.5 million senior secured promissory note to Madeleine in November 2000
and the unpaid interest that was capitalized and added to the principal due to
the proposed amendment to the promissory note.
In 2002, the Company sold marketable securities to continue to provide working
capital to the communications businesses. The transaction resulted a capital
loss of $0.3 million.
Based on the Company's continuing refocus of its communications business efforts
and resources, in addition to the substantial losses incurred in current fiscal
year, management believes that the Company will less than likely generate
sufficient taxable earnings or utilize tax planning opportunities to realize the
deferred tax benefits of $1.1 million as of June 30, 2001. Therefore, the
Company has increased its valuation allowance by $1.1 million to $21.4 million
as of June 30, 2002. Accordingly, a provision for deferred income taxes of $1.1
million was recorded in 2002. In 2001, the Company increased its valuation
allowance by $0.7 million and recorded a provision for deferred income taxes of
$0.7 million.
Fiscal 2001 Compared to Fiscal 2000
Construction revenue decreased $5.5 million or 6.4% from $85.3 million in 2000
to $79.8 million in 2001. The decrease was primarily due to fewer construction
contracts started in 2001.
Cost of construction revenue decreased $7.0 million or 8.9% from $78.8 million
in 2000 to $71.8 million in 2001. In addition to the decrease in construction
revenue, the decrease in costs in 2001 over 2000 was due primarily to $2.6
million in additional costs incurred in 2000 on five projects in completing the
work of a sheetmetal subcontractor that filed for bankruptcy in 2000. Gross
margin percentage increased to 10.0% in 2001 from 7.6% in 2000. The improvement
in gross margin percentage was due primarily to favorable close-outs on several
electrical contracting jobs in 2001 and the $2.6 million additional costs
incurred in 2000 to complete the failed sheetmetal subcontractor's work in 2000.
Excluding the $2.6 million additional costs, the gross margin percentage would
have been 8.9% in 2000.
Construction operating income was $0.5 million in 2001, compared to operating
loss of $0.1 million in 2000. The improvement was due primarily to the increase
in gross profit margin in 2001.
Communications revenue increased $1.4 million or 70.0% from $2.0 million in 2000
to $3.4 million in 2001. The increase was primarily due to an increase in the
number of cable television customers and additional revenue generated by
ParaComm. Revenue generated by ParaComm was $1.0 million in 2001, and $0.1
million for the period from May 11 to June 30, 2000.
Cost of communications revenue increased $0.7 million or 46.7% from $1.5 million
in 2000 to $2.2 million in 2001. The increase was primarily due to increases in
communications revenue. Gross profit margin percentage increased to 35.3% in
2001 from breakeven in 2000. The increase in gross profit margin percentage was
primarily due to the higher profit margin in cable television revenue. Cost of
revenue generated by ParaComm was $0.4 million in 2001 and immaterial for the
period from its acquisition on May 11 to June 30, 2000, and gross profit margin
percentage was 63.6% in 2001 and 85.2% for the period from May 11 to June 30,
2000.
Operating loss of the communications segment increased $7.1 million or 142.0%
from ($5.0) million in 2000 to ($12.1) million in 2001. The increase was due
primarily to a write-down of intangible assets and increases in operating
expenses in connection to the implementation of the newly developed wholesale
market model commenced in the third quarter of fiscal 2000. Those operating
expenses include payroll and related expenses, professional fees, travel and
entertainment. Operating loss of ParaComm was ($1.5) million and ($0.2) million
for the year ended June 30, 2001 and the period from May 11 to June 30, 2000,
respectively.
Due to increased costs associated with the previous expansion of the
communications businesses, on a consolidated basis, the Company's general and
administrative expenses increased $7.0 million or 53.8% from $13.0 million in
2000 to $20.0 million in 2001. As a result of the limited availability of
capital and a significant change in market conditions, in December 2000 the
Company's board of directors adopted a plan to refocus its communications
business expansion efforts by concentrating on core communications assets
located in the New York City and Los Angeles areas and by operating subscription
video provider, ParaComm, Inc. In connection with this effort, the Company's
communications subsidiaries have implemented and will continue to implement cost
reductions, including reductions in personnel, infrastructure and capital
expenditures. A restructuring charge of $1.0 million reflecting the impact of
such reductions and refocus of markets was recorded in 2001. A benefit from a
reversal of bonus accruals of
$0.9 million was also recorded in 2001 because those bonuses would no longer be
paid due to the restructuring.
In addition to the $0.1 million restructuring charge, net of the reversal of
bonus accruals in 2001, the increase in general and administrative expenses
included a $5.0 million increase in payroll and related costs, a $0.8 million
increase in professional fees, a $0.7 million increase in rent and operating
leases, a $0.3 million increase in telephone and office supplies, and a $0.2
million increase in insurance.
Depreciation and amortization increased $1.2 million or 120.0% from $1.0 million
in 2000 to $2.2 million in 2001. The increase was primarily due to additional
property, equipment and infrastructure acquired during the current and prior
fiscal years in connection with the expansion of the communications businesses.
In fiscal year 2001, due to the expected future losses in the communications
businesses and the decreasing market values of subscriber list and access
rights, the Company wrote down the carrying values of goodwill, subscriber list
and access rights capitalized in May 2000 in connection with the purchase of
ParaComm by $1.2 million. In fiscal year 2000, due to the expansion of the
Company's communications business model, certain telephone equipment deployed in
1997 was not to be utilized under the new delivery strategy and was to be sold.
Accordingly, in fiscal year 2000, the Company wrote down the carrying value of
the equipment by $0.3 million to $0.4 million to reflect the estimated resale
value of the equipment.
In March 2000, options to purchase 975,000 shares of the Company's common stock
were granted to employees with an exercise price lower than the closing price of
the Company stock. One-third of the options vested at the date of the grants and
the remaining two-thirds would have vested ratably on a monthly basis beginning
on the last day of each of the 24 calendar months following March 2001. As a
result of the grants, a compensation charge of $1.8 million was incurred, of
which $0.6 million, or one-third, was recognized in 2000. In February 2001, the
employees resigned and forfeited the stock options, and the unamortized deferred
compensation was reversed.
Interest income increased $0.3 million or 100% from $0.3 million in 2000 to $0.6
million in 2001. The increase was due to investment of the Company's excess cash
in an institutional money market mutual fund and marketable securities.
Interest expense increased $0.6 million or 75.0% from $0.8 million in 2000 to
$1.4 million in 2001. The increases were due primarily to the Company's issuance
of a $7.0 million secured promissory note and a $12.5 million senior secured
promissory note to Madeleine in December 1999 and November 2000, respectively. A
portion of the $12.5 million loan proceeds was used to repay the $7.0 million
note.
Based on the refocus and restructuring of the Company's communications
businesses, in addition to the substantial losses incurred in fiscal year 2001,
management believed that the Company would more than likely generate sufficient
taxable earnings or utilize tax planning opportunities to ensure realization of
the deferred tax benefits of $1.1 million, reduced from $1.8 million as June 30,
2000, but would less than likely realize the benefit on the balance of the
deferred tax assets. Therefore, the Company increased its valuation allowance
by $15.1 million to $21.8 million as of June 30, 2001. Accordingly, a provision
for deferred income taxes of $0.7 million was recorded in 2001.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission ("SEC") recently issued proposed guidance
for disclosure of critical accounting policies. The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effects of matters that are inherently uncertain and
may change in subsequent periods. To the extent that final SEC rules on this
subject may require disclosures in addition to those the Company already makes,
the Company intends to adopt such additional disclosure requirements once the
final rules required are adopted.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, "Business Combinations," and SFAS
142, "Goodwill and Intangible Assets." SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for fiscal
years beginning after December 15, 2001; however, certain provisions of this
Statement apply to goodwill and other intangible assets acquired between July 1,
2001 and the effective date of SFAS 142. Major provisions of these Statements
and their effective dates for the Company are as follows:
- - All business combinations initiated after June 30, 2001 must use the purchase
method of accounting. The pooling of interest method of accounting is
prohibited except for transactions initiated before July 1, 2001.
- - Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal rights
or are separable from the acquired entity and can be sold, transferred,
licensed, rented or exchanged, either individually or as part of a related
contract, asset or liability.
- - Goodwill, as well as intangible assets with indefinite lives, will no longer
be amortized. Goodwill and intangible assets with indefinite lives will be
tested for impairment annually and whenever there is an impairment indicator.
- - All acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
Management's assessment is that these Statements will not have a material impact
on the Company's financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 "Accounting for the Impairment or Disposal of Long Lived Assets," ("SFAS
144"). This statement is effective for the fiscal years beginning after December
15, 2001. This supercedes SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," while retaining many of the
requirements of such statement. The Company is currently evaluating the impact
of the statement. Management's assessment is that this Statement will not have a
material impact on the Company's financial position or results of operations.
On April 30, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No.13, and
Technical Corrections." The rescission of
SFAS No.4, "Reporting Gains and Losses from Extinguishments," and SFAS No.64,
"Extinguishments of Debt made to Satisfy Sinking Fund Requirements," which
amended SFAS No.4, will affect income statement classification of gains and
losses from extinguishment of debt. SFAS No.4 requires that gains and losses
from extinguishment of debt be classified as an extraordinary item, if material.
Under SFAS No. 145, extinguishment of debt is now considered a risk management
strategy by the reporting enterprise and the FASB does not believe it should be
considered extraordinary under the criteria in APB Opinion No.30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," unless the debt extinguishment meets the unusual in nature and
infrequency of occurrence criteria in APB Opinion No. 30. SFAS No. 145 will be
effective for fiscal years beginning after May 15, 2002. Upon adoption,
extinguishments of debt shall be classified under the criteria in APB Opinion
No. 30.
In June 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company has not yet determined the
impact of SFAS No.146 on its financial position and results of operations, if
any.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. As of June
30, 2002, the Company had debt of $17.1 million with various fixed interest
rates from 8.5% to 11.0%. The fixed rate debt may have its fair value adversely
affected if interest rates decline; however, the amount is not expected to be
material. The Company's cash is primarily invested in an institutional money
market mutual fund. The Company does not have any derivative financial
instruments as of June 30, 2002. The Company believes that the interest rate
risk associated with its investments is not material to the results of
operations of the Company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements following Item 15 herein.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 30, 2002, the Company dismissed Grant Thornton LLP ("Grant Thornton")
as the Company's independent accountants. As previously reported in a Current
Report on Form 8-K filed with the Securities and Exchange Commission on May 6,
2002 (to which reference is made), Grant Thornton's reports on the financial
statements of the Company for either of the fiscal years ended June 30, 2001 or
June 30, 2000 did not contain an adverse opinion or a disclaimer of opinion;
they were not qualified or modified as to uncertainty, audit scope, or
accounting principles; and there were no reportable events or disagreements with
Grant Thornton on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement(s), if
not resolved to the satisfaction of Grant Thornton, would have caused Grant
Thornton to make reference to the subject matter of such disagreement(s) in
connection with their report. On May 2, 2002, the Company engaged Grassi & Co.,
CPAs, P.C. as the Company's independent accountants to review the Company's
financial statements for the quarter ended March 31, 2002 and to audit the
Company's financial statements for the fiscal year ended June 30, 2002.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
NAME AGE POSITION WITH THE COMPANY
Jared E. Abbruzzese 48 Director(1)(2)
Gregory Cuneo 43 President, Chief Executive Officer and Director
Raymond Steele 67 Director(1)(2)
Robert J. Birnbach 37 Executive Vice President, Chief Financial Officer and Secretary
Joseph C. Chan 41 Vice President and Chief Accounting Officer
Ronald Fregara 53 President - CMA
Stephen Yager 50 Vice President - CMA
Barry Halpern 50 President - High-Rise
Nicholas Ahel 59 Vice President - High-Rise
Vincent D'Onofrio 42 President - OnTera & ParaComm
(1) Member of the Compensation and Governance Committee. The Compensation and
Governance Committee (the Compensation Committee) reviews and approves
management's recommendations as to executive compensation, reviews, approves and
administers executive compensation and DualStar's 1994 Stock Option Plan, as
amended, reviews and approves management's recommendation for organizational
structure and recommends to the DualStar board nominees for election as
directors of DualStar, including nominees recommended by stockholders.
(2) Member of the Audit Committee. The Audit Committee recommends to the
DualStar board independent auditors to serve DualStar, reviews the scope and
results of the annual audit, assures that the independent auditors act
independently, reviews with management and the independent auditors DualStar's
internal accounting controls, and reviews DualStar's annual and quarterly
reports.
Jared E. Abbruzzese has been a director of DualStar since September 1999 and he
served as Chairman from February 2000 to June 2001. Mr. Abbruzzese is a founder
and Chairman of TechOne Capital Group LLC, a consulting and private investment
firm concentrating in the telecommunications and technology sectors. Mr.
Abbruzzese was the founder and served as Chairman and Chief Executive Officer of
CAI Wireless Systems, Inc., an MMDS operator located in Albany, New York, from
August 1991 until CAI's acquisition by WorldCom, Inc. in August 1999 (Mr.
Abbruzzese served in such capacities for CAI during CAI's 1998 Chapter 11
proceeding). He is also a co-founder of Crest Communications LLC, a private
communications fund; a member of the governing board of VenInfoTel LLC, a
Venezuelan telephone and cable company. Mr. Abbruzzese also serves on the Board
of Directors of Motient Corporation and Globix Corporation, both public
companies.
Gregory Cuneo has been President and Chief Executive Officer of DualStar since
the Company was founded in August 1994. He has also served as a director since
August 1994 and served as Chairman of the Company from December 1998 until
February 2000. Mr. Cuneo is also (non-Director) Chairman of Starrett
Corporation, an affiliate of Blackacre, since August 1999, Chairman of HRH
Construction Corp., an affiliate of Starrett and Blackacre, since August 1999,
and Chairman of HRH Construction LLC, an affiliate of Blackacre and possibly TIG
and/or Brad Singer, since January 2001. Mr. Cuneo and Mr. Birnbach are first
cousins.
Raymond L. Steele, a retired businessman, has been a director of the Company
since December 1998. In addition to the Company, Mr. Steele has been a member of
the board of directors of ICH Corp. since June 1997. From August 1997 until
October 2000, Mr. Steele served as a board member of Video Services Corp. Prior
to his retirement, Mr. Steele held various senior positions such as Executive
Vice President of Pacholder Associates, Inc. (from August 1990 until September
1993), Executive Advisor at the Nickert Group (from 1989 through 1990), and Vice
President, Trust Officer and Chief Investment Officer of the Provident Bank
(from 1984 through 1988).
Robert J. Birnbach, a founder of the Company, has been Chief Financial Officer
of DualStar since December 1996, Executive Vice President since July 1999 and
Secretary since February 2000. He was a member of DualStar's board of directors
from September 1999 until February 2000. From December 1996 until July 1999, Mr.
Birnbach served as Vice President of DualStar and from August 1994 until
December 1996, he was DualStar's Director of Corporate Development/Mergers &
Acquisitions. Mr. Birnbach was President and Chief Executive Officer and a
member of the board of directors of Starrett Corporation, an affiliate of
Blackacre, from January 2000
until November 2000. He was also a member of the board of directors of HRH
Construction Corp., an affiliate of Starrett and Blackacre, from January 2000
until November 2000. Prior to joining DualStar, Mr. Birnbach was an advisor with
the financial advisory and consulting firm of Coopers & Lybrand from 1991 to
August 1994.
Joseph C. Chan served as Vice President and Chief Accounting Officer of DualStar
from December 1996 until September 24, 2002. He was controller of DualStar from
November 1994 until December 1996. Prior to joining the Company, Mr. Chan was a
certified public accountant with Konigsberg, Wolf & Co. P.C. from October 1987
to November 1994.
Ronald Fregara, a founder of the Company, served as an Executive Vice President
of the Company from December 1996 until February 2000, and served as a Vice
President from August 1994 until December 1996. Mr. Fregara has been President
of CMA since December 1996. Mr. Fregara was a member of the Company's board of
directors from August 1994 until February 2000.
Stephen Yager, a founder of the Company, served as an Executive Vice President
of the Company from August 1994 until February 2000, and served as Secretary of
the Company from August 1994 until February 2000. Mr. Yager was the Company's
Chief Financial Officer from August 1994 until November 1996. Mr. Yager has been
Vice President of CMA since December 1996. Mr. Yager was a member of the
Company's board of directors from August 1994 until February 2000.
Barry Halpern has served as President of High-Rise since July 1995.
Nicholas Ahel has served as Vice President of High-Rise since July 1995.
Vincent M. D'Onofrio has served as President and Chief Technology Officer of
OnTera since February 2001 and is responsible for the day to day operations of
OnTera. From March 2000 to February 2001, Mr. D'Onofrio served as OnTera's
Executive Vice President and Chief Technology Officer. From March 1996 until
February 2000, Mr. D'Onofrio served as President and Chief Executive Officer of
OnTera. Mr. D'Onofrio has also served as President of ParaComm since March 2001.
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation paid or awarded for each of DualStar's last three completed fiscal
years to DualStar's Chief Executive Officer and its four most highly compensated
officers (collectively, the "Named Executives") for the year ended June 30,
2002.
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------------
(A) (B) (C) (D) (G) (I)
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION(2)
---- ---------- ---------------
Gregory Cuneo 2002 $275,000 - - $4,038
Chief Executive Officer 2001 $275,000 $25,000 - $33,238
2000 $270,961 - 200,000(1) $35,038
Barry Halpern 2002 $260,000 $379,167 - $1,954
President - High-Rise 2001 $260,000 $706,712 - $1,954
2000 $230,000 $251,065 100,000(3) $1,954
Nicholas Ahel 2002 $260,000 $379,167 - $1,652
Vice President - High-Rise 2001 $260,000 $706,712 - $1,652
2000 $230,000 $251,065 100,000(3) $1,652
Ronald Fregara 2002 $235,000 - - $5,861
President - CMA 2001 $235,000 - - $5,861
2000 $235,408 $25,000 200,000(1) $5,861
Stephen Yager 2002 $235,000 - - $6,371
Vice President - CMA 2001 $235,000 - - $6,371
2000 $235,408 $25,000 200,000(1) $6,371
(1) Consists of options granted under the Company's 1994 Stock Option Plan, as
amended (the Plan), to purchase 200,000 shares granted on August 12, 1999 at an
exercise price of $4.00 per share and vest in five installments on each of
December 31, 1999, 2000, 2001, 2002 and 2003.
(2) Includes the value of personal benefits, such as disability insurance,
automobile expenses and/or director fees, pursuant to each officer's employment
agreement. See Employment Agreements.
(3) Consists of options granted under the Plan on February 15, 2000.
The options have an exercise price of $5.25 per share and were 100% vested on
February 15, 2000.
COMPENSATION OF DIRECTORS
Directors of the Company are paid an annual fee of $25,000 and a fee of $1,000
per board meeting attended in person, and $600 per telephonic meeting or
committee meeting (regardless of attendance in person or by telephone), plus, in
all cases, reimbursement of out-of-pocket expenses. For the year ended June 30,
2002, no meetings were held and the Company paid no director fees to Messrs.
Abbruzzese, Cuneo and Steele.
OPTION GRANTS IN LATEST FISCAL YEAR
No stock options were granted to any of the Named Executives during fiscal year
2002.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with regard to the
outstanding options to purchase DualStar Common Stock as of the end of the
fiscal year ended June 30, 2002 for the five Named Executives in the Summary
Compensation Table above.
(A) (B) (C) (D) (E)
SHARES ACQUIRED VALUE NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISED OPTIONS AT JUNE 30, 2002 OPTIONS AT JUNE 30, 2002
--------------- ------------ ------------------------------------ ------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Gregory Cuneo - - 120,000 80,000 $ - $ -
Barry Halpern - - 301,000 - $ - $ -
Nicholas Ahel - - 226,000 - $ - $ -
Ronald Fregara - - 120,000 80,000 $ - $ -
Stephen Yager - - 120,000 80,000 $ - $ -
EMPLOYMENT AGREEMENTS
Effective August 1994, DualStar entered into employment agreements with Messrs.
Cuneo, Yager and Fregara. The employment agreements expired in August 1997 and
have been renewed for two additional three-year terms through August 2003. Mr.
Cuneo's current salary is $275,000, with a guaranteed minimum bonus of $25,000,
up to a maximum of $100,000 based on certain performance objectives which are to
be determined by the Board and the Compensation Committee. Messrs. Fregara and
Yager's current salaries are each $235,000, with a guaranteed minimum bonus of
$25,000, up to a maximum of $100,000 based on certain performance objectives
which are to be determined by the Board and the Compensation Committee. The
salaries under these executive's employment agreements, as amended, may be
increased to reflect annual cost of living increases and may be supplemented by
discretionary merit and performance increases as determined by the Compensation
Committee.
The employment agreements provide, among other things, for participation in an
equitable manner in any profit-sharing or retirement plan for employees or
executives and for participation in other employee benefits applicable to
employees and executives of the Company. The employment agreements provide that
the Company will establish a performance incentive bonus plan providing each
executive the opportunity to earn an annual bonus of up to five percent of the
increase, if any, in the Company's pretax income, based upon the attainment of
performance goals to be established by the Compensation Committee. The
employment agreements further provide for the use of an automobile and other
fringe benefits commensurate with their duties and responsibilities, and for
benefits in the event of disability.
Pursuant to the employment agreements, employment may be terminated by the
Company with cause or by the executive with or without good reason. Termination
by the Company without cause, or by the executive for good reason, would subject
the Company to liability for liquidated damages in an amount equal to the
terminated executive's current salary for the remainder of the scheduled term of
employment and bonuses for the remainder of the scheduled term of employment
based upon the prior year's annual bonus and the maximum incentive bonus
payable. Such amounts shall be payable in equal monthly installments, without
any set-off for compensation received from any new employment. In addition, the
terminated executive would be entitled to continue to participate in and accrue
benefits under all employee benefit plans and to receive supplemental retirement
benefits to replace benefits under any qualified plan for the remaining term of
the employment agreements to the extent permitted by law.
The employment agreements provide for the purchase by the Company of insurance
policies in the amount of $1,000,000 on the lives of each of Messrs. Cuneo,
Yager and Fregara. The Company will pay the premiums under these policies, and a
portion of the payment will be treated as taxable income to the insured
executive. Upon the death of any of the insureds, the Company would be paid from
the insurance proceeds an amount equal to the total premiums it paid under the
policy, with the remaining proceeds to be paid to the deceased executive's
designated beneficiary. To date, each of Messrs. Cuneo, Yager and Fregara has
declined to have the Company purchase such insurance.
On June 1, 2000, the Company entered into employment agreements with each of
Barry Halpern and Nicholas Ahel, President and Vice President, respectively, of
High-Rise, which agreements expired on July 1, 2002. The Company and the
executives are discussing new employment agreements. Mr. Halpern continues to
serve as President of High-Rise at a current annual base salary of $260,000. Mr.
Ahel continues to serve as Vice President of High-Rise at a current annual base
salary of $260,000. Each of Messrs. Halpern and Ahel continue to receive such
other benefits, including medical, disability, pension and severance plans, as
are made generally available to executive employees of the Company from time to
time, and a life insurance benefit in the amount of one times such executive's
current annual base salary.
In connection with Robert J. Birnbach's role as the Company's Executive Vice
President, Chief Financial Officer and Secretary, the Company and Mr. Birnbach
entered into an employment agreement dated June 7, 2000, but effective as of
June 1, 1999. Under the terms of his employment agreement, Mr. Birnbach has
agreed to serve as Executive Vice President, Chief Financial Officer and
Secretary of the Company at a current base salary of $220,000. Mr. Birnbach's
agreement contemplates that he is eligible for a bonus of up to 50% of his
annual base salary upon the achievement by the Company and Mr. Birnbach of
performance targets agreed-upon by the Board of Directors and Mr. Birnbach. Mr.
Birnbach's annual base salary and bonus percentage may be increased, but not
decreased by the Company's Board of Directors.
Mr. Birnbach's employment with the Company may be terminated by the Company with
Cause (as defined in the agreement) or by Mr. Birnbach with or without good
reason (as defined in the agreement). Upon termination, all vested options
remain exercisable for the duration of the option. Termination of employment by
the Company without cause, or by Mr. Birnbach with good reason would entitle Mr.
Birnbach to severance in the amount of two times Mr. Birnbach's annual base
salary, plus other perquisites for the one-year period following the date of
termination; additionally, all unvested options to purchase Company Common Stock
would vest immediately.
In fiscal year 2000, OnTera entered into an employment agreement with Vincent
D'Onofrio, currently President and Chief Technology Officer, at a current annual
base salary of $250,000; in addition, he is eligible for a bonus of up to 40% of
his annual base salary, upon the achievement of specified performance targets.
Annual base salary and bonus percentage may be increased, but not decreased, by
the OnTera board of directors.
Pursuant to the OnTera employment agreement, employment may be terminated by
OnTera with Cause (as defined in the agreements) or by Mr. D'Onofrio with or
without good reason (as defined in the agreements). Termination of employment by
OnTera without Cause, or by Mr. D'Onofrio with good reason would entitle the
executive to severance in the amount of executive's then annual base salary,
plus a pro rata portion of the bonus that would be payable in the year of
termination. In the event of a termination of employment by OnTera with Cause,
the Mr. D'Onofrio is entitled to receive all base salary through the date of
termination. All unvested options lapse. In the event of a voluntary termination
of employment by the executive, the executive is entitled to receive his annual
base salary through the date of termination and be eligible for a pro rata
portion of any bonus.
THE 1994 STOCK OPTION PLAN
On October 17, 1994, the Board of Directors adopted, and the stockholders
subsequently approved and amended, the 1994 Stock Option Plan (as amended, the
1994 Plan) pursuant to which officers, directors, employees and consultants of
the Corporation and its affiliates are eligible to be granted stock option
awards (Awards). Stockholders approved the amendments to the 1994 Plan at the
1998 Annual Meeting of Stockholders. On April 13, 2000, the Company's Board of
Directors approved an amendment to the 1994 Plan providing that for all Awards
granted under the 1994 Plan from and after April 13, 2000, the Compensation
Committee shall determine the definition of Change of Control and the treatment
of such Awards upon a Change of Control, in the Committee's sole and absolute
discretion. This amendment does not require stockholder approval. The 1994 Plan
is currently being administered by the Compensation Committee, which has the
authority to grant awards, including Stock Options, Stock Appreciation Rights,
Restricted Stock, or any combination of the foregoing, and to determine the
terms and conditions of the Awards.
Options under the 1994 Plan generally shall be exercisable for a term fixed by
the Compensation Committee, not to exceed 10 years from date of grant, unless
any such options are terminated earlier pursuant to the terms of the 1994 Plan.
The total number of shares of Company Common Stock presently reserved for such
Awards and available for distribution under the 1994 Plan is 3,500,000. As of
June 30, 2002, 3,086,533 options were outstanding under the 1994 Plan. The
outstanding options have exercise prices ranging from $0.75 to $10.25 per share.
No stock options were exercised by any executive officer during fiscal year
2002.
401(K) PLAN
The Company maintains a retirement savings plan, effective as of January 1995,
in which eligible employees of the Company may elect to participate. The plan is
an individual account plan providing for deferred compensation as defined in
Section 401(k) of the Internal Revenue Code, and is subject to, and intended to
comply with, the Employee Retirement Income Security Act of 1974. Each
eligible employee is permitted to defer receipt of up to 15% of eligible
compensation, subject to maximum statutory limits and nondiscrimination testing
prescribed by the Internal Revenue Code. The Company may, in its discretion,
match employee deferrals in cash of DualStar stock, or make discretionary profit
sharing plan contributions in cash or DualStar stock, subject to current IRS
limits and nondiscrimination testing. For the year ended June 30, 2002, DualStar
made no contribution to the plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No Compensation Committee interlock relationship existed during the fiscal year
ended June 30, 2002.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial ownership
of DualStar Common Stock as of September 19, 2002 by each stockholder of the
Company who, based on public filings, is known to the Company to be the
beneficial owner of more than 5% of DualStar Common Stock.
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ----------------------------------- ------------------------- -----------------
Technology Investors Group, LLC
560 Sylvan Way
Englewood Cliffs, NJ 07632 1,791,000 10.9%
The following table sets forth certain information with respect to beneficial
ownership of DualStar Common Stock as of September 19, 2002 by all directors and
all Named Executives identified in the Summary Compensation Table above in Item
11. Executive Compensation, individually, and by all directors and all executive
officers of DualStar as a group.
AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ------------------------------------- ---------------------- ---------------
Gregory Cuneo 555,000(1) 2.9%
Jared E. Abbruzzese --- *
Raymond Steele 115,000(2) *
Ronald Fregara 555,000(1) 2.9%
Stephen Yager 555,000(1) 2.9%
Barry Halpern 301,000(2) 1.6%
Nicholas Ahel 226,000(2) 1.2%
All directors and executive
Officers as a group (10 persons) 3,549,400(3) 18.5%
* Less than 1%.
(1) Consists of (i) options to purchase 120,000 shares of Company common stock
granted under the Company's 1994 Stock Option Plan, as amended (the Plan),
exercisable within 60 days of September 19, 2002 and (ii) 435,000 shares of
Company common stock.
(2) Consists of options granted under the Plan, exercisable within 60 days of
September 19, 2002.
(3) Consists of (i) options to purchase 2,241,400 shares of Company common stock
granted under the Plan, exercisable within 60 days of September 19, 2002, and
(ii) 1,308,000 shares of Company common stock.
The Company maintains the DualStar Technologies Corporation 1994 Stock Option
Plan, as amended (the "1994 Plan"), pursuant to which it may grant equity awards
to eligible persons. Additionally, it has entered into individual arrangements
outside of the equity
plans with DSTR Warrant Co., LLC, providing for the award of warrants to
purchase Company common stock. The 1994 Plan and the terms of DSTR Warrant Co.,
LLC's equity award are described more fully below.
The following table gives information about equity awards under the Company's
1994 Plan, and DSTR Warrant Co., LLC's equity arrangement.
- ---------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ---------------------------------------------------------------------------------------------------------------------
Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance
of outstanding options, outstanding options, under equity compensation plans
Plan category warrants and rights warrants and rights (excluding securities
reflected in column
(a))
- ---------------------------------------------------------------------------------------------------------------------
DualStar Technologies 3,086,533 $2.78 413,467
Corporation 1994 Stock
Option Plan, as amended
- ---------------------------------------------------------------------------------------------------------------------
DSTR Warrant Co., LLC 3,125,000 $4.00 -
- ---------------------------------------------------------------------------------------------------------------------
Total 6,211,533 $3.39 413,467
- ---------------------------------------------------------------------------------------------------------------------
In addition, subject to stockholder approval, the Company granted warrants to
purchase 750,000, 625,000, 200,000 and 200,000 shares of Company common stock to
TechOne Capital Group LLC, Technology Investors Group LLC, Gregory Cuneo and
Robert Birnbach, respectively. Exercise price of the warrants granted to TechOne
Capital Group LLC and Technology Investors Group LLC is $4.06. Exercise price of
the warrants granted to Gregory Cuneo and Robert Birnbach is $6.50. The Company
has no present plan to hold a stockholder meeting for the purpose of seeking
approval for the warrants.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) The Company's communications business sublets office space in New York, NY
from Starrett Corporation (of which the Company's president and Chief Executive
Officer is (non-Director) Chairman and the Company's Chief Financial Officer was
director, president and Chief Executive Officer until November 2000). Starrett
had billed OnTera $16,340 for office improvements associated with the property
in fiscal year 2000. Rent expense for the year ended June 30, 2002 and 2001 was
$165,000 and $99,000, respectively.
(b) TechOne Capital Group LLC ("TechOne"), a private consulting and investment
firm of which Jared E. Abbruzzese, a director of the Company, is a principal,
had provided consulting services to the Company from August 12, 1999 until June
30, 2002, pursuant to letter agreements dated August 12, 1999 and March 24, 2000
and pursuant to a consulting agreement dated June 1, 2000. The consulting fee
payable under the consulting agreement was $30,000 per month, plus reimbursement
of expenses. In November 2001, TechOne gave the Company a written notice to
terminate the agreement effective on June 30, 2001 and waived any subsequent
consulting fees that might be due by the Company to TechOne under the agreement.
For the year ended June 30, 2001, in connection with the agreement, the Company
paid TechOne consulting fees in the amount of $360,000. For the year ended June
30, 2002, the Company made no payments to TechOne.
Subject to stockholder approval and other conditions, Class D Warrants to
purchase 750,000 shares of Company Common Stock were granted to TechOne on April
13, 2000. The Class D Warrants are exercisable for $4.063 per share and vest and
become fully exercisable when the 30-day average closing price of the Company
Common Stock has been at or above $14.00, and a material third party acquisition
or merger, material equity investment in the Company or joint venture or other
material third party transaction having a substantially similar economic effect
as the foregoing has been effected (excluding, in each instance, the
transactions contemplated by the Blackacre Securities Purchase Agreement).
Additionally, regardless of the vesting requirement discussed above, the Class D
Warrants vest and become fully exercisable upon a change of control (excluding
the transactions contemplated by the Blackacre Securities Purchase Agreement).
The Warrants will expire on the seventh anniversary of issuance. The Company has
no present plan to hold a stockholders meeting for the purpose of seeking
stockholder approval for the Class D Warrants. In connection with the
consummation of the November 8, 2000 financing transaction with Madeleine
L.L.C., to ensure that DualStar had a sufficient number of authorized but
unissued shares of common stock for issuance upon the exercise of such warrants,
TechOne irrevocably surrendered any rights it had to Class D Warrants to
purchase 375,000 shares of DualStar common stock.
(c) The Company is a party to a consulting agreement dated June 1, 2000 with
Hades Advisors LLC ("Hades"), an affiliate of TIG. The consulting fee payable
under the consulting agreement is $20,000 per month, plus reimbursement of
expenses. The consulting
agreement provides that other than termination as a result of a material breach
by Hades, the Company may terminate this consulting agreement only by giving
written notice to Hades of the Company's intention to terminate this consulting
agreement accompanied by payment of (i) all unpaid amounts due hereunder from
the Company to Hades for the consulting services (as defined therein) rendered
through the date of termination, plus all reimbursable amounts for which Hades
has delivered to the Company an invoice on or before the termination date, (ii)
$25,000, which will be used by Hades for reimbursable expenses incurred prior to
the termination date and not yet invoiced, and (iii) an amount equal to the
product of $20,000 times the greater of (A) the number of months remaining in
the 3-year term thereof, and (B) 24. For the years ended June 30, 2001, the
Company paid Hades consulting fees in the amount of $240,000. For the year ended
June 30, 2002, in connection with the agreement, the Company made no payments to
Hades.
(d) Subject to stockholder approval and other conditions, Class D Warrants to
purchase 625,000 shares of Company Common Stock were granted to TIG on April 13,
2000, on the same terms and conditions discussed above in paragraph (b). The
Company has no present plan to hold a stockholders meeting for the purpose of
seeking stockholder approval for the Class D Warrants.
(e) The Company's mechanical contracting business leased shop space, on a
month-to-month basis, until March 2002 from a company in which Messrs. Cuneo,
Yager and Fregara own a majority interest. Rent expense for the years ended June
30, 2002, 2001 and 2000 was $35,000, $46,000 and $34,000, respectively.
(f) The Company's electrical contracting subsidiary obtained consulting services
from M & E Advisors, LLC, an affiliate of TIG in fiscal year 2001. For the year
ended June 30, 2001, the Company paid M&E Advisors, LLC consulting fees in the
amount of $170,000. For the year ended June 30, 2002, the Company made no
payments to M & E Advisors, LLC.
(g) At June 30, 2002, the Company had outstanding loans to Messrs. D'Onofrio and
Cuneo in the amounts of $96,000 and $60,000, respectively.
(i) An original loan of $171,000 was due on demand, with an unstated
interest rate. In September 2000, the loan amount was reduced by
$75,000 to offset bonuses earned by the officer in the prior periods
and a promissory note was signed by Mr. D'Onofrio for the remaining
loan balance of $96,000. The note bears interest rate of 7.75% per
annum and is due in August 2006. In addition, Mr. D'Onofrio provided
all stock options granted to him by the Company as the collateral and
security of the note.
(ii) The $60,000 loan is due on demand, with an interest rate of 7.75%
per annum. Mr. Cuneo had borrowed $350,000 from the Company in June
2001 and repaid such loan with interest in June 2001. In addition, Mr.
Cuneo had purchased various services from the Company totaling $134,000
during fiscal year 2001, of which $84,000 was paid through September
2001.
(h) For the fiscal years ended June 30, 2002, 2001 and 2000, approximately 0.2%,
2.0% and 16% of the Company's total revenues were derived from HRH Construction
Corporation ("HRH"), respectively. Mr. Cuneo is also the Chairman of HRH.
In addition, DualStar's President and Chief Executive Officer is (non-Director)
Chairman of Starrett Corporation, an affiliate of HRH and Blackacre, and is
compensated as Chairman of Starrett Corporation under a consulting agreement
between Starrett Corporation and Starrett Consulting, L.L.C. (of which Mr. Cuneo
is a 50% member). The remaining interest in Starrett Consulting, L.L.C. is held
by Mr. Brad Singer, the President of HRH and a member of TIG. In exchange for
various services, including management services, Starrett Consulting, L.L.C.
receives an annual fee of $750,000 from Starrett Corporation in equal monthly
installments, plus an additional fee may be earned in certain circumstances.
DualStar's Executive Vice President and Chief Financial Officer was Director,
President and Chief Executive Officer of Starrett Corporation. Since these two
DualStar officers became officers of HRH and/or Starrett Corporation, DualStar
has been awarded two new contracts in the amount of approximately $5 million
from HRH.
ITEM 14 - CONTROLS AND PROCEDURES.
(A) Not applicable.
(B) There have been no significant changes in the Company's internal controls or
in other factors that could significantly alter these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART IV
ITEM 15 - 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 15. No financial statement schedules are included in this
Report.
2. Exhibits
Set forth below is a list of exhibits being filed with this Report.
EXHIBIT NO. AND DESCRIPTION IN THE EXHIBIT LIST FOR THIS REPORT
NUMBER TITLE
- ------ -----
2.1 Securities Purchase Agreement dated as of March 28, 2000 by and among
the Registrant, Cerberus Capital Management, L.P. and Blackacre
Capital Management, L.L.C. (2)
2.2 Stock Purchase Agreement dated as of March 28, 2000 between the
Registrant and M/E Contracting Corp. (2)
2.3 Agreement and Plan of Merger dated as of May 11, 2000 between the
Registrant, DCI Acquisition Co. and ParaComm, Inc. (2)
2.4 Securities Purchase Agreement dated as of November 8, 2000 by and
among Registrant, DSTR Warrant Co., LLC and Madeleine L.L.C. (4)
3.1 Certificate of Incorporation, filed June 14, 1994, as restated. (1)
3.2 Amended and Restated Bylaws. (2)
4.1 Specimen Copy of Common Stock Certificate. (1)
4.2 DualStar Technologies Corporation 1994 Stock Option Plan, as
amended.(1)
4.3 1994 Stock Option Plan Amendment. (3)
10.1 Employment Agreement between the Registrant and Gregory Cuneo, dated
August 31, 1994. (1)
10.2 Employment Agreement between the Registrant and Stephen J. Yager,
dated August 31, 1994. (1)
10.3 Employment Agreement between the Registrant and Ronald Fregara, dated
August 31, 1994. (1)
NUMBER TITLE
- ------ -----
10.4 Employment Agreement between the Registrant and Robert J. Birnbach
dated June 7, 2000. (3)
10.5 Employment Agreement between the Registrant and Nicholas Ahel dated
June 1, 2000. (3)
10.6 Employment Agreement between the Registrant and Barry Halpern dated
June 1, 2000. (3)
10.7 Second Amended and Restated Note, having an original issued dated
as of December 1, 1999, made by Registrant in favor of Madeleine
L.L.C. (5)
10.8 Stockholders Agreement dated March 28, 2000 among DualStar
Technologies Corporation, Blackacre Capital Management L.L.C.,
Cerberus Capital Management, L.P., Gregory Cuneo and Robert J.
Birnbach. (2)
10.9 Stockholders Agreement dated as of November 8, 2000 by and among
Registrant, DSTR Warrant Co., LLC, Technology Investors Group, LLC and
certain members of Registrant's management. (5)
10.10 Class E Warrant Agreement dated as of November 8, 2000 by and between
Registrant and DSTR Warrant Co., LLC. (4)
10.11 Registration Rights Agreement dated as of November 8, 2000 by and
among Registrant, DSTR Warrant Co., LLC and Technology Investors
Group, LLC. (5)
10.12 Master Surety Agreement dated November 3, 1997 by the Company and its
subsidiaries in favor of United States Fidelity and Guaranty Company,
Fidelity and Guaranty Insurance Company, Fidelity and Guaranty
Insurance Underwriters, Inc. (3)
10.13 Registration Rights and Lock-Up Agreement dated as of May 10, 2000 by
and among the Company and the former ParaComm stockholders.(3)
10.14 Voting Agreement dated as of May 10, 2000 by and among the Company,
Donald Johnson, Mark Mayhook and Geneva Associates Merchant Banking
Partners I, LLC. (3)
10.15 Consulting Agreement dated as of June 1, 2000 between the Company and
TechOne. (3)
10.16 Consulting Agreement dated as of June 1, 2000 between the Company and
Hades Advisors, LLC. (3)
21.1 Subsidiaries of the Registrant.(6)
23.1 Consent of Grassi & Co., CPAs, P.C. (6)
23.2 Consent of Grant Thornton LLP.(6)
(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 Quarterly Report on Form
10-Q (File No. 0-25552) for the quarter ended March 31, 2000.
(3) Incorporated herein by reference to Registrant's Annual Report on Form 10-K
(File No. 0-25552) for the period ended June 30, 2000.
(4) Incorporated herein by reference to Registrant's Form 13D filed by Stephen
Feinberg on November 21, 2000.
(5) Incorporated herein by reference to Registrant's Quarterly Report on Form
10-Q (File No. 0-25552) for the quarter ended December 31, 2000.
(6) Attached hereto.
(B) REPORTS ON FORM 8-K
A Current Report on Form 8-K was filed on May 6, 2002, reporting an Item 4
event.
(C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
The exhibits listed under (a)(2) of this Item 15 are filed with this Report.
(D) FINANCIAL STATEMENT SCHEDULES REQUIRED BY REGULATION S-X WHICH ARE EXCLUDED
FROM THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED JUNE
30, 2001
None.
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Certified Public Accountants F-2 - F-3
Financial Statements
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Shareholders' Equity (Deficit) F-6 - F-7
Consolidated Statements of Cash Flows F-8 - F-10
Notes to Consolidated Financial Statements F-11 - F-36
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 sheet of DualStar
Technologies Corporation and Subsidiaries as of June 30, 2002, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 audit provides 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, 2002 and the
consolidated results of their operations and their consolidated cash flows for
the year then ended, in conformity with accounting standards generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As more fully discussed in Note A to the
financial statements, the Company has suffered recurring losses from continuing
operations and is in default of its senior secured promissory note payable that
permits the holder to accelerate the maturity and demand payment. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters is also discussed in Note
A. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
GRASSI & CO., CPAs, P.C.
Lake Success, New York
September 19, 2002
F-2
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheet of DualStar
Technologies Corporation and Subsidiaries as of June 30, 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended June 30, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended June 30, 2001, in conformity with
accounting standards generally accepted in the United States of America.
GRANT THORNTON LLP
New York, New York
September 28, 2001
F-3
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
-----------------------------------------
2002 2001
-----------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $2,535,419 $3,711,287
Accounts receivable - net of allowance for doubtful accounts of
$532,000 and $586,000 in 2002 and 2001, respectively 26,249,507 23,761,367
Retainage receivable 3,473,970 3,926,902
Costs and estimated earnings in excess of billings on uncompleted contracts 1,299,615 1,236,557
Deferred tax asset - 377,000
Prepaid expenses and other current assets 210,997 1,278,469
-----------------------------------------
TOTAL CURRENT ASSETS 33,769,508 34,291,582
Property and equipment - net of accumulated depreciation and amortization 3,158,890 7,621,297
Other assets:
Deferred tax asset - 699,000
Intangible assets - net of accumulated amortization - 365,219
Other 511,303 595,883
-----------------------------------------
TOTAL ASSETS $37,439,701 $43,572,981
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $12,250,161 $12,437,911
Senior secured promissory note payable 14,850,300 -
Billings in excess of costs and estimated earnings on uncompleted contracts 5,707,947 3,572,160
Accrued expenses and other current liabilities 3,540,799 4,445,041
Mortgage payable 1,693,885 -
-----------------------------------------
TOTAL CURRENT LIABILITIES 38,043,092 20,455,112
Senior secured promissory note payable - 12,500,000
Mortgage payable - net of current portion - 1,691,744
Other liabilities - 148,613
-----------------------------------------
TOTAL LIABILITIES 38,043,092 34,795,469
-----------------------------------------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock - par value, $.01 per share; 25,000,000 shares authorized; 16,501,568
shares issued and outstanding in 2002 and 2001 165,016 165,016
Additional paid-in capital 41,575,421 41,575,421
Accumulated deficit (42,343,828) (32,760,425)
Accumulated comprehensive loss - (202,500)
-----------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (603,391) 8,777,512
-----------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $37,439,701 $43,572,981
=========================================
The accompanying notes are an integral part of these statements.
F-4
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,
2002 2001 2000
------------- ------------- --------
Revenues earned $81,180,853 $83,217,978 $87,284,513
Costs of revenues earned, excluding depreciation and
amortization of $1,651,476, $1,236,652 and $619,706 in 2002,
2001 and 2000, respectively 70,561,255 73,946,373 80,305,881
------------------------------------------------------------
Gross profit 10,619,598 9,271,605 6,978,632
------------------------------------------------------------
Operating expenses:
General and administrative expenses, excluding amortization of
deferred compensation of $637,428 in 2000, and depreciation
and amortization of $395,043, $977,810 and $427,617 in 2002,
2001 and 2000, respectively 11,976,760 20,043,044 13,049,411
Depreciation and amortization 2,046,519 2,214,462 1,047,323
Impairment of fixed and intangible assets 2,479,630 1,190,000 300,000
Amortization of deferred compensation - - 637,428
------------------------------------------------------------
Total operating expenses 16,502,909 23,447,506 15,034,162
------------------------------------------------------------
Operating loss (5,883,311) (14,175,901) (8,055,530)
Other (income) expense:
Interest income (152,808) (578,484) (264,580)
Interest expense 1,876,751 1,364,984 791,868
Loss on sale of communications assets 482,324 - -
Loss on sale of marketable securities 337,500 - -
------------------------------------------------------------
Other expense - net 2,543,767 786,500 527,288
------------------------------------------------------------
Loss before provision for income taxes (8,427,078) (14,962,401) (8,582,818)
Provision for income taxes
Current tax provision 80,325 74,787 68,000
Deferred tax provision 1,076,000 676,000 -
------------------------------------------------------------
Net loss $(9,583,403) $(15,713,188) $(8,650,818)
============================================================
Basic and diluted loss per share:
Net loss per share $(0.58) $(0.95) $(0.67)
Weighted average shares outstanding 16,501,568 16,497,255 12,824,121
The accompanying notes are an integral part of these statements.
F-5
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Years ended June 30, 2002, 2001 and 2000
Additional Accumulated
Common Stock paid-in Accumulated Deferred Comprehensive
Shares Amount Capital Deficit Compensation Loss Total
------ ------- ------- ------- ------------ ---- -----
Balance - June 30, 1999 9,000,000 $90,000 $14,995,836 $(8,396,419) $6,689,417
Net loss for the year ended
June 30, 2000 (8,650,818) (8,650,818)
Exercise of Class A warrants 4,510,571 45,106 17,997,178 18,042,284
Exercise of Underwriter unit
option 400,000 4,000 2,306,000 2,310,000
Conversion of convertible note 1,791,000 17,910 2,455,419 2,473,329
Costs in connection with
conversion of convertible
note (21,824) (21,824)
Issuance of common stock and
warrants in connection with
purchase of ParaComm, Inc. 774,997 7,750 3,117,513 3,125,263
Issuance of compensatory
stock options 1,763,428 $(1,126,000) 637,428
----------------------------------------------------------------------------------------------------
Balance - June 30, 2000 16,476,568 $164,766 $42,613,550 $(17,047,237) $(1,126,000) - $24,605,079
The accompanying notes are an integral part of this statement.
F-6
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Years ended June 30, 2002, 2001 and 2000
Additional
Common Stock paid-in Accumulated
Shares Amount Capital Deficit
------ ------- ------- -------
Balance - June 30, 2000 16,476,568 $164,766 $42,613,550 $(17,047,237)
Net loss for the year ended
June 30, 2001 (15,713,188)
Net unrealized loss on marketable
securities arising during the
year
Comprehensive loss
Issuance of common stock and
warrants in exchange for access
rights 25,000 250 87,871
Reversal of deferred compensation (1,126,000)
--------------------------------------------------------------------
Balance - June 30, 2001 16,501,568 165,016 41,575,421 (32,760,425)
Net loss for the year ended
June 30, 2002 (9,583,403)
Other comprehensive loss:
Unrealized holding loss on
marketable securities arising
during the year
Reclassification adjustment for
losses included in net income
Comprehensive loss
--------------------------------------------------------------------
Balance - June 30, 2002 16,501,568 $165,016 $41,575,421 $(42,343,828)
====================================================================
Accumulated
Deferred Comprehensive
Compensation Loss Total
------------ ---- -----
Balance - June 30, 2000 $(1,126,000) - $24,605,079
Net loss for the year ended
June 30, 2001 (15,713,188)
Net unrealized loss on marketable
securities arising during the
year $(202,500) (202,500)
-----------------
Comprehensive loss (15,915,688)
Issuance of common stock and
warrants in exchange for access
rights 88,121
Reversal of deferred compensation 1,126,000 -
-------------------------------------------------------
Balance - June 30, 2001 - (202,500) 8,777,512
Net loss for the year ended
June 30, 2002 (9,583,403)
Other comprehensive loss:
Unrealized holding loss on
marketable securities arising
during the year 540,000 540,000
Reclassification adjustment for
losses included in net income (337,500) (337,500)
-----------------
Comprehensive loss (9,380,903)
-------------------------------------------------------
Balance - June 30, 2002 - - $(603,391)
=======================================================
The accompanying notes are an integral part of this statement.
F-7
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
2002 2001 2000
---------------------------------------------------------
Cash flows from operating activities:
Net loss $(9,583,403) $(15,713,188) $(8,650,818)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 2,046,519 2,214,462 1,047,323
Deferred income taxes 1,076,000 676,000 -
Impairment of fixed and intangible assets 2,479,630 1,190,000 300,000
Loss on sale of communications assets 482,324 - -
Loss on sale of marketable securities 337,500 - -
Accrued interest added to debt principal 1,595,623 - -
Accrued interest converted to common stock - - 124,385
Amortization of deferred compensation - - 637,428
(Increase) decrease in assets, net of assets acquired
Accounts receivable (2,549,797) 103,258 (132,986)
Retainage receivable 452,932 2,763,121 (545,435)
Costs and estimated earnings in excess of billings on
uncompleted contracts (63,058) 859,154 (735,299)
Prepaid expenses and other current assets 392,402 111,664 (254,753)
Other assets 4,120 (65,544) (606,395)
Increase (decrease) in liabilities, net of liabilities
assumed
Accounts payable 155,999 (4,636,817) (4,309,577)
Billings in excess of costs and estimated earnings on
uncompleted contracts 2,135,787 (417,641) 994,805
Accrued expenses and other current liabilities (521,239) 174,637 9,006
---------------------------------------------------------
Net cash used in operating activities (1,558,661) (12,740,894) (12,122,316)
---------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (434,621) (2,667,323) (1,020,434)
Proceeds from sale (purchase) of marketable securities 555,000 (892,500) -
Proceeds from sale of communications assets 402,136 - -
ParaComm, Inc.'s cash at purchase date - - 264,853
Costs in connection with purchase of ParaComm, Inc. - - (54,984)
---------------------------------------------------------
Net cash provided by (used in) investing activities $522,515 $(3,559,823) $(810,565)
---------------------------------------------------------
The accompanying notes are an integral part of this statement.
F-8
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended June 30,
2002 2001 2000
---------------------------------------------------------
Cash flows from financing activities
Principal payments of loan and lease payables $(115,771) $(268,226) $(1,150,431)
Principal payment of mortgage payable (23,951) (20,080) (27,084)
Proceeds from senior secured promissory note payable - 5,500,000 7,000,000
Exercise of Class A warrants and underwriter unit option - - 20,352,285
Net proceeds from refinancing of mortgage payable - - 996,250
Costs in connection with conversion of convertible note - - (21,824)
---------------------------------------------------------
Net cash provided by (used in) financing activities (139,722) 5,211,694 27,149,196
---------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,175,868) (11,089,023) 14,216,315
Cash and cash equivalent at beginning of year 3,711,287 14,800,310 583,995
---------------------------------------------------------
Cash and cash equivalents at end of year $2,535,419 $3,711,287 $14,800,310
=========================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $164,053 $641,038 $719,449
Income taxes 19,549 71,503 87,986
Non-cash investing and financing transactions:
(1) During fiscal 2002, unpaid interest of $754,677 that was accrued in fiscal
2001 was capitalized to the senior secured promissory note payable.
(2) The Company acquired marketable securities in March 2001 for $892,500. As of
June 30, 2001, an unrealized loss on the Company's available-for-sale securities
was $202,500 and had been reported as a component of shareholders' equity. The
Company subsequently sold the securities in fiscal 2002 and the unrealized loss
was reversed.
(3) The Company sold certain communications assets in April 2002 for $402,136.
In addition to communications equipment and subscriber base, accounts receivable
with book value of $61,557 was included in the transaction.
(4) In connection with an agreement in exchange for access rights, the Company
issued 25,000 shares of Company common stock and warrants to purchase 2,676
shares of Company common stock in the year ended June 30, 2001. The warrants are
non-forfeitable, fully vested and immediately exercisable at a price of $4.446
per share. Accordingly, the Company's common stock was increased by $250 and
additional paid-in capital was increased by $87,871.
(5) In November 2000, the Company sold to Madeleine L.L.C. a $12.5 million
senior secured promissory note. The note, due and payable on November 8, 2007,
bears interest at a fixed rate of 11% per annum. A portion of the proceeds was
used to retire existing indebtedness of the Company in the principal amount of
$7.0 million owed to Madeleine L.L.C.
The accompanying notes are an integral part of this statement.
F-9
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended June 30, 2002, 2001 and 2000
Non-cash investing and financing transactions:
(6) In August 1996, the Company acquired real property which was financed by a
$900,000 mortgage loan. In November 1999, the Company refinanced the mortgage
loan and increased the loan balance to $1,750,000. The unpaid balance of
$754,044 of the original mortgage loan was paid off from the proceeds of the
refinancing.
(7) The Company acquired equipment related to the delivery of communications
services which was financed by a note in the amount of $668,265 in the year
ended June 30, 2001. The Company acquired equipment related to the delivery of
Internet access which was financed by capital leases in the total amount of
$193,546 in the year ended June 30, 2000.
(8) In May 2000, the Company issued 774,997 shares of common stock and 25,000
warrants with an exercise price of $15 per common stock in exchange for all of
the outstanding stock of ParaComm, Inc. In the transaction, the Company acquired
total assets of $1,871,740 and assumed total liabilities of $572,868. The
Company recorded the consideration of the transaction by increasing common stock
and additional paid-in capital by $7,750 and $3,117,513, respectively. In
addition, since the transaction amount exceeded the net assets of ParaComm, Inc.
on the purchase date, the Company allocated the excess to subscriber list,
access rights and goodwill in the amounts of $1,165,732, $444,875 and $518,978,
respectively.
(9) In July 1999, Technology Investors Group, LLC ("TIG") converted its $2.5
million convertible note and a portion of unpaid interest into 1,791,000 shares
of the Company's common stock at the conversion price of $1.40 per share. In
addition, the Company issued a promissory note in the amount of $120,000
representing the remaining indebtedness to TIG. In connection with the
conversion, the Company incurred costs of $41,471 which have been charged to
additional paid-in capital. As a result of the transaction, the Company's common
stock (in par value) was increased by $17,910 and additional paid-in capital was
increased by $2,455,419.
(10) In March 2000, options to purchase 617,500 shares of the Company's common
stock were granted to employees with an exercise price lower than the closing
price of the Company stock. One-third of the options vested at the date of the
grants and the remaining two-thirds would have vested ratably on a monthly basis
beginning on the last day of each of the 24 calendar months following March
2001. As a result of the grants, a compensation charge of $1,763,428 was
incurred, of which $637,428 was recognized in the year of grant. Accordingly,
additional paid-in capital was increased by $1,763,428, deferred compensation
was increased by $1,126,000, and $637,428 was charged to fiscal 2000 operating
result. In February 2001, the employees resigned and forfeited the stock
options, and the unamortized deferred compensation was reversed. Accordingly,
both additional paid-in capital and deferred compensation were decreased by
$1,126,000.
The accompanying notes are an integral part of these statements.
F-10
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. ("Centrifugal"),
Centrifugal Service, Inc. ("Service") and Mechanical Associates, Inc.
("Mechanical"), whereby 2,610,000 shares of DualStar were issued to the
shareholders of Centrifugal, Service and Mechanical in exchange for all of the
stock of Centrifugal, Service and Mechanical and these companies became wholly
owned subsidiaries of DualStar. Subsequently, DualStar formed new wholly owned
subsidiaries, including Centrifugal/Mechanical Associates, Inc., Property
Control, Inc., High-Rise Electric, Inc., OnTera, Inc. ("OnTera", formerly known
as DualStar Communications, Inc.), Integrated Controls Enterprises, Inc. and BMS
Electric, Inc. In May 2000, the Company issued 774,997 shares of common stock
and 25,000 warrants with an exercise price of $15 per common stock in exchange
for all of the outstanding stock of ParaComm, Inc. (see Note Q).
The accompanying financial statements for the years ended June 30, 2002, 2001
and 2000 reflect the consolidated operations of DualStar Technologies
Corporation and subsidiaries (collectively the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
DualStar, through its wholly owned subsidiaries, operates two separate lines of
business: (a) construction and (b) communications. As a result of the limited
availability of capital and a significant change in market conditions, in
December 2000 the Company's board of directors determined to refocus its
communications business efforts by concentrating on core communications assets
located in the New York City and Los Angeles areas and by operating subscription
video provider, ParaComm Inc., in several southern and western states.
The Company incurred significant losses in the last several fiscal years,
primarily in the communications segment, and it expects that the communications
segment will continue to incur losses going forward and will require additional
capital to fund those losses. The Company has implemented and will continue to
implement cost reductions designed to minimize such losses. There can be no
assurance that these efforts will be successful or that the construction segment
will sustain profitability or positive cash flow from future operations or that
any positive cash flow will be sufficient to offset continued losses from the
communications segment. Given the current U.S. economic climate and market
conditions and the financial condition of the Company, there is a substantial
likelihood that the Company will be unable to raise additional funds on terms
satisfactory to it, if at all, to fund the expected operating losses. Moreover,
the Company presently owes Madeleine L.L.C. ("Madeleine") over $15 million and
is presently in default under the loan. Madeleine may call the loan due and
payable at any time, and, if it is not paid, foreclose on significant assets of
the Company's subsidiaries that secure such loan. If the Company cannot raise
additional funds or if Madeleine demands payment on its loan, the Company will
likely be forced to cease operations. Accordingly, there is substantial doubt
about the Company's ability to continue as a going concern.
In fiscal 2002, the Company decided to further limit its communications business
efforts and resources to the Internet and subscription video businesses in the
New York City metropolitan area and in Florida. The Company's communications
segment discontinued its telephone business in New York City and, in April 2002,
informed their telephone customers and the FCC that telephone services would be
phased-out starting June 2002. In addition, the Company decided to sell certain
communications assets in locations outside of the New York City metropolitan
area and Florida.
F-11
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A (CONTINUED)
In April 2002, the Company sold certain communications assets for $400,000. The
transaction resulted in a loss of $500,000. In addition, in August 2002, the
Company sold certain access agreements on properties in the Los Angeles area and
the communications assets located in the properties for $400,000. The
transaction resulted in a gain of $100,000. Due to the Company's continuing
re-focus of its communications business efforts and resources, a $2.5 million
charge for the impairment of certain remaining communications assets was
recorded in fiscal 2002.
On November 8, 2000, the Company consummated a $12.5 million senior secured loan
transaction with Madeleine, an affiliate of Blackacre Capital Management L.L.C.
("Blackacre"). The loan, which is due and payable on November 8, 2007, bears
interest at a fixed rate of 11% per annum. The loan is a senior secured
obligation of the Company and is guaranteed by certain subsidiaries of the
Company, including OnTera, which have pledged substantially all of their
respective assets to collateralize such guarantee. In connection with the loan,
the Company issued warrants to purchase 3,125,000 shares of common stock at an
exercise price of $4.00 per share, subject to antidilution provisions, expiring
in December 2007, to an affiliate of Madeleine. A portion of the $12.5 million
loan proceeds was used to retire existing indebtedness of the Company in the
principal amount of $7 million owed to Madeleine and to pay expenses of
obtaining the loan. The remaining proceeds were used for the Company's working
capital purposes. No value was allocated to the warrants because the value was
deemed immaterial.
Since March 2001, the Company has not made regularly scheduled interest payments
to Madeleine pursuant to the $12.5 million loan agreement. In addition, the
de-listing of the Company's common shares from the Nasdaq National Market
created a default under the loan agreement. In August 2002, the Company,
Blackacre and Madeleine began negotiating to eliminate the loan by selling
certain of the Company's communications assets to Blackacre at fair market value
and by converting the remaining loan balance to stock of the Company. There is
no assurance that the Company, Blackacre and Madeleine will be able to reach
agreement on valuation issues, or that they will reach final agreement to
eliminate or reduce the loan.
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 construction contracts are recognized under the
percentage-of-completion method. Under this method, progress towards completion
is recognized according to engineering estimates. This method is used because
management considers this method the most appropriate in the circumstances.
Revenue on service contracts is recorded on the accrual basis as services are
performed. The length of the Company's contracts varies but typically ranges
from one to two years. In accordance with normal construction industry practice,
the Company includes in current assets and current liabilities amounts relating
to construction contracts realizable and payable over a period in excess of one
year.
Contract costs include all direct materials, direct labor and other indirect
costs such as tools, supplies and site office expenses. 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 costs incurred
attributable to pending change orders is included in revenues when recovery is
probable.
F-12
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A (CONTINUED)
Communication services revenue includes data and video communication and
installations services. Data and video are subscription based services generally
provided to customers under month-to-month contracts. Revenues are recognized in
the month in which the services are provided. All expenses related to services
provided are recognized as incurred.
(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 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 interest rates
on the related debt approximate the Company's current borrowing rate.
(4) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided for, on a straight-line
basis, in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives, which range from three to fifteen
years.
(5) Impairment of Long-term Assets
On an ongoing basis, the Company reviews the valuation and amortization of
long-term assets. As part of this review, the Company estimates the undiscounted
future cash flow expected to be generated by the related assets to determine
whether an impairment has occurred. In the third quarter of fiscal 2002, the
carrying value of communication equipment was written off by $2.5 million as a
result of the Company's decision of further limiting its communications business
efforts and resources to the Internet and subscription video businesses in the
New York City metropolitan area and in Florida. In the fourth quarter of fiscal
2001, the carrying value of intangible assets was written down by $1.2 million
as a result of the Company's consideration of the estimated undiscounted future
cash flow of ParaComm, Inc., a communications subsidiary (see Note Q). In
determining the amount of impairment loss, the Company considered the estimated
market value of the subsidiary's subscriber list, access rights and related
equipment. In the fourth quarter of fiscal 2000, the carrying value of certain
communication equipment was written down by $300,000 as a result of the
Company's anticipated change in strategy of delivering its communications
services. In determining the amount of the impairment loss, the Company
considered the present value of the amount that could be recovered upon the sale
of the assets.
F-13
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A (CONTINUED)
(6) Intangible Assets
Subscriber list, access rights and goodwill derived from the purchase of
ParaComm, Inc. were stated at an estimated value at the closing of the purchase
less accumulated amortization. Subscriber list, capitalized access rights and
goodwill were amortized on a straight-line basis over three, five and ten years,
respectively (see Note A (5)).
(7) 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.
(8) Cash and Cash Equivalents
The Company considers its money market funds with an original maturity of three
months or less to be cash equivalents.
F-14
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A (CONTINUED)
(9) Reclassification
In January 2001, the Company's board of directors determined not to divest most
of DualStar's construction-related businesses. Accordingly, the financial
position of such businesses as of June 30, 2001, and their financial results and
cash flows for the fiscal years ended June 30, 2001 and 2000 are no longer
presented as discontinued operations in the accompanying audited consolidated
financial statements. In addition, certain reclassifications have been made to
prior year amounts to conform to the June 30, 2002 presentation.
(10) Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes unrealized gains and losses on
marketable securities classified as available-for-sale. The marketable
securities were acquired in March 2001 for $892,500. As of June 30, 2001, the
unrealized loss on the Company's available-for-sale securities was $202,500 and
had been reported as a component of shareholders' equity. The Company
subsequently sold the securities in fiscal 2002 and the unrealized loss was
reversed. Comprehensive loss for the years ended June 30, 2002 and 2001 were
$9,380,903 and $15,915,688, respectively.
(11) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, "Business Combinations," and SFAS
142, "Goodwill and Intangible Assets." SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for fiscal
years beginning after December 15, 2001; however, certain provisions of this
Statement apply to goodwill and other intangible assets acquired between July 1,
2001 and the effective date of SFAS 142. Major provisions of these Statements
and their effective dates for the Company are as follows:
- - All business combinations initiated after June 30, 2001 must use the purchase
method of accounting. The pooling of interest method of accounting is
prohibited except for transactions initiated before July 1, 2001.
- - Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal rights
or are separable from the acquired entity and can be sold, transferred,
licensed, rented or exchanged, either individually or as part of a related
contract, asset or liability.
- - Goodwill, as well as intangible assets with indefinite lives will no longer be
amortized.
- - Goodwill and intangible assets with indefinite lives will be tested for
impairment annually and whenever there is an impairment indicator.
- - All acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
Management's assessment is that these Statements will not have a material impact
on the Company's financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 "Accounting for the Impairment or Disposal of Long Lived Assets", ("SFAS
144"). This statement is effective for the
F-15
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A (CONTINUED)
fiscal years beginning after December 15, 2001. This supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", while retaining many of the requirements of such statement. The
Company is currently evaluating the impact of the statement. Management's
assessment is that this Statement will not have a material impact on the
Company's financial position or results of operations.
On April 30, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No.13, and
Technical Corrections." The rescission of SFAS No.4, "Reporting Gains and Losses
from Extinguishments," and SFAS No.64, "Extinguishments of Debt made to Satisfy
Sinking Fund Requirements," which amended SFAS No.4, will affect income
statement classification of gains and losses from extinguishment of debt. SFAS
No.4 requires that gains and losses from extinguishment of debt be classified as
an extraordinary item, if material. Under SFAS No. 145, extinguishment of debt
is now considered a risk management strategy by the reporting enterprise and the
FASB does not believe it should be considered extraordinary under the criteria
in APB Opinion No.30, "Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," unless the debt extinguishment
meets the unusual in nature and infrequency of occurrence criteria in APB
Opinion No. 30. SFAS No. 145 will be effective for fiscal years beginning after
May 15, 2002. Upon adoption, extinguishments of debt shall be classified under
the criteria in APB Opinion No. 30.
In June 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company has not yet determined the
impact of SFAS No.146 on its financial position and results of operations, if
any.
NOTE B - ACCOUNTS RECEIVABLE
Included in accounts receivable at June 30, 2002 are unbilled receivables from
completed contracts aggregating $452,243.
In a prior year, the Company filed a claim of approximately $2,494,000 for costs
incurred by the Company relating to specific items of additional work that the
owner required the Company to perform. Included in accounts receivable is
$800,000 relating to the claim, which represents contract costs attributable to
the claim and the minimum amount expected to be recovered. In the opinion of the
Company's counsel, the contract provides a legal basis to support the claim. It
is at least reasonably possible that the estimated claim revenue for this
contract will be further revised in the near term.
The Company reduces its receivables by an allowance for future uncollectible
accounts. The reconciliation of these balances is as follows:
Allowance for Doubtful Accounts:
Years ended
------------------------------------------------------
June 30, June 30, June 30,
2002 2001 2000
------------------------------------------------------
Beginning Balance $ 586,000 $ 646,000 $ 277,000
Additions Charged to Expenses 473,121 112,894 369,000
Deductions (527,121) (172,894) -
------------------------------------------------------
Ending Balance $ 532,000 $ 586,000 $ 646,000
======================================================
F-16
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
June 30,
--------------------------------------------------
2002 2001
--------------------------------------------------
Compensation $1,142,197 $1,661,634
Current portion of mortgage and lease payables 655,664 648,914
Unearned revenues 218,613 411,168
Interest 108,064 414,527
Professional fees 380,500 311,856
Communication taxes payable 386,868 201,503
Other 648,893 795,439
-------------------------------------------------
$3,540,799 $4,445,041
=================================================
NOTE D- INTANGIBLE ASSETS
As of June 30, 2001, intangible assets consist of the following:
Subscriber list $683,492
Access rights 249,579
----------------------
933,071
Less accumulated amortization (567,852)
----------------------
$365,219
======================
F-17
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
June 30,
----------------------------------------------
2002 2001
----------------------------------------------
Network infrastructure and equipment $3,066,659 $7,596,381
Building and building improvements 1,596,719 1,596,719
Computer equipment 945,380 1,158,273
Office furniture and equipment 307,564 367,322
Automobiles 282,941 282,941
Machinery and equipment 79,048 100,898
----------------------------------------------
6,278,311 11,102,534
Less accumulated depreciation and amortization (3,434,421) (3,796,237)
----------------------------------------------
2,843,890 7,306,297
Land 315,000 315,000
----------------------------------------------
$3,158,890 $7,621,297
==============================================
NOTE F - DEBT
(1) Senior Secured Promissory Note
On November 8, 2000, the Company consummated a $12.5 million senior secured loan
transaction with Madeleine, an affiliate of Blackacre. The loan, which is due
and payable on November 8, 2007, bears interest at a fixed rate of 11% per
annum. The loan is a senior secured obligation of the Company and is guaranteed
by certain subsidiaries of the Company, including OnTera, which have pledged
substantially all of their respective assets to collateralize such guarantee. In
connection with the loan, the Company issued warrants to purchase 3,125,000
shares of common stock at an exercise price of $4.00 per share, subject to
antidilution provisions, expiring in December 2007, to an affiliate of
Madeleine. A portion of the $12.5 million loan proceeds was used to retire
existing indebtedness of the Company in the principal amount of $7 million owed
to Madeleine and to pay expenses of obtaining the loan. The remaining proceeds
were used for the Company's working capital purposes. No value was allocated to
the warrants because the value was deemed immaterial.
Since March 2001, the Company has not made regularly scheduled interest payments
to Madeleine pursuant to the $12.5 million loan agreement. In addition, the
de-listing of the Company's common shares from the Nasdaq National Market
created a default under the loan agreement. In August 2002, the Company,
Blackacre and Madeleine began negotiating to eliminate the loan by selling
certain of the Company's communications assets to Blackacre at fair market value
and by converting the remaining loan balance to stock of the Company. There is
no assurance that the Company, Blackacre and Madeleine will be able to reach
agreement on valuation issues, or that they will reach final agreement to
eliminate or reduce the loan.
The Company presently owes Madeleine over $15 million and is in default under
the loan agreement. Madeleine has the right to call the loan due and payable at
any time. If Blackacre were to demand payment, the Company would be unable to
make such payment. In such an event, Madeleine would have the right to foreclose
on significant assets of the Company that collateralize the loan. Such
foreclosure would result in the Company being unable to continue in business.
F-18
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F (CONTINUED)
(2) Mortgage Payable
In November 1999, the Company refinanced its mortgage loan, borrowing an
additional $1.0 million, thereby increasing the loan balance to $1.75 million.
The new mortgage loan will expire on December 1, 2004 and can be renewed for an
additional five years. The mortgage loan bears interest at a fixed rate of 8.5%
per annum for five years, and is secured by the related building. Interest
during the renewal term will be paid at a fixed rate per annum equal to the
prime rate in effect on November 1, 2004. Principal of the loan is amortized on
a 25-year basis. 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,
2002, the Company failed to maintain the tangible net worth and working capital
requirements. Accordingly, the mortgage payable of $1.7 million was reclassified
as a current liability. The Company has not been notified of any intention by
the bank to accelerate such repayments. The Company is current with its monthly
payment obligations.
(3) Subordinated Convertible Note
In November 1998, the Company sold to Technology Investors Group, LLC ("TIG") a
subordinated convertible note in the principal amount of $2.5 million, due and
payable on May 25, 2001. The note had an interest rate of 7.5% per annum and was
payable semi-annually at the option of the Company. The note was subordinated to
the first mortgage on the Company's building and to the rights of financial
lenders and sureties of the Company.
In accordance with the terms of the note, on July 7, 1999, the Company exercised
its right to require TIG to convert the note into 1,791,000 shares of the
Company's common stock at a conversion price of $1.40 per share. In addition,
the Company issued a promissory note in the amount of $120,000 (the "TIG Stub
Loan") representing the remaining indebtedness to TIG. The TIG Stub Loan was
repaid in full in December 1999. For the year ended June 30, 2000, interest
expense of approximately $128,000 was recorded for the note.
(4) Promissory Note
On December 16, 1999, the Company sold a $7 million secured convertible
promissory note (the "Madeleine Bridge Loan") to Madeleine. The note has an
interest rate of 11% per annum and was due on May 31, 2000. The due date of the
note was extended to the closing date of the Blackacre investment. In November
2000, the Madeleine Bridge Loan was retired from the proceeds of the Senior
Secured Promissory Note (see Note F (1)). The Company was advised that
contemporaneous with the advance of the Madeleine Bridge Loan, TIG purchased
from Blackacre a $2 million participation interest in such loan, which was
subsequently resold to Blackacre in March 2000. For the year ended June 30,
2000, interest expense of approximately $451,000 was recorded for the loan.
F-19
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - 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. During January and
February 2000, a total of 4,510,571 shares of the Company's common stock were
issued pursuant to the exercise of the Company's Class A Warrants prior to its
expiration on February 14, 2000. The Class A Warrants entitled holders to
acquire one share of the Company's common stock at a purchase price of $4.00 per
share. In addition, at a purchase price of $5.78 per share, 400,000 shares of
the Company's common stock were issued upon exercise of a purchase option
previously granted to an underwriter in connection with the Company's February
1995 initial public offering. The aggregate proceeds to the Company from the
exercise of the warrants and the option were $20.4 million during fiscal 2000.
In March 2000, options to purchase 617,500 shares of the Company's common stock
were granted to employees with an exercise price lower than the closing price of
the Company stock. One-third of the options vested at the date of the grant and
the remaining two-thirds would have vested ratably on a monthly basis beginning
on the last day of each of the 24 calendar months following March 2001. As a
result of the grants, a compensation charge of $1.7 million was incurred, of
which $600,000 was recognized in the year of grant. Accordingly, additional
paid-in capital was increased by $1.7 million, deferred compensation was
increased by $1.1 million, and general and administrative expenses were
increased by $600,000 for the year ended June 30, 2000. In February 2001, such
employees resigned and forfeited the stock options, and the unamortized deferred
compensation was reversed. Accordingly, both additional paid-in capital and
deferred compensation were decreased by $1.1 million for the year ended June 30,
2001.
In January 2000, the Company, subject to stockholder approval and other
conditions, granted a total of 400,000 Class C warrants to two officers of the
Company. The original exercise price of the warrants was $6.50 per share, which
was reduced by the Company's Board of Directors in June 2000 to $5.25 per share.
The Company has no present plan to hold a stockholder meeting for the purpose of
seeking stockholder approval for the Class C warrants.
NOTE H - 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.
Management believes that the Company will less than likely generate sufficient
taxable earnings or utilize tax planning opportunities to realize any of the
deferred tax benefits and, therefore, has recorded a valuation allowance.
F-20
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H (CONTINUED)
The following is a summary of the items giving rise to deferred tax benefits at
June 30, 2002 and 2001:
June 30,
--------------------------------------
2002 2001
--------------------------------------
Current
Allowance for doubtful accounts $ 213,000 $ 377,000
--------------------------------------
Long-term
Net operating loss carryforward 17,000,000 15,892,000
Accumulated depreciation
105,000 105,000
--------------------------------------
17,105,000 15,997,000
--------------------------------------
Total deferred tax assets 17,318,000 16,374,000
Less valuation allowance (17,318,000) (15,298,000)
--------------------------------------
Net deferred tax assets $1,076,000
-
======================================
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income (loss) before provision
(benefit) for income taxes due to the following:
June 30,
-----------------------------------------------------
2002 2001 2000
-----------------------------------------------------
Statutory federal income tax $(2,865,000) $(5,342,000) $(2,839,000)
State and local income taxes (1,517,000) (2,357,000) (1,995,000)
Valuation allowance 5,458,000 8,375,000 4,834,000
State capital taxes 80,325 74,787 68,000
-----------------------------------------------------
$1,156,325 $750,787 $68,000
================== ================= ==================
The Company has net operating loss carryforwards of approximately $34 million
available for federal, state and local income tax purposes, expiring in the
years 2011 to 2022. The Company's ability to utilize net operating loss
carryforwards to offset future taxable income may be limited if the Company
changes control as defined in Internal Revenue Code Section 382.
NOTE I - COMMITMENTS AND CONTINGENCIES
(1) The Company leases certain equipment under operating leases expiring at
various dates through June 2007. At June 30, 2002, minimum rental commitments
under noncancellable operating leases are as follows:
2003 $121,000
2004 80,000
2005 40,000
2006 11,000
2007 10,000
---------------
$262,000
===============
Equipment rent expense for the years ended June 30, 2002, 2001 and 2000 was
approximately $135,000, $369,000 and $179,000, respectively.
F-21
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I (CONTINUED)
(2) 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, 2002, 2001 and 2000, the Company
contributed $13.3 million, $13.6 million and $14.2 million, respectively, for
various union employee benefits, including pension benefit, and medical and
workers' compensation insurance.
The Multiemployer Pension Plan Administration Act of 1980 (the "Act")
significantly increased the pension responsibilities of participating employers.
Under the provisions of the Act, if the Company were to withdraw from any of
these plans or should any of the plans be terminated, the Company could be
liable for a proportionate share of the unfunded actuarial present value of plan
benefits at the date of withdrawal or termination. The amount of such unfunded
liability is not known.
(3) In connection with its construction-related businesses, 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. That is, on certain work at the request of
the Company, the sureties provide a full guarantee of performance and/or payment
to third parties in the form of a bond. If the sureties pay an amount to third
parties pursuant to such bond, the Company is obligated to fully reimburse the
sureties. There is no dollar amount limit on the amount of the indemnity
provided to the sureties. Management believes that all such contingent
liabilities, if they occur, will be satisfied by performance on the specific
bonded contracts.
(4) Until 1995, Centrifugal was a partner with DAK Electric Contracting Corp.
("DAK") in a joint venture that performed mechanical and electrical services for
a general contractor on a construction project in Manhattan known as the Lincoln
Square project. Centrifugal was responsible for the mechanical portion of the
contract, and its co-venturer, DAK, was responsible for the electrical portion.
In 1995, DAK became insolvent, thereby obligating Centrifugal to complete the
work on this project. As a result, in fiscal 1996 the Company wrote off
approximately $3.7 million with respect to accounts receivable, loans
receivable, claims and other costs that the Company incurred on behalf of DAK in
fulfillment of DAK's obligations under the contract on the Lincoln Square
project.
F-22
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I (CONTINUED)
As of June 30, 1996, all of the known claims and liens of subcontractors of the
joint venture were settled and discharged, and all of the vendor lawsuits which
arose out of these claims were also settled with the exception of the following:
The joint venture's bonding companies have claims over for indemnity against
Centrifugal and under a guarantee agreement against the Company in the event
that a judgment is rendered against the bonding companies in a suit brought by
an employee benefit fund for DAK's employees' union seeking contributions to the
fund which the fund claims were due but not paid by DAK. The complaint alleges
several causes of action against several defendants in connection with several
projects and seeks a total of approximately $450,000 in damages on all of these
causes against the named defendants; however, only one of the several causes of
action, which seeks an unspecified portion of the total damages demanded,
relates to the Company. The Company has been informed that plaintiff will assert
that more than half of the total sums it seeks is due under the bond which the
Company provided, with the remainder of the sums demanded due on the claims
unrelated to the Company. The Company may also be exposed for interest.
Additionally, it may be exposed to such legal fees and other expenses as the
Company's bonding company may incur in its defense against plaintiff's claims;
however, many years into this matter, no demand for any of these sums has been
made. The bonding companies, Centrifugal and the Company have asserted, among
other defenses, that such contributions were not guaranteed under the terms of
the joint venture's bonds.
(5) On August 11, 1999, Triangle Sheet Metal Works, Inc. ("Triangle"), a
subcontractor of Centrifugal/Mechanical Associates, Inc. ("CMA"), filed a
petition under Chapter 11 of Title 11 of the United States Code in the United
States Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court"). Triangle's Chapter 11 case was subsequently converted to a case under
Chapter 7 of the Bankruptcy Code and a Chapter 7 trustee was appointed to
administer Triangle's estate. Triangle was a sheet metal subcontractor for CMA
on six projects in New York City (the "Subcontractor Projects"). CMA was also
the subcontractor of Triangle on one additional project in New York City (the
"Contractor Project"). Prior to Triangle's Chapter 11 filing, Triangle ceased
operation and defaulted on its obligations under the Subcontractor Projects and
the Contractor Project. On or about January 18, 2000, Triangle's Chapter 7
trustee made a written request to CMA stating that Triangle's records reflected
that CMA was indebted to Triangle in the aggregate sum of $2.4 million based
upon work performed by Triangle on the Subcontractor Projects. Triangle's
Chapter 7 trustee stated CMA was not entitled, under applicable law, to offset
amounts owed to CMA on particular Subcontractor Projects against amounts owed by
CMA to Triangle on other Subcontractor Projects. CMA had claims and
counterclaims against Triangle for breaches, defaults, completion costs and
damages in respect of the Subcontractor Projects and the Contractor Project. CMA
believed that it was entitled to setoff and/or recoup part of the damages by
offsetting any monies owed by CMA to Triangle.
Subsequently, Triangle's Chapter 7 trustee commenced five (5) lawsuits against
CMA, Trident Mechanical Systems, Inc. ("Trident") (a dormant, wholly owned
subsidiary of the Company) and CMA's bonding company arising from the various
Subcontractor Projects and the Contractor Project, and claimed CMA owed Triangle
a total of $2.9 million. CMA and its bonding company asserted counterclaims
claiming damages in the aggregate amount of $9.6 million arising from the
Subcontractor Projects.
In April 2002, CMA paid $220,000 to settle with Triangle and, in return, mutual
releases from liability were given by the parties, including Trident and CMA's
bonding company.
F-23
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I (CONTINUED)
(6) In 1999, ParaComm purchased from Golden Sky Systems (GSS) GSS's contract
with DirecTV which authorized it to be a DirecTV Master Systems Operator (MSO).
Along with the contract so purchased, ParaComm acquired a GSS contract with one
of its System Operators, Cable America, Inc. In May, 2002 Cable America, Inc.
filed suit in the Circuit Court of Cook County, Illinois against ParaComm,
OnTera, DirecTV, GSS and Pegasus Communications Inc., which had subsequently
acquired GSS. The suit claims damages for allegedly unpaid commissions in the
claimed amount of $339,000 and also seeks an accounting. The Company believes
the suit to be without merit and intends to contest it.
(7) In the ordinary course of business, the Company is involved in claims
concerning personal injuries and property damage, all of which the Company
refers to its insurance carriers. The Company believes that no loss to the
Company is probable and the claims are covered under its liability policies. No
provision for such claims has been made in the accompanying financial
statements.
NOTE J - RELATED PARTY TRANSACTIONS
(1) The Company's communications business sublets office space in New York, NY
from Starrett Corporation (of which Mr. Cuneo, the Company's President and Chief
Executive Officer, is (non-Director) Chairman, and Mr. Birnbach, the Company's
Chief Financial Officer, was director, President and Chief Executive Officer
until November 2000). Starrett had billed OnTera $16,340 for office improvements
associated with the property in fiscal year 2000. Rent expense for the years
ended June 30, 2002 and 2001 was $165,000 and $99,000, respectively.
(2) TechOne Capital Group LLC ("TechOne"), a private consulting and investment
firm of which Jared E. Abbruzzese, a director of the Company, is a principal,
had provided consulting services to the Company from August 12, 1999 until June
30, 2001, pursuant to letter agreements dated August 12, 1999 and March 24, 2000
and pursuant to a consulting agreement dated June 1, 2000. The consulting fee
payable under the consulting agreement was $30,000 per month, plus reimbursement
of expenses. In November 2001, TechOne gave the Company a written notice to
terminate the agreement effective on June 30, 2001 and waived any subsequent
consulting fees that might be due by the Company to TechOne under the agreement.
For the years ended June 30, 2001 and 2000, the Company paid TechOne $360,000
and $180,000, respectively, for consulting services in connection with the
agreement. For the year ended June 30, 2002, the Company made no payments to
TechOne.
F-24
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J (CONTINUED)
Subject to stockholder approval and other conditions, Class D Warrants to
purchase 750,000 shares of Company Common Stock were granted to TechOne on April
13, 2000. The Class D Warrants are exercisable for $4.063 per share and vest and
become fully exercisable when the 30-day average closing price of the Company
Common Stock has been at or above $14.00, and a material third party acquisition
or merger, material equity investment in the Company or joint venture or other
material third party transaction having a substantially similar economic effect
as the foregoing has been effected (excluding, in each instance, the
transactions contemplated by the Blackacre Securities Purchase Agreement).
Additionally, regardless of the vesting requirement discussed above, the Class D
Warrants vest and become fully exercisable upon a change of control (excluding
the transactions contemplated by the Blackacre Securities Purchase Agreement).
The Warrants will expire on the seventh anniversary of issuance. The Company has
no present plan to hold a stockholders meeting for the purpose of seeking
stockholder approval for the Class D Warrants. In connection with the
consummation of the November 8, 2000 financing transaction with Madeleine
L.L.C., to ensure that DualStar had a sufficient number of authorized but
unissued shares of common stock for issuance upon the exercise of such warrants,
TechOne irrevocably surrendered any rights it had to Class D Warrants to
purchase 375,000 shares of DualStar common stock.
(3) The Company is a party to a consulting agreement dated June 1, 2000 with
Hades Advisors LLC ("Hades"), an affiliate of TIG. The consulting fee payable
under the consulting agreement is $20,000 per month, plus reimbursement of
expenses. The consulting agreement provides that other than termination as a
result of a material breach by Hades, the Company may terminate this consulting
agreement only by giving written notice to Hades of the Company's intention to
terminate this consulting agreement accompanied by payment of (i) all unpaid
amounts due hereunder from the Company to Hades for the consulting services (as
defined therein) rendered through the date of termination, plus all reimbursable
amounts for which Hades has delivered to the Company an invoice on or before the
termination date, (ii) $25,000, which will be used by Hades for reimbursable
expenses incurred prior to the termination date and not yet invoiced, and (iii)
an amount equal to the product of $20,000 times the greater of (A) the number of
months remaining in the 3-year term thereof, and (B) 24. For the years ended
June 30, 2001 and 2000, the Company paid Hades $240,000 and $20,000,
respectively, for consulting services in connection with the agreement. For the
year ended June 30, 2002, the Company made no payments to Hades.
(4) Subject to stockholder approval and other conditions, Class D Warrants to
purchase 625,000 shares of Company Common Stock were granted to TIG on April 13,
2000, on the same terms and conditions discussed above in paragraph (2). The
Company has no present plan to hold a stockholder meeting for the purpose of
seeking stockholder approval for the Class D Warrants.
(5) The Company's mechanical contracting business leased manufacturing space, on
a month-to-month basis, from a company in which Messrs. Cuneo and Fregara own a
majority interest. The lease was terminated in March 2002. Rent expense in
connection with the lease for the years ended June 30, 2002, 2001 and 2000 was
$35,000, $46,000 and $34,000, respectively.
F-25
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J (CONTINUED)
(6) The Company's electrical contracting subsidiary obtained consulting services
from M & E Advisors, LLC, an affiliate of TIG in fiscal 2001. For the year ended
June 30, 2001, consulting fee for the services was $170,000. For the year ended
June 30, 2002, the Company made no payments to M & E Advisors, LLC.
(7) At June 30, 2002, the Company had loans to Messrs. D'Onofrio and Cuneo in
the amounts of $96,000 and $60,000, respectively.
(a) An original loan of $171,000 was due on demand, with an unstated
interest rate. In September 2000, the loan amount was reduced by
$75,000 to offset bonuses earned by Mr. D'Onofrio in the prior periods
and a promissory note was signed by Mr. D'Onofrio for the remaining
loan balance of $96,000. The note bears an interest rate of 7.75% per
annum and is due in August 2006. In addition, D'Onofrio provided all
stock options granted to him by the Company as the collateral and
security of the note.
(b) The $60,000 loan is due on demand, with an interest rate of 7.75%
per annum. Mr. Cuneo had also borrowed $350,000 from the Company in
June 2001 and repaid the loan with interest in June 2001. In addition,
Mr. Cuneo had purchased various services from the Company totaling
$134,000 during fiscal 2001, of which $84,000 was paid through
September 2001.
(8) For the fiscal years ended June 30, 2002, 2001 and 2000, approximately 0.2%,
2.0% and 16% of the Company's total revenues were derived from HRH Construction
Corporation ("HRH"), respectively. Mr. Cuneo is also the Chairman of HRH.
In addition, Mr. Cuneo is (non-Director) Chairman of Starrett Corporation, an
affiliate of HRH, and is compensated as Chairman of Starrett Corporation under a
consulting agreement between Starrett Corporation and Starrett Consulting,
L.L.C. (of which Mr. Cuneo is a 50% member). The remaining interest in Starrett
Consulting, L.L.C. is held by Mr. Brad Singer, the President of HRH and a member
of TIG. In exchange for various services, including management services,
Starrett Consulting, L.L.C. receives an annual fee of $750,000 from Starrett
Corporation in equal monthly installments, plus an additional fee may be earned
in certain circumstances. Mr. Birnbach was Director, President and Chief
Executive Officer of Starrett Corporation. Since these two DualStar officers
became officers of HRH and/or Starrett Corporation, the Company has been awarded
two new contracts in the amount of approximately $5 million from HRH.
NOTE K - 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 cash balances with large U.S. commercial banks. The
balances are insured by the Federal Deposit Insurance Corporation and Securities
Investor Protection Corporation up to $100,000 per institution. The Company's
balances may exceed this limit. At June 30, 2002, uninsured cash balances were
approximately $2.9 million. The Company believes it is not exposed to any
significant credit risk for cash.
F-26
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K (CONTINUED)
The Company performs construction contracts for, and extends credit to, private
owners and general contractors located generally in the New York City
metropolitan 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,
2002, revenue from one customer (Bovis Lend Lease, Inc. (formerly Lehrer
McGovern Bovis, Inc.)) amounted to approximately 64% of the Company's total
revenues. For the year ended June 30, 2001, revenue from two customers (Bovis
Lend Lease, Inc. and Rockrose Construction Corp.) amounted to approximately 60%
and 15% of the Company's total revenues, respectively. For the year ended June
30, 2000, revenue from two customers (Bovis Lend Lease, Inc. and HRH
Construction Corporation) amounted to approximately 49% and 16% of the Company's
total revenue, respectively. In addition, as of June 30, 2002 and 2001, contract
and retainage receivable from Bovis Lend Lease, Inc. amounted to approximately
52% and 58% of the Company's total contract and retainage receivable,
respectively.
NOTE L - STOCK OPTION PLAN
In 1994, the Company adopted a stock option plan accounted for under the
intrinsic value method of APB No. 25. The plan, as amended, allows the Company
to grant options to employees for up to 3.5 million shares of common stock.
In general, the options have a term of ten years from the date of grant and vest
over two to five years, and the exercise price of each option is higher than the
market price of the Company's stock on the date of grant.
Pursuant to certain officers' employment agreements, such officers may be given
options under the plan, which will be shared equally, to purchase shares of the
Company's common stock at fair market value on the date of grant, if Company
pretax earning criteria are met. Through June 30, 2002, no stock options were
granted to the officers based on the criteria.
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 under the fair value method of SFAS 123. 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:
2002 2001 2000
------------------------------------------------------------
Net loss As reported $(9,583,403) $(15,713,188) $(8,650,818)
Pro forma $(10,588,836) $(16,738,375) $(11,027,353)
Basic and diluted loss
per share As reported $(0.58) $(0.95) $(0.67)
Pro forma $(0.64) $(1.01) $(0.81)
F-27
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L (CONTINUED)
The computation of basic and diluted net income (loss) per share is based on the
weighted average number of shares of common stock outstanding. For diluted net
income per share, when dilutive, stock options and warrants are included as
share equivalents using the treasury stock method, and shares available for
conversion under the convertible note are included as if converted at the date
of issuance. For the years ended June 30, 2002, 2001 and 2000, stock options and
warrants have been excluded from the calculation of diluted loss per share as
their effect would have been antidilutive.
This pro forma impact only takes into account options granted since July 1, 1994
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 2001 and 2000: risk-free interest rate of approximately 5.0%,
expected life of seven years, volatility of 100% and no dividend yield.
A summary of information relative to the Company's stock option plan follows:
WEIGHTED AVERAGE
NUMBER OF SHARES PRICE
-----------------------------------------------
Outstanding at June 30, 1999 1,676,000 $0.99
Granted in fiscal 2000 net of grants subject to
stockholder approval 1,824,000 $5.41
-----------------------
Outstanding at June 30, 2000 3,500,000 $3.29
Granted in fiscal 2001 663,225 $6.27
Forfeited in fiscal 2001 (945,000) $5.52
-----------------------
Outstanding at June 30, 2001 3,218,225 $2.88
Forfeited in fiscal 2002 (131,692) $5.11
-----------------------
Outstanding at June 30, 2002 3,086,533 $2.78
=======================
Weighted average fair values of option grants in fiscal 2001 and 2000 were $0.32
and $5.96, respectively.
In March 2000, options to purchase 617,500 shares of the Company's common stock
were granted to employees with an exercise price lower than the closing price of
the Company stock. One-third of the options vested at the date of the grants and
the remaining two-thirds would have vested ratably on a monthly basis beginning
on the last day of each of the 24 calendar months following March 2001. As a
result of the grants, a compensation charge of $1.7 million was incurred, of
which $600,000 was recognized in the year of grant. Accordingly, additional
paid-in capital was increased by $1.7 million, deferred compensation was
increased by $1.1 million, and general and administrative expenses were
increased by $600,000. In February 2001, the employees resigned and forfeited
the stock options, and the unamortized deferred compensation was reversed.
Accordingly, both additional paid-in capital and deferred compensation were
decreased by $1.1 million.
F-28
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L (CONTINUED)
The following information applies to options outstanding and exercisable at June
30, 2002:
WEIGHTED-AVERAGE
RANGE OF EXERCISE NUMBER REMAINING CONTRACTUAL WEIGHTED-AVERAGE NUMBER
PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE
---------------------------------------------------------------------------------------------------
$0.75 1,484,000 5.0 $0.75 1,484,000
$3.00 177,000 2.4 $3.00 177,000
$4.00 799,000 6.1 $4.00 501,400
$5.25-$10.25 626,533 8.1 $5.99 523,831
----------------- --------------
3,086,533 2,686,231
================= ==============
NOTE M - 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, 2002, 2001 and 2000, the Company made no contribution to the plan.
NOTE N- SEGMENT INFORMATION
The Company has the following two reportable segments: construction and
communications. The construction segment primarily engages in electrical and
mechanical contracting services in the New York metropolitan area. The
communications segment primarily installs communication systems and provides
Internet, cable television and other services to buildings in the New York City
and Los Angeles areas, and cable television and Internet services to buildings
in Florida.
The accounting policies used to develop segment information correspond to those
disclosed in these financial statements (see Note A). The Company does not
allocate certain corporate expenses to its segments. Segment profit (loss) is
based on profit (loss) from operations before income taxes (benefits). Sales and
transfers between segments are accounted for at cost. The reportable segments
are distinct business units operating in different industries. They are
separately managed, with separate marketing systems.
F-29
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N (CONTINUED)
REPORTABLE SEGMENT INFORMATION CONSTRUCTION COMMUNICATIONS TOTALS
- --------------------------------------------------------------------------------
FISCAL 2002
Revenues from external customers $ 77,903,745 $ 3,277,108 $ 81,180,853
Intersegment revenues - 18,750 18,750
Depreciation and amortization 125,402 1,738,871 1,864,273
Interest expense 6,594 55,979 62,573
Segment profit (loss) 2,356,531 (7,369,416) (5,012,885)
Impairment of assets - 2,479,630 2,479,630
Segment assets 33,452,621 2,768,592 36,221,213
Expenditure for segment assets 13,684 420,937 434,621
FISCAL 2001
Revenues from external customers $ 79,753,232 $ 3,464,746 $ 83,217,978
Intersegment revenues - 15,000 15,000
Depreciation and amortization 166,650 1,874,494 2,041,144
Interest expense - 49,410 49,410
Segment profit (loss) 519,339 (12,062,161) (11,542,822)
Impairment of assets - 1,190,000 1,190,000
Segment assets 31,377,606 7,805,246 39,182,852
FISCAL 2000
Revenues from external customers $ 85,254,572 $ 2,029,941 $ 87,284,513
Intersegment revenues - 30,000 30,000
Depreciation and amortization 184,797 567,201 751,998
Interest expense 50,365 21,610 71,975
Segment loss (955,178) (5,028,990) (5,984,168)
Impairment of assets - 300,000 300,000
RECONCILIATION TO CONSOLIDATED AMOUNTS
FISCAL
-----------------------------------------------
2002 2001 2000
-----------------------------------------------
REVENUES
Total revenues for reportable segments $ 81,199,603 $ 83,232,978 $ 87,314,513
Elimination of intersegment revenues (18,750) (15,000) (30,000)
-----------------------------------------------
Total consolidated revenues $ 81,180,853 $ 83,217,978 $ 87,284,513
===============================================
LOSS
Total loss for reportable segments $ (5,012,885) $(11,542,822) $ (5,984,168)
Unallocated amounts:
Corporate (3,414,193) (3,419,579) (2,598,650)
-----------------------------------------------
Total consolidated loss before provision for
income taxes $ (8,427,078) $(14,962,401) $ (8,582,818)
===============================================
F-30
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N (CONTINUED)
RECONCILIATION TO CONSOLIDATED AMOUNTS
FISCAL
-----------------------------------------
2002 2001
-----------------------------------------
ASSETS
Total assets for reportable segments $36,221,213 $39,182,852
Elimination of intersegment profits on capitalized assets (257,300) (257,300)
Unallocated amounts:
Corporate 1,475,788 4,647,429
=========================================
Total consolidated assets $37,439,701 $43,572,981
=========================================
OTHER SIGNIFICANT ITEMS:
SEGMENT CONSOLIDATED
TOTALS CORPORATE TOTALS
--------------------------------------------------------
FISCAL 2002
Depreciation and amortization $1,864,273 $182,246 $2,046,519
Interest expense 62,573 1,814,178 1,876,751
FISCAL 2001
Depreciation and amortization $2,041,144 $173,318 $2,214,462
Interest expense 49,410 1,315,574 1,364,984
FISCAL 2000
Depreciation and amortization $751,998 $295,325 1,047,323
Interest expense 71,975 719,893 791,868
The unallocated corporate amounts primarily include certain expenses that are
unrelated to or cannot be reasonably allocated to the Company's business
segments. These expenses include interest expenses, payroll and related expenses
of corporate employees, professional fees, investor relation expenses and
insurance.
NOTE O - EMPLOYMENT AGREEMENTS
(1) The Company has entered into employment agreements with Messrs. Cuneo,
Fregara and Yager of the Company that expire in August 2003. The agreements are
for annual base salaries ranging from $235,000 to $275,000. The agreements
provide, among other things, for participation in an equitable manner of any
profit sharing or retirement plan for employees or executives of the Company
generally. There are certain guaranteed bonuses with maximum amounts to be based
upon performance objectives that are determined by the Company's Board of
Directors and Compensation Committee.
Pursuant to the employment agreements, employment may be terminated by the
Company with cause or by the executive with or without good reason. Termination
by the Company without cause, or by the executive for good reason, would subject
the Company to certain liabilities for liquidation damages, as defined in the
agreements.
F-31
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O (CONTINUED)
(2) The Company has entered into an employment agreement with Mr. Birnbach of
the Company that provides for annual base salary of $220,000 plus a bonus up to
50% of the annual base salary based upon certain performance targets as defined
in the agreement. In addition, the executive will be entitled to severance in
the amount of two times the then annual base salary if the executive is
terminated by the Company without cause.
(3) The Company entered into employment agreements with Messrs. Halpern and Ahel
of the Company's electrical contracting subsidiary that provide for annual base
salary of $260,000 each. The agreements expired in July 2002. The Company and
the executives are discussing new employment agreements. The executives continue
to serve as executives of the electrical contracting subsidiary at the current
base salary of $260,000 each. The executives will be entitled to severance in
the amount of their annual base salary plus the pro-rata portion of the
performance bonuses in the year of termination if they are terminated as defined
in the agreements.
(4) In connection with enhancing DualStar's communications business, in fiscal
2000, OnTera entered into employment agreements with six senior officers of
OnTera. The agreements are for annual base salaries ranging from $200,000 to
$250,000. In addition to the annual base salaries, the officers are eligible for
bonuses of 40% to 50% of the annual base salaries upon achievement of specified
targets, as defined in the agreements. The officers will be entitled to
severance in the amount of their annual base salary plus the pro-rata portion of
the performance bonuses in the year of termination if they are terminated as
defined in the agreements. In February 2001, the Company accepted the
resignations from five of the six OnTera senior officers and terminated their
respective employment agreements. Currently, only Mr. D'Onofrio's employment
agreement remains in effect. In conjunction with such resignations, the Company
entered into a consulting agreement with REO Consulting Group, LLC (whose
founding members include the aforementioned former OnTera officers) to continue
to support and guide OnTera. The term of the consulting agreement was one year
with an annual consulting fee of $250,000. The consulting agreement was
subsequently terminated in July 2001. Consulting expense in connection with the
agreement was $83,000 for the year ended June 30, 2001.
In September 2000, OnTera entered into an employment agreement with an officer
of OnTera. The agreement was for annual base salary of $240,000. In addition to
the annual base salary, the OnTera executive was eligible for bonuses of 40% of
the annual base salary upon achievement of specified targets, as defined in the
agreements. The officer would have been entitled to severance in the amount of
the annual base salary plus the pro-rata portion of the performance bonus in the
year of termination if he was terminated as defined in the agreements. In
January 2001, OnTera reached an agreement with the officer to terminate the
employment agreement. Severance associated with this termination was $60,000.
F-32
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O (CONTINUED)
(5) In May 2000, ParaComm, Inc. ("ParaComm") entered into an employment
agreement with an officer of ParaComm. The agreement was for annual base salary
of $155,000. In addition to the annual base salary, the ParaComm officer was
eligible for bonuses of 25% of the annual base salary upon achievement of
specified targets, as defined in the agreements. The officer would be entitled
to severance in the amount of the annual base salary plus the pro-rata portion
of the performance bonus in the year of termination if he were terminated as
defined in the agreements. In April 2001, ParaComm reached an agreement with the
officer to terminate the employment agreement. Severance associated with this
termination was $53,000.
NOTE P - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the following:
June 30,
---------------------------------------------------
2002 2001
---------------------------------------------------
Costs incurred on uncompleted contracts $53,899,529 $41,508,255
Estimated earnings 7,655,621 6,507,684
---------------------------------------------------
61,555,150 48,015,939
Less billings to date 65,963,482 50,351,542
---------------------------------------------------
$(4,408,332) $(2,335,603)
===================================================
Costs and estimated earnings on uncompleted contracts are included in the
accompanying consolidated balance sheets as follows:
June 30,
---------------------------------------------------
2002 2001
---------------------------------------------------
Costs and estimated earnings in excess of billings on
uncompleted contacts $1,299,615 $1,236,557
Billings in excess of costs and estimated earnings on
uncompleted contracts (5,707,947) (3,572,160)
---------------------------------------------------
$(4,408,332) $(2,335,603)
===================================================
NOTE Q - ACQUISTION
On May 11, 2000, the Company issued 774,997 shares of common stock and 25,000
warrants with an exercise price of $15 per common stock in exchange for all of
the outstanding stock of ParaComm, Inc. ParaComm was incorporated in July 1999
and is a private cable operating company based in Clermont, Florida, providing
video entertainment services to MDU communities in Florida and Texas. The
acquisition has been accounted for as a purchase and ParaComm's financial
results for the period from May 11 to June 30, 2000 have been included in the
accompanying financial statements. In the transaction, the Company acquired
total assets of $1,871,740 and assumed total liabilities of $572,868. The
Company recorded the consideration of the transaction by increasing common stock
and additional-paid-in capital by $7,750 and $3,117,513, respectively. In
addition, since the transaction amount exceeded the net assets of ParaComm, Inc.
on the purchase, the Company allocated the excess to subscriber list,
capitalized access rights and goodwill in the amounts of $1,165,732, $444,875
and $518,978, respectively. Subscriber list was calculated based on the number
of ParaComm's subscribers, multiplied by a per subscriber valuation factor.
Capitalized access rights was calculated based on the number of MDUs of MDU
communities that are comprised of at least 50 units and ParaComm has access to,
multiplied by a per unit valuation factor. The excess of the consideration
given, i.e., common stock and warrants, over the net assets acquired, subscriber
list and capitalized access rights as of May 11,
F-33
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q (CONTINUED)
2000 was assigned to goodwill. Subscriber list, capitalized access rights and
goodwill are being amortized on a straight-line basis over three, five and ten
years, respectively (see Note A (5)).
The following unaudited pro forma consolidated results of continuing operations
assume that the purchase occurred on July 1, 1999:
YEAR ENDED JUNE 30,
2000
-----------------------
Revenues $5,478,534
Loss 7,712,805
Loss per share $(0.57)
NOTE R - PURCHASE AGREEMENT
Effective July 28, 2000, OnTera entered into an equipment/software Master
Purchase and License Agreement (MPLA) with Nokia to provide the primary
components for OnTera's network infrastructure. The term of the MPLA was three
(3) years during which a minimum purchase commitment of $30 million was to have
been met. OnTera's obligation to meet the minimum commitment was expressly
contingent on obtaining vendor supported financing and if such financing was not
obtained by January 2001, either party could terminate the MPLA. Such vendor
supported equipment financing has not been arranged.
In August 2001, OnTera signed a promissory note and security agreement with
Nokia to finance the purchase of various network equipment totaling
approximately $668,000. The note bears an interest rate of 11% per annum and
requires eighteen monthly installments effective April 1, 2001. The note is
secured by the network equipment financed by the note. OnTera has not made
monthly installments since June 2001, therefore the Company is in default of the
agreement. As such, the remaining balance at June 30, 2002 of $564,370 is
included in Accrued expenses and other current liabilities. In August 2002,
Nokia filed suit in the District Court of Dallas County, Texas, claiming damages
of approximately $607,000 plus interest, costs and attorneys fees on the
promissory note.
NOTE S - ACCESS AGREEMENT
In August 2000, OnTera entered into an agreement with Casden Properties, Inc.
(in which Blackacre is a significant investor) and Casden Properties Operating
Partnership L.P. to provide broadband services to up to 45 buildings
encompassing approximately 9,000 units within Casden's portfolio of nationwide
properties. Pursuant to this agreement, OnTera paid access fees to Casden
Properties Operating Partnership, L.P., in the form of cash payments, shares of
Company stock and stock warrants for each individual Casden property for which
OnTera agreed to provide service. Under the agreement, OnTera had rights to
provide services to Casden properties but OnTera was not obligated to do so. As
of March 31, 2001 total shares and warrants issued under this agreement were
25,000 and 2,676 respectively.
In September 2001, OnTera and Casden amended their prior agreements to, among
other things, (a) eliminate the payment in stock and warrants by OnTera (b)
reduce the amount of cash payments by OnTera and (c) forgive any indebtedness of
OnTera for unpaid cash, stock or warrants under the prior agreement. Also in
September 2001 OnTera and Casden entered into a right of entry agreement giving
OnTera access to a third Casden property containing 1,381 units.
F-34
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S (CONTINUED )
Due to the Company's decision to continue to limit its communications business
efforts and resources to the Internet and subscription video businesses in the
New York City metropolitan area and in Florida. In August 2002, OnTera sold
certain agreements on properties located in the Los Angeles area and the
communications assets located in the properties for $400,000.
NOTE T - RESTRUCTURING
F-35
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE T (CONTINUED)
As a result of the limited availability of capital and a significant change in
market conditions, in December 2000 the Company's board of directors determined
to refocus its communications business efforts by concentrating on core
communications assets located in the New York City and Los Angeles areas and by
operating subscription video provider, ParaComm Inc. A restructuring charge of
$1.0 million reflecting the impact of such reductions and refocus of markets was
recorded in fiscal 2001. A benefit from a reversal of bonus accruals of $0.9
million was also recorded in fiscal 2001 because those bonuses would no longer
be paid due to the restructuring.
NOTE U - UNAUDITED QUARTERLY DATA
Selected Quarterly Financial Data
(Dollars in thousands, except per share data)
FOR THE QUARTER ENDED
Sep.30, Dec.31, Mar.31, Jun.30, Sep.30, Dec.31, Mar.31, Jun.30,
2000 2000 2001 2001 2001 2001 2002 2002
-------------------------------------------------------------------------------------------------
Revenue earned $ 21,966 $ 20,670 $ 23,563 $ 17,019 17,556 $ 19,714 $ 19,716 $ 24,195
Gross profit 2,462 1,626 4,637 547 2,493 2,520 2,261 3,346
Net loss (3,408) (5,530) (883) (5,892) (1,518) (1,756) (5,018) (1,291)
Basic and diluted
loss per share (0.21) (0.34) (0.05) (0.35) (0.09) (0.11) (0.30) (0.08)
F-36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DUALSTAR TECHNOLOGIES CORPORATION
By /s/ GREGORY CUNEO
-----------------------------------
Gregory Cuneo
President and
Chief Executive Officer
Dated: September 23, 2002
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 and Chief September 23, 2002
Executive Officer
- -----------------------
Gregory Cuneo
/s/ ROBERT J. BIRNBACH Executive Vice President and September 23, 2002
Chief Financial Officer
- ----------------------- [Principal Financial
Robert J. Birnbach Officer]
/s/ JOSEPH C. CHAN Vice President and Chief September 23, 2002
Accounting Officer
- ----------------------- [Principal Accounting
Joseph C. Chan Officer]
/s/ RAYMOND L. STEELE Director September 23, 2002
- -----------------------
Raymond L. Steele
/s/ JARED E. ABBRUZZESE Director September 23, 2002
- ------------------------
Jared E. Abbruzzese
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Gregory Cuneo, President and Chief Executive Officer of DualStar Technologies
Corporation (the "Company"), do hereby certify in accordance with 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
- -- The Annual Report on Form 10-K of the Company for the period ending June
30, 2002 (the "Annual Report") fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)), and
- -- The information contained in the Annual Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: September 23, 2002
/s/ Gregory Cuneo
--------------------------------------
Gregory Cuneo
President and Chief Executive Officer
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert J. Birnbach, Executive Vice President and Chief Financial Officer of
DualStar Technologies Corporation (the "Company"), do hereby certify in
accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
- -- The Annual Report on Form 10-K of the Company for the period ending June
30, 2002 (the "Annual Report") fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)), and
- -- The information contained in the Annual Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: September 23, 2002
Robert J. Birnbach
--------------------------------------
Robert J. Birnbach
Executive Vice President and Chief Financial Officer
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gregory Cuneo, certify that:
1. I have reviewed this annual report on Form 10-K of DualStar
Technologies Corporation.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report.
Date: September 23, 2002
/s/ Gregory Cuneo
-------------------------------------
Gregory Cuneo
President and Chief Executive Officer
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert J. Birnbach, certify that:
1. I have reviewed this annual report on Form 10-K of DualStar
Technologies Corporation.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report.
Date: September 23, 2002
/s/ Robert J. Birnbach
-------------------------------------
Robert J. Birnbach
Executive Vice President and
Chief Financial Officer
II-1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 (IRS 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)
EXHIBIT INDEX
Number Title
2.1 Securities Purchase Agreement dated as of March 28, 2000 by and among
the Registrant, Cerberus Capital Management, L.P. and Blackacre
Capital Management, L.L.C. (2)
2.2 Stock Purchase Agreement dated as of March 28, 2000 between the
Registrant and M/E Contracting Corp. (2)
2.3 Agreement and Plan of Merger dated as of May 11, 2000 between the
Registrant, DCI Acquisition Co. and ParaComm, Inc. (2)
2.4 Securities Purchase Agreement dated as of November 8, 2000 by and
among Registrant, DSTR Warrant Co., LLC and Madeleine L.L.C. (4)
3.1 Certificate of Incorporation, filed June 14, 1994, as restated. (1)
3.2 Amended and Restated Bylaws. (2)
4.1 Specimen Copy of Common Stock Certificate. (1)
4.2 DualStar Technologies Corporation 1994 Stock Option Plan, as
amended.(1)
4.3 1994 Stock Option Plan Amendment. (3)
10.1 Employment Agreement between the Registrant and Gregory Cuneo, dated
August 31, 1994. (1)
10.2 Employment Agreement between the Registrant and Stephen J. Yager,
dated August 31, 1994. (1)
10.3 Employment Agreement between the Registrant and Ronald Fregara, dated
August 31, 1994. (1)
10.4 Employment Agreement between the Registrant and Robert J. Birnbach
dated June 7, 2000. (3)
10.5 Employment Agreement between the Registrant and Nicholas Ahel dated
June 1, 2000. (3)
10.6 Employment Agreement between the Registrant and Barry Halpern dated
June 1, 2000. (3)
10.7 Second Amended and Restated Note, having an original issued dated as
of December 1, 1999, made by Registrant in favor of
Madeleine L.L.C. (5)
10.8 Stockholders Agreement dated March 28, 2000 among DualStar
Technologies Corporation, Blackacre Capital Management L.L.C.,
Cerberus Capital Management, L.P., Gregory Cuneo and Robert J.
Birnbach. (2)
10.9 Stockholders Agreement dated as of November 8, 2000 by and among
Registrant, DSTR Warrant Co., LLC, Technology Investors Group, LLC and
certain members of Registrant's Management. (5)
10.10 Class E Warrant Agreement dated as of November 8, 2000 by and between
Registrant and
DSTR Warrant Co., LLC. (4)
10.11 Registration Rights Agreement dated as of November 8, 2000 by and
among Registrant, DSTR Warrant Co., LLC and Technology Investors
Group, LLC. (5)
10.12 Master Surety Agreement dated November 3, 1997 by the Company and its
subsidiaries in favor of United States Fidelity and Guaranty Company,
Fidelity and Guaranty Insurance Company, Fidelity and Guaranty
Insurance Underwriters, Inc. (3)
10.13 Registration Rights and Lock-Up Agreement dated as of May 10, 2000 by
and among the Company and the former ParaComm stockholders.(3)
10.14 Voting Agreement dated as of May 10, 2000 by and among the Company,
Donald Johnson, Mark Mayhook and Geneva Associates Merchant Banking
Partners I, LLC. (3)
10.15 Consulting Agreement dated as of June 1, 2000 between the Company and
TechOne. (3)
10.16 Consulting Agreement dated as of June 1, 2000 between the Company and
Hades Advisors, LLC. (3)
21.1 Subsidiaries of the Registrant. (6)
23.1 Consent of Grassi & Co., CPAs, P.C. (6)
23.3 Consent of Grant Thornton LLP.(6)
(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 Quarterly Report on Form
10-Q (File No. 0-25552) for the quarter ended March 31, 2000.
(3) Incorporated herein by reference to Registrant's Annual Report on Form 10-K
(File No. 0-25552) for the period ended June 30, 2000.
(4) Incorporated herein by reference to Registrant's Form 13D filed by Stephen
Feinberg on November 21, 2000.
(5) Incorporated herein by reference to Registrant's Quarterly Report on Form
10-Q (File No. 0-25552) for the quarter ended December 31, 2000.
(6) Attached hereto.