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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, 2003
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
(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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Act). Yes [ ]. No [X].
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of December 31, 2003 was approximately $1,206,231 based upon
the closing price ($0.09) for such common equity on such date. The number of
shares outstanding of the Registrant's Common Stock, as of December 31, 2003,
was 16,501,568.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of September 19, 2003 was approximately $4,288,822 based upon
the closing price ($0.32) for such common equity on such date. The number of
shares outstanding of the Registrant's Common Stock, as of September 19, 2003,
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, if Madeleine L.L.C. were to call its loan, the ability of the
Company to raise and provide the capital resources to fund any operating losses
that may occur through the operation of the construction business, 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 construction-related businesses.
The Company completed the discontinuance of its communications business in
August 2003. The Company's communications segment's telephone service business
was discontinued in August 2002. In April 2002, the Company sold communications
network equipment 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. A $2.5 million charge for the impairment of certain remaining
communications assets was recorded in fiscal year 2002.
In January 2003, the Company sold the network infrastructure assets in
conjunction with its exit out of the Internet service business for a nominal
amount. The net book value of the assets sold was $0.6 million.
In August 2003, the Company and its wholly owned subsidiary, ParaComm, Inc.
("ParaComm"), consummated the sale to an affiliate of its senior lender,
Madeleine, LLC ("Madeleine"), of substantially all of ParaComm's assets,
pursuant to an Asset Purchase Agreement dated as of July 2003 by and among the
Company, ParaComm, Madeleine, and PCM Acquisitions Corp. Such assets related to
ParaComm's satellite television and private cable services business in Florida.
The consideration for the sale was the reduction of $3.2 million of the
principal amount of a note of the Company to Madeleine, plus waiver of accrued
and unpaid interest on such principal amount. Such reduction is subject to
certain post-closing adjustments, which are not expected to be material.
The Company incurred significant losses in the last several fiscal years,
primarily in the communications segment. The Company completed the
discontinuance of its communications business in August 2003. There can be no
assurance that the construction segment will sustain profitability or positive
cash flow from future operations. 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 any future operating losses that
may occur through the operation of the construction business.
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 "Madeleine Loan"). The Madeleine Loan, which is due and
payable in November 2007, bears interest at a fixed rate of 11% per annum. The
Madeleine Loan is a senior secured obligation of the Company and is guaranteed
by certain subsidiaries of the Company, which have pledged substantially all of
their respective assets to collateralize such guarantee. In connection with the
Madeleine 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 Madeleine Loan 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 Madeleine 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. The outstanding principal and accrued interest with
respect to the senior secured indebtedness owed by the Company to Madeleine
totals approximately $13.1 million in September 2003.
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The Company has not made payments to Madeleine pursuant to the Madeleine Loan
agreement and is presently in default under the terms of the agreement relating
to the outstanding debt to Madeleine. The de-listing of the Company's common
shares from the Nasdaq National Market in June 2001 also created a default under
the Madeleine Loan agreement. 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
for continuing operations 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 June 2003, the Company entered into an agreement in principle with Madeleine,
whereby Madeleine would exchange all of the outstanding principal and accrued
interest of the Madeleine Loan for the Company's interests in certain real
estate and certain private cable television assets and for common equity of the
Company.
The agreement in principle provides that the outstanding principal and accrued
interest with respect to the senior secured indebtedness owed by the Company to
Madeleine is to be exchanged for (a) certain private cable television systems
and associated assets related to properties in Florida of ParaComm, Inc., a
wholly-owned subsidiary of the Company, in consideration of a reduction of
indebtedness equal to the fair market value of such assets (which transaction
was consummated in August 2003); (b) certain real estate owned by the Company
located in Long Island City, New York in consideration of the reduction of
indebtedness equal to the fair market value of such real estate; and (c)
issuance of approximately 7.6 million shares of the Company's common stock to
Madeleine for the balance of the indebtedness. Such number of shares issuable to
Madeleine represents all of the authorized and unissued shares of common stock
of the Company less shares reserved for issuance pursuant to the exercise of
outstanding stock options and warrants to purchase common stock that are not
surrendered and cancelled. In connection with the transaction, certain members
of management of the Company and an affiliate of Madeleine, respectively, are to
surrender options and warrants to be cancelled. The agreement also provides for
the issuance of new options to such management members at a subsequent date,
subject to approval by the stockholders of the Company of an increase in the
number of shares of authorized Common Stock. Upon such issuance to Madeleine,
Madeleine will own approximately 32% of the total outstanding stock of the
Company. The Company and Madeleine are presently negotiating definitive
agreements for transactions (b) and (c), which are subject to approval by the
Board of Directors of the Company. There can be no assurance that definitive
agreements will be reached.
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,
2003, 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. As described above (see Overview), certain assets of
ParaComm were sold in August 2003.
The Company historically has engaged in two business segments: construction and
communications. The Company completed the discontinuance of its communications
business in August 2003.
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
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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, 2003, revenue from two customers (Bovis Lend Lease, Inc.
(formerly Lehrer McGovern Bovis, Inc.), and HRH Construction Corporation)
amounted to approximately 37% and 17% of the Company's total revenues,
respectively. 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. In addition, as of June 30, 2003, contract and retainage
receivables from Bovis Lend Lease, Inc. and HRH Construction Corporation
amounted to approximately 15% and 28% of the Company's total contract and
retainage receivables, respectively. As of June 30, 2002 and 2001, contract and
retainage receivables from Bovis Lend Lease, Inc. amounted to approximately 52%
and 58% of the Company's total contract and retainage receivables, 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, were 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.
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, 2003, the backlog of the Company's construction business was
approximately $38 million and approximately $38 million at June 30, 2002. The
Company believes that most of its backlog at June 30, 2003 will be completed
prior to December 31, 2004, 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
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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.
The Company's construction contracts with public sector clients are often
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, the discontinuance of which
were completed in August 2003, were 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. OnTera was a
Competitive Local Exchange Carrier (CLEC), an Internet Service Provider (ISP),
and a provider of subscription television services. ParaComm also provided
subscription television services.
OnTera and Paracom, while operating as subsidiaries of the Company, faced
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 included (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
attempted 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 were well financed, had
significant market share and significantly more resources than were available to
OnTera.
OnTera believed that the MDU market was under-served by the then 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.
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 fiscal 2003,
the Company informed the FCC that all telephone services ceased. As part of a
June 2003 agreement in principle, the Company and ParaComm sold substantially
all of ParaComm's assets to an affiliate of Madeleine. See "Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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.
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
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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 BUSINESS 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. Both OnTera and ParaComm's services, while operated as subsidiaries of
the Company, were subject to government regulation at various levels. (See "Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations" relating to the Company's completion of the discontinuance of its
communications business, which was completed in August 2003.)
Federal and state regulation affected OnTera's access to inside wiring in the
MDUs that made up its primary target market. OnTera's access to inside wiring
was potentially 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 was required to 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 provided regulated intrastate services or
decided to otherwise submit itself to the jurisdiction of the relevant state
telecommunications regulatory commission, OnTera may have been subject to such
jurisdiction. There are many state commission proceedings underway to determine
the rates, charges and terms and conditions for UNEs and, in some cases, owner
control of inside wiring. Any decisions to increase the cost of UNEs or restrict
a property owner's ability to make inside wiring available to OnTera could have
negatively affected OnTera's business. The effect of state regulation on
OnTera's business varied 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 have
reduced OnTera's penetration rates and may adversely affect its business.
Like OnTera, ParaComm's business was 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 could have resulted in tenant bypass of
ParaComm's services and could, in some cases, adversely affected penetration
rates.
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 fiscal 2003,
the Company informed the FCC that all telephone services ceased.
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 have affected OnTera or ParaComm. Judicial review of
existing regulations, legislative hearings, legislation, and administrative
proposals could negatively influence U.S. communications companies' operations,
including those of OnTera. OnTera and ParaComm were unable to predict the
impact, if any, that future regulation or regulatory changes may have had on
their respective businesses and were unable to offer assurances that any such
future regulation or regulatory changes would not harm their respective
businesses.
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EMPLOYEES.
As of June 30, 2003, the Company employed 282 full-time employees, of which 17
are engaged in administration and finance. Of the remaining full-time employees,
259 are employed by the various construction subsidiaries of the Company, with
258 engaged in manufacturing, engineering and production and 1 in marketing and
sales. The remaining 14 employees were engaged in the communications business of
the Company, which was discontinued in August 2003. 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 and technical
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, 2003, the Company had 242 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.
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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. The Company completed the
discontinuance of its communications business in August 2003. There can be no
assurance that the construction segment will sustain profitability or positive
cash flow from future operations. 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 any future operating losses that
may occur through the operation of the construction business.
The outstanding principal and accrued interest with respect to the Madeleine
Loan totals approximately $13.1 million in September 2003. The Company is in
default under the terms of the Madeleine Loan agreement. 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 for continuing operations 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 June 2003, the Company entered into an agreement in principle with Madeleine,
whereby Madeleine would exchange all of the outstanding principal and accrued
interest of the Madeleine Loan for the Company's interests in certain real
estate and certain private cable television assets and for common equity of the
Company.
The agreement in principle provides that the outstanding principal and accrued
interest with respect to the Madeleine Loan is to be exchanged for (a) certain
private cable television systems and associated assets related to properties in
Florida of ParaComm in consideration of a reduction of indebtedness equal to the
fair market value of such assets (which transaction was consummated in August
2003); (b) certain real estate owned by the Company located in Long Island City,
New York in consideration of the reduction of indebtedness equal to the fair
market value of such real estate; and (c) issuance of approximately 7.6 million
shares of the Company's common stock to Madeleine for the balance of the
indebtedness. Such number of shares issuable to Madeleine represents all of the
authorized and unissued shares of common stock of the Company less shares
reserved for issuance pursuant to the exercise of outstanding stock options and
warrants to purchase common stock that are not surrendered and cancelled. In
connection with the transaction, certain members of management of the Company
and an affiliate of Madeleine, respectively, are to surrender options and
warrants to be cancelled. The agreement also provides for the issuance of new
options to such management members at a subsequent date, subject to approval by
the stockholders of the Company of an increase in the number of shares of
authorized Common Stock. Upon such issuance to Madeleine, Madeleine will own
approximately 32% of the total outstanding stock of the Company. The Company and
Madeleine are presently negotiating definitive agreements for transactions (b)
and (c), which are subject to approval by the Board of Directors of the Company.
There can be no assurance that definitive agreements will be reached.
As part of the June 2003 agreement in principle, the Company and ParaComm
consummated the sale to an affiliate of Madeleine of substantially all of
ParaComm's satellite television and private cable services business assets in
Florida, pursuant to an Asset Purchase Agreement dated as of July 2003 by and
among the Company, ParaComm, Madeleine, and PCM Acquisitions Corp. The
consideration for the sale was the reduction of $3.2 million of the principal
amount of the Madeleine Loan, plus waiver of accrued and unpaid interest on the
Madeleine Loan. Such reduction is subject to certain post-closing adjustments,
which are not expected to be material.
THE COMPANY IS IN DEFAULT ON THE MADELEINE LOAN
The outstanding principal and accrued interest with respect to the Madeleine
Loan totals approximately $13.1 million in September 2003. The Company is in
default under the terms of the Madeleine Loan agreement. 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 for continuing operations 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.
-7-
OPERATING LOSSES AND CAPITAL REQUIREMENTS
The Company incurred significant losses in fiscal years 2003 and 2002 primarily
in the communications segment. The Company completed the discontinuance of its
communications business in August 2003. There can be no assurance either that
the construction segment will sustain profitability or positive cash flow from
future operations. 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 any future operating losses that may occur through the
operation of the construction business.
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.
SURETY BONDS
Due to the downturn affecting corporate America, the bonding industry has come
under increased pressure and claims, and in general, the bonding market has
tightened. Consequently, it has become more difficult for the Company to secure
surety bonds due to the Company's financial position and overall market
conditions. The Company is currently considering ways to improve its ability to
obtain bonding. There can be no assurance that the Company will be able to
obtain bonding or, if so, at a reasonable cost. If the Company is unable to
obtain surety bonds as needed, this may have a material adverse effect on the
Company.
SOCIAL, POLITICAL AND ECONOMIC RISKS AFFECTING OPERATIONS
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, such terrorist attacks and future developments may result in
reduced demand from the Company's customers 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 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,
2003, revenue from two customers (Bovis Lend Lease, Inc. (formerly Lehrer
McGovern Bovis, Inc.), and HRH Construction Corporation) amounted to
approximately 37% and 17% of the Company's total revenues, respectively. 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. In
addition, as of June 30, 2003, contract and retainage receivables from Bovis
Lend Lease, Inc. and HRH Construction Corporation amounted to approximately 15%
and 28% of the Company's total contract and retainage receivables, respectively.
As of June 30, 2002 and 2001, contract and retainage receivables from Bovis Lend
Lease, Inc. amounted to approximately 52% and 58% of the Company's total
contract and retainage receivables, 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, were derived from HRH Construction Corp.
DualStar's President and Chief Executive Officer
-8-
is also the Chairman of HRH Construction Corp. HRH Construction Corp. is an
affiliate of Blackacre. 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 and,
in some instances, the licenses they hold. Each of the loss of the services of
key executives, the loss of a license held by one of them or the inability of
the Company to attract additional qualified personnel could have a material
adverse effect on the Company. Some employment agreements of key executives have
expired and renewal discussions are ongoing. There is no assurance such
agreements will be reached. See Item 11 - Executive Compensation, under the
subcaption "Employment Agreements."
POTENTIAL LIABILITY AND INSURANCE
In general, the Company's operations involve electrical, mechanical and building
control 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 $1.1
million, of which $0.9 million was financed by a mortgage loan. The five-year
mortgage loan was refinanced on November 22, 1999, thereby increasing the loan
balance to $1.75 million. In March 2003, the Company satisfied its mortgage
obligation in the amount of $1.7 million.
CMA leases, on a month-to-month basis, approximately 7,500 square feet of
manufacturing space located at 88 Dobbin Street, Brooklyn, New York 11222.
The Company believes that adequate office and warehouse space is available in
the market in which it currently transacts its construction business and in the
markets in which it intends to transact business.
In June 2003, the Company entered into an agreement in principle with Madeleine,
whereby Madeleine would exchange all of the outstanding principal and accrued
interest of the Madeleine Loan for the Company's interests in certain real
estate and certain private cable television assets and for common equity of the
Company. As part of this agreement in principle, the Company and PCI may
transfer to an affiliate of Madeleine the building located at 11-30 47th Avenue,
Long Island City, NY in consideration of a reduction of indebtedness equal to
the fair market value of such real estate. The Company and Madeleine are
presently negotiating definitive agreements for such transaction, which is
subject to approval by the Board of Directors of the Company.
-9-
The Company currently uses approximately 65% of its facilities' available
capacity The Company could continue to operate at its current facilities, or
could relocate after the consummation of the Madeleine agreement in principle.
Total rental expense for the Company for recent periods is as follows:
PERIOD EXPENSE
- ----------- -------------
Year ended June 30, 2003.......................$124,000
Year ended June 30, 2002.......................$440,000
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. In February 2003, the Company was informed that the
bonding company reached a settlement with the union on account of the claim for
unpaid benefits on the Lincoln Square project in the amount of $270,000. The
bonding company expressed its intent to pursue reimbursement for such settlement
amount through the cross-claims alleged against the Company in such action.
Additionally, the Company may be exposed to such legal fees and other expenses
as the Company's bonding company may have incurred or will incur in connection
with this claim. 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) 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 interest at a 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 March 31, 2003 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 on the promissory
note.
(c) 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.
(d) In July 2002, plaintiff Harvey Wayne 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. Motions to dismiss have been filed by
the Company and other defendants and are pending before the Court.
-10-
(e) 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 the claims are
covered under its liability policies and that no loss to the Company is
probable. 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 traded on the NASD Over-the-Counter (OTC) Bulletin
Board under the symbol DSTR. . The following table 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
fiscal years ended June 30, 2002 and June 30, 2003 and for the first quarter
(through September 19, 2003) of the Company's fiscal year ending June 30, 2004.
Such quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily reflect actual transactions.
Bid Quotations
--------------
High Low
---- ---
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 $0.28 $0.06
Second Quarter $0.18 $0.06
Third Quarter $0.12 $0.08
Fourth Quarter $0.65 $0.08
Fiscal 2004
- -----------
First Quarter (through September 19, 2003) $0.41 $0.25
As of September 19, 2003, there were 127 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.
-11-
ITEM 6 - SELECTED FINANCIAL DATA
DUALSTAR TECHNOLOGIES CORPORATION
SELECTED FINANCIAL DATA(1)
(Dollars in thousands, except per share data)
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenue from continuing operations $59,824 $77,885 $79,738 $85,225 $90,390
Operating (loss) income from continuing operations 1,515 948 (2,162) (3,256) 1,517
Net (loss) income from continuing operations (312) (2,214) (3,651) (3,322) 2,136
Loss from discontinued operations 2,779 7,369 12,062 5,329 814
Net (loss) income (3,091) (9,583) (15,713) (8,651) 1,322
Basic (loss) income from continuing operations per (0.02) (0.13) (0.22) (0.26) 0.24
share
Diluted (loss) income from continuing operations per (0.02) (0.13) (0.22) (0.26) 0.21
share
Basic loss from discontinued operations per share (0.17) (0.45) (0.73) (0.41) (0.09)
Diluted loss from discontinued operations (0.17) (0.45) (0.73) (0.41) (0.08)
Basic (loss) income per share (0.19) (0.58) (0.95) (0.67) 0.15
Diluted (loss) income per share (0.19) (0.58) (0.95) (0.67) 0.13
JUNE 30,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $(5,012) $(4,274) $13,836 $16,404 $3,818
Total assets 26,221 37,440 43,573 58,400 38,595
Long-term liabilities 0 0 14,340 1,921 3,430
Stockholders' equity (deficit) (3,437) (603) 8,778 24,605 6,689
(1) The Selected Financial Data represent the consolidated data for the years
ended June 30, 2003, 2002, 2001, 2000 and 1999.
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
The following discussion should be read in conjunction with the Financial
Statements and notes thereto. See item 15 of this Annual Report on Form 10-K.
GENERAL
DualStar Technologies Corporation ("DualStar" or the "Company"), through its
wholly owned subsidiaries, operates construction-related businesses.
The Company completed the discontinuance of its communications business in
August 2003. The Company's communications segment's telephone service business
was discontinued in August 2002. In April 2002, the Company sold its
communications network equipment 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. A $2.5 million charge for the impairment of certain remaining
communications assets was recorded in fiscal year 2002.
In January 2003, the Company sold the network infrastructure assets in
conjunction with its exit out of the Internet service business for a nominal
amount. The net book value of the assets sold was $0.6 million.
-12-
In August 2003, the Company and its wholly owned subsidiary, ParaComm, Inc.
("ParaComm"), consummated the sale to an affiliate of its senior lender,
Madeleine, LLC ("Madeleine"), of substantially all of ParaComm's assets. Such
assets related to ParaComm's satellite television and private cable services
business in Florida. The consideration for the sale was the reduction of $3.2
million of the principal amount of a note of the Company to Madeleine, plus
waiver of accrued and unpaid interest on such principal amount. Such reduction
is subject to certain post-closing adjustments, which are not expected to be
material.
CAPITAL RESOURCES AND LIQUIDITY
The Company incurred significant losses in the last several fiscal years,
primarily in the communications segment. The Company completed the
discontinuance of its communications business in August 2003. There can be no
assurance that the construction segment will sustain profitability or positive
cash flow from future operations. 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 any future operating losses that
may occur through the operation of the construction business.
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 "Madeleine Loan").The outstanding principal and accrued
interest with respect to the senior secured indebtedness owed by the Company to
Madeleine totals approximately $13.1 million in September 2003.
The Company has not made payments to Madeleine pursuant to the Madeleine Loan
agreement and is presently in default under the terms of the agreement relating
to the outstanding debt to Madeleine. The de-listing of the Company's common
shares from the Nasdaq National Market in June 2001 also created a default under
the Madeleine Loan agreement. 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
for continuing operations 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 June 2003, the Company entered into an agreement in principle with Madeleine,
whereby Madeleine would exchange all of the outstanding principal and accrued
interest of the Madeleine Loan for the Company's interests in certain real
estate and certain private cable television assets and for common equity of the
Company.
The agreement in principle provides that the outstanding principal and accrued
interest with respect to the Madeleine Loan is to be exchanged for (a) certain
private cable television systems and associated assets related to properties in
Florida of ParaComm, in consideration of a reduction of indebtedness equal to
the fair market value of such assets (which transaction was consummated in
August 2003); (b) certain real estate owned by the Company located in Long
Island City, New York in consideration of the reduction of indebtedness equal to
the fair market value of such real estate; and (c) issuance of approximately 7.6
million shares of the Company's common stock to Madeleine for the balance of the
indebtedness. Such number of shares issuable to Madeleine represents all of the
authorized and unissued shares of common stock of the Company less shares
reserved for issuance pursuant to the exercise of outstanding stock options and
warrants to purchase common stock that are not surrendered and cancelled. In
connection with the transaction, certain members of management of the Company
and an affiliate of Madeleine, respectively, are to surrender options and
warrants to be cancelled. The agreement also provides for the issuance of new
options to such management members at a subsequent date, subject to approval by
the stockholders of the Company of an increase in the number of shares of
authorized Common Stock. Upon such issuance to Madeleine, Madeleine will own
approximately 32% of the total outstanding stock of the Company. The Company and
Madeleine are presently negotiating definitive agreements for transactions (b)
and (c), which are subject to approval by the Board of Directors of the Company.
There can be no assurance that definitive agreements will be reached.
As part of the June 2003 agreement in principle, the Company and ParaComm
consummated the sale to an affiliate of Madeleine of substantially all of
ParaComm's television and private cable services business assets in Florida. The
consideration for the sale was the reduction of $3.2 million of the principal
amount of the Madeleine Loan, plus waiver of accrued and unpaid interest on the
Madeleine Loan. Such reduction is subject to certain post-closing adjustments,
which are not expected to be material.
Cash balances at June 30, 2003 and 2002 were approximately $3.0 million and $2.5
million, respectively. In fiscal 2003, $2.0 million of net cash was provided by
the Company's operating activities. In fiscal 2002 and 2001, the Company used
approximately $1.6 million and $12.7 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 the quarter ended September 30, 2002, the Company acquired capital assets
of approximately $0.2 million, of which approximately $0.1 million was primarily
for investment in communications infrastructure systems for multiple dwelling
unit
-13-
("MDU") buildings in return for rights to provide Internet and television
services to the MDU buildings' residents in Florida. During fiscal 2002, the
Company acquired capital assets of approximately $0.4 million, primarily for
investment in communications infrastructure systems for 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. The capital assets acquired during fiscal 2001 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. All of the Company's remaining
communications assets were held for sale at June 30, 2003. These assets, which
were approximately $0.5 million, were sold in August 2003.
Due to the downturn affecting corporate America, the bonding industry has come
under increased pressure and claims, and in general, the bonding market has
tightened. Consequently, it has become more difficult for the Company to secure
surety bonds due to the Company's financial position and overall market
conditions. The Company is currently considering ways to improve its ability to
obtain bonding. There can be no assurance that the Company will be able to
obtain bonding or, if so, at a reasonable cost. If the Company is unable to
obtain surety bonds as needed, this may have a material adverse effect on the
Company. The following table provides a summary of the effect on liquidity and
cash flows from the Company's contractual obligation as of June 30, 2003.
- ------------------------ ------------ ------------ ------------ ------------ ------------- ------------- --------------
2009
and
2004 2005 2006 2007 2008 Thereafter Total
- ------------------------ ------------ ------------ ------------ ------------ ------------- ------------- --------------
Contractual obligations $820,000 $820,000 $820,000 $199,167 -- -- $2,659,167
- ------------------------ ------------ ------------ ------------ ------------ ------------- ------------- --------------
Noncancellable
operating leases $163,000 $96,000 $56,000 $15,000 -- -- $330,000
- ------------------------ ------------ ------------ ------------ ------------ ------------- ------------- --------------
See Notes H & M to the Financial Statements, at Item 15 hereto, for a summary of
the effect on liquidity and cash flows from the Company's contractual
obligations as of June 30, 2003.
Senior Secured Promissory Note
See also the discussion in this Item under the subcaption "Capital Resources and
Liquidity."
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 "Madeleine Loan"). The Madeleine Loan, which is due and
payable in November 2007, bears interest at a fixed rate of 11% per annum. The
Madeleine Loan is a senior secured obligation of the Company and is guaranteed
by certain subsidiaries of the Company, which have pledged substantially all of
their respective assets to collateralize such guarantee. In connection with the
Madeleine 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 Madeleine Loan 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 Madeleine 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. The outstanding principal and accrued interest with
respect to the senior secured indebtedness owed by the Company to Madeleine
totals approximately $13.1 million in September 2003.
The Company has not made payments to Madeleine pursuant to the Madeleine Loan
agreement and is presently in default under the terms of the agreement relating
to the outstanding debt to Madeleine. The de-listing of the Company's common
shares from the Nasdaq National Market in June 2001 also created a default under
the Madeleine Loan agreement. 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
for continuing operations 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.
-14-
In June 2003, the Company entered into an agreement in principle with Madeleine,
whereby Madeleine would exchange all of the outstanding principal and accrued
interest of the Madeleine Loan for the Company's interests in certain real
estate and certain private cable television assets and for common equity of the
Company.
The agreement in principle provides that the outstanding principal and accrued
interest with respect to the Madeleine Loan is to be exchanged for (a) certain
private cable television systems and associated assets related to properties in
Florida of ParaComm in consideration of a reduction of indebtedness equal to the
fair market value of such assets (which transaction was consummated in August
2003); (b) certain real estate owned by the Company located in Long Island City,
New York in consideration of the reduction of indebtedness equal to the fair
market value of such real estate; and (c) issuance of approximately 7.6 million
shares of the Company's common stock to Madeleine for the balance of the
indebtedness. Such number of shares issuable to Madeleine represents all of the
authorized and unissued shares of common stock of the Company less shares
reserved for issuance pursuant to the exercise of outstanding stock options and
warrants to purchase common stock that are not surrendered and cancelled. In
connection with the transaction, certain members of management of the Company
and an affiliate of Madeleine, respectively, are to surrender options and
warrants to be cancelled. The agreement also provides for the issuance of new
options to such management members at a subsequent date, subject to approval by
the stockholders of the Company of an increase in the number of shares of
authorized Common Stock. Upon such issuance to Madeleine, Madeleine will own
approximately 32% of the total outstanding stock of the Company. The Company and
Madeleine are presently negotiating definitive agreements for transactions (b)
and (c), which are subject to approval by the Board of Directors of the Company.
There can be no assurance that definitive agreements will be reached.
As part of the June 2003 agreement in principle, the Company and ParaComm
consummated the sale to an affiliate of Madeleine of substantially all of
ParaComm's satellite television and private cable services business assets in
Florida. The consideration for the sale was the reduction of $3.2 million of the
principal amount of the Madeleine Loan, plus waiver of accrued and unpaid
interest on the Madeleine Loan. Such reduction is subject to certain
post-closing adjustments, which are not expected to be material.
Mortgage payable
In March 2003, the Company satisfied its mortgage obligation on real property at
11-30 47th Avenue, Long Island City, New York, in the amount of $1.7 million.
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 on the 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 the fiscal year ended
June 30, 2001 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 years ended June 30, 2003 and
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. The Company completed the
discontinuance of its communications business in August 2003. There can be no
assurance that the construction segment will sustain profitability or positive
cash flow from future operations. 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 any future operating losses that
may occur through the operation of the construction business.
-15-
The outstanding principal and accrued interest with respect to the Madeleine
Loan totals approximately $13.1 million in September 2003. The Company is in
default under the terms of the Madeleine Loan agreement. 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 for continuing operations 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.
As part of an agreement in principle to reduce or eliminate the Company's
indebtedness under the Madeleine Loan, the Company and ParaComm consummated the
sale to an affiliate of Madeleine of substantially all of ParaComm's satellite
television and private cable services business assets in Florida. The
consideration for the sale was the reduction of $3.2 million of the principal
amount of the Madeleine Loan, plus waiver of accrued and unpaid interest on the
Madeleine Loan. Such reduction is subject to certain post-closing adjustments,
which are not expected to be material.
Net Revenues from Continuing Operations
- -----------------------------------------------
2003 2002 2001
- ---------------- -------------- ---------------
($ million) ($ million) ($ million)
- ---------------- -------------- ---------------
59.8 77.9 79.7
================ ============== ===============
Income (Loss) from Continuing Operations
- -----------------------------------------------
2003 2002 2001
- ---------------- -------------- ---------------
($ million) ($ million) ($ million)
- ---------------- -------------- ---------------
(0.3) (2.2) (3.7)
================ ============== ===============
Revenue from continuing operations decreased $18.1 million or 23.2% from $77.9
million in 2002 to $59.8 million in 2003. The decrease was primarily due to
fewer and smaller construction contracts started in 2003.
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 revenue decreased $19.8 million or 28.8% from $68.8 million in 2002 to
$49.0 million in 2003. In addition to the decrease in revenue, the decrease in
costs in 2003 over 2002 was due primarily to fewer and smaller construction
contracts started in 2003. Gross margin percentage increased to 18.1% in 2003
from 11.7% in 2002. The improvement in gross margin percentage was due primarily
to better control of direct costs.
Operating income increased $0.6 million or 66.7% from $0.9 million in 2002 to
$1.5 million in 2003. The improvement was due primarily to the increase in gross
profit margin in 2003. There can be no assurance that the Company will sustain
profitability or positive cash flow from future operations.
General and administrative expenses increased $1.2 million or 15.4% from $7.8
million in 2002 to $9.0 million in 2003. The increase in general and
administrative expenses included a $1.1 million increase in payroll and related
costs, and a $0.1 million increase in professional fees.
Depreciation and amortization remained unchanged from $0.3 million in 2002 to
$0.3 million in 2003.
Interest income decreased $0.2 million or 100% from $0.2 million in 2002 to an
immaterial amount in 2003. The decrease was due to a decrease in investment of
the Company's excess cash that was used to reduce the Company's accounts
payable, satisfy the Company's mortgage obligation, and fund the operating
losses during the discontinuance of the Company's communications business.
Interest expense increased $0.1 million or 5.6% from $1.8 million in 2002 to
$1.9 million in 2003. The increases were due primarily to the capitalization of
unpaid interest on the senior secured promissory note to Madeleine.
See also Notes O and P to the Financial Statements, at Item 15, attached hereto.
-16-
Fiscal 2002 Compared to Fiscal 2001
Revenue decreased $1.8 million or 2.3% from $79.7 million in 2001 to $77.9
million in 2002. The decrease was primarily due to fewer construction contracts
started in 2002.
Cost of 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 fewer 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.
Operating income from increased $3.1 million from $(2.2) million in 2001 to $0.9
million in 2002. The improvement was due primarily to the increase in gross
profit margin in 2002. There can be no assurance that the company will sustain
profitability or positive cash flow from future operations.
General and administrative expenses decreased $2.0 million or 20.4% from $9.8
million in 2001 to $7.8 million in 2002. The decrease in general and
administrative expenses included a $0.5 million decrease in payroll and related
costs, a $1.0 million decrease in professional fees, a $0.1 million decrease in
travel, meal and entertainment, and a $0.4 million decrease in miscellaneous,
office supplies and telephone.
Depreciation and amortization remained unchanged from $0.3 million in 2001 to
$0.3 million in 2002.
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 business prior to its discontinuance.
Interest expense increased $0.5 million or 38.5% from $1.3 million in 2001 to
$1.8 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 business prior to its discontinuance. The
transaction resulted in a capital loss of $0.3 million.
The Company increased its deferred tax benefit valuation allowance by $1.1
million to $21.4 million at 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.
New Accounting Standards Adopted
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure requirements apply to all companies for fiscal years ending after
December 15, 2002. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. The adoption of SFAS No. 148 had no impact on the Company's
financial statements.
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 adoption of SFAS No. 146 had no impact on the
Company's financial statements.
-17-
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees." FIN 45 requires a
guarantor to recognize, at the inception of a guarantee, a liability it has
undertaken in issuing the guarantee. In addition, FIN 45 requires a guarantor to
make disclosures of its obligations under the guarantees that a company has
issued. The disclosure requirements of FIN 45 are effective for financial
statements for periods ending after December 15, 2002. The initial recognition
and initial measurement provision of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company
adopted FIN 45 in fiscal year 2003. Our adoption of FIN 45 did not have a
material impact on the Company's financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149 (SFAS 149), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 amends and clarifies accounting for derivative
instruments and hedging activities under Statement of Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 149 is effective for contracts entered into or modified and
for hedging relationships designated after June 30, 2003. The Company believes
the adoption of SFAS 149 will not have a material impact on the Company's
financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
(SFAS 150), "Accounting for Certain Financial Instruments and Characteristics of
both Liabilities and Equity." SFAS 150 establishes standards on the
classification and measurement of financial instruments with characteristics as
both liabilities and assets. SFAS 150 is effective for instruments entered into
or modified after May 31, 2003 and pre-existing instruments as of the beginning
of the first interim period after June 15, 2003. The adoption of SFAS 150 had no
material impact on the Company's financial statements.
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, 2003, the Company had debt of $17.5 million with a fixed interest rate of
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, 2003. 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 on the 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 the fiscal year ended June 30, 2001did 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 years ended June 30, 2003 and 2002. The decision to change
accountants was approved by the Board of Directors.
ITEM 9A - CONTROLS AND PROCEDURES
Disclosure controls and procedures.
Based on an evaluation of the Company's disclosure controls and procedures as of
the end of the period covered by this Annual Report, the Company's Chief
Executive Officer and Chief Financial Officer have determined that the Company's
current disclosure controls and procedures are effective.
Changes in internal control over financial reporting.
-18-
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rule 13a-15(f) or Rule 15d-15(f) under the
Exchange Act) during the fourth quarter of fiscal year ended June 30, 2003 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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 49 Director(1)(2)(3)
Gregory Cuneo 44 President, Chief Executive Officer and Director
Raymond Steele 68 Director(1)(2)
Robert Birnbach 38 Executive Vice President and Chief Financial
Officer
Michael Giambra 38 Vice President and Chief Accounting Officer
Ronald Fregara 54 President of CMA & Vice President of DualStar
Stephen Yager 51 Vice President of CMA & Vice President & Secretary
of DualStar
Barry Halpern 51 President of High-Rise & Vice President of
DualStar
Nicholas Ahel 60 Vice President of High-Rise & Vice President of
DualStar
Peter Aiello __ President of ICE & BMS and Vice President &
Assistant Secretary of DualStar
Vincent D'Onofrio 43 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.
(3) Jared E. Abbruzzese was a director of DualStar from September 1999 until
September 10, 2003.
Jared E. Abbruzzese was a director of DualStar from September 1999 until
September 10, 2003. He had served as Chairman from February 2000 to June 2001.
Mr. Abbruzzesse 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).
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.
-19-
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 Birnbach, a founder of the Company, has been Chief Financial Officer of
DualStar since December 1996 and Executive Vice President since July 1999.. He
was a member of DualStar's board of directors from September 1999 until February
2000 and Secretary from February 2000 until July 2003. 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.
Michael Giambra has been Chief Accounting Officer of DualStar since January 2003
and Vice President since July 2003. He has been Controller of DualStar since
October 2002. He was controller of DualStar's construction segment from May 2000
to October 2002. Prior to joining the Company, Mr. Giambra was a controller with
the Weeks Lerman Group from April 1999 to May 2000. He acted as a certified
public accountant prior to April 1999.
Ronald Fregara, a founder of the Company, was named Vice President of the
Company in July 2003. He 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, was named Vice President and Secretary
of the Company in July 2003. He 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 and Vice
President of DualStar since July 2003.
Nicholas Ahel has served as Vice President of High-Rise since July 1995 and Vice
President of DualStar since July 2003.
Peter Aiello has served as President of ICE since August 1996 and President of
BMS since July 2000. He was named Vice President and Assistant Secretary of the
Company in July 2003.
Vincent M. D'Onofrio has served as President and Chief Technology Officer of
OnTera (f/k/a DualStar Communications, Inc.) since February 2001 and was
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 DualStar Communications, Inc. Mr.
D'Onofrio has also served as President of ParaComm since March 2001.
-20-
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,
2003.
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- -----------------
(a) (b) (c) (d) (g) (i)
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION(1)
---- ----------- ---------------
Gregory Cuneo 2003 $275,000 $25,000 - $4,038
Chief Executive Officer 2002 $275,000 $25,000 - $4,038
2001 $275,000 $25,000 - $33,238
Barry Halpern 2003 $260,000 $685,101 - $1,954
President - High-Rise 2002 $260,000 $508,433 - $1,954
2001 $260,000 $706,712 - $1,954
Nicholas Ahel 2003 $260,000 $685,101 - $1,652
Vice President - High-Rise 2002 $260,000 $508,433 - $1,652
2001 $260,000 $706,712 - $1,652
Ronald Fregara 2003 $235,000 $25,000 - $5,861
President - CMA 2002 $235,000 $25,000 - $5,861
2001 $235,000 $25,000 - $5,861
Stephen Yager 2003 $235,000 $25,000 - $6,371
Vice President - CMA 2002 $235,000 $25,000 - $6,371
2001 $235,000 $25,000 - $6,371
(1) 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.
COMPENSATION OF DIRECTORS
Directors of the Company are paid an annual fee up to $25,000 and may also be
eligible for fees of up to $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.
In fiscal 2003, the Company paid no director fees to Messrs. Abbruzzese and
Cuneo, but paid Mr. Steele $10,337.
OPTION GRANTS IN LATEST FISCAL YEAR
No stock options were granted to any of the Named Executives during fiscal year
2003.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with regard to the
outstanding options to purchase DualStar Common Stock as of the end of the
fiscal year ended June 30, 2003 for the five Named Executives in the Summary
Compensation Table above.
(a) (b) (c) (d) (e)
SHARES ACQUIRED VALUE NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISED OPTIONS AT JUNE 30, 2003 OPTIONS AT JUNE 30, 2003
--------------- ------------ ------------------------------------ ------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Gregory Cuneo - - 160,000 40,000 $ - $ -
Barry Halpern - - 301,000 - $ - $ -
Nicholas Ahel - - 226,000 - $ - $ -
Ronald Fregara - - 160,000 40,000 $ - $ -
Stephen Yager - - 160,000 40,000 $ - $ -
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 three additional three-year terms through August 2006. 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
-21-
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 continue to discuss new employment agreements, but there can be no
assurance that the parties will reach agreement. If the parties do not reach
agreement and the Company loses the services of Mr. Halpern or Mr. Ahel, there
may be a material adverse effect on the Company's business. 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 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 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
-22-
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, 2003, 2,937,067 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
2003.
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, 2003, 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, 2003.
-23-
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, 2003 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%
Lawrence Roman
WDF,Inc.
30 N. MacQuenten Pkwy.
Mt. Vernon, NY 10550 1,267,400 6.6%
The following table sets forth certain information with respect to beneficial
ownership of DualStar Common Stock as of September 19, 2003 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 595,000(1) 3.1%
Jared E. Abbruzzese --- *
Raymond Steele 115,000(2) *
Ronald Fregara 595,000(1) 3.1%
Stephen Yager 595,000(1) 3.1%
Barry Halpern 301,000(2) 1.6%
Nicholas Ahel 226,000(2) 1.2%
All directors and executive
officers as a group (11 persons) 3,435,200(3) 17.8%
* Less than 1%.
(1) Consists of (i) options to purchase 160,000 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, 2003 and (ii) 435,000 shares of
Company common stock. (2) Consists of options granted under the Plan,
exercisable within 60 days of September 19, 2003. (3) Consists of (i) options to
purchase 2,127,200 shares of Company common stock granted under the Plan,
exercisable within 60 days of September 19, 2003, and (ii) 1,308,000 shares of
Company common stock.
-24-
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 in the table more fully
below.
- --------------------------- ------------------------- -------------------------- ------------------------------------
(a) (b) (c)
- --------------------------- ------------------------- -------------------------- ------------------------------------
Number of securities to Weighted-average Number of securities remaining under
be issued upon exercise exercise price of available for future issuance
of outstanding options, outstanding options, equity compensation plans (excluding
Plan category warrants and rights warrants and rights securities reflected in column (a))
- --------------------------- ------------------------- -------------------------- ------------------------------------
Equity compensation 3,086,533 $2.78 413,467
plans approved by
security holders
- --------------------------- ------------------------- -------------------------- ------------------------------------
Equity compensation plans 3,125,000 $4.00 -
not approved by security
holders
- --------------------------- ------------------------- -------------------------- ------------------------------------
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) TechOne Capital Group LLC ("TechOne"), a private consulting and investment
firm of which Jared E. Abbruzzese, a director of the Company until his
resignation on September 10, 2003, 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 year
ended June 30, 2001, in connection with the agreement, the Company paid TechOne
consulting fees in the amount of $360,000. For the years ended June 30, 2003 and
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.
(b) 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
-25-
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 year ended June 30, 2001, the
Company paid Hades consulting fees in the amount of $240,000 for consulting
services in connection with the agreement. For the years ended June 30, 2003 and
2002, the Company made no payments to Hades.
(c) 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.
(d) 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 years ended June 30, 2003 and 2002, the Company made
no payments to M & E Advisors, LLC.
(e) At June 30, 2003, 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.
(f) For the fiscal years ended June 30, 2003, 2002 and 2001, approximately
17.1%, 0.2% and 2.0% 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. In
the last fiscal year, DualStar has been awarded new contracts in the approximate
amount of $23.9 million from HRH.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT AND NON-AUDIT FEES
For the fiscal years ended June 30, 2003 and June 30, 2002, aggregate fees for
services provided by Grassi & Co., CPAs, P.C., were as follows:
Fiscal year Fiscal year
Ended Ended
June 30, 2003 June 30, 2002
------------- -------------
Audit fees $52,500 $ --
Audit related fees 22,500 7,500
Tax fees 27,500 --
All other fees -- --
-------- ------
$102,500 $7,500
The audit committee pre-approves all non-audit fees paid to the accountant.
-26-
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)
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)
-27-
NUMBER TITLE
- ------ -----
10.16 Consulting Agreement dated as of June 1, 2000 between the Company and
Hades Advisors, LLC. (3)
10.17 Asset Purchase Agreement, dated as of July 9, 2003 by and among the
Company, ParaComm, Madeleine, and PCM Acquisitions Corp. (6)
10.18 Global Bonding general agreement of indemnity. (7)
21.1 Subsidiaries of the Registrant.(7)
23.1 Consent of Grassi & Co., CPAs, P.C. (7)
23.2 Consent of Grant Thornton LLP.(7)
31.1 Rule 13a-14(a)/15d-14(a) Certification. (7)
31.2 Rule 13a-14(a)/15d-14(a) Certification. (7)
32.1 Section 1350 Certification. (7)
32.2 Section 1350 Certification. (7)
(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) Incorporated herein by reference to Registrant's Current Report on Form 8-K
(File No. 000-25552) filed on August 19, 2003.
(7) Attached hereto.
(B) REPORTS ON FORM 8-K
A Current Report on Form 8-K was filed on June 18, 2003, reporting an Item 5 and
7 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, 2003
None.
-28-
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
Consolidated Statements of Cash Flows..................... F-7 -- F-8
Notes to Consolidated Financial Statements................ F-9 -- F-30
F-1
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Shareholders DualStar Technologies Corporation and
Subsidiaries
We have audited the accompanying consolidated balance sheets of DualStar
Technologies Corporation and Subsidiaries as of June 30, 2003 and 2002, and the
related consolidated statements of operations, shareholders' deficit and cash
flows for the years 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 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, 2003 and 2002, and the
consolidated results of their operations and their consolidated cash flows for
the years 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 Notes A and E to
the financial statements, the Company has suffered recurring losses 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 23, 2003
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows for the year 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 audit.
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 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 result of operations and consolidated
cash flow of DualStar Technologies Corporation and Subsidiaries for the year
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, 2003
F-3
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
--------
2003 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 3,055,255 $ 2,535,419
Accounts receivable -- net of allowance for doubtful accounts
of $420,000 and $532,000 in 2003 and 2002, respectively ..................... 17,067,241 26,249,507
Retainage receivable .......................................................... 3,049,667 3,473,970
Costs and estimated earnings in excess of billings on
uncompleted contracts ....................................................... 768,409 1,299,615
Assets held for sale .......................................................... 483,756 --
Prepaid expenses and other current assets ..................................... 220,823 210,997
------------ ------------
Total Current Assets ........................................................ 24,645,151 33,769,508
Property and equipment -- net of accumulated
depreciation and amortization ............................................... 1,144,282 3,158,890
Other assets:
Other ......................................................................... 431,363 511,303
------------ ------------
Total Assets ................................................................ $ 26,220,796 $ 37,439,701
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable .............................................................. $ 5,466,501 $ 12,250,161
Senior secured promissory note payable ........................................ 16,827,583 14,850,300
Billings in excess of costs and estimated earnings on
uncompleted contracts ....................................................... 2,788,820 5,707,947
Liabilities held for sale ..................................................... 52,575 --
Accrued expenses and other current liabilities ................................ 4,521,913 3,540,799
Mortgage payable .............................................................. -- 1,693,885
------------ ------------
Total Current Liabilities ................................................... 29,657,392 38,043,092
------------ ------------
Total Liabilities ........................................................... 29,657,392 38,043,092
------------ ------------
Commitments and contingencies
SHAREHOLDERS' DEFICIT:
Common stock -- par value, $.01 per share; 25,000,000 shares authorized;
16,501,568 shares issued and outstanding in 2003
and 2002 .................................................................... 165,016 165,016
Additional paid-in capital .................................................... 41,832,721 41,575,421
Accumulated deficit............................................................ (45,434,333) (42,343,828)
------------ ------------
Total Shareholders' Deficit ................................................. (3,436,596) (603,391)
------------ ------------
Total Liabilities and Shareholders' Deficit ................................. $26,220,796 $ 37,439,701
============ ============
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,
--------------------
2003 2002 2001
---- ---- ----
Revenues earned ................................ $ 59,824,031 $ 77,884,995 $ 79,738,232
Costs of revenues earned, ...................... 48,985,163 68,783,066 71,777,029
------------ ------------ ------------
Gross profit ................................... 10,838,868 9,101,929 7,961,203
------------ ------------ ------------
Operating expenses:
General and administrative expenses, ......... 9,046,591 7,846,479 9,783,718
Depreciation and amortization ................ 277,691 307,648 339,968
------------ ------------ ------------
Total operating expenses ................... 9,324,282 8,154,127 10,123,686
------------ ------------ ------------
Operating income (loss) ........................ 1,514,586 947,802 (2,162,483)
Other (income) expense:
Interest income .............................. (28,301) (152,808) (577,817)
Interest expense ............................. 1,870,592 1,820,772 1,315,574
Loss on sale of marketable securities ........ -- 337,500 --
------------ ------------ ------------
Other expense -- net ........................... 1,842,291 2,005,464 737,757
------------ ------------ ------------
Loss before provision (benefit) for income taxes (327,705) (1,057,662) (2,900,240)
Provision (benefit) for income taxes
Current tax provision (benefit) .............. (16,007) 80,325 74,787
Deferred tax provision ....................... -- 1,076,000 676,000
------------ ------------ ------------
Loss from continuing operations ................ (311,698) (2,213,987) (3,651,027)
------------ ------------ ------------
Discontinued operations
Loss from discontinued communications business 2,778,807 7,369,416 12,062,161
Income tax (benefit) ......................... -- -- --
------------ ------------ ------------
Loss from discontinued operations .............. 2,778,807 7,369,416 12,062,161
------------ ------------ ------------
Net loss ....................................... $ (3,090,505) $ (9,583,403) $(15,713,188)
============ ============ ============
Basic and diluted loss per share:
Loss from continuing operations .............. $(0.02) $(0.13) $(0.22)
Loss from discontinued operations ............ $(0.17) $(0.45) $(0.73)
Net loss per share ........................... $(0.19) $(0.58) $(0.95)
Weighted average shares outstanding .......... 16,501,568 16,501,568 16,497,255
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, 2003, 2002 AND 2001
COMMON STOCK ADDITIONAL
------------ ----------
PAID-IN
SHARES AMOUNT CAPITAL
------ ------ -------
Balance -- June 30, 2000 ................ 16,476,568 $ 164,766 $42,613,550
Net loss for the year ended
June 30, 2001
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
Net loss for the year ended
June 30, 2002
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
Net loss for the year ended
June 30, 2003
Adjustment to recurring elimination
entry for investments in subsidiaries . 257,300
-----------
Balance -- June 30, 2003 ................ 16,501,568 $ 165,016 $41,832,721
=========== =========== ===========
ACCUMULATED
ACCUMULATED DEFERRED COMPREHENSIVE
DEFICIT COMPENSATION LOSS TOTAL
------- ------------ ---- -----
Balance -- June 30, 2000 .... $(17,047,237) $ (1,126,000) -- $ 24,605,079
Net loss for the year ended
June 30, 2001 ............. (15,713,188) (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 .... (32,760,425) -- (202,500) 8,777,512
Net loss for the year ended
June 30, 2002 ............. (9,583,403) (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 .... (42,343,828) -- -- (603,391)
Net loss for the year ended
June 30, 2003 ............. (3,090,505) (3,090,505)
------------ ------------
Adjustment to recurring
elimination entry for
investments in
subsidiaries .............. 257,300
------------
Balance -- June 30, 2003 .... $(45,434,333) -- -- $ (3,436,596)
============ ============ ============ ============
The accompanying notes are an integral part of this statement.
F-6
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net loss .......................................................... $ (3,090,505) $ (9,583,403) $(15,713,188)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Depreciation and amortization ................................... 875,748 2,046,519 2,214,462
Deferred income taxes ........................................... -- 1,076,000 676,000
Impairment of fixed and intangible assets ....................... 920,972 2,479,630 1,190,000
(Gain) loss on sale of communications assets .................... (115,580) 482,324 --
Loss on sale of marketable securities ........................... -- 337,500 --
Accrued interest added to debt principal ........................ 1,811,139 1,595,623 --
Accrued legal fees added to debt principal ...................... 166,144 -- --
(Increase) decrease in assets, net of assets acquired
Accounts receivable ......................................... 9,182,266 (2,549,797) 103,258
Retainage receivable ........................................ 424,303 452,932 2,763,121
Costs and estimated earnings in excess of billings on
uncompleted contracts ..................................... 531,206 (63,058) 859,154
Prepaid expenses and other current assets ................... (1,481) 392,402 111,664
Other assets ................................................ (4,700) 4,120 (65,544)
Increase (decrease) in liabilities, net of liabilities assumed
Accounts payable ............................................ (6,731,085) 155,999 (4,636,817)
Billings in excess of costs and estimated earnings on
uncompleted contracts ....................................... (2,919,127) 2,135,787 (417,641)
Accrued expenses and other current liabilities .............. 977,468 (521,239) 174,637
------------ ------------ ------------
Net cash provided by (used in) operating activities ............... 2,026,768 (1,558,661) (12,740,894)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures .............................................. (176,105) (434,621) (2,667,323)
Proceeds from sale (purchase) of marketable securities ............ -- 555,000 (892,500)
Proceeds from sale of communications assets ....................... 369,822 402,136 --
Long term investments ............................................. (6,764) -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities ............... 186,953 522,515 (3,559,823)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments of loan and lease payables ..................... -- (115,771) (268,226)
Principal payment of mortgage payable ............................. (1,693,885) (23,951) (20,080)
Proceeds from senior secured promissory note payable .............. -- -- 5,500,000
------------ ------------ ------------
Net cash provided by (used in) financing activities ............... (1,693,885) (139,722) 5,211,694
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ................ 519,836 (1,175,868) (11,089,023)
Cash and cash equivalents at beginning of year ...................... 2,535,419 3,711,287 14,800,310
------------ ------------ ------------
Cash and cash equivalents at end of year ............................ $ 3,055,255 $ 2,535,419 $ 3,711,287
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest ........................................................ $ 127,517 $ 164,053 $ 641,038
Income taxes .................................................... 48,207 19,549 71,503
The accompanying notes are an integral part of this statement.
F-7
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002, AND 2001
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
(1) 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.
(2) In November 2000, the Company issued 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.
(3) The Company acquired equipment related to the delivery of
communications services which was financed by a note in the amount of
$668,265 during the year ended June 30, 2001.
(4) 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.
The accompanying notes are an integral part of this statement.
F-8
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
Background and Financial Statement Presentation
DualStar Technologies Corporation ("DualStar" or the "Company"), 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 shares
of common stock and warrants in exchange for all of the outstanding stock of
ParaComm, Inc.
The accompanying financial statements for the years ended June 30, 2003, 2002
and 2001 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 construction-related
businesses. The Company completed the discontinuance of its communications
business in August 2003. The Company's communications segment's telephone
service business was discontinued in August 2002. In April 2002, the Company
sold communications network equipment 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. A $2.5 million charge for the impairment of certain
remaining communications assets was recorded in fiscal year 2002.
In August 2003, the Company and its wholly owned subsidiary, ParaComm, Inc.
("ParaComm"), consummated the sale to an affiliate of its senior lender,
Madeleine, LLC ("Madeleine"), of substantially all of ParaComm's assets,
pursuant to an Asset Purchase Agreement dated as of July 2003 by and among the
Company, ParaComm, Madeleine, and PCM Acquisitions Corp. Such assets related to
ParaComm's satellite television and private cable services business in Florida.
The consideration for the sale was the reduction of $3.2 million of the
principal amount of a note of the Company to Madeleine, plus waiver of accrued
and unpaid interest on such principal amount. Such reduction is subject to
certain post-closing adjustments, which are not expected to be material.
The Company incurred significant losses in the last several fiscal years,
primarily in the communications business. The Company completed the
discontinuance of its communications business in August 2003. There can be no
assurance that the construction segment will sustain profitability or positive
cash flow from future operations. 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 any operating losses that may
occur through the operation of the construction business.
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 "Madeleine Loan"). The Madeleine Loan, which is due and
payable in November 2007, bears interest at a fixed rate of 11% per annum. The
Madeleine Loan is a senior secured obligation of the Company and is guaranteed
by certain subsidiaries of the Company, which have pledged substantially all of
their respective assets to collateralize such guarantee. In connection with the
Madeleine 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 Madeleine Loan 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 Madeleine 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. The outstanding principal and accrued interest with
respect to the senior secured indebtedness owed by the Company to Madeleine
totals approximately $13.1 million in September 2003.
F-9
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE A -- COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has not made payments to Madeleine pursuant to the Madeleine Loan
agreement and is presently in default under the terms of the agreement relating
to the outstanding debt to Madeleine. The de-listing of the Company's common
shares from the Nasdaq National Market in June 2001 also created a default under
the Madeleine Loan agreement. 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 June 2003, the Company entered into an agreement in principle with Madeleine,
whereby Madeleine would exchange all of the outstanding principal and accrued
interest of the Madeleine Loan for the Company's interests in certain real
estate and certain private cable television assets and for common equity of the
Company.
The agreement in principle provides that the outstanding principal and accrued
interest with respect to the senior secured indebtedness owed by the Company to
Madeleine is to be exchanged for (a) certain private cable television systems
and associated assets related to properties in Florida of ParaComm, Inc., a
wholly-owned subsidiary of the Company, in consideration of a reduction of
indebtedness equal to the fair market value of such assets (which transaction
was consummated in August 2003); (b) certain real estate owned by the Company
located in Long Island City, New York in consideration of the reduction of
indebtedness equal to the fair market value of such real estate; and (c)
issuance of approximately 7.6 million shares of the Company's common stock to
Madeleine for the balance of the indebtedness. Such number of shares issuable to
Madeleine represents all of the authorized and unissued shares of common stock
of the Company less shares reserved for issuance pursuant to the exercise of
outstanding stock options and warrants to purchase common stock that are not
surrendered and cancelled. In connection with the transaction, certain members
of management of the Company and an affiliate of Madeleine, respectively, are to
surrender options and warrants to be cancelled. The agreement also provides for
the issuance of new options to such management members at a subsequent date,
subject to approval by the stockholders of the Company of an increase in the
number of shares of authorized Common Stock. Upon such issuance to Madeleine,
Madeleine will own approximately 32% of the total outstanding stock of the
Company. The Company and Madeleine are presently negotiating definitive
agreements for transactions (b) and (c), which are subject to approval by the
Board of Directors of the Company. There can be no assurance that definitive
agreements will be reached.
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-10
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE A -- COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(2) USE OF ESTIMATES IN FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, marketable securities, contracts and retainage
receivable, accounts payable and current 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 fiscal 2003, the carrying value of
communication equipment was written off by $0.9 million as a result of the
Company's decision to discontinue its communications business. 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. 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.
(6) INCOME TAXES
The Company files consolidated federal, state and local income tax returns.
Deferred income taxes are principally the result of net operating loss
carryforwards and differences related to different bases of accounting for
financial accounting and tax reporting purposes.
F-11
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE A -- COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(7) CASH AND CASH EQUIVALENTS
The Company considers its money market funds with an original maturity of three
months or less to be cash equivalents.
(8) RECLASSIFICATION
The Company completed the discontinuance of its communications business in
August 2003. Accordingly the financial results of this business for the fiscal
years ended June 30, 2003, 2002, and 2001 are presented as discontinued
operations.
(9) 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.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees." FIN 45 requires a
guarantor to recognize, at the inception of a guarantee, a liability it has
undertaken in issuing the guarantee. In addition, FIN 45 requires a guarantor to
make disclosures of its obligations under the guarantees that a company has
issued. The disclosure requirements of FIN 45 are effective for financial
statements for periods ending after December 15, 2002. The initial recognition
and initial measurement provision of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company
adopted FIN 45 in fiscal year 2003. Our adoption of FIN 45 did not have a
material impact on the Company's financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149 (SFAS 149), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 amends and clarifies accounting for derivative
instruments and hedging activities under Statement of Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 149 is effective for contracts entered into or modified and
for hedging relationships designated after June 30, 2003. The Company believes
the adoption of SFAS 149 will not have a material impact on the Company's
financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
(SFAS 150), "Accounting for Certain Financial Instruments and Characteristics of
both Liabilities and Equity." SFAS 150 establishes standards on the
classification and measurement of financial instruments with characteristics as
both liabilities and assets. SFAS 150 is effective for instruments entered into
or modified after May 31, 2003 and pre-existing instruments as of the beginning
of the first interim period after June 15, 2003. The adoption of SFAS 150 had no
material impact on the Company's financial statements.
F-12
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE B -- ACCOUNTS RECEIVABLE
Included in accounts receivable at June 30, 2003 and June 30, 2002, are unbilled
receivables from completed contracts aggregating $314,448 and $446,821,
respectively.
Retained contract receivables at June 30, 2003 and 2002 of $3,050,000 and
$3,474,000, respectively, include approximately $1,500,000 and $1,100,000,
respectively, that is not expected to be collected within one year.
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
$1,245,000 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,
2003 2002 2001
---- ---- ----
Beginning Balance................ $532,000 $586,000 $646,000
Additions Charged to Expenses.... -- 473,121 112,894
Deductions....................... (112,000) (527,121) (172,894)
-------- -------- --------
Ending Balance................... $420,000 $532,000 $586,000
======== ======== ========
F-13
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE C -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
JUNE 30,
--------
2003 2002
---- ----
Compensation................................. $1,340,904 $1,142,197
Current portion of lease payables............ 655,664 655,664
Unearned revenues............................ 49,874 218,613
Interest..................................... 60,000 108,064
Professional fees............................ 381,500 380,500
Communication taxes payable.................. 257,391 386,868
Other........................................ 1,776,580 648,893
--------- -------
$4,521,913 $3,540,799
========== ==========
F-14
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE D -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30,
--------
2003 2002
---- ----
Network infrastructure and equipment............... $ -- $3,066,659
Building and building improvements................. 1,627,669 1,596,719
Computer equipment................................. 639,753 945,380
Office furniture and equipment..................... 264,835 307,564
Automobiles........................................ 299,134 282,941
Machinery and equipment............................ 79,048 79,048
------ -----
2,910,439 6,278,311
Less accumulated depreciation and amortization.....(2,081,157) (3,434,421)
--------- ---------
829,282 2,843,890
Land............................................... 315,000 315,000
------- -------
$1,144,282 $3,158,890
========== ==========
NOTE E -- 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 Capital Management L.L.C.
("Blackacre") (the "Madeleine Loan"). The Madeleine Loan, which is due and
payable in November 2007, bears interest at a fixed rate of 11% per annum. The
Madeleine Loan is a senior secured obligation of the Company and is guaranteed
by certain subsidiaries of the Company, which have pledged substantially all of
their respective assets to collateralize such guarantee. In connection with the
Madeleine 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 Madeleine Loan 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 Madeleine 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. The outstanding principal and accrued interest with
respect to the senior secured indebtedness owed by the Company to Madeleine
totals approximately $13.1 million in September 2003.
The Company has not made payments to Madeleine pursuant to the Madeleine Loan
agreement and is presently in default under the terms of the agreement relating
to the outstanding debt to Madeleine. The de-listing of the Company's common
shares from the Nasdaq National Market in June 2001 also created a default under
the Madeleine Loan agreement. 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 June 2003, the Company entered into an agreement in principle with Madeleine,
whereby Madeleine would exchange all of the outstanding principal and accrued
interest of the Madeleine Loan for the Company's interests in certain real
estate and certain private cable television assets and for common equity of the
Company.
The agreement in principle provides that the outstanding principal and accrued
interest with respect to the senior secured indebtedness owed by the Company to
Madeleine is to be exchanged for (a) certain private cable television systems
and associated assets related to properties in Florida of ParaComm, Inc., a
wholly-owned subsidiary of the Company, in consideration of a reduction of
indebtedness equal to the fair market value of such assets (which transaction
was consummated in August 2003); (b) certain real estate owned by the Company
located in Long Island City, New York in consideration of the reduction of
indebtedness equal to the fair market value of such real estate; and (c)
issuance of approximately 7.6 million shares of the Company's common stock to
Madeleine for the balance
F-15
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE E -- DEBT (CONTINUED)
of the indebtedness. Such number of shares issuable to Madeleine represents all
of the authorized and unissued shares of common stock of the Company less shares
reserved for issuance pursuant to the exercise of outstanding stock options and
warrants to purchase common stock that are not surrendered and cancelled. In
connection with the transaction, certain members of management of the Company
and an affiliate of Madeleine, respectively, are to surrender options and
warrants to be cancelled. The agreement also provides for the issuance of new
options to such management members at a subsequent date, subject to approval by
the stockholders of the Company of an increase in the number of shares of
authorized Common Stock. Upon such issuance to Madeleine, Madeleine will own
approximately 32% of the total outstanding stock of the Company. The Company and
Madeleine are presently negotiating definitive agreements for transactions (b)
and (c), which are subject to approval by the Board of Directors of the Company.
There can be no assurance that definitive agreements will be reached.
(2) MORTGAGE PAYABLE
In March 2003, the Company satisfied its mortgage obligation in the amount of
$1.7 million.
F-16
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F -- SHAREHOLDERS' EQUITY
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.
NOTE G -- INCOME TAXES
Deferred income taxes reflect the impact of "temporary differences" between the
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws, and relate primarily to the net operating loss
carryforward, allowance for doubtful accounts and accumulated depreciation.
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.
The following is a summary of the items giving rise to no deferred tax benefits
at June 30, 2003 and 2002:
JUNE 30,
--------
2003 2002
---- ----
Current
Allowance for doubtful accounts......... $213,000 $213,000
-------- --------
Long-term
Net operating loss carryforward......... 18,500,000 17,000,000
Accumulated depreciation................ 105,000 105,000
------- -------
18,605,000 17,105,000
---------- ----------
Total deferred tax assets................. 18,818,000 17,318,000
Less valuation allowance.................. (18,818,000) (17,318,000)
------------ ------------
Net deferred tax assets................... -- --
============ ============
F-17
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE G -- INCOME TAXES (CONTINUED)
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,
--------
2003 2002 2001
---- ---- ----
Statutory federal income tax... $(1,051,000) $(2,865,000) $(5,342,000)
State and local income taxes... (652,000) (1,517,000) (2,357,000)
Valuation allowance............ 1,607,000 5,458,000 8,375,000
State capital taxes............ 79,993 80,325 74,787
----------- -----------
$(16,007) $1,156,325 $750,787
=========== ===========
The Company has net operating loss carryforwards of approximately $37 million
available for federal, state and local income tax purposes, expiring in the
years 2011 to 2023. 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 H -- COMMITMENTS AND CONTINGENCIES
(1) The Company leases certain equipment and fabrication shop space under
operating leases expiring at various dates through June 2007. At June 30,
2003, minimum rental commitments under noncancellable operating leases
are as follows:
2004.................. $163,000
2005.................. 96,000
2006.................. 56,000
2007.................. 15,000
2008.................. 0
-
$330,000
========
Equipment rent expense under operating leases for the years ended June
30, 2003, 2002 and 2001 was approximately $124,000, $135,000 and
$369,000, respectively. Rent expense for fabrication shop space under an
operating lease for the years ended June 30, 2003 and 2002, was $60,000
and $30,000, respectively,
(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, 2003, 2002 and 2001, the
Company contributed $10.6 million, $13.3 million, and $13.6 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
F-18
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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. In February 2003, the
Company was informed that the bonding company reached a settlement with
the union on account of the claim for unpaid benefits on the Lincoln
Square project in the amount of $270,000. The bonding company expressed
its intent to pursue reimbursement for such settlement amount through the
cross-claims alleged against the Company in such action. Additionally,
the Company may be exposed to such legal fees and other expenses as the
Company's bonding company may have incurred or will incur in connection
with this claim. 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) 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 interest at a 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, 2003 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 on the promissory note. The Company
believes that the final amount will not exceed amounts accrued.
F-19
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H -- COMMITMENTS AND CONTINGENCIES (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.
(7) In July 2002, plaintiff Harvey Wayne 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. Motions to
dismiss have been filed by the Company and other defendants and are
pending before the Court.
(8) 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 the
claims are covered under its liability policies and that no loss to the
Company is probable. No provision for such claims has been made in the
accompanying financial statements.
NOTE I -- RELATED PARTY TRANSACTIONS
(1) TechOne Capital Group LLC ("TechOne"), a private consulting and
investment firm of which Jared E. Abbruzzese, a director of the Company
until his resignation on September 10, 2003, 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 year ended June 30, 2001,
the Company paid TechOne $360,000 for consulting services in connection
with the agreement. For the years ended June 30, 2002 and June 30, 2003,
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.
(2) 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
F-20
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I -- RELATED PARTY TRANSACTIONS (CONTINUED)
$20,000 times the greater of (A) the number of months remaining in the
3-year term thereof, and (B) 24. For the year ended June 30, 2001, the
Company paid Hades $240,000 for consulting services in connection with
the agreement. For the years ended June 30, 2003 and 2002, the Company
made no payments to Hades.
(3) 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.
(4) 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 and 2001 was $35,000 and $46,000, respectively.
(5) 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 years ended June 30, 2003 and 2002, the Company made no
payments to M & E Advisors, LLC.
(6) At June 30, 2003, 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, Mr. 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.
(7) For the fiscal years ended June 30, 2003, 2002, and 2001,
approximately 17.1%, 0.2%, and 2.0% 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.
NOTE J -- CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of cash, marketable securities, trade accounts
receivable and retainage receivable.
The Company maintains cash balances with large U.S. commercial banks. The
balances are insured by the Federal Deposit Insurance Corporation up to $100,000
per institution. The Company's balances may exceed this limit. At June 30, 2003,
uninsured cash balances were approximately $2.6 million. The Company believes it
is not exposed to any significant credit risk for cash.
F-21
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE J -- CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (CONTINUED)
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,
2003, revenue from two customers (Bovis Lend Lease, Inc. (formerly Lehrer
McGovern Bovis, Inc.), and HRH Construction Corporation) amounted to
approximately 37% and 17% of the Company's total revenues, respectively. 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. In
addition, as of June 30, 2003, contract and retainage receivables from Bovis
Lend Lease, Inc. and HRH Construction Corporation amounted to approximately 15%
and 28% of the Company's total contract and retainage receivables, respectively.
As of June 30, 2002 and 2001, contract and retainage receivables from Bovis
Lend Lease, Inc. amounted to approximately 52% and 58% of the Company's total
contract and retainage receivables, 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, were 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.
NOTE K -- 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, 2003, 2,937,067 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
2003.
F-22
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE K -- STOCK OPTION PLAN (CONTINUED)
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:
2003 2002 2001
---- ---- ----
Net loss As reported............ $(3,090,505) $(9,583,403) $(15,713,188)
Pro forma.............. $(4,072,468) $(10,588,836) $(16,738,375)
Basic and diluted loss As reported............ $(0.19) $(0.58) $(0.95)
per share Pro forma.............. $(0.25) $(0.64) $(1.01)
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, 2003, 2002, and 2001, 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 2003 and 2002: 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
NUMBER OF SHARES AVERAGE PRICE
---------------- -------------
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............. (127,025) $5.10
---------
Outstanding at June 30, 2002......... 3,091,200 $2.78
Forfeited in fiscal 2003............. (154,133) $4.21
---------
Outstanding at June 30, 2003......... 2,937,067 $2.72
=========
Weighted average fair values of option grants in fiscal 2001were $0.32.
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
F-23
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE K -- STOCK OPTION PLAN (CONTINUED)
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.
The following information applies to options outstanding and exercisable at June
30, 2003:
WEIGHTED-AVERAGE
NUMBER REMAINING CONTRACTUAL WEIGHTED-AVERAGE NUMBER
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE
- ------------------------ ----------- ------------ -------------- -----------
$0.75.......................... 1,448,000 4.0 $0.75 1,448,000
$3.00.......................... 177,000 1.4 $3.00 177,000
$4.00.......................... 789,000 5.1 $4.00 640,200
$5.25-$10.25................... 523,067 7.1 $6.13 509,768
2,937,067 2,774,968
NOTE L -- EMPLOYEE BENEFIT 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 the lesser of $12,000 or 100% 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 or 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, 2003, 2002, and 2001, DualStar made no contribution to the plan.
NOTE M -- 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 three additional three-year terms through August 2006. 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.
F-24
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE M -- EMPLOYMENT AGREEMENTS (CONTINUED)
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 continue to discuss new employment agreements, but there can be no
assurance that the parties will reach agreement. If the parties do not reach
agreement and the Company loses the services of Mr. Halpern or Mr. Ahel, there
may be a material adverse effect on the Company. 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 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 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.
F-25
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE N -- COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the following:
JUNE 30,
--------
2003 2002
---- ----
Costs incurred on uncompleted contracts..... $60,945,907 $53,899,529
Estimated earnings.......................... 14,454,584 7,655,621
---------- ---------
75,400,491 61,555,150
Less billings to date....................... 77,420,902 65,963,482
---------- ----------
$(2,020,411) $(4,408,332)
============ ============
Costs and estimated earnings on uncompleted contracts are included in the
accompanying consolidated balance sheets as follows:
JUNE 30,
--------
2003 2002
---- ----
Costs and estimated earnings in excess of billings on uncompleted
contracts............................................................ $768,409 $1,299,615
Billings in excess of costs and estimated earnings on uncompleted
contracts............................................................ (2,788,820) (5,707,947)
----------- -----------
$(2,020,411) $(4,408,332)
============ ============
F-26
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE O -- 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,
2001 2001 2002 2002 2002 2002 2003 2003
---- ---- ---- ---- ---- ---- ---- ----
Revenue earned net of
discontinued operations ............... 16,684 18,897 18,793 23,512 14,097 14,173 14,838 16,716
Revenue earned from
discontinued operations ............... 873 816 923 684 451 379 250 253
------ ------ ------ ------ ------ ------ ------ ------
Total revenue earned .................... 17,557 19,713 19,716 24,196 14,548 14,552 15,088 16,969
------ ------ ------ ------ ------ ------ ------ ------
Gross profit net of
discontinued operations ............... 2,104 2,112 1,874 3,012 1,796 2,338 3,579 3,126
Gross profit from
discontinued operations ............... 389 408 387 334 251 194 6 25
------ ------ ------ ------ ------ ------ ------ ------
Total gross profit ...................... 2,493 2,520 2,261 3,346 2,047 2,532 3,585 3,151
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) from
continuing operations ................. (132) (640) (1,423) (19) (338) (485) 642 (131)
Net loss from
Discontinued operations ............... 1,386 1,116 3,595 1,272 650 1,043 464 622
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) ....................... (1,518) (1,756) (5,018) (1,291) (988) (1,528) 178 (753)
====== ====== ====== ====== ====== ====== ====== ======
Basic and diluted
income (loss) per share
from continuing operations ............ (0.01) (0.04) (0.09) (0.00) (0.02) (0.03) 0.04 (0.01)
====== ====== ====== ====== ====== ====== ====== ======
Basic and diluted
income (loss) per share
from discontinued operations .......... (0.08) (0.07) (0.21) (0.08) (0.04) (0.06) (0.03) (0.04)
====== ====== ====== ====== ====== ====== ====== ======
Basic and diluted
Income (loss) per share ............... (0.09) (0.11) (0.30) (0.08) (0.06) (0.09) 0.01 (0.05)
F-27
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE P - DISCONTINUED OPERATIONS
In November 2002, the Company announced its intent to sell substantially all of
the assets of ParaComm. The carrying value of the ParaComm assets held for sale
at June 30, 2003, represented, substantially, all of the assets of the Company's
communications business. Since the Company intended on selling the ParaComm
assets within twelve months of November 2002, the ParaComm assets are reported
as a separate line item, "Assets held for sale" on the Company's consolidated
balance sheet at June 30, 2003. The communications operations for the year ended
June 30,2003 are reported as discontinued on the Company's consolidated
statement of operations for the year ended June 30, 2003. Additionally, the
Company's consolidated statements of operations for the years ended June 30,
2002 and 2001 have been restated to report the communications operations as
discontinued. Selected quarterly unaudited financial data from continued and
discontinued operations is presented in Note O.
The results of operations for the Company's discontinued communications business
were as follows (in thousands):
YEARS ENDED JUNE 30,
- --------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Revenues earned................................. $1,334 $3,296 $3,480
------ ------ ------
Loss from discontinued communications business 2,779 7,369 12,062
Income tax (benefit) -- -- --
------ ------ ------
Loss from discontinued operations 2,779 7,369 12,062
------ ------ ------
The major classes of assets and liabilities for the Company's discontinued
communications business were as follows (in thousands):
JUNE 30,
--------
2003 2002
------- -------
Accounts receivable - net ................................... $ 37 $ 546
------- -------
Property and equipment -- net (held for sale at June 30,2003) 484 2,150
Total Current Assets .................................... 521 546
Property and equipment -- net (held for sale at June 30,2003) -- 2,150
------- -------
Total Assets ............................................ $ 521 $ 2,696
======= =======
Due to affiliates ........................................... $24,695 $23,994
Accounts payable ............................................ 1,274 1,169
Accrued expenses ............................................ 1,408 1,635
------- -------
Total Current Liabilities ............................... 27,377 26,798
------- -------
Total Liabilities ....................................... $27,377 $26,798
======= =======
The sale of ParaComm's assets was consummated in August 2003, pursuant to an
asset purchase agreement dated as of July 2003 by and among the Company,
ParaComm, Madeleine, and PCM Acquisitions Corp. The ParaComm sale finalized the
Company's discontinuance of its communications business. Details of the asset
purchase agreement are presented in Notes A and E.
F-28
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 29, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the date indicated.
Signature Title Date
- ----------- ----- ----
/s/ GREGORY CUNEO President, Chief September 29, 2003
Executive Officer and Director
- --------------------
Gregory Cuneo
/s/ ROBERT BIRNBACH Executive Vice President and September 29, 2003
Chief Financial Officer
- -------------------- [Principal Financial
Robert Birnbach Officer]
/s/ MICHAEL GIAMBRA Vice President and Chief September 29, 2003
Accounting Officer
- -------------------- [Principal Accounting
Michael Giambra Officer]
/s/ RAYMOND STEELE Director September 29, 2003
- --------------------
Raymond Steele
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-K
COMMISSION FILE NUMBER 0-25552
11-30 47TH AVENUE, LONG ISLAND CITY, NEW YORK 11101
(Address of principal executive offices) (Zip Code)
DELAWARE 13-3776834
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
(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)
Number Title
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)
10.17 Asset Purchase Agreement, dated as of July 9, 2003 by and among the
Company, ParaComm, Madeleine, and PCM Acquisition Corp. (6)
10.18 Global Bonding general agreement of indemnity. (7)
21.1 Subsidiaries of the Registrant.(7)
23.1 Consent of Grassi & Co., CPAs, P.C. (7)
23.2 Consent of Grant Thornton LLP.(7)
31.1 Rule 13a-14(a)/15d-14(a) Certification. (7)
31.2 Rule 13a-14(a)/15d-14(a) Certification. (7)
32.1 Section 1350 Certification. (7)
32.2 Section 1350 Certification. (7)
(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) Incorporated herein by reference to Registrant's Current Report on Form 8-K
(File No. 000-25552) filed on August 19, 2003.
(7) Attached hereto.