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, 2004
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to __________
COMMISSION FILE NUMBER 0-25552
DUALSTAR TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3776834
- --------------------------------- -------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
47-25 34TH STREET, LONG ISLAND CITY, NEW YORK 11101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 784-2514
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 $7,998,713 based upon
the closing price ($0.35) for such common equity on such date. The number of
shares outstanding of the Registrant's Common Stock, as of December 31, 2003,
was 24,161,467.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of October 4, 2004 was approximately $3,656,715 based upon the
closing price ($0.16) for such common equity on such date. The number of shares
outstanding of the Registrant's Common Stock, as of October 4, 2004, was
24,161,467.
DOCUMENTS INCORPORATED BY REFERENCE
None.
-i-
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, the ability of the Company to raise and provide the capital
resources to fund operating losses that occur through the operation of the
construction business, the Company's ability to obtain surety bonds, the
Company's ability to continue to obtain insurance 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 Securities and
Exchange Commission (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 electrical and mechanical
construction-related businesses. The Company completed the discontinuance of its
communications business in August 2003.
On November 8, 2000, the Company consummated a $12.5 million senior secured loan
transaction with Madeleine (the "Madeleine Loan"). As a result of unpaid,
accrued interest, the Madeleine Loan grew. The Company ultimately extinguished
$17.3 million of indebtedness owed to Madeleine under the Madeleine Loan
according to the following transactions:
(1) On August 1, 2003, the Company and its wholly owned subsidiary, ParaComm,
Inc. ("Paracomm"), consummated the sale to an affiliate of its then-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 $4.2 million (principal plus
capitalized accrued interest) of the amount of a note of the Company to
Madeleine. Madeleine is an affiliate of Blackacre Capital Management L.L.C.
(through common management and control) and Cerberus Capital Management L.P.
This transaction resulted in a gain of $3.7 million.
(2) As of October 27, 2003, the Company owed Madeleine approximately $13.1
million that remained on the Madeleine Loan. As reported in the Company's
Current Report on Form 8-K filed on November 12, 2003, the Company completed
transactions by which the Company reduced to zero its indebtedness to Madeleine
on October 27, 2003. To consummate that transaction, the Company and its wholly
owned subsidiary Property Control, Inc. sold and conveyed to an affiliate of
Madeleine certain real property in Long Island City, New York. The consideration
for the sale was the reduction of $3 million principal amount of the Company's
outstanding note to Madeleine. Also on October 27, 2003, the Company issued to
Madeleine an aggregate of 7,659,899 shares of the Company's common stock. The
issuance of such shares was in consideration of the reduction to zero of the
Company's remaining indebtedness to Madeleine in the approximate aggregate
amount of $10.1 million (principal plus accrued interest). These transactions
resulted in a net gain of $1.6 million. The Company also granted certain
registration rights to Madeleine. In connection with the transaction, certain
officers and management employees surrendered options to purchase an aggregate
of 2,248,000 shares of common stock and DSTR Warrant Co., LLC, an affiliate of
Madeleine, terminated warrants to purchase 3,125,000 shares of common stock. New
options may be granted to management, subject to shareholder approval.
Madeleine, as record holder, currently owns approximately 31.7% of the total
outstanding common stock of the Company. As provided in a Schedule 13D/A filed
with the SEC, Mr. Stephen Feinberg is the beneficial owner of the shares held by
Madeleine.
Upon the consummation of the transactions with Madeleine and its affiliates (as
noted above), which occurred on August 1, 2003 and on October 27, 2003, the
Company no longer has any indebtedness to Madeleine.
On August 20, 2004, High-Rise Electric, Inc. ("High-Rise"), a wholly owned
subsidiary of DualStar, entered into a loan agreement in the amount of
$2,000,000 from Gary Segal of Ozone Park, NY. Under the terms of the loan
agreement, the loan accrues interest at the rate of 5.5% per annum, which rate
is adjusted on the first day of each month commencing October 1, 2004 to one
point above the then prime rate; is payable on demand; is secured by certain
accounts receivable of High-Rise; and is guaranteed by DualStar and secured by a
pledge of the capital stock of High-Rise. The description of the terms of this
loan agreement are subject to the terms of the agreements as filed in the
Company's Current Report on Form 8-K filed on August 26, 2004.
DualStar and Mr. Segal are exploring a possible sale of High-Rise to Mr. Segal.
No terms for any sale have been reached. Any such transaction is subject to
completion of due diligence by Mr. Segal, execution of definitive agreements,
and approval by the Boards of Directors of DualStar and of High-Rise and the
shareholders of DualStar. Mr. Segal is a principal of Five Star Electric, Inc.,
a large electrical contractor that primarily does large government work.
The Company incurred significant operating losses in the last several fiscal
years. The Company completed the discontinuance of its communications business
in August 2003. There can be no assurance that the construction related
businesses will attain or sustain profitability or positive cash flow from
future operations. If the Company does not effectively manage its working
capital, it may need to implement additional cost containment measures, seek
additional financing, and/or seek to renegotiate its contractual obligations.
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 businesses. This uncertainty may create a concern among the
Company's current and future customers and vendors as to whether it will be able
to fulfill its contractual obligations. As a result, current and future
customers may determine not to do business with the Company, or only do so on
less favorable terms, which would cause the Company's revenues to decline.
Employee concern about the future of the business and their continued prospects
for employment may cause them to seek employment elsewhere, depriving the
Company of the human capital it needs to be successful. If the Company cannot
raise additional funds for continuing operations or if the Company cannot obtain
a sufficient amount of new work due to its inability to obtain surety bonds, 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.
DualStar is a Delaware corporation. Its principal place of business is located
at 47-25 34th Street, Long Island City, New York 11101. DualStar's telephone
number is (718) 784-2514.
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 October 4,
2004, there were 24,161,467 shares of Common Stock issued and outstanding.
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, formed in July 1995, Integrated Controls Enterprises, Inc. ("ICE"),
formed in August 1996, BMS Electric, Inc. ("BMS"), formed in July 2000, and
Property Control, Inc. ("PCI"), formed in June 1995. The inactive
communications-related subsidiaries of DualStar consist of OnTera, Inc.
("OnTera") (formerly known as DualStar Communications, Inc.), formed in February
1996, and ParaComm, acquired by DualStar in May 2000. The communications
subsidiaries are wholly owned and inactive. DualStar wholly owns each
subsidiary.
The Company historically has engaged in two business segments: construction and
communications. The Company completed the discontinuance of its communications
business in August 2003 and now only does construction-related business.
BUSINESS AND OPERATING STRATEGIES.
Overview. High-Rise designs and installs sophisticated electrical systems for
newly constructed residential and commercial high-rise buildings. CMA designs
and installs sophisticated heating, ventilation and air conditioning (HVAC)
systems for newly constructed residential and commercial high-rise buildings.
Additionally, CMA engages in mechanical contracting services, i.e. heating,
ventilation and air conditioning (HVAC) services. High-Rise's and CMA's
engagements are generally performed under fixed price long-term contracts
undertaken with general contractors, with the lengths of such long-term
contracts varying, but typically ranging from one to two years.
ICE supplies, installs and services facility management, energy management,
building automation, and commercial temperature control systems. In general, ICE
acts as a subcontractor to mechanical subcontractors, including those of the
Company. ICE also works directly for real property owners and general
contractors.
BMS installs and services electrical systems, concentrating on low-voltage work
in the areas of building management systems and controls, and fire and security,
mostly on new construction work.
PCI owns or manages the Company's fixed asset or office peripheral needs, e.g.,
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, 2004, revenue from two customers (Bovis Lend Lease, Inc. and HRH
Construction) amounted to approximately 18% and 35% of the Company's total
revenues, respectively. For the year ended June 30, 2003, revenue from two
customers (Bovis Lend Lease, Inc. and HRH Construction) 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.)
amounted to approximately 64% of the Company's total revenues. In addition, as
of June 30, 2004, contract and retainage receivables from Bovis Lend Lease, Inc.
and HRH Construction amounted to approximately 24% and 29% of the Company's
total contract and retainage receivables, respectively. As of June 30, 2003,
contract and retainage receivables from Bovis Lend Lease, Inc. and HRH
Construction amounted to approximately 15% and 28% of the Company's total
contract and retainage receivables, respectively. As of June 30, 2002, contract
and retainage receivables from Bovis Lend Lease, Inc. amounted to approximately
52% of the Company's total contract and retainage receivables. In addition, for
the fiscal year ended June 30, 2002 , approximately 0.2% of the Company's total
revenues were derived from HRH Construction. DualStar's President and Chief
Executive Officer is also the Chairman of HRH Construction. HRH Construction is
an affiliate of Blackacre. Blackacre has a minority ownership interest in HRH
Construction. Blackacre is an affiliate, through common management and control,
of Madeleine, LLC, previously a senior lender to the Company (described above in
Item 1 - Business, under the subcaption "Overview"). Brad Singer is President of
HRH Construction and a member of Technology Investors Group, LLC ("TIG"). TIG is
a 7.4% shareholder of the Company. High-Rise is acting as a subcontractor to HRH
Construction on a job for the Metropolitan Transportation Authority. High-Rise
has experienced an estimated loss on this job of approximately $5 million, of
which all of such loss is recognized in the fiscal year ended June 30, 2004.
High-Rise and HRH Construction have not yet reached contract terms on this job.
Manufacturing. The Company's production facilities fabricate and assemble
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. The manufacturing
operation supports the Company's construction projects; the Company does not
manufacture products for direct sales to customers.
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 performs work for property owners, general contractors, and mechanical
contractors in addition to serving CMA. BMS sells most of its services to ICE,
although 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. With the
exception of cash flow limiting the Company's ability to make purchases, the
Company has not experienced any significant difficulty in obtaining adequate
supplies to perform under its contracts.
At June 30, 2004, the backlog of the Company's construction business was
approximately $41 million; and at June 30, 2003, it was approximately $38
million. The Company believes that most of its backlog at June 30, 2004 will be
completed prior to December 31, 2005, 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, if it had the ability to obtain payment and
performance bonds from a stable surety credit facility, it would 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. The Company can give no assurance it will be able to
compete successfully in the future.
In both the private and public sectors, the Company, acting either as a prime
contractor or as a subcontractor, occasionally joins with other firms to form a
team that competes for contracts by submitting a jointly prepared proposal.
Because a team of firms will usually offer a stronger set of qualifications than
any single firm, teaming arrangements are generally advantageous to the
Company's success. These teaming relationships, however, generate risk to the
Company in the event that a non-DualStar team member experiences financial
difficulty or is otherwise unable to fulfill its responsibilities on the
project. The Company maintains a large network of business relationships with
other companies and has drawn repeatedly upon these relationships to form
winning teams. Moreover, each DualStar subsidiary may market its services
independently, with the potential to offer in concert with other DualStar
subsidiaries, comprehensive and complementary services on multi-million dollar
construction projects.
The majority of the Company's work is traditionally in the private sector. To
the extent the Company performs public sector work, such construction contracts
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 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 can make no
assurances that it may be able to continue to successfully bid and compete in
its marketplace.
As noted above, the Company completed the discontinuance of its communications
related businesses in August, 2003. Such businesses were carried out through
OnTera, Inc. (retail communications services to the residential apartment
building market) and ParaComm, Inc. (subscription TV services). These
subsidiaries experienced significant competition and losses, which resulted in
the discontinuance of the Company's communications business.
PATENT, TRADEMARK, SERVICE MARK, COPYRIGHT AND PROPRIETARY RIGHTS.
The Company has in the past registered trademarks and service marks, which are
not material to the Company's current business.
The Company may in the future file patent or copyright applications, or
additional trademark or service mark applications, relating to certain of the
Company's mechanical, electrical, electronic, control, environmental,
information technology, security, entertainment and communications products and
services. Nevertheless, if patents are issued, or trademarks, service marks or
copyrights are registered, there can be no assurance as to the extent of the
protection that will be granted to the Company as a result of having such
patents, trademarks, service marks or copyrights, or that the Company will be
able to afford the expenses of any complex litigation which may be necessary to
enforce its proprietary rights. Failure of any future or existing patents,
trademark, service mark and copyright applications may have a material adverse
impact on the Company's business since the Company may not otherwise be able to
protect the proprietary or trade secret aspects of its business and operations,
thereby diluting the Company's ability to compete in the marketplace. Except as
may be required by the filing of patent, trademark, service mark and copyright
applications, the Company will attempt to keep all other proprietary information
secret and to take such actions as may be necessary to insure the results of its
development activities are not disclosed and are protected under the common law
concerning trade secrets. Such steps may include the execution of nondisclosure
agreements by key Company personnel and may also include the imposition of
restrictive agreements on purchasers of the Company's products and services.
There is no assurance that the execution of such agreements will be effective to
protect the Company, that the Company will be able to enforce the provisions of
such nondisclosure agreements or that technology and other information acquired
by the Company pursuant to its development activities will be deemed to
constitute trade secrets by any court of competent jurisdiction.
CONSTRUCTION BUSINESS REGULATION.
Our operations are subject to compliance with regulatory requirements of
federal, state, and local agencies and authorities, including regulations
concerning workplace safety and labor relations. We are also subject to
substantial environmental laws that 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.
EMPLOYEES.
As of June 30, 2004, the Company employed 356 full-time employees, of which 18
are engaged in administration and finance. Of the remaining full-time employees,
338 are employed by the various construction subsidiaries of the Company, with
337 engaged in manufacturing, engineering and production and 1 in marketing and
sales. 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, 2004, the Company had 332 employees that
were represented by labor organizations. The Company has never experienced a
work stoppage. Management of the Company believes that it has a healthy
relationship with its employees.
RISK FACTORS
AN INVESTMENT IN THE COMPANY'S SECURITIES INVOLVES A HIGH DEGREE OF RISK AND
SHOULD BE CONSIDERED ONLY BY INVESTORS WHO CAN AFFORD THE RISK OF LOSS OF THEIR
ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS BEFORE INVESTING IN THE COMPANY'S SECURITIES. SEE ALSO NOTE ON
FORWARD-LOOKING STATEMENTS.
THE COMPANY MAY BE UNABLE TO CONTINUE OPERATIONS DUE TO OPERATING LOSSES
The Company incurred significant operating losses in the last several fiscal
years. The Company completed the discontinuance of its communications business
in August 2003. There can be no assurance that the construction related
businesses will attain or sustain profitability or positive cash flow from
future operations. If the Company does not effectively manage its working
capital, it may need to implement additional cost containment measures, seek
additional financing, and/or seek to renegotiate its contractual obligations.
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 businesses. This uncertainty may create a concern among the
Company's current and future customers and vendors as to whether the Company
will be able to fulfill its contractual obligations. As a result, current and
future customers may determine not to do business with the Company, or only do
so on less favorable terms, which would cause the Company's revenues to decline.
Employee concern about the future of the business and their continued prospects
for employment may cause them to seek employment elsewhere, depriving the
Company of the human capital it needs to be successful. If the Company cannot
raise additional funds for continuing operations or if the Company cannot obtain
a sufficient amount of new work due to its inability to obtain surety bonds, the
Company will likely be forced to cease operations. Accordingly, there is
substantial doubt about the Company's ability to continue as a going concern.
The Company's independent registered public accounting firm has included in its
report on the Company's consolidated financial statements for the fiscal year
ended June 30, 2004 a going concern explanatory paragraph, which states that the
Company has uncertain revenue streams and a low level of liquidity that raise
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
THE COMPANY'S BUSINESS RELIES ON OBTAINING ADEQUATE SURETY BONDS; IF THE
COMPANY CANNOT OBTAIN SUCH BONDING, THE COMPANY'S REVENUES, RESULTS OF
OPERATIONS, AND ABILITY TO OBTAIN NEW CONTRACTS SHALL BE HARMED
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 continues to consider 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. As the Company has been unable
to obtain surety bonds as needed, this has had and shall continue to have a
material adverse effect on the Company's income, revenues and profits. The
Company's inability to supply payment and performance bonds required on
particular projects has affected negatively and continues to affect negatively
the Company's ability to acquire new work; in addition, this inability has
affected negatively and continues to affect negatively the Company's cash flow
as customers have refrained from making regular payments on jobs in customary
fashion due to the Company's lack of bonding, erratic cash flow and uncertainty
over its future. The Company is continuing to negotiate with its customers to
obtain progress payments as those projects progress.
THE COMPANY IS DEPENDENT ON CERTAIN MAJOR CUSTOMERS
The Company has two major construction customers largely in the New York
metropolitan area, who are very important to the Company's business. The loss of
one or more of these major customers could materially adversely affect the
Company's business, its results of operations and financial condition.
THE COMPANY DEPENDS ON KEY MANAGEMENT
The Company's business is dependent upon a small number of key executives and,
in some instances, the licenses they hold. 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."
THE COMPANY FACES SUBSTANTIAL COMPETITION IN ITS LOCAL MARKETS
Electrical and mechanical contracting, which represent the Company's core
businesses, are characterized by intense and substantial competition in the New
York metropolitan area. As a result of such competition, 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. The Company
may be unable to continue to obtain new contracts with satisfactory profit
margins.
THE COMPANY MAY SUFFER CASUALTY LOSSES IN EXCESS OF INSURANCE COVERAGE
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.
THE COMPANY'S BUSINESS IS SUBJECT TO ENVIRONMENTAL RISKS
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.
THE COMPANY'S BUSINESS IS SUBJECT TO THE LOCAL AND NATIONAL ECONOMIC CLIMATE;
SOCIAL, POLITICAL AND ECONOMIC RISKS MAY ADVERSELY AFFECT OPERATIONS
Acts of terrorism caused major instability in the U.S. and other financial
markets. 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.
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. On October 27, 2003, as part of the
Madeleine Loan extinguishment (described above in Item 1 - Business, under the
subcaption "Overview"), PCI sold and conveyed such real property to Madeleine.
The Company continued to operate out of that location for the remainder of this
fiscal year.
DualStar, High-Rise, and BMS now lease approximately 10,000 square feet of
office and warehouse space at 47-25 34th Street, Long Island City, NY 11101.
This lease started in September 2004. CMA leases 2,000 square feet of office
space, rent-free from Diversified Mechanical Associates, Inc., an affiliate of
HRH Construction, at 200 Marine Street, Farmingdale, NY 11735. This lease
started in July 2004. ICE leases space, rent-free from HRH Construction at 50
Main Street, White Plains, NY 10606. This lease started in August 2004. Mr.
Cuneo is Chairman of HRH Construction. CMA also continues to lease, 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 its current facilities are adequate, and 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.
The Company currently uses approximately 85% of its facilities' available
capacity. Total rental expense for the Company for recent periods is as follows:
PERIOD EXPENSE
- ----------- -------------
Year ended June 30, 2004.......................$ 60,000
Year ended June 30, 2003.......................$124,000
ITEM 3 - LEGAL PROCEEDINGS
(a) In connection with its construction-related businesses, the Company is
contingently liable to sureties under a general indemnity agreement. The Company
has agreed to indemnify the sureties for any payments made on contracts of
suretyship, guarantee or indemnity. That is, on certain work at the request of
the Company, the sureties provide a full guarantee of performance and/or payment
to third parties in the form of a bond. If the sureties pay an amount to third
parties pursuant to such bond, the Company is obligated to fully reimburse the
sureties. There is no dollar amount limit on the amount of the indemnity
provided to the sureties.
(b) In August 2001, OnTera, a wholly owned subsidiary of the Company, formerly
in the telecommunications business, signed a promissory note and security
agreement with a telecommunications equipment provider 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. In August 2002, such equipment
provider filed suit claiming damages of approximately $607,000 plus interest,
costs and attorneys on the promissory note. In April 2004 a civil judgement was
awarded to plaintiff in New York State in the amount of $873,163. The judgement
has not been satisfied. The network equipment had no useful value to the Company
and has been disposed of.
(c) 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.
(d) In April 2003, a former employee of the Company commenced a lawsuit to
recover damages for the alleged failure of the Company to honor options to
purchase shares of the Company's common stock pursuant to the 1994 Stock Option
Plan. Plaintiff seeks $462,500 in damages. Management has responded by
vigorously contesting the claims. Trial is scheduled in this case for November
2004. At this time, we are unable to predict the likelihood of an unfavorable
outcome in this case or the range of potential loss, if any, in the event of an
unfavorable outcome.
(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
condensed consolidated financial statements.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
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, 2003 and June 30, 2004 and for the first quarter
(through October 4, 2004) of the Company's fiscal year ending June 30, 2005.
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 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 $0.41 $0.25
Second Quarter $0.60 $0.22
Third Quarter $0.50 $0.35
Fourth Quarter $0.51 $0.20
Fiscal 2005
- -----------
First Quarter (through October 4, 2004) $0.27 $0.11
As of October 4, 2004, there were 134 record holders of the Company's Common
Stock.
The Company has not declared any dividends since its incorporation. The Company
does not anticipate the declaration or payment of dividends in the foreseeable
future. Future dividend policy will be subject to the discretion of the Board of
Directors and will be contingent upon future earnings, the Company's financial
condition, capital requirements, general business conditions and other factors.
ITEM 6 - SELECTED FINANCIAL DATA
DUALSTAR TECHNOLOGIES CORPORATION
SELECTED FINANCIAL DATA(1)
(Dollars in thousands, except per share data)
YEAR ENDED JUNE 30,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenue from continuing operations $71,179 $59,824 $77,885 $79,738 $85,225
Operating (loss) income from continuing operations (7,709) 1,515 948 (2,126) (3,256)
Net (loss) income from continuing operations (3,221) (312) (2,214) (3,651) (3,322)
Loss from discontinued operations 67 2,779 7,369 12,062 5,329
Net (loss) income (3,289) (3,091) (9,583) (15,713) (8,651)
Basic (loss) income from continuing operations per (0.13) (0.02) (0.13) (0.22) (0.26)
share
Diluted (loss) income from continuing operations per (0.13) (0.02) (0.13) (0.22) (0.26)
share
Basic loss from discontinued operations per share (0.00) (0.17) (0.45) (0.73) (0.41)
Diluted loss from discontinued operations (0.00) (0.17) (0.45) (0.73) (0.41)
Basic (loss) income per share (0.14) (0.19) (0.58) (0.95) 0.67
Diluted (loss) income per share (0.14) (0.19) (0.58) (0.95) 0.67
JUNE 30,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $2,151 $(5,012) $(4,274) $13,836 $16,404
Total assets 23,340 26,221 37,440 43,573 58,400
Long-term liabilities 0 0 0 14,340 1,921
Stockholders' equity (deficit) 3,343 (3,437) (603) 8,778 24,605
(1) The Selected Financial Data represent the consolidated data for the years
ended June 30, 2004, 2003, 2002, 2001, and 2000.
ITEM 7 - 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, through its wholly owned subsidiaries, operates electrical and
mechanical construction-related businesses. The Company completed the
discontinuance of its communications business in August 2003.
On November 8, 2000, the Company consummated a $12.5 million senior secured loan
transaction with Madeleine (the "Madeleine Loan"). As a result of unpaid,
accrued interest, the Madeleine Loan grew. The Company ultimately extinguished
$17.3 million of indebtedness owed to Madeleine under the Madeleine Loan
according to the following transactions:
(1) On August 1, 2003, the Company and its wholly owned subsidiary, ParaComm,
consummated the sale to an affiliate of its then-senior lender, 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 $4.2 million (principal plus capitalized accrued interest) of
the amount of a note of the Company to Madeleine. Madeleine is an affiliate of
Blackacre Capital Management L.L.C. (through common management and control) and
Cerberus Capital Management L.P. This transaction resulted in a gain of $3.7
million.
(2) As of October 27, 2003, the Company owed Madeleine approximately $13.1
million that remained on the Madeleine loan. As reported in the Company's
Current Report on Form 8-K filed on November 12, 2003, the Company completed
transactions by which the Company reduced to zero its indebtedness to Madeleine
on October 27, 2003. To consummate that transaction, the Company and its wholly
owned subsidiary Property Control, Inc. sold and conveyed to an affiliate of
Madeleine certain real property in Long Island City, New York. The consideration
for the sale was the reduction of $3 million principal amount of the Company's
outstanding note to Madeleine. Also on October 27, 2003, the Company issued to
Madeleine an aggregate of 7,659,899 shares of the Company's common stock. The
issuance of such shares was in consideration of the reduction to zero of the
Company's remaining indebtedness to Madeleine in the approximate aggregate
amount of $10.1 million (principal plus accrued interest). These transactions
resulted in a net gain of $1.6 million. The Company also granted certain
registration rights to Madeleine. In connection with the transaction, certain
officers and management employees surrendered options to purchase an aggregate
of 2,248,000 shares of common stock and DSTR Warrant Co., LLC, an affiliate of
Madeleine, terminated warrants to purchase 3,125,000 shares of common stock. New
options may be granted to management, subject to shareholder approval. Madeleine
currently owns approximately 31.7% of the total outstanding common stock of the
Company. As provided in a Schedule 13D/A filed with the SEC, Mr. Stephen
Feinberg is the beneficial owner of the shares held by Madeleine.
On August 20, 2004, High-Rise, a wholly owned subsidiary of DualStar, entered
into a loan agreement in the amount of $2,000,000 from Gary Segal, of Ozone
Park, NY. Under the terms of the loan agreement, the loan accrues interest at
the rate of 5.5% per annum, which rate is adjusted on the first day of each
month commencing October 1, 2004 to one point above the then prime rate; is
payable on demand; is secured by certain accounts receivable of High-Rise; and
is guaranteed by DualStar and secured by a pledge of the capital stock of
High-Rise. The description of the terms of this loan agreement are subject to
the terms of the agreements as filed in the Company's Current Report on Form 8-K
filed on August 26, 2004.
DualStar and Mr. Segal are exploring a possible sale of High-Rise to Mr. Segal.
No terms for any sale have been reached. Any such transaction is subject to
completion of due diligence by Mr. Segal, execution of definitive agreements,
and approval by the Boards of Directors of DualStar and of High-Rise and the
shareholders of DualStar. Mr. Segal is a principal of Five Star Electric, Inc.,
a large electrical contractor that primarily does large government work.
High-Rise is acting as a subcontractor to HRH Construction on a job for the
Metropolitan Transportation Authority. High-Rise has experienced an estimated
loss on this job of approximately $5 million, of which all of such loss is
recognized in the fiscal year ended June 30, 2004. High-Rise and HRH
Construction have not yet reached contract terms on this job.
CAPITAL RESOURCES AND LIQUIDITY
The Company incurred significant operating losses in the last several fiscal
years. The Company completed the discontinuance of its communications business
in August 2003. There can be no assurance that the construction related
businesses will attain or sustain profitability or positive cash flow from
future operations. If the Company does not effectively manage its working
capital, it may need to implement additional cost containment measures, seek
additional financing, and/or seek to renegotiate its contractual obligations.
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 businesses. This uncertainty may create a concern among the
Company's current and future customers and vendors as to whether the Company
will be able to fulfill its contractual obligations. As a result, current and
future customers may determine not to do business with the Company, or only do
so on less favorable terms, which would cause the Company's revenues to decline.
Employee concern about the future of the business and their continued prospects
for employment may cause them to seek employment elsewhere, depriving the
Company of the human capital it needs to be successful. If the Company cannot
raise additional funds for continuing operations or if the Company cannot obtain
a sufficient amount of new work due to its inability to obtain surety bonds, the
Company will likely be forced to cease operations. Accordingly, there is
substantial doubt about the Company's ability to continue as a going concern.
The Company's independent registered public accounting firm has included in its
report on the Company's consolidated financial statements for the fiscal year
ended June 30, 2004 a going concern explanatory paragraph, which states that the
Company has uncertain revenue streams and a low level of liquidity that raise
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
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 continues to consider 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. As the Company has been unable
to obtain surety bonds as needed, this has had and shall continue to have a
material adverse effect on the Company's income, revenues and profits. The
Company's inability to supply payment and performance bonds required on
particular projects has affected negatively and continues to affect negatively
the Company's ability to acquire new work; in addition, this inability has
affected negatively and continues to affect negatively the Company's cash flow
as customers have refrained from making regular payments on jobs in customary
fashion due to the Company's lack of bonding, erratic cash flow and uncertainty
over its future. The Company is continuing to negotiate with its customers to
obtain progress payments as those projects progress.
The Company is currently limited to pursuing new work that does not require the
Company to provide payment and performance bonds. The Company's management is
developing plans to streamline operations to obtain better profit margins on
such non-bonded work. Moreover, (as described above and in Item 1 - Business
under the subcaption "Overview") the Company is considering plans to sell off
additional assets or the Company may make other financial arrangements to arrive
at a better financial position, which may help the Company's chances of securing
a stable and credible bonding facility on continuing operations.
The following table provides a summary of the effect on liquidity and cash flows
from the Company's contractual obligations as of June 30, 2004.
Contractual Obligations Payments due by period
Total Less than 1 year 1-3 years 3-5 years More than
5 years
----------------------------------------------------------------------
Employment agreements $1,839,000 $820,000 $1,019,000 -- --
Noncancellable operating leases 209,000 111,000 98,000 -- --
Total $2,048,000 $931,000 $1,117,000 -- --
The Company entered into additional noncancellable operating leases subsequent
to June 30, 2004. The following table provides a summary of the effect on
liquidity and cash flows from these subsequent events.
Contractual Obligations Payments due by period
Total Less than 1 year 1-3 years 3-5 years More than
5 years
----------------------------------------------------------------------
Noncancellable operating leases $799,000 $126,000 $391,000 $282,000 --
Total $799,000 $126,000 $391,000 $282,000 --
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, 2004.
INFLATION
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 operating losses in the last several fiscal
years. The Company completed the discontinuance of its communications business
in August 2003. There can be no assurance that the construction related
businesses will attain or sustain profitability or positive cash flow from
future operations. If the Company does not effectively manage its working
capital, it may need to implement additional cost containment measures, seek
additional financing, and/or seek to renegotiate its contractual obligations.
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 businesses. This uncertainty may create a concern among the
Company's current and future customers and vendors as to whether the Company
will be able to fulfill its contractual obligations. As a result, current and
future customers may determine not to do business with the Company, or only do
so on less favorable terms, which would cause the Company's revenues to decline.
Employee concern about the future of the business and their continued prospects
for employment may cause them to seek employment elsewhere, depriving the
Company of the human capital it needs to be successful. If the Company cannot
raise additional funds for continuing operations or if the Company cannot obtain
a sufficient amount of new work due to its inability to obtain surety bonds, 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.
High-Rise is acting as a subcontractor to HRH Construction on a job for the
Metropolitan Transportation Authority. High-Rise has experienced an estimated
loss on this job of approximately $5 million, of which all of such loss is
recognized in the fiscal year ended June 30, 2004. High-Rise and HRH
Construction have not yet reached contract terms on this job.
The Company's independent registered public accounting firm has included in its
report on the Company's consolidated financial statements for the fiscal year
ended June 30, 2004 a going concern explanatory paragraph, which states that the
Company has uncertain revenue streams and a low level of liquidity that raise
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Net Revenues from Continuing Operations
- ---------------------------------------
2004 2003 2002
---------------- -------------- ---------------
($ million) ($ million) ($ million)
---------------- -------------- ---------------
71.2 59.8 77.9
================ ============== ===============
Loss from Continuing Operations
- -------------------------------
2004 2003 2002
---------------- -------------- ---------------
($ million) ($ million) ($ million)
---------------- -------------- ---------------
(3.3) (0.3) (2.2)
================ ============== ===============
Revenue from continuing operations increased $11.4 million or 19.1% from $59.8
million in 2003 to $71.2 million in 2004. The increase was primarily due to an
increase in construction contracts started in 2004, and larger construction
contracts started in 2003 and 2004.
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 increased $23.5 million or 48.0% from $49.0 million in 2003 to
$72.5 million in 2004. In addition to the increase in revenue, the increase in
costs in 2004 over 2003 was due to a combination of an increase in construction
contracts started in 2004, larger construction contracts started in 2003 and
2004, increased costs on jobs started in 2003, and an accrued loss on
uncompleted contracts at June 30, 2004. Gross margin percentage decreased to
(1.6%) in 2004 from 18.1% in 2003. The decrease in gross margin percentage was
due to increased costs on jobs started in 2003, and an accrued loss on
uncompleted contracts at June 30, 2004. Essentially, the Company's inability to
obtain payment and performance bonds from a stable surety credit facility has
hindered the Company from successfully bidding jobs with customary higher
margins in 2003 and 2004. Due to this circumstance, the Company was forced to
take on jobs with lower margins, and in some instances, jobs with potential to
close at a loss. Some jobs have closed at a loss during 2004, and some jobs are
projected to close at a loss in 2005. An accrued loss has been recorded at June
30, 2004.
Operating income (loss) decreased $9.2 million or 613.3% from $1.5 million in
2003 to ($7.7) million in 2004. The decrease was due primarily to the severe
decrease in gross margin in 2004. There can be no assurance that the Company
will regain profitability or positive cash flow from future operations.
General and administrative expenses decreased $2.7 million or 30.0% from $9.0
million in 2003 to $6.3 million in 2004. The decrease in general and
administrative expenses included a $2.6 million decrease in payroll and related
costs due to the discontinuance of the communications segment and the
discontinuance of performance bonuses in the construction segment, a $0.2
million decrease in professional fees, and a $0.1 million increase in bad debt
expense.
Depreciation and amortization decreased $0.2 million or 66.7% from $0.3 million
in 2003 to $0.1 million in 2004. The decrease was due primarily to the
disposition of property and equipment in 2004.
Interest expense decreased $1.0 million or52.6% from $1.9 million in 2003 to
$0.9 million in 2004. The decrease was due primarily to the extinguishment of
$17.3 million of indebtedness owed to Madeleine, which was finalized on October
27, 2003.
See also Notes O and P to the Financial Statements, at Item 15, attached hereto.
Fiscal 2003 Compared to Fiscal 2002
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.
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.
New Accounting Standards Adopted
In March 2004, the Financial Accounting Standards Board (FASB) approved the
consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." The objective of this Issue is to provide guidance for identifying
impaired investments. EITF 03-1 also provides new disclosure requirements for
investments that are deemed to be temporarily impaired. The accounting
provisions of EITF 03-1 are effective for all reporting periods beginning after
June 15, 2004, while the disclosure requirements are effective only for annual
periods ending after June 15, 2004. The Company has evaluated the impact of the
adoption of EITF 03-1 and does not believe the impact is significant to the
Company's overall results of operations or financial position.
FASB Interpretation No. 46R:
In December 2003, the FASB issued revised Interpretation No. 46 ("FIN 46R"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.51,"
which was originally issued in January 2003. FIN 46R requires an investor who
absorbs the majority of the expected losses, receives a majority of its expected
returns, or both, (primary beneficiary) of a variable interest entity ("VIE") to
consolidate the assets, liabilities and results of operations of the entity. A
variable interest entity is an entity in which the equity investors do not have
a controlling interest or the equity investment at risk is insufficient to
finance the entity's activities without receiving additional subordinated
financial support from other parties. FIN 46R, as amended, was applicable for
public companies that have interests in VIE's or potential variable entities
commonly referred to as special-purpose entities ("SPE's") for periods ending
after December 15, 2003. Application by public entities for all other types of
entities is required in financial statements for the periods ending after March
15, 2004. Interests held in VIE's created after January 31, 2003 are subject to
the provisions of FIN 46R from the date of the Company's initial involvement
with the entity. The Company believes the adoption of FIN 46R will not have a
material impact on the Company's financial condition, results of operations or
liquidity.
RELATED PARTY TRANSACTIONS
(a) TechOne Capital Group LLC ("Tech One"), a private consulting and
investment firm of which Jared E. Abbruzzese, a former director of the Company,
was a principal, holds Class D Warrants to purchase 375,000 shares of Company
Common Stock. The Class D Warrants are subject to stockholder approval and other
conditions and were granted on April 13, 2000. TechOne provided consulting
services to the Company from August 12, 1999 until June 30, 2001. The Company
has no present plan to hold a stockholders' meeting for the purpose of seeking
stockholder approval for the Class D Warrants.
(b) Subject to stockholder approval and other conditions, Class D Warrants
to purchase 625,000 shares of Company Common Stock were granted to Technology
Investors Group, LLC ("TIG") on April 13, 2000. TIG is a 7.4% shareholder of the
Company. The Company has no present plan to hold a stockholders' meeting for the
purpose of seeking stockholder approval for the Class D Warrants.
(c) At June 30, 2004, the Company had outstanding loans to Messrs.
D'Onofrio and Cuneo in the amounts of $96,000 and $60,000 respectively. Also at
June 30, 2004, the Company had an outstanding loan from Mr. Fregara in the
amount of $45,000.
(i) An original loan to Mr. Donofrio 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. Mr. D'Onofrio is an employee of the Company.
(ii) The $60,000 loan to Mr. Cuneo is due on demand, with an interest
rate of 7.75% per annum. Mr. Cuneo is the President and CEO of
the Company.
(iii) The $45,000 loan from Mr. Fregara is due on demand with no
stated interest rate. Mr. Fregara is a Vice President of the
Company.
(d) For the fiscal years ended June 30, 2004, 2003, and 2002, approximately
35.2%, 17.1%, and 0.2% of the Company's total revenues were derived from jobs
with HRH Construction. Mr. Cuneo is also the Chairman of HRH Construction and
Mr. Brad Singer, President of HRH Construction, is a member of TIG.
From August 1999 to November 2002, Mr. Cuneo was (non-Director) Chairman of
Starrett Corporation, an affiliate of Blackacre. HRH Construction was an
affiliate of Starrett Corporation until September 2003, and remains an affiliate
of Blackacre. Mr. Cuneo is a 50% member of Starrett Consulting, L.L.C. and is
compensated as Chairman of HRH Construction via Starrett Consulting, L.L.C.,
which is funded by HRH Construction. Blackacre is an affiliate, through common
management and control, of Madeleine, LLC, previously a senior lender to the
Company, and presently a 31.7% owner of the Company's common stock. The
remaining interest in Starrett Consulting, L.L.C. is held by Mr. Brad Singer,
the President of HRH Construction and a member of TIG. TIG is a 7.4% shareholder
of the Company. In exchange for various services, including management services,
Starrett Consulting, L.L.C. receives an annual fee of $750,000 from HRH
Construction, plus an additional fee may be earned in certain circumstances. In
the last fiscal year, DualStar has been awarded no new work from HRH
Construction. High-Rise is acting as a subcontractor to HRH Construction on a
job for the Metropolitan Transportation Authority. High-Rise has experienced an
estimated loss on this job of approximately $5 million, of which all of such
loss is recognized in the fiscal year ended June 30, 2004. High-Rise and HRH
Construction have not yet reached contract terms on this job.
(e) CMA leases 2,000 square feet of office space, rent-free from
Diversified Mechanical Associates, Inc., an affiliate of HRH Construction, at
200 Marine Street, Farmingdale, NY 11735. The lease started in July 2004. ICE
leases space, rent-free from HRH Construction, at 50 Main Street, White Plains,
NY 10606. The lease started in August 2004.
(f) ICE received a $100,000 loan from HRH Construction in November 2003.
The loan is unsecured, due on demand, and bears no interest.
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, 2004, the Company had no debt. On August 20, 2004, High-Rise entered into a
$2 million loan agreement with Gary Segal (described in Item 1 under the
subcaption "Overview"), with an interest rate of 5.5% per annum, adjustable on
the first day of each month commencing October 1, 2004 to one point above the
then prime rate. The floating-rate debt is not likely to have its fair value
adversely affected if interest rates increase or decrease; and if it is
affected, 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, 2004. 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
None.
ITEM 9A - 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
disclosure controls as procedures as of June 30, 2004 are effective. There have
not been any changes in the Company's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fourth fiscal quarter ended June 30, 2004, that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
However, in July and August, 2004, several of DualStar's subsidiaries relocated
offices. The Company and remaining subsidiaries relocated their offices in
September 2004. The moves and their related disruptions, along with a
significant decrease in cash flow, caused a significant increase in workload on
the Company's accounting department, which in turn led to a disruption in the
Company's disclosure controls and procedures.
As a consequence of these disruptions, the Company was unable to complete its
work on the Annual Report in a timely manner to, in turn, enable the Company's
auditors to complete their audit prior to the filing deadline for the Company's
Annual Report on Form 10-K.
To rectify the situation, the Company utilized the services of its former Chief
Accounting Officer to oversee and coordinate the Company's financial reporting
in conjunction with the current Chief Accounting Officer. Furthermore, the
Company has strengthened its existing controls to manage the now physically
separated subsidiaries. The Company believes it has addressed its controls and
procedures issues and believes the remedial action taken has mitigated the noted
issues. As a result, the Company is confident that its financial statements for
the year ended June 30, 2004 fairly present, in all material respects, its
financial condition and results of operations. The Company will continue to
evaluate the effectiveness of its controls and procedures on an on-going basis
and will take further remedial corrective action as appropriate.
ITEM 9B - OTHER INFORMATION
None
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
Gregory Cuneo 45 President, Chief Executive Officer and Director
Raymond Steele 69 Director(1)(2)
Robert Birnbach 39 Executive Vice President and Chief Financial
Officer
Michael Giambra 39 Vice President and Chief Accounting Officer
Ronald Fregara 55 President of CMA & Vice President of DualStar
Stephen Yager 52 Vice President of CMA & Vice President & Secretary
of DualStar
Barry Halpern 52 President of High-Rise & Vice President of
DualStar
Nicholas Ahel 61 Vice President of High-Rise & Vice President of
DualStar
Peter Aiello 44 President of ICE & of BMS and Vice President &
Assistant Secretary of DualStar
(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.
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 DualStar from December 1998 until February
2000. From August 1999 to November 2002, Mr. Cuneo was (non-Director) Chairman
of Starrett Corporation, an affiliate of Blackacre. Mr. Cuneo is also Chairman
of HRH Construction. HRH Construction was an affiliate of Starrett Corporation
until September 2003, and remains an affiliate of Blackacre. Blackacre is an
affiliate of Madeleine, LLC, previously a senior lender to the Company
(described above in Item 1 - Business, under the subcaption "Overview"). Mr.
Cuneo and Mr. Birnbach are first cousins. Mr. Brad Singer is president of HRH
Construction and a member of Technology Investors Group, LLC ("TIG"). TIG is a
7.4% shareholder of the Company.
Raymond L. Steele, a retired businessman, has been a director of DualStar since
December 1998. Mr. Steele is also a director of American Bank Note, Globix
Corp., Motient Corp., and Horizon Offshore, Inc. He chairs the audit committees
of DualStar and Globix and also serves on the audit committee of Motient and
American Bank Note. 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 and Cerberus, from January 2000 until
November 2000. He was also a member of the board of directors of HRH
Construction Corp., an affiliate of Starrett, Cerberus 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 of DualStar 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
worked as a certified public accountant prior to April 1999.
Ronald Fregara, a founder of the Company, has been Vice President of DualStar
since July 2003. He served as an Executive Vice President of DualStar from
December 1996 until February 2000, and initially served as a Vice President of
DualStar from August 1994 until December 1996. Mr. Fregara has been President of
CMA since December 1996. Mr. Fregara was a member of DualStar's board of
directors from August 1994 until February 2000.
Stephen Yager, a founder of the Company, has been Vice President and Secretary
of DualStar since July 2003. He served as an Executive Vice President of
DualStar from August 1994 until February 2000, and initially served as Secretary
of DualStar 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 DualStar'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 has been Vice President and Assistant Secretary of
DualStar since July 2003.
The Board of Directors of the Company determined that Raymond L. Steele, the
audit committee member, has the requisite attributes of an "audit committee
financial expert" as defined by regulations promulgated by the Securities and
Exchange Commission and that such attributes were acquired through relevant
education and experience. The Board has also determined that Mr. Steele is
"independent" as defined by Item 7(d)(3)(iv) of Schedule 14A under the Exchange
Act.
The Company has adopted a code of ethics for senior officers, including its
chief executive officer, chief financial officer and chief accounting officer.
Such code is annexed as an exhibit to this Annual Report on Form 10-K.
The Board has codified its informal practices with regard to how stockholders
may recommend nominees to the Company's Board. A stockholder wishing to
recommend a person for consideration as a potential candidate for election to
the Board of Directors may do so by sending a written communication to the Board
in care of the Secretary of the Corporation at 47-25 34th Street, Long Island
City, New York 11101. Any submission to the Board must include (a) a written
statement signed by the potential candidate confirming that he or she wishes to
be considered as a candidate and would be willing and able to serve as a
Director if elected, and (b) a writing signed by the stockholder that includes
sufficient information and specificity to (i) enable the Board to confirm the
writer's status as a stockholder of the Corporation and (ii) allow the Board to
evaluate the potential candidate.
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,
2004.
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 2004 $275,000 $25,000 - $4,038
Chief Executive Officer 2003 $275,000 $25,000 - $4,038
2002 $275,000 $25,000 - $4,038
Barry Halpern 2004 $260,000 $ 0 - $1,954
President - High-Rise 2003 $260,000 $583,140 - $1,954
2002 $260,000 $379,167 - $1,954
Nicholas Ahel 2004 $260,000 $ 0 - $1,652
Vice President - High-Rise 2003 $260,000 $583,140 - $1,652
2002 $260,000 $379,167 - $1,652
Ronald Fregara 2004 $235,000 $25,000 - $5,861
President - CMA 2003 $235,000 $25,000 - $5,861
2002 $235,000 $25,000 - $5,861
Stephen Yager 2004 $235,000 $25,000 - $6,371
Vice President - CMA 2003 $235,000 $25,000 - $6,371
2002 $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 2004, the Company paid no director fees to Messrs. Cuneo and Steele.
OPTION GRANTS IN LATEST FISCAL YEAR
No stock options were granted to any of the Named Executives during fiscal year
2004.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
None of the five Named Executives in the Summary Compensation Table above had
outstanding options to purchase DualStar Common Stock as of the end of the
fiscal year ended June 30, 2004. In connection with the Madeleine Loan
extinguishment (described above in Item 1 - Business, under the subcaption
"Overview"), the Named Executives, and certain other officers and management
employees surrendered their options to purchase an aggregate of 2,248,000 shares
of common stock and DSTR Warrant Co., LLC, an affiliate of Madeleine, terminated
warrants to purchase 3,125,000 shares of common stock. New options may be
granted to management, subject to shareholder approval of certain items to
effect such grants.
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.
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
provides 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. In addition, Mr.
Birnbach has the right to receive insurance coverage, bonuses and other benefits
at an amount and rate no less than that of other senior executive officers of
the Company. 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.
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, 2004, 674,067 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
2004.
The 1994 Plan has expired. Accordingly, new grants may not be made under the
1994 Plan. If the Company adopts a new plan, it will be presented to the
shareholders for necessary approvals.
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, 2004, 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, 2004.
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 October 4, 2004 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(1) PERCENT OF CLASS
- ------------------------------------ ------------------------- -----------------
Stephen Feinberg(2)
299 Park Avenue, 22 Floor
New York, NY 10171 7,659,899 31.7%
Technology Investors Group, LLC(3)
560 Sylvan Way
Englewood Cliffs, NJ 07632 1,791,000 7.4%
Lawrence Roman(4)
C/o WDF, Inc.
30 N. MacQuenten Pkwy.
Mt. Vernon, NY 10550 1,267,400 5.2%
(1) The percentage ownership calculation for each beneficial owner has been made
on the basis of the amount of outstanding shares of the Company's Common Stock
as of October 4, 2004.
(2) Based upon a Schedule 13 D/A, filed with the Securities and Exchange
Commission on October 27, 2003, by Mr. Feinberg, as the individual who possesses
sole power to vote and direct the disposition of all shares of Common Stock held
by Madeleine, LLC (the holder of the Company's Common Stock).
(3) Based upon a Schedule 13D/A filed with the Securities and Exchange
Commission on January 11, 2001, by Technology Investors Group, LLC ("TIG"), and
its three members, Messrs. Brad C. Singer and Lloyd I. Miller, III, and Ms.
Frieda R. Tydings.
(4) Based upon a Schedule 13D filed with the Securities and Exchange Commission
on May 15, 2002, reflecting 1,267,400 shares of the Company's Common Stock held
by Lawrence Roman, of which 140,300 shares are beneficially owned by the
Lawrence Roman IRA.
The following table sets forth certain information with respect to beneficial
ownership of DualStar Common Stock as of October 4, 2004 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 435,000(1) 1.8%
Raymond Steele 115,000(2) *
Ronald Fregara 435,000(1) 1.8%
Stephen Yager 435,000(1) 1.8%
Barry Halpern --- *
Nicholas Ahel --- *
All directors and executive
officers as a group (9 persons) 1,423,000(3) 5.9%
* Less than 1%.
(1) Consists of 435,000 shares of Company common stock.
(2) Consists of options granted under the Plan, exercisable within 60 days of
October 4, 2004.
(3) Consists of (i) options to purchase 115,000 shares of Company common stock
granted under the Plan, exercisable within 60 days of October 4, 2004, and (ii)
1,308,000 shares of Company common stock.
The Company maintains the 1994 Plan pursuant to which it may grant equity awards
to eligible persons. The 1994 Plan is described in this Item, under the
subcaption "The 1994 Stock Option Plan", and in the table more fully below.
- --------------------------- ------------------------- -------------------------- ------------------------------------
(a) (b) (c)
- --------------------------- ------------------------- -------------------------- ------------------------------------
Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance under
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
not approved by security 0 N/A 0
holders
- --------------------------- ------------------------- -------------------------- ------------------------------------
Total 3,086,533 $2.78 413,467
- --------------------------- ------------------------- -------------------------- ------------------------------------
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, TIG, Gregory Cuneo and Robert Birnbach, respectively. Exercise price of
the warrants granted to TechOne and TIG $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, a private consulting and investment firm of which Jared E.
Abbruzzese, a former director of the Company, was a principal, holds Class D
Warrants to purchase 375,000 shares of Company Common Stock. The Class D
Warrants are subject to stockholder approval and other conditions and were
granted on April 13, 2000. TechOne provided consulting services to the Company
from August 12, 1999 until June 30, 2001. The Company has no present plan to
hold a stockholders' meeting for the purpose of seeking stockholder approval for
the Class D Warrants.
(b) 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. The Company has no present plan to hold a stockholders' meeting for the
purpose of seeking stockholder approval for the Class D Warrants.
(c) At June 30, 2004, the Company had outstanding loans to Messrs. D'Onofrio and
Cuneo in the amounts of $96,000 and $60,000 respectively. Also at June 30, 2004,
the Company had an outstanding loan from Mr. Fregara in the amount of $45,000.
(i) An original loan to Mr. D'Onofrio 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.
(ii) The $60,000 loan to Mr. Cuneo is due on demand, with an interest
rate of 7.75% per annum.
(iii) The $45,000 loan from Mr. Fregara is due on demand with no
stated interest rate.
(d) For the fiscal years ended June 30, 2004, 2003, and 2002, approximately
35.5%, 17.1%, and 0.2% of the Company's total revenues were derived from jobs
with HRH Construction. Mr. Cuneo is also the Chairman of HRH Construction and
Mr. Brad Singer, President of HRH Construction, is a member of TIG.
From August 1999 to November 2002, Mr. Cuneo was (non-Director) Chairman of
Starrett Corporation, an affiliate of Blackacre. HRH Construction was an
affiliate of Starrett Corporation until September 2003, and remains an affiliate
of Blackacre. Mr. Cuneo is a 50% member of Starrett Consulting, L.L.C. and is
compensated as Chairman of HRH Construction via Starrett Consulting, L.L.C.,
which is funded by HRH Construction. Blackacre is an affiliate, through common
management and control, of Madeleine, LLC, previously a senior lender to the
Company, and presently a 31.7% owner of the Company's common stock. (described
above in Item 1 - Business, under the subcaption "Overview"). The remaining
interest in Starrett Consulting, L.L.C. is held by Mr. Brad Singer, the
President of HRH Construction and a member of TIG. TIG is a 7.4% shareholder of
the Company. In exchange for various services, including management services,
Starrett Consulting, L.L.C. receives an annual fee of $750,000 from HRH
Construction, plus an additional fee may be earned in certain circumstances. In
the last fiscal year, DualStar has been awarded no new work from HRH
Construction. High-Rise is acting as a subcontractor to HRH Construction on a
job for the Metropolitan Transportation Authority. High-Rise has experienced an
estimated loss on this job of approximately $5 million, of which all of such
loss is recognized in the fiscal year ended June 30, 2004. High-Rise and HRH
Construction have not yet reached contract terms on this job.
(e) CMA leases 2,000 square feet of office space, rent-free from Diversified
Mechanical Associates, Inc., an affiliate of HRH Construction, at 200 Marine
Street, Farmingdale, NY 11735. The lease started in July 2004. ICE leases space,
rent-free from HRH Construction, at 50 Main Street, White Plains, NY 10606. The
lease started in August 2004.
(f) ICE received a $100,000 loan from HRH Construction in November 2003. The
loan is unsecured, due on demand, and bears no interest.
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES.
For the fiscal years ended June 30, 2004 and June 30, 2003, aggregate fees for
services provided by independent accountants, were as follows:
Fiscal year Fiscal year
Ended Ended
June 30, 2004 June 30, 2003
------------- -------------
Audit fees $57,500 $52,500
Audit-related fees 38,200 22,500
Tax fees 25,000 27,500
All other fees 12,250 --
-------- ------
$132,950 $102,500
Audit-related services provided were the review 10Q and S8 filings.
Tax services provided were preparation of federal and state consolidated income
tax returns.
Other services provided were the review of financial statements as of October
31, 2003.
The audit committee pre-approves all non-audit fees paid to the accountant.
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
1. All financial statements
2. Financial statement schedules required to be filed by item 8 of the
form and by paragraph (c) below. 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.
3. Exhibits required by item 601 of Regulation S-K and by paragraph (b)
below.
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)
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)
10.19 Securities Purchase Agreement by and among Dualstar Technologies
Corporation and Madeleine, L.L.C., dated October 27, 2003. (8)
10.20 Bargain and Sale Deed, dated October 27, 2003, by and between Property
Control, Inc. and 11-30 47th Avenue Company LLC. (8)
10.21 Registration Rights Agreement by and between Dualstar Technologies
Corporation and Madeleine, L.L.C. dated October 27, 2003. (8)
10.22 Form of Agreement to Surrender Options. (8)
10.23 Warrant Termination Agreement by and between DSTR Warrant Co., LLC and
DualStar Technologies Corporation, dated October 27, 2003. (8)
10.24 Promissory Note by High-Rise Electric, Inc. to Gary Segal, dated
August 20, 2004. (9)
10.25 Security Agreement by and between High-Rise Electric, Inc. and Gary
Segal, dated August 20, 2004. (9)
10.26 Guaranty Agreement by and between DualStar Technologies Corporation and
Gary Segal, dated August 20, 2004. (9)
10.27 Pledge Agreement by and between DualStar Technologies Corporation and
Gary Segal, dated August 20, 2004. (9)
14 DualStar Technologies Corporation Code of Business Conduct and
Ethics(10)
21.1 Subsidiaries of the Registrant.(10)
23.1 Consent of Grassi & Co., CPAs, P.C. (10)
31.1 Rule 13a-14(a)/15d-14(a) Certification. (10)
31.2 Rule 13a-14(a)/15d-14(a) Certification. (10)
32.1 Section 1350 Certification. (10)
32.2 Section 1350 Certification. (10)
(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) Incorporated herein by reference to Registrant's Annual Report on Form 10-K
(File No. 000-25552) for the period ended June 30, 2003.
(8) Incorporated herein by reference to Registrant's Current Report on Form 8-K
(File No. 000-25552) Filed on November 12, 2003.
(9) Incorporated herein by reference to Registrant's Current Report on Form 8-K
(File No. 000-25552) filed on August 26, 2004.
(10) Attached hereto.
(B) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
The exhibits listed under (a)(2) of this Item 15 are filed with this Report.
(C) 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, 2004
None.
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Certified Public Accountants........... F-2
Financial Statements
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statement of Shareholders' Equity (Deficit).. F-5
Consolidated Statements of Cash Flows..................... F-6 -- F-7
Notes to Consolidated Financial Statements................ F-8 -- F-27
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, 2004 and 2003, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the three years in the period ended June 30, 2004.
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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 2004, in conformity with
accounting standards generally accepted in the United States of America. Certain
prior year amounts in the balance sheet, statement of cash flows and notes to
consolidated financial statements have been reclassified to conform to the
current year's presentation.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As more fully discussed in Note B to the
financial statements, the Company has current and prior operating losses and an
inability to obtain a sufficient amount of new work. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are 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
October 26, 2004
F-2
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
--------
2004 2003
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 435,857 $ 3,055,255
Accounts receivable -- net of allowance for doubtful accounts
of $445,000 and $420,000 in 2004 and 2003, respectively ..................... 14,683,529 16,122,535
Retainage receivable .......................................................... 4,246,292 3,049,667
Loan receivable-officers....................................................... 65,000 65,000
Costs and estimated earnings in excess of billings on
uncompleted contracts ....................................................... 2,684,185 768,409
Assets held for sale .......................................................... -- 483,756
Prepaid expenses and other current assets ..................................... 32,958 59,580
------------ ------------
Total Current Assets ........................................................ 22,147,821 23,604,202
Property and equipment -- net of accumulated
depreciation and amortization ............................................... 82,244 1,144,282
Other assets:
Note receivable from employee.................................................. 96,243 96,243
Contract receivables - non current............................................. 944,706 944,706
Other ......................................................................... 69,369 431,363
------------ ------------
Total Assets ................................................................ $ 23,340,383 $ 26,220,796
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable .............................................................. $ 14,459,325 $ 5,466,501
Loan payable-officer........................................................... 45,000 --
Senior secured promissory note payable ........................................ -- 16,827,583
Billings in excess of costs and estimated earnings on
uncompleted contracts ....................................................... 860,162 2,788,820
Liabilities held for sale ..................................................... -- 52,575
Accrued loss on uncompleted contracts.......................................... 825,466 --
Accrued expenses and other current liabilities ................................ 3,807,133 4,521,913
------------ ------------
Total Current Liabilities ................................................... 19,997,086 29,657,392
------------ ------------
Total Liabilities ........................................................... 19,997,086 29,657,392
------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock -- par value, $.01 per share; 25,000,000 shares authorized;
24,161,467 and 16,501,568 shares issued and outstanding in 2004
and 2003, respectively....................................................... 241,615 165,016
Additional paid-in capital .................................................... 51,854,613 41,832,721
Accumulated deficit............................................................ (48,752,931) (45,434,333)
------------ ------------
Total Shareholders' Equity (Deficit)......................................... 3,343,297 (3,436,596)
------------ ------------
Total Liabilities and Shareholders' Equity (Deficit)......................... $ 23,340,383 $ 26,220,796
============ ============
The accompanying notes are an integral part of these statements.
F-3
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
--------------------
2004 2003 2002
---- ---- ----
Revenues earned ................................ $ 71,178,555 $ 59,824,031 $ 77,884,995
Cost of revenues earned ...................... 72,466,734 48,985,163 68,783,066
------------ ------------ ------------
Gross (loss) margin ............................ (1,288,179) 10,838,868 9,101,929
------------ ------------ ------------
Operating expenses:
General and administrative expenses ......... 6,338,848 9,046,591 7,846,479
Depreciation and amortization ................ 111,876 277,691 307,648
------------ ------------ ------------
Total operating expenses ................... 6,450,724 9,324,282 8,154,127
------------ ------------ ------------
Operating income (loss) ........................ (7,738,903) 1,514,586 947,802
Other income (expense):
Interest income .............................. 1,506 28,301 152,808
Interest expense ............................. (858,011) (1,870,592) (1,820,772)
Gain on disposition of property & equipment
(Note A)................................... 5,355,279 -- --
Loss on sale of marketable securities ........ -- -- (337,500)
------------ ------------ ------------
Other income (expense) -- net .................. 4,498,774 (1,842,291) (2,005,464)
------------ ------------ ------------
Loss before provision (benefit) for income taxes (3,240,129) (327,705) (1,057,662)
Provision (benefit) for income taxes
Current tax provision (benefit) .............. 11,092 (16,007) 80,325
Deferred tax provision ....................... -- -- 1,076,000
------------ ------------ ------------
Loss from continuing operations................. (3,251,221) (311,698) (2,213,987)
------------ ------------ ------------
Discontinued operations
Loss from discontinued communications business 67,377 2,778,807 7,369,416
Income tax (benefit) ......................... -- -- --
------------ ------------ ------------
Loss from discontinued operations .............. 67,377 2,778,807 7,369,416
------------ ------------ ------------
Net loss........................................ $ (3,318,598) $ (3,090,505) $ (9,583,403)
============ ============ ============
Basic and diluted loss per share:
Loss from continuing operations............... $(0.15) $(0.02) $(0.13)
Loss from discontinued operations ............ $(0.00) $(0.17) $(0.45)
Net loss per share............................ $(0.15) $(0.19) $(0.58)
Weighted average shares outstanding .......... 21,691,882 16,501,568 16,501,568
The accompanying notes are an integral part of these statements.
F-4
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
COMMON STOCK ADDITIONAL
------------ PAID-IN
SHARES AMOUNT CAPITAL
------ ------ -------
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
Net loss for the year ended
June 30, 2004
Shares of common stock issued in
consideration of debt reduction 7,659,899 76,599 10,021,892
---------- ---------- -----------
Balance - June 30, 2004 ................ 24,161,467 $241,615 $51,854,613
========== ========== ===========
ACCUMULATED
ACCUMULATED COMPREHENSIVE
DEFICIT LOSS TOTAL
----------- ---- -----
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)
Net loss for the year ended
June 30, 2004 ............................ (3,318,598) -- (3,318,598)
Shares of common stock issued in
consideration of debt reduction.......... -- -- 10,098,491
------------ ------------
Balance - June 30, 2004 ................... $(48,752,931) -- $ 3,343,297
============ ============
The accompanying notes are an integral part of this statement.
F-5
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
2004 2003 2002
---- ---- ----
Cash flows from operating activities:
Net loss .......................................................... $ (3,318,598) $ (3,090,505) $ (9,583,403)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Depreciation and amortization ................................... 111,876 875,748 2,046,519
Deferred income taxes ........................................... -- -- 1,076,000
Impairment of fixed and intangible assets ....................... -- 920,972 2,479,630
(Gain) loss on sale of communications assets .................... -- (115,580) 482,324
Loss on sale of marketable securities ........................... -- -- 337,500
(Gain) on disposition of property and equipment.................. (5,355,279) -- --
Accrued interest added to debt principal ........................ 826,365 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 ......................................... 1,439,006 9,182,266 (2,549,797)
Retainage receivable ........................................ (1,196,625) 424,303 452,932
Costs and estimated earnings in excess of billings on
uncompleted contracts ..................................... (1,915,776) 531,206 (63,058)
Prepaid expenses and other current assets ................... 10,803 (1,481) 392,402
Other assets ................................................ (3,114) (11,464) 4,120
Increase (decrease) in liabilities, net of liabilities assumed
Accounts payable ............................................ 8,940,251 (6,731,085) 155,999
Billings in excess of costs and estimated earnings on
uncompleted contracts ..................................... (1,928,658) (2,919,127) 2,135,787
Accrued loss on uncompleted contracts........................ 825,466 -- --
Accrued expenses and other current liabilities .............. (1,039,882) 977,468 (521,239)
------------ ------------ ------------
Net cash provided by (used in) operating activities ............... (2,604,165) 2,020,004 (1,558,661)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures .............................................. (60,233) (176,105) (434,621)
Proceeds from sale (purchase) of marketable securities ............ -- -- 555,000
Proceeds from sale of communications assets ....................... -- 369,822 402,136
------------ ------------ ------------
Net cash provided by (used in) investing activities ............... (60,233) 193,717 522,515
------------ ------------ ------------
Cash flows from financing activities:
Loan payable-officer............................................... 45,000 -- --
Principal payments of loan and lease payables ..................... -- -- (115,771)
Principal payment of mortgage payable ............................. -- (1,693,885) (23,951)
------------ ------------ ------------
Net cash provided by (used in) financing activities ............... 45,000 (1,693,885) (139,722)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ................ (2,619,398) 519,836 (1,175,868)
Cash and cash equivalents at beginning of year ...................... 3,055,255 2,535,419 3,711,287
------------ ------------ ------------
Cash and cash equivalents at end of year ............................ $ 435,857 $ 3,055,255 $ 2,535,419
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest ........................................................ $ 5,236 $ 127,517 $ 164,053
Income taxes .................................................... 28,555 48,207 19,549
The accompanying notes are an integral part of these statements.
F-6
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 2004, 2003, AND 2002
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
(1) 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.
(2) The Company exchanged property and equipment for a $4,230,355 (principal
plus accrued interest) reduction of the note payable to Madeleine in August
2003. The transaction resulted in a gain of $3,746,379.
(3) Interest capitalized was $826,365, $1,811,139, and $1,595,623 in fiscal
2004, 2003, and 2002 respectively.
(4) The Company exchanged real property for a $3,000,000 reduction of the
Madeleine note in October 2003. The Company also exchanged 7,659,899 shares of
common stock for a $10,098,491 reduction of the Madeleine note in October 2003.
These transactions resulted in a net gain of $1,608,900.
The accompanying notes are an integral part of these statements.
F-7
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
Background and Financial Statement Presentation
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, BMS Electric, Inc. (BMS), formed in July 2000, and
Property Control, Inc. (PCI), formed in June 1995. The inactive
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. The
communications subsidiaries are wholly owned and inactive. DualStar wholly owns
each subsidiary.
The Company historically has engaged in two business segments: construction and
communications. The Company completed the discontinuance of its communications
business in August 2003 and now only does construction-related business.
The accompanying financial statements for the years ended June 30, 2004, 2003
and 2002 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 electrical and
mechanical construction-related businesses. The Company completed the
discontinuance of its communications business in August 2003.
The Company is currently limited to pursuing new work that does not require
the Company to provide payment and performance bonds. The Company's management
is developing plans to streamline operations to obtain better profit margins on
such non-bonded work. Moreover, the Company is considering plans to sell off
additional assets or the Company may make other financial arrangements to arrive
at a better financial position, which may help the Company's chances of securing
a stable and credible bonding facility on continuing operations.
On November 8, 2000, the Company consummated a $12.5 million senior secured loan
transaction with Madeleine (the "Madeleine Loan"). As a result of unpaid,
accrued interest, the Madeleine Loan grew. The Company ultimately extinguished
$17.3 million of indebtedness owed to Madeleine under the Madeleine Loan
according to the following transactions:
(1) On August 1, 2003, the Company and its wholly owned subsidiary, ParaComm,
consummated the sale to an affiliate of its then-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 $4.2 million (principal plus
capitalized accrued interest) of the amount of a note of the Company to
Madeleine. Madeleine is an affiliate of Blackacre Capital Management L.L.C.
(through common management and control) and Cerberus Capital Management L.P.
This transaction resulted in a gain of $3.7 million
(2) As of October 27, 2003, the Company owed Madeleine approximately $13.1
million that remained on the Madeleine Loan. As reported in the Company's
Current Report on Form 8-K filed on November 12, 2003, the Company completed
transactions by which the Company reduced to zero its indebtedness to Madeleine
on October 27, 2003. To consummate that transaction, the Company and its wholly
owned subsidiary Property Control, Inc. sold and conveyed to an affiliate of
Madeleine certain real property in Long Island City, New York. The consideration
for the sale was the reduction of $3 million principal amount of the Company's
outstanding note to Madeleine. Also on October 27, 2003, the Company issued to
Madeleine an aggregate of 7,659,899 shares of the Company's common stock. The
issuance of such shares was in consideration of the reduction to zero of the
Company's remaining indebtedness to Madeleine in the approximate aggregate
amount of $10.1 million (principal plus accrued interest). These transactions
resulted in a net gain of $1.6 million. The Company also granted certain
registration rights to Madeleine. In connection with the transaction, certain
officers and management employees surrendered options to purchase an aggregate
of 2,248,000 shares of common stock and DSTR Warrant Co., LLC, an affiliate of
F-8
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Madeleine, terminated warrants to purchase 3,125,000 shares of common stock. New
options may be granted to management, subject to shareholder approval.
Madeleine, as record holder, currently owns approximately 31.7% of the total
outstanding common stock of the Company. As provided in a Schedule 13D/A filed
with the SEC, Mr. Stephen Feinberg is the beneficial owner of the shares held by
Madeleine. Upon the consummation of the transactions with Madeleine and its
affiliates (as noted above), which occurred on August 1, 2003 and on October 27,
2003, the Company no longer has any indebtedness to Madeleine. See Note F.
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.
(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
F-9
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
(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, 2004, 2003, and 2002 are presented as discontinued
operations. Certain prior-year amounts in the Consolidated Balance Sheet,
Statement of Cash Flows and Notes to Consolidated Financial Statements have been
reclassified to conform to the current year's presentation.
(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 year ended June 30, 2002 was $9,380,903.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standards Board (FASB) approved the
consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." The objective of this Issue is to provide guidance for identifying
impaired investments. EITF 03-1 also provides new disclosure requirements for
investments that are deemed to be temporarily impaired. The accounting
provisions of EITF 03-1 are effective for all reporting periods beginning after
June 15, 2004, while the disclosure requirements are effective only for annual
periods ending after June 15, 2004. The Company has evaluated the impact of the
adoption of EITF 03-1 and does not believe the impact is significant to the
Company's overall results of operations or financial position.
FASB Interpretation No. 46R:
In December 2003, the FASB issued revised Interpretation No. 46 ("FIN 46R"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.51,"
which was originally issued in January 2003. FIN 46R requires an investor who
absorbs the majority of the expected losses, receives a majority of its expected
returns, or both, (primary beneficiary) of a variable interest entity ("VIE") to
consolidate the assets, liabilities and results of operations of the entity. A
variable interest entity is an entity in which the equity
F-10
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investors do not have a controlling interest or the equity investment at risk is
insufficient to finance the entity's activities without receiving additional
subordinated financial support from other parties. FIN 46R, as amended, was
applicable for public companies that have interests in VIE's or potential
variable entities commonly referred to as special-purpose entities ("SPE's") for
periods ending after December 15, 2003. Application by public entities for all
other types of entities is required in financial statements for the periods
ending after March 15, 2004. Interests held in VIE's created after January 31,
2003 are subject to the provisions of FIN 46R from the date of the Company's
initial involvement with the entity. The Company believes the adoption of FIN
46R will not have a material impact on the Company's financial condition,
results of operations or liquidity.
NOTE B - GOING CONCERN
The Company incurred significant operating losses in the last several fiscal
years. The Company completed the discontinuance of its communications business
in August 2003. There can be no assurance that the construction related
businesses will attain or sustain profitability or positive cash flow from
future operations. If the Company does not effectively manage its working
capital, it may need to implement additional cost containment measures, seek
additional financing, and/or seek to renegotiate its contractual obligations.
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 businesses. This uncertainty may create a concern among the
Company's current and future customers and vendors as to whether it will be able
to fulfill its contractual obligations. As a result, current and future
customers may determine not to do business with the Company, or only do so on
less favorable terms, which would cause the Company's revenues to decline.
Employee concern about the future of the business and their continued prospects
for employment may cause them to seek employment elsewhere, depriving the
Company of the human capital it needs to be successful. If the Company cannot
raise additional funds for continuing operations or if the Company cannot obtain
a sufficient amount of new work due to its inability to obtain surety bonds, 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.
Management's plans in regard to these matters are also discussed in Note A.
NOTE C -- ACCOUNTS RECEIVABLE
Included in accounts receivable at June 30, 2004 and 2003, are unbilled
receivables from completed contracts aggregating $101,027 and $314,448,
respectively.
Retained contract receivables at June 30, 2004 and 2003 of approximately
$4,246,000 and $3,050,000, respectively, include approximately $2,500,000 and
$1,500,000, respectively, that is not expected to be collected within one year.
In 1999, 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
$944,706 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 future. This receivable is reported as
non current.
F-11
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - ACCOUNTS RECEIVABLE (CONTINUED)
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,
2004 2003 2002
---- ---- ----
Beginning Balance................ $420,000 $532,000 $586,000
Additions Charged to Expenses.... 30,000 -- 473,121
Deductions....................... (5,000) (112,000) (527,121)
-------- -------- --------
Ending Balance................... $445,000 $420,000 $532,000
======== ======== ========
F-12
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
JUNE 30,
--------
2004 2003
---- ----
Compensation................................. $ 419,850 $1,340,904
Current portion of lease payables............ 980,765 655,664
Unearned revenues............................ -- 49,874
Interest..................................... -- 60,000
Professional fees............................ 350,950 381,500
Communication taxes payable.................. 257,391 257,391
Employee benefits and union costs............ 957,752 706,494
Commercial insurance......................... 294,675 681,903
Other........................................ 545,750 388,183
---------- ----------
$3,807,133 $4,521,913
========== ==========
F-13
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30,
--------
2004 2003
---- ----
Building and building improvements................. $ -- $1,627,669
Computer equipment................................. 516,273 639,753
Office furniture and equipment..................... 43,241 264,835
Automobiles........................................ 327,024 299,134
Machinery and equipment............................ 79,048 79,048
---------- ----------
965,586 2,910,439
Less: accumulated depreciation and amortization.... (883,342) (2,081,157)
---------- ----------
82,244 829,282
Land............................................... -- 315,000
---------- ----------
$ 82,244 $1,144,282
========== ==========
F-14
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F -- SHAREHOLDERS' EQUITY
On October 27, 2003, the Company issued to its then-senior lender, Madeleine,
LLC ("Madeleine"), an aggregate of 7,659,899 shares of the Company's common
stock. The Company also granted certain registration rights to Madeleine. In
connection with the transaction, certain officers and management employees
surrendered options to purchase an aggregate of 2,248,000 shares of common stock
and DSTR Warrant Co., LLC, an affiliate of Madeleine, terminated warrants to
purchase 3,125,000 shares of common stock. New options may be granted to
management, subject to shareholder approval. Madeleine currently owns
approximately 31.7% of the total outstanding common stock of the Company. See
Note A (2).
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 full valuation allowance.
F-15
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G -- INCOME TAXES (CONTINUED)
The following is a summary of the items giving rise to no deferred tax benefits
at June 30, 2004 and 2003:
JUNE 30,
--------
2004 2003
---- ----
Current
Allowance for doubtful accounts......... $ 213,000 $ 213,000
---------- -----------
Long-term
Net operating loss carryforward......... 20,145,000 18,500,000
Accumulated depreciation................ 25,000 105,000
---------- -----------
20,170,000 18,605,000
---------- -----------
Total deferred tax assets................. 20,383,000 18,818,000
Less valuation allowance.................. 20,383,000 18,818,000
----------- ------------
Net deferred tax assets................... -- --
=========== ============
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,
--------
2004 2003 2002
---- ---- ----
Statutory federal income tax... $(1,118,000) $(1,051,000) $(2,865,000)
State and local income taxes... (592,000) (652,000) (1,517,000)
Valuation allowance............ 1,710,000 1,607,000 5,458,000
State capital taxes............ 11,092 79,993 80,325
---------- ----------- -----------
$ 11,092 $ (16,007) $ 1,156,325
========== =========== ===========
F-16
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G -- INCOME TAXES (CONTINUED)
The Company has net operating loss carryforwards of approximately $40.3 million
available for federal, state and local income tax purposes, expiring in the
years 2011 to 2024. 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 office space under operating
leases. At June 30, 2004, minimum rental commitments under noncancellable
operating leases are as follows:
2005.................. $111,400
2006.................. 71,400
2007.................. 24,900
2008.................. 2,000
2009 and beyond....... --
----------
$209,700
==========
The Company entered into additional noncancellable operating leases
subsequent to June 30, 2004. The minimum rental commitments under these
subsequent events are as follows:
2005.................. $125,900
2006.................. 131,700
2007.................. 130,700
2008.................. 128,000
2009 and beyond....... 282,600
----------
$798,900
==========
Equipment rent expense under operating leases for the years ended June 30,
2004, 2003 and 2002 was approximately $133,000, $124,000 and $135,000,
respectively. Rent expense for fabrication shop space under an operating lease
for the years ended June 30, 2004 and 2003, was $30,000 and $60,000,
respectively. The Company began to incur office rent expense in September 2004,
and ceased to be obligated under a lease agreement for fabrication shop space in
January 2004.
(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, 2004, 2003 and 2002, the Company
contributed $14.3 million, $10.6 million, and $13.3 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.
F-17
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
(3) In connection with its construction-related businesses, the Company is
contingently liable to sureties under a general indemnity agreement. The Company
has agreed to indemnify the sureties for any payments made on contracts of
suretyship, guarantee or indemnity. That is, on certain work at the request of
the Company, the sureties provide a full guarantee of performance and/or payment
to third parties in the form of a bond. If the sureties pay an amount to third
parties pursuant to such bond, the Company is obligated to fully reimburse the
sureties. There is no dollar amount limit on the amount of the indemnity
provided to the sureties.
(4) In August 2001, OnTera, a wholly owned subsidiary of the Company, formerly
in the telecommunications business, signed a promissory note and security
agreement with a telecommunications equipment provider 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. In August 2002, such equipment
provider filed suit claiming damages of approximately $607,000 plus interest,
costs and attorneys on the promissory note. In April 2004 a civil judgment was
awarded to plaintiff in New York State in the amount of $873,163. The judgment
has not been satisfied. The network equipment had no useful value to the Company
and has been disposed of.
(5) 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.
(6) In April 2003, a former employee of the Company commenced a lawsuit to
recover damages for the alleged failure of the Company to honor options to
purchase shares of the Company's common stock pursuant to the 1994 Stock Option
Plan. Plaintiff seeks $462,500 in damages. Management has responded by
vigorously contesting the claims. Trial is scheduled in this case for November
2004. At this time, we are unable to predict the likelihood of an unfavorable
outcome in this case or the range of potential loss, if any, in the event of an
unfavorable outcome.
(7) In the ordinary course of business, the Company is involved in claims
concerning personal injuries and property damage, all of which the Company
refers to its insurance carriers. The Company believes that 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
consolidated 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 former director of the Company, was a
principal, holds Class D Warrants to purchase 375,000 shares of Company Common
Stock. The Class D Warrants are subject to stockholder approval and other
conditions and were granted on April 13, 2000. TechOne provided consulting
services to the Company from August 12, 1999 until June 30, 2001. The Company
has no present plan to hold a stockholders' meeting for the purpose of seeking
stockholder approval for the Class D Warrants.
(2) Subject to stockholder approval and other conditions, Class D Warrants to
purchase 625,000 shares of Company Common Stock were granted to Technology
Investors Group, LLC ("TIG") on April 13, 2000. TIG is a 7.4% shareholder of the
Company. The Company has no present plan to hold a stockholders' meeting for the
purpose of seeking stockholder approval for the Class D Warrants.
(3) At June 30, 2004, the Company had outstanding loans to Messrs. D'Onofrio and
Cuneo in the amounts of $96,000 and $60,000 respectively. Also at June 30, 2004,
the Company had an outstanding loan from Mr. Fregara in the amount of $45,000.
F-18
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I -- RELATED PARTY TRANSACTIONS (CONTINUED)
(a) An original loan to Mr. D'Onofrio 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 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. Mr. D'Onofrio is an
employee of the Company.
(b) The $60,000 loan to Mr. Cuneo is due on demand, with an interest rate
of 7.75% per annum. Mr. Cuneo is the President and CEO of the Company.
(c) The $45,000 loan from Mr. Fregara is due on demand with no stated
interest rate. Mr. Fregara is a Vice President of the Company.
(4) For the fiscal years ended June 30, 2004, 2003, and 2002, approximately
35.2%, 17.1%, and 0.2% of the Company's total revenues were derived from jobs
with HRH Construction. Mr. Cuneo is also the Chairman of HRH Construction and
Mr. Brad Singer, President of HRH Construction, is a member of TIG.
From August 1999 to November 2002, Mr. Cuneo was (non-Director) Chairman of
Starrett Corporation, an affiliate of Blackacre. HRH Construction was an
affiliate of Starrett Corporation until September 2003, and remains an affiliate
of Blackacre. Mr. Cuneo is a 50% member of Starrett Consulting, L.L.C. and is
compensated as Chairman of HRH Construction via Starrett Consulting, L.L.C.,
which is funded by HRH Construction. Blackacre is an affiliate, through common
management and control, of Madeleine, LLC, previously a senior lender to the
Company, and presently a 31.7% owner of the Company's common stock. The
remaining interest in Starrett Consulting, L.L.C. is held by Mr. Brad Singer,
the President of HRH Construction and a member of TIG. TIG is a 7.4% shareholder
of the Company. In exchange for various services, including management services,
Starrett Consulting, L.L.C. receives an annual fee of $750,000 from HRH
Construction, plus an additional fee may be earned in certain circumstances. In
the last fiscal year, DualStar has been awarded no new work from HRH
Construction. High-Rise is acting as a subcontractor to HRH Construction on a
job for the Metropolitan Transportation Authority. High-Rise has experienced an
estimated loss on this job of approximately $5 million, of which all of such
loss is recognized in the fiscal year ended June 30, 2004. High-Rise and HRH
Construction have not yet reached contract terms on this job.
(5) CMA leases 2,000 square feet of office space, rent-free from Diversified
Mechanical Associates, Inc., an affiliate of HRH Construction, at 200 Marine
Street, Farmingdale, NY 11735. The lease started in July 2004. ICE leases space,
rent-free from HRH Construction, at 50 Main Street, White Plains, NY 10606. The
lease started in August 2004.
(6) ICE received a $100,000 loan from HRH Construction in November 2003. The
loan is unsecured, due on demand, and bears no interest.
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, 2004,
uninsured cash balances were approximately $0.2 million. The Company believes it
is not exposed to any significant credit risk for cash.
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,
2004, revenue from four customers (Bovis Lend Lease, Inc., HRH Construction,
Rockrose Construction, and Newmark Construction) amounted to approximately 18%,
35%, 11%, and 10% of the Company's total revenues,
F-19
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J -- CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (CONTINUED)
respectively. For the year ended June 30, 2003, revenue from two customers
(Bovis Lend Lease, Inc. and HRH Construction) 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.) amounted to
approximately 64% of the Company's total revenues. In addition, as of June 30,
2004, contract and retainage receivables from Bovis Lend Lease, Inc., HRH
Construction, and Rockrose Construction amounted to approximately 24%, 29%, and
17% of the Company's total contract and retainage receivables, respectively. As
of June 30, 2003, contract and retainage receivables from Bovis Lend Lease, Inc.
and HRH Construction amounted to approximately 15% and 28% of the Company's
total contract and retainage receivables, respectively. As of June 30, 2002,
contract and retainage receivables from Bovis Lend Lease, Inc. amounted to
approximately 52%. In addition, for the fiscal year ended June 30, 2002,
approximately 0.2% of the Company's total revenues were derived from HRH
Construction. DualStar's President and Chief Executive Officer is also the
Chairman of HRH Construction. HRH Construction is an affiliate of Blackacre.
Blackacre has a minority ownership interest in HRH. Blackacre is an affiliate,
through common management and control, of Madeleine, LLC, previously a senior
lender to the Company. 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.
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, 2004, 674,067 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
2004.
F-20
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
2004 2003 2002
---- ---- ----
Net loss As reported............ $(3,318,598) $(3,090,505) $(9,583,403)
Pro forma.............. $(3,689,551) $(4,072,468) $(10,588,836)
Basic and diluted loss As reported............ $(0.15) $(0.19) $(0.58)
per share Pro forma.............. $(0.17) $(0.25) $(0.64)
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, 2004, 2003, and 2002, 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 2004 and 2003: 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, 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
Forfeited in fiscal 2004............. (2,263,000) 2.62
---------
674,067 $3.03
=========
F-21
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K -- STOCK OPTION PLAN (CONTINUED)
The following information applies to options outstanding and exercisable at June
30, 2004:
WEIGHTED-AVERAGE
NUMBER REMAINING CONTRACTUAL WEIGHTED-AVERAGE NUMBER
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE
- ------------------------ ----------- ------------ -------------- -----------
$0.75.......................... 381,000 3.0 $0.75 381,000
$4.00.......................... 95,000 4.1 $4.00 95,000
$5.25-$10.25................... 198,067 6.1 $6.95 198,067
----------- -----------
674,067 674,067
=========== ===========
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 years ended
June 30, 2004, 2003, and 2002, 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
F-22
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M -- EMPLOYMENT AGREEMENTS (CONTINUED)
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. 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. In addition, Mr.
Birnbach has the right to receive insurance coverage, bonuses and other benefits
at an amount and rate no less than that of other senior executive officers of
the Company. 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.
F-23
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N -- COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the following:
JUNE 30,
--------
2004 2003
---- ----
Costs incurred on uncompleted contracts..... $64,553,754 $60,945,907
Estimated earnings (loss)................... (1,020,710) 14,454,584
----------- -----------
63,533,044 75,400,491
Less billings to date....................... 61,709,021 77,420,902
----------- -----------
$ 1,824,023 $(2,020,411)
=========== ===========
Costs and estimated earnings on uncompleted contracts are included in the
accompanying consolidated balance sheets as follows:
JUNE 30,
--------
2004 2003
---- ----
Costs and estimated earnings in excess of billings on
uncompleted contracts.....................................$ 2,684,185 $ 768,409
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (860,162) (2,788,820)
----------- -----------
$ 1,824,023 $ (2,020,411)
=========== ============
F-24
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2002 2002 2003 2003 2003 2003 2004 2004
---- ---- ---- ---- ---- ---- ---- ----
Revenue earned net of
discontinued operations ............... 14,097 14,173 14,838 16,716 16,221 20,329 16,209 18,420
Revenue earned from
discontinued operations ............... 451 379 250 253 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total revenue earned .................... 14,548 14,552 15,088 16,969 16,221 20,329 16,209 18,420
------ ------ ------ ------ ------ ------ ------ ------
Gross profit net of
discontinued operations ............... 1,796 2,338 3,579 3,126 2,422 2,039 291 (6,040)
Gross profit from
discontinued operations ............... 251 194 6 25 (64) -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total gross profit ...................... 2,047 2,532 3,585 3,151 2,358 2,039 291 (6,040)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) from
continuing operations ................. (338) (485) 642 (131) 4,250 1,628 (1,251) (7,848)
Net income (loss) from
discontinued operations ............... (650) (1,043) (464) (622) (125) -- -- 58
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) ....................... (988) (1,528) 178 (753) 4,125 1,628 (1,251) (7,790)
====== ====== ====== ====== ====== ====== ====== ======
Basic and diluted
income (loss) per share
from continuing operations ............ (0.02) (0.03) 0.04 (0.01) 0.26 0.08 (0.06) (0.36)
====== ====== ====== ====== ====== ====== ====== ======
Basic and diluted
income (loss) per share
from discontinued operations .......... (0.04) (0.06) (0.03) (0.04) (0.01) -- -- --
====== ====== ====== ====== ====== ====== ====== ======
Basic and diluted
income (loss) per share ............... (0.06) (0.09) 0.01 (0.05) 0.25 0.08 (0.06) (0.36)
====== ====== ====== ====== ====== ====== ====== ======
F-25
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - DISCONTINUED OPERATIONS
The Company discontinued its communications business in August 2003. 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 Company's consolidated statements of
operations for the years ended June 30, 2004, 2003 and 2002 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,
2004 2003 2002
---- ---- ----
Revenues earned................................. $ -- $1,334 $3,296
====== ====== ======
Loss from discontinued communications business $ 67 $2,779 $7,369
Income tax (benefit) -- -- --
------ ------ ------
Loss from discontinued operations $ 67 $2,779 $7,369
====== ====== ======
The major classes of assets and liabilities for the Company's discontinued
communications business were as follows (in thousands):
JUNE 30,
-------- 2004 2003
------- -------
Assets held for sale ........................................ $ -- $ 484
------- -------
Total Current Assets .................................... -- 484
Property and equipment -- net (held for sale at June 30,2003) -- --
------- -------
Total Assets ............................................ $ -- $ 484
======= =======
Liabilities held for sale ................................... $ -- $ 53
------- -------
Total Current Liabilities ............................... -- 53
------- -------
Total Liabilities ....................................... $ -- $ 53
======= =======
The sale of ParaComm's assets was consummated in August 2003. The ParaComm sale
finalized the Company's discontinuance of its communications business. Details
of the asset purchase agreement are presented in Note A.
F-26
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - SUBSEQUENT EVENT
On August 20, 2004, High-Rise, a wholly owned subsidiary of DualStar, entered
into a loan agreement in the amount of $2,000,000 from Gary Segal of Ozone Park,
NY. Under the terms of the loan agreement, the loan accrues interest at the rate
of 5.5% per annum, which rate is adjusted on the first day of each month
commencing October 1, 2004 to one point above the then prime rate; is payable on
demand; is secured by certain accounts receivable of High-Rise; and is
guaranteed by DualStar and secured by a pledge of the capital stock of
High-Rise. The description of the terms of this loan agreement are subject to
the terms of the agreements as filed in the Company's Current Report on Form 8-K
filed on August 26, 2004.
DualStar and Mr. Segal are exploring a possible sale of High-Rise to Mr. Segal.
No terms for any sale have been reached. Any such transaction is subject to
completion of due diligence by Mr. Segal, execution of definitive agreements,
and approval by the Boards of Directors of DualStar and of High-Rise and the
shareholders of DualStar. Mr. Segal is a principal of Five Star Electric, Inc.,
a large electrical contractor that primarily does large government work.
F-27
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: November 11, 2004
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 November 11, 2004
Executive Officer and Director
- --------------------
Gregory Cuneo
/s/ ROBERT BIRNBACH Executive Vice President and November 11, 2004
Chief Financial Officer
- -------------------- [Principal Financial
Robert Birnbach Officer]
/s/ MICHAEL GIAMBRA Vice President and Chief November 11, 2004
Accounting Officer
- -------------------- [Principal Accounting
Michael Giambra Officer]
/s/ RAYMOND STEELE Director November 11, 2004
- --------------------
Raymond Steele
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-K
COMMISSION FILE NUMBER 0-25552
47-25 34TH STREET, 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) 784-2514
(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)
10.19 Securities Purchase Agreement by and among Dualstar Technologies
Corporation and Madeleine, L.L.C., dated October 27, 2003. (8)
10.20 Bargain and Sale Deed, dated October 27, 2003, by and between Property
Control, Inc. and 11-30 47th Avenue Company LLC. (8)
10.21 Registration Rights Agreement by and between Dualstar Technologies
Corporation and Madeleine, L.L.C. dated October 27, 2003. (8)
10.22 Form of Agreement to Surrender Options. (8)
10.23 Warrant Termination Agreement by and between DSTR Warrant Co., LLC and
DualStar Technologies Corporation, dated October 27, 2003. (8)
10.24 Promissory Note by High-Rise Electric, Inc. to Gary Segal, dated
August 20, 2004. (9)
10.25 Security Agreement by and between High-Rise Electric, Inc. and Gary
Segal, dated August 20, 2004. (9)
10.26 Guaranty Agreement by and between DualStar Technologies Corporation and
Gary Segal, dated August 20, 2004. (9)
10.27 Pledge Agreement by and between DualStar Technologies Corporation and
Gary Segal, dated August 20, 2004. (9)
14 DualStar Technoloies Corporation Code of Business Conduct and Ethics(10)
21.1 Subsidiaries of the Registrant.(10)
23.1 Consent of Grassi & Co., CPAs, P.C. (10)
31.1 Rule 13a-14(a)/15d-14(a) Certification. (10)
31.2 Rule 13a-14(a)/15d-14(a) Certification. (10)
32.1 Section 1350 Certification. (10)
32.2 Section 1350 Certification. (10)
(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) Incorporated herein by reference to Registrant's Annual Report on Form 10-K
(File No. 000-25552) for the period ended June 30, 2003.
(8) Attached hereto.
(9) Incorporated herein by reference to Registrant's Current Report on Form 8-K
(File No. 000-25552) filed on August 26, 2004.
(10) Attached hereto.