<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT TO APPLICATION OR REPORT
FILED PURSUANT TO SECTION 12, 13, OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DUALSTAR TECHNOLOGIES CORPORATION
AMENDMENT NO.1
The undersigned registrant hereby amends Item 14 - Exhibits, Financial
Statement Schedules and Reports on Form 8-K contained in the registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 2000 to correct certain
typographical errors contained primarily in the Consolidated Statements of Cash
Flows and Note M - "Segment Information."
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned thereunto duly authorized.
DUALSTAR TECHNOLOGIES CORPORATION
By: /s/ Robert J. Birnbach
---------------------------------------
Robert J. Birnbach
Executive Vice President, Chief
Financial Officer and Secretary
DATE: September 28, 2000
<PAGE>
DualStar Technologies Corporation and Subsidiaries
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-9
Notes to Consolidated Financial Statements F-10 - F-38
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of DualStar
Technologies Corporation and Subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of DualStar
Technologies Corporation and Subsidiaries as of June 30, 2000 and 1999 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 2000, in conformity with
accounting standards generally accepted in the United States of America.
GRANT THORNTON LLP
New York, New York
September 27, 2000
F-2
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-----------------------------
2000 1999
------------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $13,823,267 $110,003
Accounts receivable - net of allowance for doubtful accounts of
$145,000 ad $97,000 in 2000 and 1999, respectively 1,427,856 1,085,221
Net assets of discontinued operations 11,738,852 5,874,748
Deferred tax asset 178,000 178,000
Prepaid expenses and other current assets 393,287 328,095
-----------------------------
Total current assets 27,561,262 7,576,067
PROPERTY AND EQUIPMENT - net of accumulated depreciation and amortization 5,210,383 3,912,684
OTHER ASSETS
Deferred tax asset 1,574,000 1,574,000
Intangible assets - net of accumulated amortization 2,056,036 -
Other 678,731 74,136
-----------------------------
$37,080,412 $13,136,887
=============================
</TABLE>
F-3
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
June 30,
-----------------------------
2000 1999
------------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,111,377 $1,314,681
Promissory note payable 7,000,000 -
Accrued expenses and other current liabilities 2,442,896 1,702,541
-----------------------------
Total current liabilities 10,554,273 3,017,222
MORTGAGE PAYABLE - net of current portion 1,715,948 723,750
SUBORDINATED CONVERTIBLE NOTE - 2,500,000
OTHER LIABILITIES 205,112 206,498
-----------------------------
Total liabilities 12,475,333 6,447,470
-----------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - par value, $.01 per share; 25,000,000 shares authorized; 16,476,568
and 9,000,000 shares issued and outstanding in 2000 and 1999, respectively 164,766 90,000
Additional paid-in capital 42,613,550 14,995,836
Accumulated deficit (17,047,237) (8,396,419)
Deferred compensation (1,126,000) -
-----------------------------
Total shareholders' equity 24,605,079 6,689,417
-----------------------------
$37,080,412 $13,136,887
=============================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- --------
<S> <C> <C> <C>
Revenues $5,256,899 $6,233,554 $5,341,192
-------------------------------------------------------------------
Operating expenses:
Cost of revenues 4,253,654 4,691,191 4,526,881
General and administrative expenses 5,922,833 2,283,844 1,684,442
Depreciation and amortization 865,613 352,615 305,090
Amortization of deferred compensation 637,428 - -
Impairment of fixed assets 300,000 - -
-------------------------------------------------------------------
Total operating expenses 11,979,528 7,327,650 6,516,413
-------------------------------------------------------------------
Operating loss (6,722,629) (1,094,096) (1,175,221)
Other (income) expense:
Interest income (264,580) - -
Interest expense 741,603 379,100 109,059
-------------------------------------------------------------------
Other expense - net 477,023 379,100 109,059
-------------------------------------------------------------------
Loss before provision
(benefit) for income taxes (7,199,652) (1,473,196) (1,284,280)
Provision (benefit) for income taxes
Current tax provision 68,000 31,000 41,000
Deferred tax benefit - (650,000) -
-------------------------------------------------------------------
Loss from continuing operations (7,267,652) (854,196) (1,325,280)
(Loss) income from discontinued operations (1,383,166) 2,176,444 1,881,126
-------------------------------------------------------------------
Net (loss) income $(8,650,818) $1,322,248 $555,846
===================================================================
Basic and diluted (loss) income per share:
Continuing operations $(0.57) $(0.09) $(0.15)
Discontinued operations (0.11) 0.24 0.21
-------------------------------------------------------------------
Total $(0.68) $0.15 $0.06
===================================================================
Weighted average shares outstanding 12,824,121 9,000,000 9,000,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Common Stock Additional
paid-in Accumulated Deferred
Shares Amount Capital Deficit Compensation Total
------ ------ ------- ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1997 9,000,000 $90,000 $14,995,836 $(10,274,513) - $4,811,323
Net income for the year
ended June 30, 1998 - - - 555,846 - 555,846
----------------------------------------------------------------------------------------------
Balance - June 30, 1998 9,000,000 90,000 14,995,836 (9,718,667) - 5,367,169
Net income for the year
ended June 30, 1999 - - - 1,322,248 - 1,322,248
----------------------------------------------------------------------------------------------
Balance - June 30, 1999 9,000,000 90,000 14,995,836 (8,396,419) - 6,689,417
Net loss for the year
ended June 30, 2000 - - - (8,650,818) - (8,650,818)
Exercise of Class A warrants 4,510,571 45,106 17,997,178 - - 18,042,284
Exercise of Underwriter unit option 400,000 4,000 2,306,000 - - 2,310,000
Conversion of convertible note 1,791,000 17,910 2,455,419 - - 2,473,329
Costs in connection with
conversion of convertible note - - (21,824) - - (21,824)
Issuance of common stock and
warrants in connection with
purchase of ParaComm, Inc. 774,997 7,750 3,117,513 - - 3,125,263
Issuance of compensatory
stock options - - 1,763,428 - $(1,126,000) 637,428
----------------------------------------------------------------------------------------------
Balance - June 30, 2000 16,476,568 $164,766 $42,613,550 $(17,047,237) $(1,126,000) 24,605,079
==============================================================================================
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- --------
<S> <C> <C> <C>
Cash flows from operating activities of continuing operations:
Net loss $(7,267,652) $ (854,196) $(1,325,280)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities
Depreciation and amortization 865,613 352,615 305,090
Deferred income taxes - (650,000) -
Accrued interest converted to common stock 124,385 - -
Impairment of fixed assets 300,000 - -
Amortization of deferred compensation 637,428 - -
(Increase) decrease in assets, net of assets acquired
Accounts receivable (264,708) 55,781 (771,645)
Prepaid expenses and other current assets (43,054) (308,935) 148,554
Other assets (606,395) (3,000) (3,765)
Increase (decrease) in liabilities, net of liabilities assumed
Accounts payable (534,188) 526,467 242,344
Accrued expenses and other current liabilities 1,366,124 (1,384,040) 548,842
----------------------------------------------------------
Net cash (used in) provided by operating activities of continuing
operations (5,422,447) (2,265,308) 760,826
----------------------------------------------------------
Net cash (used in) provided by operating activities of discontinued
operations (6,699,869) (1,596,830) 447,516
----------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (1,020,434) (265,851) (868,486)
ParaComm, Inc.'s cash at purchase date 264,853 - -
Costs in connection with purchase of ParaComm, Inc. (54,984) - -
----------------------------------------------------------
Net cash used in investing activities $(810,565) $(265,851) $(868,486)
----------------------------------------------------------
</TABLE>
F-7
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended June 30,
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- --------
<S> <C> <C> <C>
Cash flows from financing activities
Exercise of Class A warrants and underwriter unit option $20,352,285 - -
Proceeds from promissory note payable 7,000,000 - -
Net proceeds from refinancing of mortgage payable 996,250 - -
Principal payments of loan and lease payables (1,150,431) (95,494) (52,993)
Principal payment of mortgage payable (27,084) (48,750) (41,250)
Costs in connection with conversion of convertible note (21,824) - -
Proceeds from subordinated convertible note - 2,500,000 -
Proceeds from subordinated note - 1,000,000 -
----------------------------------------------------------
Net cash provided by (used in) financing activities 27,149,196 3,355,756 (94,243)
----------------------------------------------------------
Net increase (decrease) in cash 14,216,315 (772,233) 245,613
Cash of continuing operations at beginning of year 110,003 34,224 190,534
Cash of discontinued operations at beginning of year 473,992 1,322,004 920,081
----------------------------------------------------------
Cash and cash equivalents at end of year $14,800,310 $583,995 $1,356,228
==========================================================
Cash and cash equivalents of continuing operations at end of year $13,823,267 $110,003 $34,224
Cash of discontinued operations at end of year 977,043 473,992 1,322,004
----------------------------------------------------------
Total cash and cash equivalents at end of year $14,800,310 $583,995 $1,356,228
==========================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $719,449 $330,757 $123,937
Income taxes 87,986 14,910 18,594
</TABLE>
F-8
<PAGE>
DualStar Technologies Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended June 30, 2000
Non-cash investing and financing transactions:
(1) In August 1996, the Company acquired real property which was financed
by a $900,000 mortgage loan. In November 1999, the Company refinanced the
mortgage loan and increased the loan balance to $1,750,000. The unpaid
balance of $754,044 of the original mortgage loan was paid off from the
proceeds of the refinancing.
(2) The Company acquired equipment related to the delivery of Internet
access which was financed by leases in the total amount of $193,546 and
$156,792 during the fiscal year ended June 30, 2000 and 1999, respectively.
These leases are classified as capital leases.
(3) In May 2000, the Company issued 774,997 shares of common stock and
25,000 warrants with an exercise price of $15 per common stock in exchange
for all of the outstanding stock of ParaComm, Inc. In the transaction, the
Company acquired total assets of $1,871,740 and assumed total liabilities
of $572,868. The Company recorded the consideration of the transaction by
increasing common stock and additional-paid-in capital by $7,750 and
$3,117,513, respectively. In addition, since the transaction amount
exceeded the net assets of ParaComm, Inc. on the purchase date, the Company
allocated the excess to subscriber list, access rights and goodwill in the
amounts of $1,165,732, $444,875 and $518,978, respectively.
(4) In July 1999, Technology Investors Group, LLC ("TIG") converted its
$2.5 million convertible note and a portion of unpaid interest into
1,791,000 shares of the Company's common stock at the conversion price of
$1.40 per share. In addition, the Company issued a promissory note in the
amount of $120,000 representing the remaining indebtedness to TIG. In
connection with the conversion, the Company incurred costs of $41,471 which
have been charged to additional paid-in capital. As a result of the
transaction, the Company's common stock (in par value) was increased by
$17,910 and additional paid-in capital was increased by $2,455,419.
(5) In March 2000, options to purchase 617,500 shares of the Company's
common stock were granted to employees with an exercise price lower than
the closing price of the Company stock. One-third of the options vested at
the date of the grants and the remaining two-thirds shall vest ratably on a
monthly basis beginning on the last day of each of the 24 calendar months
following March 2001. As a result of the grants, a compensation charge of
$1,763,428 was incurred, of which $637,428 was recognized in the current
period. Accordingly, additional paid-in capital was increased by
$1,763,428, deferred compensation was increased by $1,126,000, and $637,428
was charged to fiscal 2000 operating result.
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
Background and Financial Statement Presentation
DualStar Technologies Corporation ("DualStar") is a holding company which
was incorporated on June 17, 1994. Effective August 1, 1994, DualStar
entered into share acquisition agreements with Centrifugal Associates, Inc.
("Associates") and Centrifugal Service, Inc. ("Service") (collectively,
"Centrifugal"), and Mechanical Associates, Inc. ("Mechanical"), whereby
2,610,000 shares of DualStar were issued to the shareholders of Centrifugal
and Mechanical in exchange for all of the stock of Centrifugal and
Mechanical and these companies became wholly owned subsidiaries of
DualStar. Subsequently, DualStar formed new wholly owned subsidiaries:
Trident Mechanical Systems, Inc., Centrifugal/Mechanical Associates, Inc.,
The Automation Group, Inc., Property Control, Inc., High-Rise Electric,
Inc., Grace Systems Technologies, Inc., DualStar Communications, Inc.,
Integrated Controls Enterprises, Inc., HR Electrical Systems, Inc. and BMS
Electric, Inc. In May 2000, the Company issued 774,997 shares of common
stock and 25,000 warrants with an exercise price of $15 per common stock in
exchange for all of the outstanding stock of ParaComm, Inc. (see Note P).
The accompanying financial statements for the years ended June 30, 2000,
1999 and 1998 reflect the consolidated operations of DualStar Technologies
Corporation and subsidiaries (collectively the "Company"). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
DualStar, through its wholly owned subsidiaries, operates two separate
lines of business: (a) construction-related businesses; and (b)
communications businesses. In light of significantly increased demand for
high-speed data access fueled by the explosive growth of the Internet,
DualStar has begun to pursue its communications business plan more
aggressively. Specifically, DualStar seeks to become principally an access
provider of broadband communications services to residential and commercial
properties. The DualStar board of directors believes that future prospects
of the Company are highly dependent on the rapid expansion of its
communications business. This expansion requires significant capital
expenditures to construct and operate the infrastructure necessary to
provide access services for broadband communications services, and to
acquire access rights to provide such services in residential and
commercial buildings. In connection with DualStar's communications focus,
the DualStar board of directors has determined to divest most of DualStar's
construction-related businesses, and has entered into that certain Stock
Purchase Agreement dated as of March 28, 2000 with M/E Contracting Corp.
The assets constituting such businesses are classified as "discontinued
operations."
F-10
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A (CONTINUED)
Accordingly, the financial position of such businesses as of June 30, 2000
and 1999, and their financial results and cash flows for the fiscal years
ended June 30, 2000, 1999 and 1998 are presented as the discontinued
operations in the accompanying financial statements.
In connection with the Company's previously-announced plan to expand the
Company's communications businesses, on June 15, 2000, the Company
announced that it had entered into letters of intent with Exelon Capital
Partners, Inc. ("Exelon") and Blackacre Capital Management L.L.C.
("Blackacre") with respect to an investment by both parties in
newly-created preferred stock of the Company. Under the letter of intent
with Exelon, subject to definitive documentation, stockholder and
regulatory approval, Exelon would make a $55 million preferred stock
investment in the Company. Blackacre's letter of intent contemplated a $20
million preferred stock investment in the Company, and further contemplated
that if the Exelon transaction did not close, that Blackacre would lend $20
million to the Company on a senior secured basis, which loan would be
convertible into DualStar common stock at the option of Blackacre at the
conversion price of $4.00 per share.
On September 27, 2000, the Company announced that Blackacre had extended
its commitment to lend the Company $20 million, and that Exelon had
notified the Company that Exelon had decided not to move forward with their
proposed preferred stock investment. The Company expects to close the
Blackacre loan, which will be convertible into Company common stock at
$4.00 per share, in two stages. The stage one closing will consist of an
advance of $13 million, the proceeds of which will be used (i) to retire
existing indebtedness of the Company in the principal amount of $7 million
owed to Madeleine L.L.C., an affiliate of Blackacre, and (ii) for working
capital. The stage two closing will consist of an advance of $7 million,
which advance is subject to certain conditions, including, without
limitation, the receipt of stockholder approval and the absence of a
material adverse change to the Company. The Company is negotiating
definitive documentation for the transaction, and expects to close stage
one shortly.
The stage two closing, at which the Company expects to receive $7 million,
will require stockholder approval of an increase in the number of
authorized shares of Company common stock. The Company is preparing a proxy
statement in connection with the stockholder meeting at which such approval
will be sought, which proxy statement will be submitted to the Securities
and Exchange Commission prior to mailing it to the Company's stockholders.
The Company anticipates using a significant amount of the net proceeds from
the Blackacre loan to fund a portion of the build-out of the Company's
DSL-based communications infrastructure. The Company plans to build certain
facilities that it believes will be instrumental in attracting one or more
strategic investors to the Company.
F-11
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A (CONTINUED)
The Company's communications business continues to hold discussions with
one or more potential strategic partners. These discussions have been wide
ranging and have included investment opportunities, joint ventures and
service agreements; however, no definitive agreement has been reached with
any entity at this time. The Company is exploring additional financing
alternatives through Raymond James & Associates, Inc., which has been
retained by the Company as its financial advisor, as well as with
Blackacre.
On March 28, 2000, the Company entered into that certain Stock Purchase
Agreement (the "M/E Agreement") with M/E Contracting Corp. ("M/E"), an
affiliate of Blackacre, to sell to M/E, subject to the approval of the
Company's stockholders and the consummation of a previously-announced $46.2
million investment by Blackacre (which investment has been replaced with
$20 million senior secured facility from Blackacre, stage one of which is
expected to close shortly), High-Rise, Centrifugal and Mechanical. The
aggregate purchase price for such stock if $11 million, consisting of $1
million in cash and a $10 million secured 10-year note bearing interest at
10% per annum.
In June 1999, the Company signed a letter of intent to sell High-Rise
Electric, Inc. ("High-Rise") to a buyer for $11 million, subject to certain
adjustments. The transaction was subject to the execution of a definitive
purchase agreement, arrangement of financing by the buyer, and approval by
the Company's Board of Directors. In January 2000, the transaction was
terminated due to the buyer's inability to secure financing for the
transaction.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows:
1. Revenue and Cost Recognition
Communication services revenue includes data, video and voice
communication and installations services. Data and video are
subscription based services generally provided to customers under month
to month contracts. Voice communications include recurring and usage
based fees. Installation service fees are nonrecurring fees for access
to the Company's network. Revenues are recognized in the month in which
the services are provided. All expenses related to services provided
are recognized as incurred.
F-12
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A (CONTINUED)
Revenues on long-term contracts are accounted for by the
percentage-of-completion method, whereby revenue is recognized based on
the estimated percentage of costs incurred to date to the estimated
total costs of each individual contract. This method is used because
management considers costs to be the best available measure of progress
on these contracts. Revenue on service contracts is recorded on the
accrual basis as services are performed.
Contract costs include all direct materials and labor costs. General
and administrative costs are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are made in the period in
which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from
final contract settlements, may result in revisions to costs and
income, and such changes are recognized in the period in which the
revisions are determined. An amount equal to contract costs
attributable to job change orders is included in revenues when
realization is probable and the amount of such orders can be reliably
estimated.
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, contracts and retainage receivable,
accounts payable and current debt approximates fair value, principally
because of the short-term maturity of these items. The fair value of
the Company's long-term debts approximates carrying value as the
interest rates on the related debts approximate the Company's current
borrowing rate.
4. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
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.
F-13
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A (CONTINUED)
5. Impairment of Long-term Assets
On an ongoing basis, the Company reviews the valuation and amortization
of long-term assets. As part of this review, the Company estimates the
undiscounted future cash flow expected to be generated by the related
assets to determine whether an impairment has occurred. In the fourth
quarter of fiscal 2000, the carrying value of certain communication
equipment was written down by $300,000 as a result of the Company's
anticipated change in strategy of delivering its communications
services. In determining the amount of the impairment loss, the Company
considered the present value of the amount that could be recovered upon
the sale of the assets.
6. Intangible Asstes
Subscriber list, access rights and goodwill derived from the purchase
of ParaComm, Inc. are stated at an estimated value at the closing of
the purchase less accumulated amortization. Subscriber list,
capitalized access rights and goodwill are being amortized on a
straight-line basis over three, five and ten years, respectively.
7. Income Taxes
The Company files consolidated federal, state and local income tax
returns. Deferred income taxes are principally the result of net
operating loss carryforwards and differences related to different bases
of accounting for financial accounting and tax reporting purposes.
8. Per Share Data
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 year ended June 30, 2000, 1999 and 1998, stock options and
warrants (see Notes F, K and P) and shares available for conversion
under the convertible note (see Note E) have been excluded from the
calculation of diluted loss per share as their effect would have been
antidilutive.
F-14
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A (CONTINUED)
9. Cash Equivalents
The Company considers its money market funds with an original maturity
of three months or less to be cash equivalents. At June 30, 2000, the
Company has approximately $13.2 million in money market funds in the
United States which are uninsured. The Company has not experienced any
losses on these funds and believes it is not exposed to any significant
credit risk on these cash equivalents.
10. Reclassification
Certain reclassifications have been made to prior year amounts to
conform to the June 30, 2000 presentation.
NOTE B - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
June 30,
-----------------------------
2000 1999
------------ ----------
Compensation $601,327 $284,880
Note payable - 1,000,000
Professional fees 673,577 90,000
Communication taxes payable 392,958 154,271
Current portion of mortgage and
lease payables 188,253 166,784
Other 586,781 6,606
-----------------------------
$2,442,896 $1,702,541
=============================
NOTE C - INTANGIBLE ASSETS
Intangible assets consist of the following:
JUNE 30, 2000
-------------
Subscriber list $1,165,732
Access rights 444,875
Goodwill 518,978
-------------
2,129,585
Less accumulated amortization (73,549)
-------------
$2,056,036
=============
F-15
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------------------
2000 1999
------------ ----------
<S> <C> <C>
Building and building improvements $930,523 $1,093,606
Infrastructure costs 2,827,391 1,604,919
Machinery and equipment 1,755,097 1,184,806
Computer equipment 565,917 373,831
Furniture and fixtures 109,728 105,843
Automobiles 20,590 23,232
-------------------------------------
6,209,246 4,386,237
Less accumulated depreciation and amortization (1,313,863) (788,553)
-------------------------------------
4,895,383 3,597,684
Land 315,000 315,000
-------------------------------------
$5,210,383 $3,912,684
=====================================
</TABLE>
NOTE E - DEBT
1. Mortgage Payable
On November 22, 1999, the Company refinanced its mortgage loan,
borrowing an additional $996,000. The new mortgage loan will expire on
December 1, 2004 and can be renewed for an additional five years. The
mortgage loan bears interest at a fixed rate of 8.5% per annum.
Interest during the renewal term will be paid at a fixed rate per annum
equal to the prime rate in effect on November 1, 2004. Principal of the
loan is amortized on a 25-year basis. As of June 30, 2000, the mortgage
balance was approximately $1.73 million. For the years ended June 30,
2000, 1999 and 1998, interest expense of approximately $115,000,
$81,000 and $71,000, respectively, was recorded for the mortgage loans.
F-16
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E (CONTINUED)
At June 30, 2000, principal payments under the mortgage loan are as
follows:
2001 $ 21,968
2002 24,000
2003 26,000
2004 29,000
2005 1,636,948
-----------------
1,737,916
Less current portion (21,968)
-----------------
$1,715,948
=================
The mortgage loan agreement requires the Company to comply with certain
covenants, including maintaining certain net working capital and
tangible net worth amounts. If the Company fails to meet any of the
requirements, the loan shall become immediately due and payable. At
June 30, 2000 and 1999, the Company met both the net working capital
and the tangible net worth amounts.
2. Subordinated Convertible Note
In November 1998, the Company sold to Technology Investors Group, LLC
("TIG") a subordinated convertible note in the principal amount of $2.5
million, due and payable on May 25, 2001. The note had an interest rate
of 7.5% per annum and was payable semi-annually at the option of the
Company. The note was subordinated to the first mortgage on the
Company's building and to the rights of financial lenders and sureties
of the Company.
In accordance with the terms of the note, on July 7, 1999, the Company
exercised its right to require TIG to convert the note into 1,791,000
shares of the Company's common stock at a conversion price of $1.40 per
share. In addition, the Company issued a promissory note in the amount
of $120,000 (the "TIG Stub Loan") representing the remaining
indebtedness to TIG.
The TIG Stub Loan was repaid in full in December 1999.
For the years ended June 30, 2000 and 1999, interest expense of
approximately $128,000 and 160,000, respectively, was recorded for the
note.
In connection with the subordinated convertible note, the Company and
certain stockholders of the Company also agreed to the designation by
TIG of one member to the Company's Board of Directors.
F-17
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E (CONTINUED)
3. Promissory Note
On December 16, 1999, the Company sold a $7 million secured convertible
promissory note (the "Madeleine Bridge Loan") to Madeleine, L.L.C.
("Madeleine"), an affiliate of Cerberus Capital Management L.P.
("Cerberus") and Blackacre Capital Management L.L.C. ("Blackacre"). The
note has an interest rate of 11% per annum and was due on May 31, 2000.
The due date of the note was extended to the closing date of the
Blackacre investment. The Madeleine Bridge Loan is guaranteed by
certain subsidiaries of the Company and secured by such subsidiaries'
assets and capital stock and the Company's assets. The Company has been
advised that contemporaneous with the advance of the Madeleine Bridge
Loan, TIG purchased from Blackacre a $2 million participation interest
in such loan, which was subsequently resold to Blackacre in March 2000.
On October 26, 1999, the Company's subsidiary, Centrifugal/Mechanical
Associates, Inc., ("CMA") sold a $1 million promissory note (the "TIG
Bridge Note") to TIG. The TIG Bridge Note had an interest rate of 10%
per annum and was due December 15, 1999. The loan was guaranteed by the
Company and collateralized by certain Company assets. The TIG Bridge
Note was paid in full in December 1999 from the proceeds of the $7
million Madeleine Bridge Loan.
For the year ended June 30, 2000, interest expense of approximately
$451,000 was recorded for the loan.
NOTE F - SHAREHOLDERS' EQUITY
In February 1995, in connection with the Company's initial public offering,
the Company issued 4,600,000 Class A warrants to shareholders. During
January and February 2000, a total of 4,510,571 shares of the Company's
common stock were issued pursuant to the exercise of the Company's Class A
Warrants which would have expired on February 14, 2000. The Class A
Warrants entitled holders to acquire one share of the Company's common
stock at a purchase price of $4.00 per share. In addition, at a purchase
price of $5.78 per share, 400,000 shares of the Company's common stock were
issued upon exercise of a purchase option previously granted to an
underwriter in connection with the Company's February 1995 initial public
offering. The aggregate proceeds to the Company from the exercise of the
warrants and the option were $20,352,285.
F-18
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F (CONTINUED)
In March 2000, options to purchase 617,500 shares of the Company's common
stock were granted to employees with an exercise price lower than the
closing price of the Company stock. One-third of the options vested at the
date of the grants and the remaining two-thirds shall vest ratably on a
monthly basis beginning on the last day of each of the 24 calendar months
following March 2001. As a result of the grants, a compensation charge of
$1,763,428 was incurred, of which $637,428 was recognized in the current
period. Accordingly, additional paid-in capital was increased by
$1,763,428, deferred compensation was increased by $1,126,000, and general
and administrative expenses were increased by $637,428.
In January 2000, the Company, subject to stockholder approval and other
conditions, granted a total of 400,000 Class C warrants to two officers of
the Company. The original exercise price of the warrants was $6.50 per
share, which was reduced by the Company's Board of Directors in June 2000
to $5.25 per share.
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 more than likely generate
sufficient taxable earnings or utilize tax planning opportunities to ensure
realization of the tax benefits of $1,752,000, but will less than likely
realize the benefit on the balance of the deferred tax assets, and
therefore, has recorded a valuation allowance.
F-19
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G (CONTINUED)
The following is a summary of the items giving rise to deferred tax
benefits at June 30, 2000 and 1999:
June 30,
-----------------------------------
2000 1999
------------- ------------
Current
Allowance for doubtful accounts $ 178,000 $ 178,000
-----------------------------------
Long-term
Net operating loss carryforward 8,209,000 3,307,000
Accumulated depreciation 20,000 20,000
-----------------------------------
8,229,000 3,327,000
-----------------------------------
Total deferred tax assets 8,407,000 3,505,000
Less valuation allowance (6,655,000) (1,753,000)
-----------------------------------
Net deferred tax assets $1,752,000 $1,752,000
===================================
The provision (benefit) for income taxes differs from the amount computed
by applying the statutory federal income tax rate to income (loss) before
provision (benefit) for income taxes due to the following:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------
2000 1999 1998
------------- ------------- --------
<S> <C> <C> <C>
Statutory federal income tax $(2,839,000) $239,000 $189,000
State and local income taxes (1,995,000) 31,000 41,000
Net operating loss carryforward - (239,000) (1,489,000)
Valuation allowance 4,902,000 (650,000) 129,000
Allowance for doubtful accounts - - 1,217,000
Accumulated depreciation - - (46,000)
--------------------------------------------------------------
$68,000 $(619,000) $41,000
==============================================================
</TABLE>
F-20
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G (CONTINUED)
The Company has net operating losses of approximately $14,366,000 available
for federal income tax purposes, and net operating losses of approximately
$15,496,000 for state and local tax purposes, expiring in the years 2011 to
2018. The Company's ability to utilize net operating losses to offset
future taxable income may be limited if the Company changes control as
defined in Internal Revenue Code Section 382.
In 2000, no federal income tax expense was recorded due to the net loss. In
1999 and 1998, no federal income tax expense was recorded as a result of a
benefit of $239,000 and $189,000, respectively, for the utilization of a
portion of the net operating loss carryforward for financial accounting
purposes.
NOTE H - COMMITMENTS AND CONTINGENCIES
(1) The Company leases certain equipment under operating leases expiring at
various dates through June 2005. At June 30, 2000, minimum rental
commitments under noncancellable operating leases are as follows:
2001 $410,000
2002 333,000
2003 310,000
2004 297,000
2005 291,000
-------------
$1,641,000
=============
Equipment rent for the years ended June 30, 2000, 1999 and 1998 was
$179,000, $126,000 and $106,000, respectively.
(2) The Company contributes to multiemployer pension plans for employees
covered by collective bargaining agreements. These plans are not
administered by the Company and contributions are determined in accordance
with provisions of the agreements. Information with respect to the
Company's proportionate share of the excess, if any, of the actuarially
computed value of vested benefits over the total of the pension plans' net
assets is not available from the plans' administrators. For the years ended
June 30, 2000, 1999 and 1998, the Company's continuing operations
contributed $104,000, $377,000 and $712,000, respectively, for various
union employee benefits, including pension benefit, and medical and
workers' compensation insurance. For the same fiscal period, the Company's
discontinued operations contributed $14,049,000, $11,665,000 and
$9,990,000, respectively, for various union employee benefits, including
pension benefit, and medical and workers' compensation insurance.
F-21
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H (CONTINUED)
The Multiemployer Pension Plan Administration Act of 1980 (the "Act")
significantly increased the pension responsibilities of participating
employers. Under the provisions of the Act, if the plans are terminated or
the Company withdraws, the Company could be subject to a substantial
"withdrawal liability."
(3) In connection with its construction-related businesses, the Company is
contingently liable to sureties under a general indemnity agreement. The
Company agrees to indemnify the sureties for any payments made on contracts
of suretyship, guarantee or indemnity. Management believes that all such
contingent liabilities will be satisfied by performance on the specific
bonded contracts.
(4) On August 11, 1999, Triangle Sheet Metal Works, Inc. ("Triangle"), a
subcontractor of CMA filed a petition under Chapter 11 of Title 11 of the
United States Code in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"). Triangle's Chapter 11 case
was subsequently converted to a case under Chapter 7 of the Bankruptcy Code
and a Chapter 7 trustee was appointed to administer Triangle's estate.
Triangle was a sheet metal subcontractor for CMA on six projects in New
York City (the "Subcontractor Projects"). CMA was also the subcontractor of
Triangle on one additional project in New York City (the "Contractor
Project"). Prior to Triangle's Chapter 11 filing, Triangle ceased operation
and defaulted on its obligations under the Subcontractor Projects and
Contractor Project. In pleadings filed with the Bankruptcy Court prior to
the appointment of a Chapter 7 trustee, Triangle alleged, among other
things, that CMA is indebted to Triangle in an amount ranging between
$1,400,000 and $3,000,000. Triangle also suggested in such pleadings that
there may exist potential causes of action by Triangle against the Company
and/or CMA, including breach of contract, tortious interference and unfair
competition. Triangle did not commence any formal legal actions or
proceedings with respect to any of such allegations (other than seeking to
obtain discovery from CMA and DualStar). On or about January 18, 2000,
Triangle's Chapter 7 trustee made a written request on CMA stating that
Triangle's records reflected that CMA was indebted to Triangle in the
aggregate sum of $2,435,097 based upon work performed by Triangle on the
Subcontractor Projects. Triangle's Chapter 7 trustee stated CMA was not
entitled, under applicable law, to offset amounts owed to CMA on particular
Subcontractor Projects against amounts owed by CMA to Triangle on other
Subcontractor Projects. Triangle's Chapter 7 trustee stated its intention
to institute legal proceedings in the Bankruptcy Court against CMA and the
owners of the Subcontractor Projects to recover such funds. CMA and
DualStar dispute Triangle's and the Chapter 7 trustee's allegations and
assertions and believe that they are without merit.
F-22
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H (CONTINUED)
CMA has claims and counterclaims against Triangle for breaches, defaults,
completion costs and damages in respect of the Subcontractor Projects and
the Contractor Project. Although such claims and counterclaims are not
fully liquidated and cannot be fully ascertained at this time, CMA believes
that it is entitled setoff and/or recoup part of the damages by offsetting
any monies owed by CMA to Triangle. The Company can make no assurances,
however, that such offsets and recoupment will be either (a) allowed and
that CMA will prevail in any such litigation with Triangle's Chapter 7
trustee, or (b) sufficient to cover all of CMA's damages resulting from
Triangle's defaults under the Subcontractor Projects and Contractor
Project. Based upon currently available information, it appears that a
significant portion of CMA's claims against Triangle may not be recoverable
after such setoff and/or recoupment.
On June 1, 2000, Triangle's Chapter 7 trustee commenced a lawsuit in the
Bankruptcy Court against CMA and its bonding company and claimed CMA was
indebted to Triangle in the amount of $411,002 based upon worked performed
by Triangle on one of the Subcontractor Projects. A motion to dismiss the
complaint has been filed by CMA and is pending before the Court. For the
reasons discussed above, the Company can make no assurances that CMA will
prevail in such litigation.
(5) High-Rise is a defendant in two lawsuits filed in April 1999. The
plaintiffs are seeking $5,000,000 and $2,000,000, respectively, for claims
related to bodily injuries on job sites where High-Rise and other trades
were working. Management of High-Rise believes that the plaintiffs' claims
are without merit and, in any event, are covered under the Company's
general and umbrella liability insurance policies.
(6) The Company and Trident Mechanical Systems, Inc. ("Trident"), a
dormant, wholly owned subsidiary of the Company, are defendants in a
lawsuit filed in January 2000. The plaintiff is seeking in excess of
$30,000,000 for claims related to property damage on a job site where
Trident and other trades were working. The claim, as currently constituted,
exceeds the Company's general as well as umbrella liability policy limits
in the aggregate. However, management believes that the Company and Trident
are not responsible for the damage and, accordingly, no provision for loss
in excess of the insurance coverage has been made in the accompanying
financial statements.
(7) On September 29, 1997, Centrifugal filed a complaint in the Supreme
Court of the State of New York, Kings County, against DAK Electric
Contracting Corp. ("DAK") and two of DAK's officers, Donald Kopec and Al
Walker, for breach of contract in the amount of $4.1 million.
F-23
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H (CONTINUED)
In prior years, Centrifugal was a partner in a joint venture that performed
mechanical and electrical services for a general contractor on the Lincoln
Square project. Centrifugal was responsible for the mechanical portion of
the contract, and its co-venturer, DAK, was responsible for the electrical
portion. The joint venture's work on this project has been completed. The
joint venture received demands for payment from certain vendors used by the
co-venturer of Centrifugal. These vendors filed liens and/or made demands
against the joint venture payment bond amounting to approximately $1.7
million. Some of these vendors also filed lawsuits against the joint
venture, the joint venture partners and related bonding companies, to
secure payment on their claims. These claims were based on the alleged
failure of the joint venture partner to pay for electrical goods provided
to it as the electrical subcontractor of the joint venture. The joint
venture's bonding companies proposed settling with the claimants; the
bonding companies would then seek indemnification from the joint venture.
It was management's opinion that it would cost the Company less if this
settlement process was managed and completed by the Company.
Based on these developments, the Company wrote off in fiscal 1996
approximately $2.3 million with respect to accounts and loans receivable,
and $1.4 million of claims and other costs that the Company incurred on
behalf of Centrifugal's co-venturer in fulfillment of the electrical
co-venturer's obligations under the contract on the Lincoln Square Project.
Nevertheless, the Company commenced the above identified action in an
attempt to recover its losses, expenses and costs as above set forth. As of
the date of this report, both the corporate defendant, DAK and Donald Kopec
have defaulted, and motions are being made for judgment against each.
As of June 30, 1996, all of the known claims and liens of subcontractors of
the joint venture were settled and discharged, and all of the vendor
lawsuits which arose out of these claims were also settled with the
exception of the following: The joint venture's bonding companies have
claims over for indemnity against Centrifugal and under a guarantee
agreement against the Company in the event that a judgment is rendered
against the bonding companies in a suit brought by an employee benefit fund
for DAK's employees' union seeking contributions to the fund which the fund
claims were due but not paid by DAK. The bonding companies, Centrifugal and
the Company have asserted, among other defenses, that such contributions
were not guaranteed under the terms of the joint venture's bonds.
(8) In the ordinary course of business, the Company is involved in claims
concerning personal injuries and other matters, all of which the Company
refers to its insurance carriers. The Company believes the claims are
covered under its general and umbrella liability policies. No provision for
loss in excess of the insurance coverage have been made in the accompanying
financial statements.
F-24
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I - RELATED PARTY TRANSACTIONS
(1) The Company's mechanical contracting business leases shop space, on a
month-to-month basis, from a company in which certain officers own a
majority interest. No written lease agreement is signed. Rent expense for
the years ended June 30, 2000, 1999 and 1998 was $34,000, $46,000 and
$25,000, respectively.
(2) The Company's communications business sublets office space in New York,
New York from Starrett Corporation (of which the Company's president and
CEO is chairman and the Company's CFO is president and CEO). Starrett has
recently billed DualStar Communications $16,340 for office improvements
associated with the property. Rental charges for the office space have
commenced as of July 1, 2000. DCI occupies approximately 3,800 square feet,
and the rent is expected to be approximately $22.50 per square foot, plus
incidentals.
(3) TechOne Capital Group LLC ("TechOne"), a private consulting and
investment firm of which Jared E. Abbruzzese, chairman of the Company, is a
principal, has provided consulting services to the Company since August 12,
1999, pursuant to letter agreements dated August 12, 1999 and March 24,
2000. Currently, the Company is a party to a consulting agreement dated
June 1, 2000 with TechOne. The consulting fee payable under the consulting
agreement is $30,000 per month, plus reimbursement of expenses. The
consulting agreement provides, among other things, that other than
termination as a result of a material breach by TechOne, the Company may
terminate this consulting agreement only by giving written notice to
TechOne of the Company's intention to terminate this consulting agreement
accompanied by payment of (i) all unpaid amounts due hereunder from the
Company to TechOne for the consulting services rendered through the date of
termination, plus all reimbursable amounts for which TechOne has delivered
to the Company an invoice on or before the termination date, (ii) $25,000,
which will be used by TechOne for reimbursable expenses incurred prior to
the termination date and not yet invoiced, and (iii) an amount equal to the
product of $30,000 times the greater of (A) the number of months remaining
in the 3-year term thereof, and (B) 24. For the year ended June 30, 2000,
consulting expense in connection with the agreement was $180,000.
F-25
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I (CONTINUED)
Subject to stockholder approval and other conditions, Class D Warrants to
purchase 750,000 shares of Company Common Stock were granted to TechOne on
April 13, 2000. The Class D Warrants are exercisable for $4.063 per share
and vest and become fully exercisable when the 30-day average closing price
of the Company Common Stock has been at or above $14.00, and a material
third party acquisition or merger, material equity investment in the
Company or joint venture or other material third party transaction having a
substantially similar economic effect as the foregoing has been effected
(excluding, in each instance, the transactions contemplated by the
Blackacre Securities Purchase Agreement). Additionally, regardless of the
vesting requirement discussed above, the Class D Warrants vest and become
fully exercisable upon a change of control regardless of the satisfaction
of the vesting requirements set forth above (excluding the transactions
contemplated by the Blackacre Securities Purchase Agreement). The Warrants
will expire on the seventh anniversary of issuance.
(4) The Company is a party to a consulting agreement dated June 1, 2000
with Hades Advisors LLC, an affiliate of Technology Investors Group, Inc.
("TIG"). The consulting fee payable under the consulting agreement is
$20,000 per month, plus reimbursement of expenses. The consulting agreement
provides that other than termination as a result of a material breach by
Hades, the Company may terminate this consulting agreement only by giving
written notice to Hades of the Company's intention to terminate this
consulting agreement accompanied by payment of (i) all unpaid amounts due
hereunder from the Company to Hades for the consulting services (as defined
therein) rendered through the date of termination, plus all reimbursable
amounts for which Hades has delivered to the Company an invoice on or
before the termination date, (ii) $25,000, which will be used by Hades for
reimbursable expenses incurred prior to the termination date and not yet
invoiced, and (iii) an amount equal to the product of $20,000 times the
greater of (A) the number of months remaining in the 3-year term thereof,
and (B) 24. For the year ended June 30, 2000, consulting expense in
connection with the agreement was $20,000
(5) Subject to stockholder approval and other conditions, Class D Warrants
to purchase 625,000 shares of Company Common Stock were granted to TIG on
April 13, 2000, on the same terms and conditions discussed above in
paragraph (3).
F-26
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I (CONTINUED)
(6) At June 30, 2000, the Company had loans to three officers in the
amounts of $171,000, $60,000 and $50,000, respectively.
(a) The $171,000 loan was due on demand, with an unstated interest
rate. In September 2000, the loan amount was reduced by $75,000 to
offset bonuses earned by the officer in the prior periods and a
promissory note was signed by the officer for the remaining loan
balance of $96,000. The note bears interest rate of 7.75% per annum and
is due in August 2003. In addition, the officer provided all stock
options granted to the officer by the Company as the collateral and
security of the note.
(b) The $60,000 loan is due on demand, with an unstated interest rate.
(c) The $50,000 loan was originally due in February 2000 and bore an
interest rate of 7.75% per annum. The loan and unpaid interest was
repaid in full in August 2000.
(7) ParaComm, Inc. purchases various marketing and business consulting
services from two companies, which ParaComm's president holds equity
interests. For the period from May 11, 2000, the date the Company acquired
ParaComm, to June 30, 2000, approximately $12,000 of expense was incurred
for the services provided by these two companies.
(8) On October 26, 1999, CMA borrowed $1 million from TIG. The loan was
evidenced by a promissory note made by CMA in favor of TIG, providing for
interest at a per annum rate of 10% and a maturity date of December 15,
1999. The loan was guaranteed by DualStar and collateralized by certain of
DualStar's assets. The promissory note was paid in full in December 1999
from the proceeds of the Madeleine Bridge Loan.
NOTE J - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash, trade accounts
receivable and retainage receivable.
The Company maintains its cash in accounts which exceed federally insured
limits. It has not experienced any losses to date resulting from this
policy.
F-27
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J (CONTINUED)
The Company's discontinued operations perform construction contracts for,
and extends credit to, private owners and general contractors located
generally in the New York Tri-State area. The operations are directly
affected by the well-being of these entities and the construction industry
as a whole. For the year ended June 30, 2000, revenue from two customers
amounted to approximately 52% and 17% of total revenue of the discontinued
operations, respectively. For the year ended June 30, 1999, revenue from
three customers amounted to approximately 21%, 21% and 14% of total revenue
of the discontinued operations, respectively. For the year ended June 30,
1998, revenue from three customers amounted to approximately 26%, 12% and
11% of total revenue of the discontinued operations, respectively.
NOTE K - STOCK OPTION PLAN
In 1994, the Company adopted a stock option plan accounted for under the
intrinsic value method of APB No. 25. The plan allows the Company to grant
options to employees for up to 2.2 million shares of common stock. In
December 1998, the Company's shareholders approved an amendment of the
stock option plan to increase the number of shares available for grant to
3.5 million, and to add directors of the Company as persons eligible for
grant of options.
In general, the options have a term of ten years from the date of grant and
vest over two to five years, and the exercise price of each option is
higher than the market price of the Company's stock on the date of grant.
Pursuant to certain officers' employment agreements, such officers may be
given options under the plan, which will be shared equally, to purchase
shares of the Company's common stock at fair market value on the date of
grant, if Company pretax earning criteria are met. Through June 30, 2000,
none of the pre-determined criteria were met and no stock options were
granted to the officers based on the criteria.
Effective July 1, 1996, the Company adopted the provisions of Statement No.
123, Accounting for Stock-Based Compensation. As permitted by the
Statement, the Company has chosen to continue to account for stock-based
compensation using the intrinsic value method. Accordingly, no compensation
cost has been recognized for the plan under the fair value method of SFAS
123. Had compensation cost of the plan been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS
123, the Company's net income (loss) and income (loss) per share would have
been:
F-28
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K (CONTINUED)
<TABLE>
<CAPTION>
2000 1999 1998
------------- ----------- --------
<S> <C> <C> <C>
Net income (loss) As reported $(8,650,818) $1,322,248 $555,846
Pro forma $(11,027,353) $1,322,248 $271,596
Basic and diluted (loss) income As reported $(0.68) $0.15 $0.06
Per share Pro forma $0.81 $0.15 $0.03
</TABLE>
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 2000: risk-free interest rate of
approximately 6.56%, expected life of seven years, volatility of 110% and
no dividend yield.
A summary of information relative to the Company's stock option plan
follows:
<TABLE>
<CAPTION>
Weighted
Number of Shares Average Price
---------------- -------------
<S> <C> <C>
Outstanding at June 30, 1997 and 1998 2,072,000 $0.94
Forfeited as of June 30, 1999 (396,000) $0.75
----------------
Outstanding at June 30, 1999 1,676,000 $0.99
Granted in fiscal 2000 net of grants subject to 1,824,000 $5.41
----------------
Outstanding at June 30, 2000 3,500,000 $3.29
================
</TABLE>
F-29
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K (CONTINUED)
The Plan provides for 3,500,000 shares of Company common stock to be
reserved and available for distribution as grants under the Plan. On
February 18, 2000, subject to stockholder approval, the Company's Board of
Directors approved an amendment to the Plan to increase the number of
shares reserved and available for distribution as awards under the Plan
from 3,500,000 to 6,000,000. The Company anticipates seeking such
stockholder approval at the next annual meeting of its stockholders.
Options granted in excess of the number of shares of Company common stock
currently authorized by the Company's stockholders as being reserved and
available for distribution as awards under the Plan and identified above
are subject to such stockholder approval. At June 30, 2000, 1,282,500
options with exercise prices ranging from $5.25 to $7.06 have been granted
subject to stockholder approval of the amendment of the Plan. To the extent
that such stockholder approval is not obtained, the Company has agreed to
provide certain officers with the same economic benefit as would have been
provided by the options.
In March 2000, options to purchase 617,500 shares of the Company's common
stock were granted to employees with an exercise price lower than the
closing price of the Company stock. One-third of the options vested at the
date of the grants and the remaining two-thirds shall vest ratably on a
monthly basis beginning on the last day of each of the 24 calendar months
following March 2001. As a result of the grants, a compensation charge of
$1,763,428 was incurred, of which $637,428 was recognized in the current
period. Accordingly, additional paid-in capital was increased by
$1,763,428, deferred compensation was increased by $1,126,000, and general
and administrative expenses were increased by $637,428.
The following information applies to options outstanding and exercisable at
June 30, 2000:
RANGE OF WEIGHTED-AVERAGE
EXERCISE NUMBER REMAINING CONTRACTUAL WEIGHTED-AVERAGE
PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE
$0.75 1,499,000 7.0 $0.75
$3.00 177,000 4.4 $3.00
$4.00 826,500 8.1 $4.00
$5.00-$10.25 997,500 9.4 $6.58
------------
3,500,000
============
F-30
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K (CONTINUED)
RANGE OF
EXERCISE NUMBER WEIGHTED-AVERAGE
PRICES EXERCISABLE EXERCISE PRICE
$0.75 1,499,000 $0.75
$3.00 177,000 $3.00
$4.00 213,300 $4.00
$5.00-$10.25 367,500 $6.91
-------------
2,256,800
=============
In July 2000, subject to stockholder approval of the amendment of the Plan,
the Company's Board of Directors granted an additional 806,000 options to
various employees. These options vest over 3 years and have an option
exercise price of $5.25.
NOTE L - EMPLOYEE BENEFIT PLAN
In 1995, the Company adopted a defined contribution retirement plan
(commonly referred to as a 401(k) plan) which satisfies the requirements
for qualification under Section 401(k) of the Internal Revenue Code. The
Company's contribution to the plan is based entirely on management's
discretion. For the years ended June 30, 2000, 1999 and 1998, the Company
made no contribution to the plan.
NOTE M - SEGMENT INFORMATION
Other than the mechanical and electrical contracting business segment,
which is now reported as discontinued operations (see Note J), the Company
has the following two reportable segments: communications and automated
temperature controls. The communications segment primarily installs
communication systems and provides telephone, Internet, television and
other services to buildings. The automated temperature controls segment,
which was previously included in the construction segment, primarily
installs automated temperature controls systems to buildings in the New
York Tri-State area.
F-31
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M (CONTINUED)
The accounting policies used to develop segment information correspond to
those disclosed in these financial statements (see Note A). The Company
does not allocate certain corporate expenses to its segments. Segment
profit (loss) is based on profit (loss) from operations before income taxes
(benefits). The communications segment loss for the year ended March 31,
2000 includes the $637,428 charge for stock options granted in March, 2000
which were granted with an exercise price lower than the closing price of
the Company stock, as reported by Nasdaq, on the dates on which such
options were granted. Sales and transfers between segments are accounted
for at cost. The reportable segments are distinct business units operating
in different industries. They are separately managed, with separate
marketing systems.
<TABLE>
<CAPTION>
AUTOMATED
TEMPERATURE
REPORTABLE SEGMENT INFORMATION COMMUNICATIONS CONTROLS TOTALS
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FISCAL 2000
Revenues from external customers $2,029,434 $1,999,843 $4,029,277
Intersegment revenues 5,000 108,450 113,450
Revenues from discontinued operations 25,000 1,202,622 1,227,622
Depreciation and amortization 567,201 110,612 677,813
Interest expense 21,610 16,149 37,759
Segment profit (loss) (5,028,990) 224,086 (4,804,814)
Segment assets 7,729,240 1,116,237 8,845,477
Expenditure for segment assets 955,494 20,590 976,084
FISCAL 1999
Revenues from external customers $2,204,642 $2,600,917 $4,805,559
Intersegment revenues 20,000 - 20,000
Revenues from discontinued operations 35,000 1,392,995 1,427,995
Depreciation and amortization 154,070 35,370 189,440
Interest expense 86,857 24,999 111,856
Segment profit (loss) (813,573) 265,651 (547,922)
Segment assets 3,639,734 687,515 4,327,249
Expenditure for segment assets 248,102 248,102
</TABLE>
F-32
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M (CONTINUED)
<TABLE>
<CAPTION>
AUTOMATED
TEMPERATURE
REPORTABLE SEGMENT INFORMATION COMMUNICATIONS CONTROLS TOTALS
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FISCAL 1998
Revenues from external customers $1,490,619 $2,562,182 $4,052,801
Intersegment revenues 20,000 20,000
Revenues from discontinued operations 30,098 1,258,293 1,288,391
Depreciation and amortization 121,566 34,174 155,740
Interest expense 20,745 5,940 26,685
Segment loss (1,003,852) (251,595) (1,255,447)
Segment assets 3,075,150 1,636,015 4,711,165
Expenditure for segment assets 897,379 897,379
RECONCILIATION TO CONSOLIDATED AMOUNTS
<CAPTION>
FISCAL
-------------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
REVENUES
Revenues from external customers $4,029,277 $4,805,559 $4,052,801
Revenues from discontinued operations 1,227,622 1,427,995 1,288,391
-------------------------------------------------------
Total consolidated revenues $5,256,899 $6,233,554 $5,341,192
=======================================================
LOSS
Total loss for reportable segments $(4,804,814) $(547,922) $(1,255,447)
Unallocated amounts:
Corporate (2,162,748) (306,274) (69,833)
-------------------------------------------------------
Total consolidated loss from continuing operations $(6,967,652) $(854,196) $(1,325,280)
=======================================================
</TABLE>
F-33
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M (CONTINUED)
RECONCILIATION TO CONSOLIDATED AMOUNTS
<TABLE>
<CAPTION>
FISCAL
----------------------------------
2000 1999
---- ----
<S> <C> <C>
ASSETS
Total assets for reportable segments $8,845,477 $4,711,165
Elimination of intersegment profits on capitalized assets (257,300) (257,300)
Net assets of discontinued operations 11,738,852 5,874,748
Unallocated amounts:
Corporate 17,053,383 2,808,274
----------------------------------
Total consolidated assets $37,380,412 $13,136,887
==================================
OTHER SIGNIFICANT ITEMS:
<CAPTION>
INTERSEGMENT
SEGMENT PROFITS CONSOLIDATED
TOTALS CORPORATE ELIMINATION TOTALS
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 2000
Depreciation and amortization $677,813 $187,800 - $865,613
Interest expense 37,759 703,844 - 741,603
Expenditure for segment assets 976,084 - 976,084
FISCAL 1999
Depreciation and amortization 189,440 163,175 - 352,615
Interest expense 111,856 267,244 - 379,100
Expenditure for segment assets 248,102 39,954 (30,391) 257,665
FISCAL 1998
Depreciation and amortization 155,740 149,350 - 305,090
Interest expense 26,685 82,374 - 109,059
Expenditure for segment assets 897,379 9,894 (84,380) 822,893
</TABLE>
F-34
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N - EMPLOYMENT AGREEMENTS
(1) The Company has entered into employment agreements with three
executives of the Company that expire in August 2003. The agreements are
for annual base salaries ranging from $235,000 to $275,000. The agreements
provide, among other things, for participation in an equitable manner of
any profit sharing or retirement plan for employees or executives of the
Company. There are certain guaranteed bonuses with maximum amounts to be
based upon performance objectives that are determined by the Company's
Board of Directors and Compensation Committee.
Pursuant to the employment agreements, employment may be terminated by the
Company with cause or by the executive with or without good reason.
Termination by the Company without cause, or by the executive for good
reason, would subject the Company to certain liabilities for liquidation
damages, as defined in the agreements.
(2) The Company has entered into an employment agreement with another
executive of the Company that provides for annual base salary of $220,000
plus a bonus up to 50% of the annual base salary based upon certain
performance targets as defined in the agreement. In addition, the executive
will be entitled to severance in the amount of two times the then annual
base salary if the executive is terminated by the Company without cause.
(3) The Company has entered into employment agreements with two executive
of the Company's electrical contracting subsidiary that provide for annual
base salary of $260,000 each. In addition, the agreements provide for
performance bonuses equal to 10% of the subsidiary's net income before
taxes. The executives will be entitled to severance in the amount of their
annual base salary plus the pro-rata portion of the performance bonuses in
the year of termination if they are terminated as defined in the
agreements.
(4) In connection with enhancing DualStar's communications business, DCI
has entered into employment agreements with seven officers of DCI. The
agreements are for annual base salaries ranging from $200,000 to $250,000.
In addition to the annual base salaries, each of the DCI executives are
eligible for bonuses of 40% to 50% of the annual base salaries upon
achievement of specified targets, as defined in the agreements. The
officers will be entitled to severance in the amount of their the annual
base salary plus the pro-rata portion of the performance bonuses in the
year of termination if they are terminated as defined in the agreements.
F-35
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O - DISCONTINUED OPERATIONS
In connection the proposed sale of the Company's electrical and mechanical
contracting subsidiaries to M/E (see Note A), the electrical and mechanical
contracting operations are reflected as discontinued operations for all
periods presented. Accordingly, the net assets of the contracting
subsidiaries have been segregated from the net assets of continuing
operations in the accompanying consolidated balance sheets and their
operating results are segregated from continuing operations and are
reported as discontinued operations in the accompanying consolidated
statements of operations and cash flows.
Summary financial information of the discontinued operations are as
follows:
FISCAL
------------------------------------------------
2000 1999 1998
---- ---- ----
Revenues $82,052,614 $86,416,024 $88,939,108
Gross profit 5,440,285 9,016,418 8,086,392
Net (loss) income (1,383,166) 2,176,444 1,881,126
Current assets 32,455,476 30,591,714
Total assets 33,058,850 31,332,448
Current liabilities 21,319,998 25,457,700
Current assets and current liabilities of the discontinued operations
consist mainly of contracts receivable and trade accounts payable,
respectively.
The Company is unable to reasonably and accurately project the profit or
loss from the discontinued operations from the measurement date (March 8,
2000, the date the Board of Directors approved the plan to sell the
electrical and HVAC contracting businesses) to the ultimate disposal date
and the gain or loss on the sale of the discontinued operations.
Accordingly, the operating results of the discontinued operations for all
periods presented reflect only the actual results incurred.
F-36
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P - ACQUISTION
On May 11, 2000, the Company issued 774,997 shares of common stock and
25,000 warrants with an exercise price of $15 per common stock in exchange
for all of the outstanding stock of ParaComm, Inc. ParaComm was
incorporated in July 1999 and is a private cable operating company based in
Clermont, Florida, providing video entertainment services to MDU
communities in Texas, Florida and Colorado. The acquisition has been
accounted for as a purchase and ParaComm's financial results for the period
from May 11 to June 30, 2000 have been included in the accompanying
financial statements. In the transaction, the Company acquired total assets
of $1,871,740 and assumed total liabilities of $572,868. The Company
recorded the consideration of the transaction by increasing common stock
and additional-paid-in capital by $7,750 and $3,117,513, respectively. In
addition, since the transaction amount exceeded the net assets of ParaComm,
Inc. on the purchase, the Company allocated the excess to subscriber list,
access rights and goodwill in the amounts of $1,165,732, $444,875 and
$518,978, respectively. Subscriber list, capitalized access rights and
goodwill are being amortized on a straight-line basis over three, five and
ten years, respectively.
The following unaudited pro forma consolidated results of continuing
operations assume that the purchase occurred on July 1, 1999:
Year Ended
June 30, 2000
-----------------
Revenues $5,478,534
Loss 7,712,805
Loss per share $(0.57)
F-37
<PAGE>
DualStar Technologies Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q - SUBSEQUENT EVENTS
Effective July 28, 2000, DCI entered into an equipment/software Master
Purchase and License Agreement (MPLA) to a supplier who will provide the
primary components for DCI's network infrastructure. The term of the MPLA
is three (3) years during which a minimum purchase commitment of $30
million must be met. There are related agreements with the same supplier
for installation and support services. Payments made under these related
agreements are included in calculating the satisfaction of the minimum
purchase commitment. DCI's obligation to meet the minimum commitment is
expressly contingent on obtaining vendor supported financing and if such
financing is not obtained by January 1, 2001, either party may terminate
the MPLA. DCI may early terminate, without further payment obligation, for
vendor failure to meet the agreed service/availability levels or delivery
requirements. The related installation and support services agreements can
also be terminated by DCI if the master agreement is terminated.
In conjunction with its intention to expand its communications business, in
August 2000, DCI has been selected by Casden Properties, Inc., an affiliate
of Blackacre, to provide broadband services to up to 45 buildings
encompassing approximately 9,000 units within Casden's portfolio of
nationwide properties.
In August 2000, DCI has also executed an agreement to pursue the broadband
access rights and existing service contracts to 50 properties containing
approximately 12,000 units in the Houston, Texas market
F-38
