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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 2000
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to __________
COMMISSION FILE NUMBER 0-25552
DUALSTAR TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3776834
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
ONE PARK AVENUE, NEW YORK, NEW YORK 10016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 340-6655
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant as of September 15, 2000 was $53,548,846 based
upon the closing price ($3.25) for such Common Stock on such date. The number of
shares outstanding of Registrant's Common Stock, as of September 15, 2000, was
16,486,629.
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PART I
The statements contained in this Annual Report on Form 10-K, including
the exhibits hereto, relating to future operations of DualStar Technologies
Corporation ("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, without limitation, the execution of
definitive documentation for, and consummation of the financing transaction
with, Blackacre Capital Management L.L.C. and its affiliates, the ability of
DualStar Communications, Inc., a wholly owned subsidiary of the Company, to
implement its business plan, the ability of the Company to sell its discontinued
operations, 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 the assumptions, risks and uncertainties set forth
below in the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations," as well as other factors
contained herein and in DualStar's other filings with the SEC. Although the
Company believes that its plans, intentions, and expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
plans, intentions, and expectations will be achieved and actual results could
differ materially from forecasts and estimates.
ITEM 1 - BUSINESS
OVERVIEW
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."
DualStar is a Delaware corporation. Its principal place of business is
located at One Park Avenue, New York, New York 10016. DualStar's telephone
number is (718) 340-6655.
DualStar's common stock, par value $.01 per share (the "Common Stock"),
trades on The Nasdaq National Market under the symbol "DSTR." As of September
15, 2000, there were 16,486,629 shares of Common Stock issued and outstanding.
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RECENT DEVELOPMENTS
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.
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.
DualStar also announced that, in conjunction with its
previously-announced intention to expand its communications business, DCI has
been selected by Casden Properties, Inc., a portfolio company of Blackacre, to
provide broadband services to up to 45 buildings encompassing approximately
9,000 units within Casden's portfolio of nationwide properties.
DCI has also executed an agreement with a telecommunications entity,
providing DCI, subject to certain conditions, broadband access rights and
service contracts to 50 properties containing approximately
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12,000 units in the Houston, Texas market.
These two major agreements, along with DCI's other marketing efforts,
have resulted in a growth in DCI's portfolio of broadband access rights from 17
properties and 6,700 units in March, 2000 to approximately 200 properties and
45,000 units today, representing nearly a seven fold increase. DCI currently has
approximately 11,000 voice, high speed Internet and video lines in service. To
support this growth, DCI has expanded its operations from the New York
metropolitan area to 12 states, and has now established offices in Florida,
Georgia, Texas, New York, and California.
BUSINESS AND OPERATING STRATEGIES
DualStar Historical Background. DualStar was incorporated in the State
of Delaware on June 17, 1994. In August 1994, DualStar acquired Centrifugal
Associates, Inc. ("Centrifugal") and Mechanical Associates, Inc. ("Mechanical")
in an exchange of securities, and Centrifugal and Mechanical each became wholly
owned subsidiaries of DualStar engaged in the construction business. Centrifugal
began operations in 1964 and Mechanical in 1989. In addition to Mechanical and
Centrifugal, the significant 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, and Integrated
Controls Enterprises, Inc. ("ICE"), formed in August 1995. Property Control,
Inc. ("PCI") was formed in June 1995. DCI, formed in February 1996, and
ParaComm, Inc. ("ParaComm"), acquired by DualStar in May 2000, comprise
DualStar's communications-related business subsidiaries. (DualStar and its
subsidiaries are hereinafter collectively referred to as the "Company," unless
otherwise specified.) Each subsidiary is directly and wholly owned by DualStar,
except for CMA, which is owned 50% by Centrifugal and 50% by Mechanical.
The Company historically has engaged in two business segments:
contracting and communications. For financial information concerning the two
segments, see Note M - "Segment Information" of the Notes to the Financial
Statements referred to in Item 8 hereof. During the fiscal year ended June 30,
2000, the Company aggressively pursued its communications business segment
through DCI and the acquisition of ParaComm, as more fully described below. In
an effort to transform the Company into purely a communications company, the
Company's Board of Directors has decided to sell the construction-related
business segment, other than the automated temperature control business
previously included in the contracting segment. For financial information
concerning the Company's segment and discontinued operations, see Note M --
"Segment Information" and Note O -- "Discontinued Operations" of the Notes to
Financial Statements referred to in Item 8 hereof. In furtherance of the
Company's anticipated transformation, DualStar has retained Raymond James &
Associates, Inc. to act as its external investment banker to assist the Company
with its financing needs.
Communications Business and Operating Strategy.
Overview. The Company's communications businesses are transacted
through DCI and ParaComm. DCI was originally launched as a retail provider of
integrated communications services to the multiple dwelling unit ("MDU") market
in the metropolitan New York area. In furtherance of this, DCI is a Competitive
Local Exchange Carrier (CLEC), an Internet Service Provider (ISP), and a
provider of subscription television services.
The Company offers a variety of services utilizing several delivery
techniques and technologies. Local voice services are either obtained through
resale arrangements with AT&T Corporation or Bell Atlantic Corporation (d/b/a
Verizon Communications), or provisioned by the Company through a switch located
within an MDU. Long distance telephony is provided through a resale arrangement
with AT&T, and high-speed Internet access services are offered via Ethernet and
Digital Subscriber Line ("DSL"). Subscription television services offered
consist of either DirecTV, Dish Network or a satellite master antenna
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television system for basic and premium channels, which are combined with local
programming by the Company for the MDU.
DualStar faces substantial competition for the services provided to
residential consumers in the metropolitan New York area. The Company's main
competitors in the metropolitan New York area include (1) local and long
distance phone companies, such as AT&T and Verizon; (2) Data Local Exchange
Companies (DLECs) and cable overbuilders, such as Covad Communications, Darwin
Networks and NorthPoint Communications; (3) Internet service providers (ISPs)
and cable companies providing high-speed Internet and data access services, such
as EarthLink, AOL, AT&T and RCN; and (4) cable franchise operators, such as
TimeWarner. The Company attempts to differentiate itself in this highly
competitive environment by improving the MDU's communications infrastructure,
providing responsive support for property owners and residents, and by offering
residents a single source for a variety of services. Many of the Company's
competitors are well-financed, have significant market share and significantly
more resources than are available to the Company. There can be no assurance that
the Company will be able to successfully compete with respect to the services
that it currently provides.
The Company intends to expand its operations, product offerings and
services to position itself as a nationwide broadband access service provider
focused primarily on the largely-concentrated and under-served MDU market.
DualStar will add a wholesale component that is expected to increase customer
choice.
During the fiscal year ended June 30, 2000, the Company embarked upon
this expansion of its communications business. A new management team consisting
of former senior management team members from major communications companies was
hired at DCI for the purpose of devising, implementing and operating a broadband
access business focusing primarily on the MDU market in major metropolitan
areas. This management team is also developing a wholesale market approach which
is expected to address a broader market while avoiding the high cost of direct
customer care and other retail customer costs.
The Company seeks to offer to communications services providers a
variety of wholesale services provided over platforms owned and operated by the
Company within a multiple tenant building. Tenants residing in a Company-enabled
building will be able to purchase services from any of the Company's anticipated
communications services providers, which are expected to include CLECs, DLECs,
IXCs, ISPs and other retail service providers. The Company intends to become a
"one-stop shop" for lifeline (911-enabled service) local voice, "always on"
high-speed, two-way Internet access and satellite television services for
buildings in the Company's target markets.
The Company will use a new, DSL-based infrastructure in MDUs at which
it has "right of entry" agreements, in combination with satellite-based
subscription television service. The Company believes that its planned
infrastructure will result in a lower cost to provide service to an MDU than
fiber- or coaxial cable-based providers. The DSL-based infrastructure is
expected to offer property owners the selling advantages of faster Internet
access and higher quality voice services, along with in-building sales and
marketing support and the flexibility to address an owner's entire portfolio,
both commercial and residential. Moreover, the Company believes that its
infrastructure is designed to be flexible enough to be upgraded in the future to
provide extremely high speed services.
The Company will continue to be focused on the MDU market. The Company
believes that the MDU market is large and concentrated. According to The Yankee
Group, it is estimated that the MDU market contains over 20% of the total United
States households, and that 63% of MDUs are concentrated
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in 10 states. Demographic studies also demonstrate that over 50% of the
households in MDUs are middle market and above, while another 25% are considered
to be affordable housing.
The Company believes that the MDU market continues to be underserved by
current communications services providers, with a majority of MDUs being
restricted to (i) traditional voice service provided via an Incumbent Local
Exchange Carrier (ILEC), (ii) cable television service from franchise cable
operators, and (iii) possible high-speed Internet access service provided by
second- and third-tier carriers and cable overbuilders. The Company also
believes that the small- and mid-sized business market is largely underserved.
International Data Corporation estimates that 60% of business are located within
the top 30 Metropolitan Statistical Areas (MSAs); however, it is estimated that
the majority of multi-tenant office buildings (MTUs) are not reached by a
high-speed access infrastructure such as fiber. Typically, the Company believes,
MTU owners and their tenants must rely on the ILEC and third-tier carriers to
provide services.
The Company believes that small- and mid-sized businesses and
residential customers drive demand for high-speed Internet access and multiple
voice lines in light of the explosive growth of the Internet. The Company will
initially target these potential subscribers in MDUs located in the top MSAs in
the country. MTUs within such MSAs will be targeted in an attempt to achieve
projected network efficiencies. The Company estimates that there are
approximately 10 million households within these markets that the Company plans
to be able to address over the course of the next ten years. Of these
households, the Company estimates that 6.3 million households are in buildings
with over 100 units, with the remainder being in buildings having at least 50
units.
The Company is in its initial stages of implementing its expansion.
There can be no assurance that the Company will be able to implement this
expansions it is currently contemplated, or that the expansion, if successfully
implemented, will be deployed in a commercially successful manner. Furthermore,
the implementation of the Expanded Model will require significant capital
resources. There can be no assurance that the Company will be able to raise and
provide the capital resources necessary to implement all or part of the Expanded
Model. There can also be no assurance that the Company will be able to attract
the communications services providers to deliver communications services over
the Company's infrastructure. Relationships with such communications services
providers are integral to the success of the expanded plan.
ParaComm Acquisition. In connection with the expansion of the
communications business, the Company acquired ParaComm, Inc. ("ParaComm") on May
11, 2000. The acquisition was structured as a merger of ParaComm with an into a
wholly owned subsidiary of the Company pursuant to an Agreement and Plan of
Merger dated as of May 10, 2000 (the "Merger Agreement") among the Company,
ParaComm and DCI Acquisitions Co. Pursuant to the Merger Agreement, DualStar
issued an aggregate of 774,997 shares of its Common Stock and warrants to
purchase 25,000 shares of Common Stock at an exercise price of $15.00 per share.
The warrants expire five years after issuance. The Agreement and Plan of Merger
dated as of May 11, 2000 among the Company, DCI Acquisition Co. and ParaComm,
Inc. was filed as exhibit 2.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000.
Competition. The Company contemplates three lines of business that are
highly competitive. The Company believes that it will establish a competitive
advantage by offering a wider range of choices than are currently available
through any one provider. However, while the Company believes that its market
and product plans acknowledge the current state of competition in the consumer
and business communications markets and takes advantage of the latest
technologies, the Company cannot assure you that it will be able to compete with
the companies providing all or some of the services intended to be
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provided by the Company. Additionally, several of the Company's competitors are
much larger, established companies, having significantly more resources than are
currently available to the Company.
While the Company believes that it has no direct competitors in the
wholesale market, there are two different categories of providers that, alone or
in combination, pose a competitive threat. The first group of companies competes
with the Company for access rights to buildings. These entities include
building-centric, retail-focused companies attempting to provide video, voice
and data, such as U.S. Online, InLec, Allied-Riser and OnSite Access; retail
Internet and DSL companies such as Darwin; and cable overbuilders, such as RCN
Corporation. The second group of potential competitors includes DSL companies
that provide high-speed Internet/data lines on a wholesale basis to IXCs and
ISPs. These entities have recently begun to offer second-line voice services,
and pose a limited threat to the Company with their current approach.
Competitors in this category include Covad Communications and NorthPoint
Communications.
While the Company believes that it will benefit from new and advanced
technologies for video, voice and data access that are in various stages of
development, these technologies are also being developed and supported by
entities having significantly greater financial and other resources than the
Company. New technologies and/or the competition faced by the Company from one
of the types of competitors identified above could have a materially adverse
affect on the ability of the Company to enter into access agreements with MDU
and MTU owners The Company cannot assure that it will be able to compete
successfully with existing competitors or new entrants in the market for video,
voice and data access services.
Construction Business and Operating Strategies.
Overview. CMA engages in mechanical contracting services, services that were
formerly engaged in by Centrifugal and Mechanical, separately. High-Rise designs
and installs sophisticated electrical systems for newly constructed residential
and commercial high-rise buildings. Some of the work performed by High-Rise
(e.g., installation of control wiring) was previously subcontracted by the
Company to unaffiliated companies. CMA's and High-Rise'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.
PCI owns or manages the Company's fixed asset or office peripheral
needs, e.g., ownership and maintenance of real property.
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. The M/E
Agreement was filed as exhibit 2.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000.
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Major Customers. The Company's construction customers, which are
concentrated in the New York Tri-State region, include various general
contractors, banks, hospitals, hotels, insurance companies, securities
exchanges, governmental agencies, and subcontractors. For the year ended June
30, 2000, revenue derived from two customers (Bovis Lend Lease, Inc. (formerly,
Lehrer McGovern Bovis, Inc.) and HRH Construction Corp.) amounted to
approximately 52% and 17%,respectively, of the Company's discontinued operations
total revenue. For the year ended June 30, 1999, revenue derived from three
customers (Bovis Lend Lease, Inc., HRH Construction Corp. and Tishman
Construction Corp. of NY) amounted to approximately 21%, 21% and 14%,
respectively, of the Company's discontinued operations total revenue.
Manufacturing. The Company's production facilities are capable of
fabricating and assembling mechanical and electrical systems and subsystems. The
Company maintains a test and inspection program to ensure that such systems meet
customer requirements for performance and quality workmanship. In addition, pipe
fabrication and machine shops allow for the manufacture of both prototype and
production hardware. To support its internal operation and to extend its overall
capacity, the Company purchases a wide variety of components, assemblies and
services from outside manufacturers, distributors and service organizations.
Marketing and Sales. For CMA and High-Rise, the Company's marketing
strategy has focused on cultivating long-term relationships with developers,
mechanical and electrical engineers and general contractors. As a result of its
limited and focused target market, the Company's marketing efforts rely
primarily on direct sales efforts (including engineering presentations) which
emphasize the Company's quality control and value engineering. The relatively
high dollar value of each contract (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
typically lasts approximately 90 days. Sales activities are handled by direct
sales personnel . Due to the depth of analysis involved in the customer's
purchase decision, management emphasizes frequent interaction between the direct
sales staff, its independent sales representatives and the buyer throughout the
selling process.
ICE solicits property owners, general contractors, and mechanical
contractors in addition to serving the mechanical subsidiaries of DualStar.
Sources of Supply and Backlog. The raw materials, such as pipe,
fittings and valves, and electrical components used in the development and
manufacture of the Company's mechanical and electrical systems and subsystems
are generally available from domestic suppliers at competitive spot prices;
fabrication of certain major components may be subcontracted for on an as-needed
basis. The Company does not have any long-term contracts for its raw materials.
The Company has not experienced any significant difficulty in obtaining adequate
supplies to perform under its contracts.
At fiscal year ending June 30, 2000, the backlog of the Company's
construction business was approximately $59 million as contrasted with
approximately $93 million at June 30, 1999. The Company believes that most of
its backlog at June 30, 2000 will be completed prior to December 31, 2001, 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.
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Competition. The mechanical, electrical, electronic, control,
environmental, information technology, security, telephone, Internet and
television infrastructure systems and service industries involve rapid
technological change and are characterized by intense and substantial
competition. The Company's competitors range from small firms to large
multinational companies. 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 mechanical and
electrical industries, and will be able to maintain a strong competitive
position in its areas of expertise by adhering to its basic philosophy of
delivering high-quality work in a timely fashion within client budget
constraints.
In both the private and public sectors, the Company, acting either as a
prime contractor or as a subcontractor, occasionally joins with other firms to
form a team that competes for contracts by submitting a jointly prepared
proposal. Because a team of firms will usually offer a stronger set of
qualifications than any single firm, teaming arrangements are generally
advantageous to the Company's success. These teaming relationships, however,
generate risk to the Company in the event that a non-DualStar team member
experiences financial difficulty or is otherwise unable to fulfill its
responsibilities on the project. The Company maintains a large network of
business relationships with other companies and has drawn repeatedly upon these
relationships to form winning teams. Moreover, each DualStar subsidiary may
market its services independently, with the potential to offer in concert with
other DualStar subsidiaries, comprehensive and complementary services on
multi-million dollar construction projects.
Most of the Company's contracts with public sector clients are awarded
through a competitive bidding process that places no limit on the number or type
of offerors that may compete. The process usually begins with a government
Request for Proposal (RFP) that delineates the size and scope of the proposed
contract. Proposals submitted by the Company and others are evaluated by the
government on the basis of technical merit, response to mandatory solicitation
provisions, corporate and personnel qualifications and experience, management
capabilities and cost. While each RFP sets out specific criteria for the choice
of a successful offeror, RFP selection criteria in the government services
market often tend to weigh the technical merit of the proposal more heavily than
cost. The Company believes that its experience and ongoing work strengthen its
technical qualifications and thereby enhance its ability to compete successfully
for future government work. However, the Company can make no assurances that it
may be able to continue to successfully bid and compete in its marketplace.
Patent, Trademark, Service Mark, Copyright and Proprietary Rights.
Currently, the Company has two trademark applications (DualStar and
DualStar Technologies) pending with the U.S. Patent & Trademark Office
("USPTO"). Seven service marks, Global Hiring Hall, CyberBuilding,
CyberBuilders, CyberCierge, DualStar Communications, DualStar and DualStar
Technologies, were registered with the USPTO on July 29, 1997, August 25, 1998,
September 1, 1998, March 9, 1999, May 11, 1999, June 29, 1999 and July 13, 1999,
respectively. Three trademarks, CyberBuilding, CyberView and Building Area
Network, were registered with the USPTO on August 4, 1998, July 20, 1999 and
October 12, 1999, respectively.
Two pending trademark applications are being opposed by Dualstar
Entertainment, an unaffiliated entity. The parties have formulated a settlement
proposal; however, DualStar has not received word if Dualstar Entertainment has
accepted it. Additionally, by letter dated July 31, 2000 from DualStar
Entertainment's lawyers, DualStar Entertainment is now questioning the propriety
of the domain names dualstar.com, dualstar.org and dualstar.net. There is no
dollar amount in controversy.
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The Company has registered several domain names on the Internet
relating to its businesses, including, without limitation, cyberbuilding.com,
cyberbuilding.org, cybercierge.com, cyberresident.com, cybertenant.com,
dstr.net, dstr.org, dualstar.com, dualstar.net, dualstar.org, gracesystems.com
integratedcontrols.com, paracommonline.com and taghome.com.
On June 30, 2000, DualStar Communications, Inc. filed with the USPTO a
Provisional Patent Application respecting the structure, applications and
processes used in the nation-wide network that DCI has begun to build to deliver
its Broadband Access Services.
The Company has the authority to and utilizes trademarks, logos and
other intellectual property owned or controlled by third parties in the
promotion of the Company's video offerings.
The Company may in the future file patent or copyright applications, or
additional trademark or service mark applications, relating to certain of the
Company's mechanical, electrical, electronic, control, environmental,
information technology, security, entertainment and communications products and
services. Nevertheless, if patents are issued, or trademarks, service marks or
copyrights are registered, there can be no assurance as to the extent of the
protection that will be granted to the Company as a result of having such
patents, trademarks, service marks or copyrights, or that the Company will be
able to afford the expenses of any complex litigation which may be necessary to
enforce its proprietary rights. Failure of any future or existing patents,
trademark, service mark and copyright applications may have a material adverse
impact on the Company's business since the Company may not otherwise be able to
protect the proprietary or trade secret aspects of its business and operations,
thereby diluting the Company's ability to compete in the marketplace. Except as
may be required by the filing of patent, trademark, service mark and copyright
applications, the Company will attempt to keep all other proprietary information
secret and to take such actions as may be necessary to insure the results of its
development activities are not disclosed and are protected under the common law
concerning trade secrets. Such steps may include the execution of nondisclosure
agreements by key Company personnel and may also include the imposition of
restrictive agreements on purchasers of the Company's products and services.
There is no assurance that the execution of such agreements will be effective to
protect the Company, that the Company will be able to enforce the provisions of
such nondisclosure agreements or that technology and other information acquired
by the Company pursuant to its development activities will be deemed to
constitute trade secrets by any court of competent jurisdiction.
Construction Businesses Regulation.
Substantial environmental laws have been enacted in the United States
and in the New York Tri-State region 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 have increased demand for the Company's services,
and the Company believes there will be a trend toward increasing regulation and
government enforcement in the environmental area. The necessity that the
Company's clients comply with these laws and implementing regulations subjects
the Company to substantial liability. The Company believes that, to the best of
its information and knowledge, it is in compliance with all material federal,
state and local laws and regulations governing its construction operations.
Communications Businesses Regulation.
Overview. DCI's services are subject to federal, state and sometimes
local government regulation. Federal regulation applies to DCI's interstate and
international telephony services and, for all DCI's
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services, federal regulation as well as state regulation affects DCI's access to
inside wiring in the MDUs and MTUs that make up primary target market. DCI's
access to inside wiring can be affected by (1) definitions of the point dividing
inside wiring ownership between the traditional telephone company and the
property owner or (2) regulatory decisions regulating the telephone company's
unbundled network elements ("UNEs") (i.e, various portions of a traditional
telephone company's network that a CLEC needs to build or fill in missing parts
of its facilities network). DCI's local telephony services and facilities, which
are provided only in New York State, are subject to regulation by the New York
Public Service Commission. DCI is an authorized by the FCC and the New York PSC
as competitive local exchange carrier (CLEC) and provides its telephony services
under state and federal tariffs. In addition, local municipal government
authorities in some cases may also assert jurisdiction over DCI's facilities and
operations. The jurisdictional reach of the various federal, state, and local
authorities is subject to ongoing controversy and judicial review. The outcome
of such reviews cannot be predicted.
Federal Regulation. DCI must comply with the requirements of the
Communications Act of 1934, as amended by the 1996 Telecommunications Act, as
well as the FCC's regulations under the statute. The 1996 Telecommunications Act
eliminates many of the pre-existing legal barriers to competition in the
telecommunications and video programming communications businesses, preempts
many of the state barriers to local telecommunications service competition that
previously existed in state and local laws and regulations, and sets the basic
standards for relationships between telecommunications providers. The law
delegates broad regulatory and administrative authority to the FCC and to the
states to implement the 1996 Telecommunications Act.
Regulations promulgated by the FCC under the 1996 Telecommunications
Act impose on the traditional telephone companies various requirements that are
intended to foster competition by new entrants such as DCI. DCI's current
retail, resold local and long distance services have benefited to some degree
from the FCC's regulations under the 1996 Telecommunications Act. In the
Company's Expanded Model, DCI intends to de-emphasize direct provision of
telephony services; instead, telephony services would increasingly be provided
by communications carriers using DCI's network to the MDUs and MTUs with which
DCI's has right of entry agreements. For the Expanded Model, the most critical
of the FCC's regulations would be the Company's access to inside wiring within
MDUs and MTUs, and the definition and price of UNEs. The desire of the
traditional telephone companies to enter long distance service markets and the
FCC's local competition criteria prerequisites have assisted the CLECs, such as
DCI, in obtaining cooperation from the traditional telephone companies. The FCC
is now showing a willingness to allow traditional telephone companies to enter
the long distance. This trend could well negatively affect the level of
cooperation that DCI will receive from traditional telephone companies in
securing timely and cost-effective access to inside wiring.
There is a FCC proceeding (Promotion of Competitive Networks in Local
Telecommunications Markets, NPRM, CC Docket No. 98-96, WT Docket No. 99-217)
whose outcome could influence DCI's access to inside wiring and the freedom of
contract with MDU and MTU property owners. Depending on the scope of the
decision, the FCC's order in this NPRM could also preempt and change state
regulations favorable to the Company's Expanded Model. Thus, the outcome of the
NPRM could increase DCI's costs and reduce its competitive ability to reach
acceptable penetration rates in the MDUs and MTUs that are its primary target
market. The FCC is currently expected to issue an Order in this NPRM in
approximately the first week of October.
Local Regulation. To the extent DCI's provides regulated intrastate
services or decides to otherwise submit itself to the jurisdiction of the
relevant state telecommunications regulatory commissions, DCI is and could be
subject to such jurisdiction. Decisions respecting applications for CLEC status
in the
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<PAGE>
various states where DCI intends to do business will be made on a state by state
basis, depending on the state requirements and the services that DCI intends to
provide in a given state. There are many state commission proceedings now
underway to determine the rates, charges and terms and conditions for UNEs and,
in some cases, owner control of inside wiring. If a decision increases the cost
of unbundled network elements or restricts a property owner's ability to make
inside wiring available to DCI, the Company's business could be negatively
affected. The effect of state regulation on DCI's business varies from state to
state. For instance, states (or municipalities) sometimes accord to the
franchised cable companies (that are DCI's competitors not only for its
television services but also potentially for data, including Internet Access,
and voice services) rights of access to MDUs and MTUs. that could reduce DCI's
penetration rates.
Like DCI, ParaComm's business is potentially affected by the state or
municipal actions granting rights of access to franchised cable companies and by
FCC and state regulation respecting inside wiring. Additionally, federal
legislation that confers rights on tenants to purchase and operate their own
satellite signal reception equipment can result in tenant bypass of ParaComm's
services and could, in some cases, adversely affect penetration rates.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation affecting the
telecommunications industry or that could affect DCI. Judicial review of
existing regulations, legislative hearings, legislation, and administrative
proposals could negatively influence U.S. communications companies' operations,
including DCI's operations. Additionally, DCI cannot predict the impact, if any,
that future regulation or regulatory changes may have on its business and does
not offer assurance that such future regulation or regulatory changes will not
harm DCI's business.
Potential Liability and Insurance.
The Company's operations involve mechanical, electrical, electronic,
control, environmental, information technology, security, telephone, Internet
and television infrastructure contracting of major residential, commercial and
institutional buildings and facilities. The Company therefore is exposed to a
significant risk of liability for damage and personal injury. The Company
maintains quality control programs in an attempt to reduce the risk of potential
damage to persons and property and any associated potential liability. In
addition, the Company maintains 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.
Employees.
As of June 30, 2000, the Company employed 368 full-time employees, of
which 21 are engaged in administration and finance. Of the remaining full-time
employees, 279 are employed by the various
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<PAGE>
construction subsidiaries of the Company, with 278 engaged in manufacturing,
engineering and production and 1in marketing and sales. The remaining 68
employees are engaged in the communications business of the Company, with 22
engaged in administration and finance, 6 engaged in network development, 5 in
marketing and sales, and 35 in operations and development. Many of the Company's
employees have overlapping responsibilities in these job descriptions.
The Company believes that its future success will depend, in part, upon
its continued ability to recruit and retain qualified management, technical and
communications personnel. Competition for qualified personnel is significant,
particularly in the geographic areas in which DualStar and its subsidiaries are
located. The Company depends upon its ability to retain the services of key
employees. The loss of services of one or more key employees could have a
material adverse impact on the Company. 280of its employees are 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.
ITEM 2 - PROPERTIES
CMA leases, on a month-to-month basis, approximately 5,000 square feet
of manufacturing and office space located at 141 47th Street, Brooklyn, New York
11232 from FIS Management, Inc. in which certain officers of the Company and CMA
own a majority interest.
In August 1996, PCI acquired real property, including a building
containing approximately 22,000 square feet of office and warehouse space, at
11-30 47th Avenue, Long Island City, New York 11101. The cost of the real
property was $1,109,000, of which $900,000 was financed by a mortgage loan. The
mortgage loan was refinanced on November 22, 1999, increasing the principal
amount outstanding under such loan to $1,750,000.
DCI sublets office space at One Park Avenue, New York, New York from
Starrett Corporation (of which Gregory Cuneo, the Company's president and chief
executive officer, is chairman and Robert Birnbach, the Company's executive vice
president and chief financial officer, is president and CEO). 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 incidental costs and expenses. Additionally, DCI and ParaComm
lease, on a month-to-month basis, office space in several cities, including,
without limitation, Los Angeles, Orlando and Dallas.
The Company believes that adequate office and warehouse space is
available in each of the markets in which it currently transacts its
construction and communications business and in the markets in which it intends
to transact business. The Company further believes that the productive use of
its current facilities represents approximately 80 percent of capacity. Total
rental expense for the Company for recent periods is as follows:
PERIOD EXPENSE
------ -------
Year ended June 30, 2000.......................$47,000
Year ended June 30, 1999.......................$46,000
ITEM 3 - LEGAL PROCEEDINGS
(1) On August 11, 1999, Triangle Sheet Metal Works, Inc. ("Triangle"), a
subcontractor of CMA filed a
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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. 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.
(2) 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.
(3) 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.
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<PAGE>
(4) 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.
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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year covered by this Report.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock are traded on the Nasdaq National Market
System under the symbol DSTR. Set forth below are the high and low sales prices
for the Common Stock of the Company for fiscal year 2000 and for fiscal year
1999.
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Fiscal 2000 High Low
----------- ---- ---
First Quarter $6.438 $3.875
Second Quarter $9.250 $3.969
Third Quarter $12.750 $5.938
Fourth Quarter $7.797 $3.000
Fiscal 1999 High Low
----------- ---- ---
First Quarter $2.000 $1.125
Second Quarter $1.875 $0.938
Third Quarter $1.500 $1.000
Fourth Quarter $7.656 $1.125
As of September 15, 2000, there were 80 record holders of the Company's
Common Stock.
The Company has not declared any dividends since its incorporation in
June 1994. The Company does not anticipate the declaration or payment of
dividends in the foreseeable future. Future dividend policy will be subject to
the discretion of the Board of Directors and will be contingent upon future
earnings, the Company's financial condition, capital requirements, general
business conditions and other factors.
ITEM 6 - SELECTED FINANCIAL DATA
DUALSTAR TECHNOLOGIES CORPORATION
SELECTED FINANCIAL DATA (1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $2,558 $4,127 $5,341 $6,234 $5,257
(Loss) income from continuing operations 426 (2,464) (1,325) (854) (7,268)
(Loss) income from discontinued operations (4,200) (4,048) 1,881 2,176 (1,383)
Net (loss) income (3,774) (6,512) 556 1,322 (8,351)
Basic and diluted (loss) income per
share of continuing operations $ 0.05 $(0.27) $(0.15) $(0.09) $(0.57)
Basic and diluted (loss) income per
share of discontinued operations $(0.47) $(0.45) $ 0.21 $ 0.24 $(0.11)
<CAPTION>
JUNE 30,
--------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) of continuing
operations $4,239 $(872) $(1,280) $(1,316) $5,268
Net assets of discontinued operations 5,042 2,247 2,814 5,849 11,739
Total assets 9,941 6,090 4,884 13,137 37,008
Shareholders' equity 11,323 4,811 5,367 6,689 24,905
</TABLE>
(1) The Selected Financial Data represent the consolidated data for the years
ended June 30, 2000, 1999, 1998, 1997 and 1996.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
DualStar Technologies Corporation ("DualStar" or the "Company"), through its
wholly owned subsidiaries, operates two separate lines of business: (a)
construction-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".
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. DualStar Technologies Corporation and its
subsidiaries are hereafter referred to as the "Company".
CAPITAL RESOURCES AND LIQUIDITY
Cash balances at June 30, 2000 and 1999 were approximately $13.8 million and
$0.1 million, respectively. The increase in cash balances was due primarily to
the proceeds of approximately $20.3 million from the exercise of the Class A
warrants and the underwriter unit option and of $7.0 million from a promissory
note sold by the Company in connection with the Madeleine Bridge Loan as defined
below.
In fiscal 2000 and 1999, the Company's continuing operations used approximately
$5.4 million and $2.3 million, respectively, of net cash in its operating
activities. In the same periods, the Company's discontinued operations used
approximately $6.7 million and $1.6 million, respectively, of net cash in its
operating activities. These uses of cash were attributed primarily to pay trade
payables and fund operating losses.
<PAGE>
During fiscal 2000, the Company acquired capital assets of approximately $1.2
million, of which approximately $0.2 million was financed by capital leases.
During fiscal 1999, the Company acquired capital assets of approximately $0.4
million, of which approximately $0.2 million was financed by capital leases. The
capital assets acquired during the periods were primarily for investment in
communications infrastructure systems for multiple dwelling unit ("MDU")
buildings in return for rights to provide telephone, Internet, television and
other services to the buildings' residents.
Mortgage payable
In November 1999, the Company refinanced its mortgage loan and increased the
loan balance to $1.75 million, yielding approximately $1.0 million of net cash.
In fiscal 2000 and 1999, the Company repaid approximately $27,000 and $49,000,
respectively, of the mortgage payable. As of June 30, 2000 and 1999, the Company
had a mortgage payable of approximately $1.7 million and $0.8 million,
respectively, of which approximately $22,000 and $45,000, respectively, were
classified as current liabilities.
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.
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.
<PAGE>
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 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
be 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.
Recent Developments
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.
<PAGE>
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.
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.
DualStar also announced that, in conjunction with its previously-announced
intention to expand its communications business through DualStar Communications,
Inc. ("DCI"), its wholly owned subsidiary, DCI has been selected by Casden
Properties, Inc., a portfolio company of Blackacre, to provide broadband
services to up to 45 buildings encompassing approximately 9,000 units within
Casden's portfolio of nationwide properties.
DCI has also executed an agreement with a telecommunications entity, providing
DCI, subject to certain conditions, broadband access rights and service
contracts to 50 properties containing approximately 12,000 units in the Houston,
Texas market.
<PAGE>
These two major agreements, along with DCI's other marketing efforts, have
resulted in a growth in DCI's portfolio of broadband access rights from 17
properties and 6,700 units in March, 2000 to approximately 200 properties and
45,000 units today, representing nearly a seven fold increase. DCI currently has
approximately 11,000 voice, high speed Internet and video lines in service. To
support this growth, DCI has expanded its operations from the New York
metropolitan area to 12 states, and has now established offices in Florida,
Georgia, Texas, New York, and California.
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.
INFLATION
The Company has continued to experience the benefits of a low inflation economy
in the New York Tri-State area. In general, the Company'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
Fiscal 2000 Compared to Fiscal 1999
Revenues from the continuing operations decreased $1.0 million or 15.7% from
$6.2 million in 1999 to $5.3 million in 2000. The decrease in revenues was
primarily due to the discontinuation of a small electrical contracting
subsidiary (included in the automated temperature control segment) at the
beginning of the current fiscal year. As a result of the discontinuation,
revenues from this electrical contracting subsidiary decreased by $1.9 million
in 2000, compared to 1999. The decrease in electrical contracting revenues was
partially offset by an increase of $0.9 million in automated temperature control
revenues. Cost of revenues decreased $0.4 million from $4.7 million in 1999 to
$4.3 million in 2000. The decrease in costs was due primarily to the decrease in
revenues.
<PAGE>
General and administrative expenses increased $3.6 million from $2.3 million in
1999 to $5.9 million in 2000. The increase was primarily attributed to the
Company's refocus from the construction to the communications businesses, and
included an increase in payroll and related costs of $1.5 million, an increase
in professional fees of $1.2 million, an increase in travel and entertainment
expense of $0.3 million, and write-offs of bad debts of $0.3 million.
Depreciation and amortization increased $0.5 million from $0.4 million in 1999
to $0.9 million in 2000. The increase was primarily due to additional capital
expenditures acquired during the year.
The Company recorded a $0.6 million deferred compensation charge for stock
options granted in March 2000 which were granted with an exercise price lower
than the closing price of the Company's stock on the dates on which such options
were granted.
The Company's communications business was originally launched as a retail
provider of integrated communications services to the MDU market exclusively in
the metropolitan New York area. The Company is expanding its communication
businesses and a new management team was hired at the communications subsidiary
for the purpose of devising, implementing and operating a wholesale broadband
access business focusing on the MDU market in major metropolitan areas. Because
of the expansion of business model, certain telephone equipment deployed in 1997
may not be utilized under the new delivery strategy and may be sold.
Accordingly, in fiscal 2000, the Company wrote down the carrying value of the
equipment by $0.3 million to $0.4 million to reflect the estimated resale value
of the equipment.
Interest income was $0.3 million in 2000 and was insignificant in 1999. The
increase was due primarily to investment of the Company's excess cash in an
institutional money-market mutual fund in 2000.
Interest expense increased $0.3 million from $0.4 million in 1999 to $0.7
million in 2000. The increase was due primarily to the Company's issuance of a
$7.0 million promissory note in connection with the Madeleine Bridge Loan.
The Company's discontinued operations experienced a net loss of $1.4 million in
2000, compared to a net income of $2.2 million in 1999. The difference of $3.6
million was primarily due to $2.9 million of additional costs incurred to
complete a failed sheetmetal subcontractor's work on five projects, and a
decrease of contract revenues.
<PAGE>
Fiscal 1999 Compared to Fiscal 1998
Revenues from continuing operations increased $0.9 million or 16.7% from $5.3
million in 1998 to $6.2 million in 1999. The increase was due primarily to the
additional revenues generated from a newly-formed small electrical contracting
subsidiary (included in the automated temperature control segment), and an
increase in communications revenues. Costs of revenues increased $0.2 million or
3.6% from $4.5 million in 1998 to $4.7 million in 1999.
General and administrative increased $0.6 million from $1.7 million in 1998 to
$2.3 million in 1999. The increase was due primarily to charges of $0.3 million
incurred in connection with the buyouts of two officers' employment agreements,
an increase in payroll and related costs of $0.1 million, and an increase of
professional fees of $0.1 million.
Interest expense increased $0.3 million from $0.1 million in 1998 to $0.4
million in 1999. The increase was due primarily to a $2.5 million convertible
note sold by the Company to TIG.
The Company's discontinued operations generated net income of $2.2 million and
$1.9 million in 1999 and 1998, respectively. The increase in net income was due
primarily to the implementation of a marketing plan by the contracting
subsidiaries to emphasize contracts that return higher profit margins.
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, 2000, the Company had debt of $8.7 million with various fixed
interest rates from 8.5% to 11.0%. The fixed rate debt may have its fair value
adversely affected if interest rates decline; however, the amount is not
expected to be material. The Company's cash is primarily invested in an
institutional money market mutual fund. The Company does not have any derivative
financial instruments as of June 30, 2000. 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 14 herein.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning each of
the Company's directors and executive officers:
Name Age Position with the Company
----
Jared E. Abbruzzese 46 Chairman of the Board, Director (1)(2)
Gregory Cuneo 41 President, Chief Executive Officer and Director
Raymond Steele 65 Director (1)(2)
Robert J. Birnbach 35 Executive Vice President, Chief Financial Officer
and Secretary
Joseph C. Chan 39 Vice President and Chief Accounting Officer
Ronald Fregara 51 President - CMA
Stephen Yager 48 Vice President - CMA
Nicholas Ahel 57 Vice President - High-Rise
Barry Halpern 48 President - High-Rise
Jill Thoerle 49 President and Chief Executive Officer - DCI
Peter Sach 40 Executive Vice President and Chief Operating
Officer - DCI
(1) Member of the Compensation and Governance Committee. The Compensation and
Governance Committee (the "Compensation Committee") review and approves
management's recommendations as to executive compensation, reviews,
approves and administers executive compensation and DualStar's 1994 Stock
Option Plan, as amended, reviews and approves management's recommendation
for organizational structure and recommends to the DualStar board nominees
for election as directors of DualStar, including nominees recommended by
stockholders.
(2) Member of the Audit Committee. The Audit Committee recommends to the
DualStar board independent auditors to serve DualStar, reviews the scope
and results of the annual audit, assures that the independent auditors act
independently, reviews with management and the independent auditors
DualStar's internal accounting controls, and reviews DualStar's annual and
quarterly reports.
Jared E. Abbruzzese has been Chairman of the Board and a Director of
DualStar since September 1999. Mr. Abbruzzese is a founder and Chairman of
TechOne Capital Group LLC, a consulting and private investment firm
concentrating in the telecommunications and technology sectors. Mr. Abbruzzese
was the founder and served as Chairman and Chief Executive Officer of CAI
Wireless Systems, Inc., an MMDS operator located in Albany, New York, from
August 1991 until CAI's acquisition by WorldCom, Inc. in August 1999 (Mr.
Abbruzzese served in such capacities for CAI during CAI's 1998 Chapter 11
proceeding). He is also a co-founder of Crest Communications LLC, a private
communications fund; a member of the governing board of VenInfoTel LLC, a
Venezuelan telephone and cable company.
Gregory Cuneo has been President and Chief Executive Officer of
DualStar since the Company was founded in August 1994. He has also served as a
director since August 1994 and served as Chairman of the Company from December
1998 until February 2000. Mr. Cuneo is also Chairman of Starrett
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<PAGE>
Corporation, a position he has held since August 1999, and Chief Executive
Officer of HRH Construction Corp., a subsidiary of Starrett.
Raymond Steele, a retired businessman, has been a director of the
Company since December 1998. In addition to the Company, Mr. Steele is a member
of the board of directors of Video Services Corp. and ICH Corp.
Robert J. Birnbach, a founder of the Company, has been Chief Financial
Officer of DualStar since December 1996, Executive Vice President since July
1999 and Secretary since February 2000. He was a member of DualStar's board of
directors from September 1999 until February 2000. From December 1996 until July
1999, Mr. Birnbach served as Vice President of DualStar and from August 1994
until December 1996, he was DualStar's Director of Corporate Development/Mergers
& Acquisitions. Since January 1, 2000, Mr. Birnbach has been President and Chief
Executive Officer and a member of the board of directors of Starrett
Corporation. He is also a member of the board of directors of HRH Construction
Corp. Prior to joining DualStar, Mr. Birnbach was an advisor with the financial
advisory and accounting firm of Coopers & Lybrand from 1991 to August 1994. Mr.
Birnbach and Mr.Cuneo are first cousins.
Joseph C. Chan has been Vice President and Chief Accounting Officer of
DualStar since December 1996. He was controller of DualStar from November 1994
until December 1996. Prior to joining the Company, Mr. Chan was a certified
public accountant with Konigsberg, Wolf & Co. P.C. from October 1987 to November
1994.
Ronald Fregara, a founder of the Company served as an Executive Vice
President of the Company from December 1996 until February 2000, and served as a
Vice President from August 1994 until December 1996. Mr. Fregara has been
President of CMA since December 1996. Mr. Fregara was a member of the Company's
board of directors from August 1994 until February 2000.
Stephen Yager, a founder of the Company, served as an Executive Vice
President of the Company from August 1994 until February 2000, and served as
Secretary of the Company from August 1994 until February 2000. Mr. Yager was the
Company's Chief Financial Officer from August 1994 until November 1996. Mr.
Yager has been Vice President of CMA since December 1996. Mr. Yager was a member
of the Company's board of directors from August 1994 until February 2000.
Nicholas Ahel has served as Vice President of High-Rise since July
1995.
Barry Halpern has served as President of High-Rise since July 1995.
Jill Thoerle has served as President and Chief Executive Officer of DCI
since March 2000. From 1998 until joining the Company in March 2000, Ms. Thoerle
was Corporate Strategy and New Business Development Vice President of AT&T
Corporation. Prior to that Ms. Thoerle served as Vice President of Teleport
Communications Group, Inc. from 1995 until 1998.
Peter Sach has served as Executive Vice President and Chief Operating
Officer of DCI since March 2000. From 1998 until joining the Company in March
2000, Mr. Sach was first Vice President Network Services at AT&T, and then was
promoted in 1999 to AT&T Broadband's Senior Vice President - Systems
Development. From 1986 until 1998, Mr. Sach held a variety of positions
culminating with Vice President - Network Services of Teleport Communications
Group, Inc.
ITEM 11 - EXECUTIVE COMPENSATION
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<PAGE>
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 (the "Named Executives") at June 30, 2000.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
(a) (b) (c) (d) (g) (i)
Securities
Fiscal underlying All Other
Name and Principal Position Period Salary ($) Bonus Options (#) Compensation
<S> <C> <C> <C> <C> <C>
Gregory Cuneo 2000 $270,961 -- 200,000 (1) $4,038 (2)
Chief Executive Officer 1999 $150,000 $67,500 0 $5,794 (2)
1998 $150,000 -- 0 $5,901 (2)
Barry Halpern 2000 $230,000 $251,065 0 $1,954 (2)
President - High-Rise 1999 $156,600 $180,000 0 $2,947 (2)
1998 $148,900 $252,500 0 $2,673 (2)
Nicholas Ahel 2000 $230,000 $251,065 0 $1,652 (2)
Vice President - High-Rise 1999 $156,600 $180,000 0 $2,618 (2)
1998 $148,900 $252,500 0 $2,673 (2)
Stephen Yager 2000 $235,408 $25,000 200,000 (3) $6,371 (2)
Vice President - CMA 1999 $151,005 $67,500 0 $6,371 (2)
1998 $150,580 -- 0 $5,453 (2)
Ronald Fregara 2000 $235,408 $25,000 200,000 (3) $5,861 (2)
President - CMA 1999 $151,005 $67,500 0 $5,991 (2)
1998 $150,580 -- 0 $6,017 (2)
</TABLE>
(1) Consists of options granted under the Company's 1994 Stock Option
Plan, as amended (the "Plan"), to purchase 200,000 shares granted on
August 12, 1999 at an exercise price of $4.00 per share and vest in five
installments on each of December 31, 1999, 2000, 2001, 2002 and 2003.
(2) Includes the value of personal benefits, such as life insurance,
disability insurance and automobile expenses, pursuant to each officer's
employment agreement. See "Employment Agreements."
(3) Consists of options granted under the Plan on August 12, 1999. The options
have an exercise price of $4.00 per share and vest in five installments on
each of December 31, 1999, 2000, 2001, 2002 and 2003.
Compensation of Directors
Directors of the Company are paid an annual fee of $25,000 and a fee of
$1,000 per board meeting attended in person, and $600 per telephonic meeting or
committee meeting (regardless of attendance in
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<PAGE>
person or by telephone), plus, in all cases, reimbursement of out-of-pocket
expenses.
Option Grants in Latest Fiscal Year
The following table provides information on options to purchase
DualStar Common Stock which were granted during the year ended June 30, 2000 to
the five Named Executives identified in the Summary Compensation Table above.
<TABLE>
<CAPTION>
Potential realizable
value at assumed annual
rates of stock price
Individual Grants appreciation
for option term
(a) (b) (c) (d) (e) (f) (g)
% of Total
Number of Options Granted
Securities to Employees in
Underlying Options Fiscal Year (1) Exercise Price Expiration
Name Per Share Date 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Gregory Cuneo 200,000 10.88% $4.00 (1) $382,000 $914,000
Ronald Fregara 200,000 10.88% $4.00 (1) $382,000 $914,000
Stephen Yager 200,000 10.88% $4.00 (1) $382,000 $914,000
</TABLE>
(1) Options vest in five annual equal installments on each of December 31,
1999, 2000, 2001, 2002 and 2003, and expire five years from the date of
vesting.
Aggregate Option Exercises in Latest Fiscal Year and Fiscal Year-End Values
The following table sets forth certain information with regard to the
outstanding options to purchase DualStar Common Stock as of the end of the
fiscal year ended June 30, 2000 for the five Named Executives in the Summary
Compensation Table above.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Shares Acquired on Value Options at June 30, 2000 June 30, 2000(1)
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Gregory Cuneo -- $ -- 40,000 160,000 -- --
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Barry Halpern -- $ -- 201,000 -- $628,125 --
Nicholas Ahel -- $ -- 126,000 -- $393,750 --
Ronald Fregara -- $ -- 40,000 160,000 -- --
Stephen Yager -- $ -- 40,000 160,000 -- --
</TABLE>
Employment Agreements
Effective August 1994, DualStar entered into employment agreements with
Armando Spaziani, an Executive Vice President and Chief Operating Officer of
DualStar until his retirement on June 15, 1999, Elven M. Tangel, a senior
officer of the Company until his retirement on June 1, 1999 and Messrs. Cuneo,
Yager and Fregara. The employment agreements expired in August 1997 and have
been renewed for two additional three-year terms through August 2003. In
connection with his retirement on June 1, 1999, Mr. Tangel received $116,000 in
consideration of the buyout of his employment agreement. In connection with his
retirement on June 15, 1999, Mr. Spaziani received $206,000 in consideration of
the buyout of his employment agreement. 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
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<PAGE>
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. Pursuant to Mr. Halpern's agreement, Mr. Halpern has
agreed to serve as President of high-Rise at a current annual base salary of
$260,000. Mr. Ahel's employment agreement contemplates that he will serve as
Vice President of High-Rise at a current annual base salary of $260,000. Each of
Messrs. Halpern and Ahel are also entitled to an annual bonus equal to 10% of
the net income before taxes of High-Rise, calculated on a consolidating basis in
a manner consistent with past practices and in accordance with generally
accepted accounting practices. The employment agreements also provide Messrs.
Halpern and Ahel with 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.
Pursuant to the employment agreements for each of Messrs. Halpern and
Ahel, employment may be terminated by the Company with Cause (as defined in the
agreements) or by the executive with or without good reason (as defined in the
agreements). Termination of employment by the Company without Cause, or by the
executive with good reason would entitle the executive to severance in the
amount of executive's then annual base salary, plus a pro rata portion of the
bonus that would be payable in the year of termination. Additionally, all
unvested options to purchase DualStar common stock issued to the executive shall
vest immediately, and be exercisable for a period of 9 months following the date
of termination. Certain other benefits continue for a period of 6 months
following the date of termination. In the event of a termination of employment
by the Company with Cause, the executive is entitled to receive all base salary
through the date of termination. Options held by such executive that are vested
on the date of termination remain exercisable for a period of 90 days from the
date of termination. All unvested options lapse. In the event of a voluntary
termination of employment by the executive, the executive is entitled to receive
her or his annual base salary through the date of termination and be eligible
for a pro rata portion of any bonus. Options held by an executive who
voluntarily terminates her or his employment that are vested remain exercisable
for a period of 90 days from the date of termination. Upon a termination of
employment as a result of an executive's death or disability, all vested options
remain exercisable for a period of 18 months following the date of termination.
In connection with Robert J. Birnbach's role as the Company's Executive
Vice President, Chief Financial Officer and Secretary, the Company and Mr.
Birnbach entered into an employment agreement dated June 7, 2000, but effective
as of June 1, 1999. Under the terms of the Birnbach employment agreement, Mr.
Birnbach has agreed to serve as Executive Vice President, Chief Financial
Officer and Secretary of the Company at a current base salary of $220,000. Mr.
Birnbach's agreement contemplates that he is eligible for a bonus of up to 50%
of his annual base salary upon the achievement by the Company and Mr. Birnbach
of performance targets agreed-upon by the Board of Directors and Mr. Birnbach.
Mr. Birnbach's annual base salary and bonus percentage may be increased, but not
decreased by the Company's Board of Directors.
Mr. Birnbach's employment with the Company may be terminated by the
Company with Cause (as defined in the agreement) or by Mr. Birnbach with or
without good reason (as defined in the agreement). 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.
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<PAGE>
In connection with enhancing DualStar's communications business, DCI
has entered into employment agreements with Jill Thoerle, pursuant to which Ms.
Thoerle has agreed to serve as President and Chief Executive Officer of DCI at a
current annual base salary of $250,000; Peter Sach, pursuant to which he has
agreed to serve as Executive Vice President and Chief Operating Officer of DCI
at a current annual base salary of $240,000; Dennis Rosatelli, pursuant to which
he has agreed to serve as Executive Vice President and Chief Financial Officer
of DCI at a current annual base salary of $240,000; George Parise, pursuant to
which he has agreed to serve as Executive Vice President - Corporate Development
of DCI at a current annual base salary of $200,000; Vincent D'Onofrio, pursuant
to which he has agreed to serve as Executive Vice President and Chief Technology
Officer of DCI at a current annual base salary of $200,000; Mary E. Deal,
pursuant to which she has agreed to serve as Executive Vice President and
General Counsel of DCI at a current annual base salary of $200,000; and Bruce
Forsyth, pursuant to which he has agreed to serve as Executive Vice President
and Chief Marketing Officer of DCI at a current annual base salary of $200,000.
In addition to annual base salaries, each of the DCI executives is eligible for
a bonus of up to (i) 50% of the annual base salary in the case of Ms. Thoerle
and Mr. Sach and (ii) 40% in the case of Ms. Deal and Messrs. Parise, D'Onofrio,
Forsyth and Rosatelli, upon the achievement of specified performance targets.
Annual base salaries and bonus percentages may be increased, but not decreased,
by the DCI board of directors.
Pursuant to the DCI employment agreement, employment may be terminated
by DCI with Cause (as defined in the agreements) or by the executive with or
without good reason (as defined in the agreements). Termination of employment by
DCI without Cause, or by the executive with good reason would entitle the
executive to severance in the amount of executive's then annual base salary,
plus a pro rata portion of the bonus that would be payable in the year of
termination. Additionally, all unvested options to purchase DualStar common
stock issued to the executive shall vest immediately, and be exercisable for a
period of 9 months following the date of termination. Certain other benefits
continue for a period of 6 months following the date of termination (12 months
in the case of Mr. Sach). In the event of a termination of employment by DCI
with Cause, the executive is entitled to receive all base salary through the
date of termination. Options held by such executive that are vested on the date
of termination remain exercisable for a period of 90 days from the date of
termination. All unvested options lapse. In the event of a voluntary termination
of employment by the executive, the executive is entitled to receive her or his
annual base salary through the date of termination and be eligible for a pro
rata portion of any bonus. Options held by an executive who voluntarily
terminates her or his employment that are vested remain exercisable for a period
of 90 days from the date of termination. Upon a termination of employment as a
result of an executive's death or disability, all vested options remain
exercisable for a period of 18 months following the date of termination.
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
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<PAGE>
reserved for such Awards and available for distribution under the 1994 Plan is
3,500,000. As of June 30, 2000, 5,439,800 options were outstanding under the
1994 Plan, 1,939,800 of which are subject to stockholder approval at the next
meeting of Company stockholders. 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 2000.
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, 2000, 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, 2000.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial
ownership of DualStar Common Stock as of September 15, 2000 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 Amount and Nature Percent
Of Beneficial Owner of Beneficial Ownership of Class
Technology Investors Group, LLC
25 Coligni Avenue 1,791,000 10.9%
New Rochelle, NY 10801
The following table sets forth certain information with respect to
beneficial ownership of DualStar Common Stock as of September 15, 2000 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
Beneficial Owner of Beneficial Ownership Percent of Class
Jared E. Abbruzzese 0 *
Gregory Cuneo 475,000 (1) 2.8%
Raymond Steele 15,000 (2) *
Barry Halpern 201,000 (2) 1.2%
Nicholas Ahel 126,000 (2) *
-24-
<PAGE>
Ronald Fregara 475,000 (1) 2.8%
Stephen Yager 475,000 (1) 2.8%
All directors and executive officers
as a group (11 persons) 3,011,000 (3) 16.6%
* Less than 1%.
(1) Consists of (i) options to purchase 40,000 shares of Company common stock
granted under the Company's 1994 Stock Option Plan, as amended (the
"Plan"), exercisable within 60 days of September 15, 2000 and (ii) 435,000
shares of Company common stock .
(2) Consists of options granted under the Plan, exercisable within 60 days of
September 15, 2000.
(3) Consists of (i) options to purchase 1,703,000 shares of Company common
stock granted under the Plan, exercisable within 60 days of September 15,
2000, and (ii) 1,308,000 shares of Company common stock.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CMA leases shop space at 141 47th Avenue, Brooklyn, NY 11235, on a
month-to-month basis, from FIS Management, Inc. in which certain officers of CMA
and the Company own a majority interest. No written lease agreement is signed.
For the fiscal year ended June 30, 2000, the Company paid $34,000in rental
payments to FIS Management, Inc. for this space.
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.
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 described 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.
The Company is a party to a consulting agreement dated June 1, 2000 with
Hades Advisors LLC ("Hades"), 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 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.
Subject to stockholder approval and other conditions, Class D Warrants to
purchase 625,000 shares of Company Common Stock were granted and issued to TIG
on April 13, 2000, on the same terms and conditions described above.
-25-
<PAGE>
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.
DCI sublets office space at One Park Avenue, New York, New York from
Starrett Corporation (of which Gregory Cuneo, the Company's president and chief
executive officer, is chairman and Robert Birnbach, the Company's executive vice
president and chief financial officer, is president and CEO). 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 incidental costs and expenses.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
1. Financial Statements and Financial Statement Schedules
See the Index to Financial Statements appearing on page F-1 of this
Report following this Item 14. No financial statement schedules are included in
this Report.
2. Exhibits
Set forth below is a list of exhibits being filed with this Report. The
management contracts or compensatory plans or arrangements required to be filed
as an Exhibit pursuant to Item 14(c) are Exhibits 4.2 and 10.1 - 10.8.
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.(1)
2.2 Stock Purchase Agreement dated as of March 28, 2000 between the
Registrant and M/E Contracting Corp.(1)
2.3 Agreement and Plan of Merger dated as of May 11, 2000 between the
Registrant, DCI Acquisition Co. and ParaComm, Inc.(1)
3.1 Certificate of Incorporation, filed June 14, 1994, as restated. (2)
3.2 Amended and Restated By-Laws. (1)
4.1 Specimen Copy of Common Stock Certificate. (1)
4.2 DualStar Technologies Corporation 1994 Stock Option Plan, as amended. (2)
4.3 Amendment to DualStar Technologies Corporation 1994 Stock Option Plan,
as amended.
10.1 Employment Agreement between the Registrant and Gregory Cuneo, dated
August 31, 1994. (2)
10.2 Employment Agreement between the Registrant and Stephen J. Yager, dated
August 31, 1994. (2)
10.3 Employment Agreement between the Registrant and Ronald Fregara, dated
August 31, 1994. (2)
-26-
<PAGE>
10.4 Employment Agreement between the Registrant and Robert J. Birnbach
dated June 7, 2000.
10.5 Employment Agreement between the Registrant and Nicholas Ahel dated
June 1, 2000.
10.6 Employment Agreement between the Registrant and Barry Halpern dated
June 1, 2000.
10.7 Employment Agreement between DualStar Communications, Inc. and Jill
Thoerle dated March 1, 2000.(1)
10.8 Employment Agreement between DualStar Communications, Inc. and Peter
Sach dated March 17, 2000.
10.9 Secured Promissory Note and Security Agreement between the Registrant
and Technology Investors Group, LLC, dated July 24, 1998.(3)
10.10 Non-Negotiable, Non-Transferable Subordinated, Convertible Promissory
Note, dated November 25, 1998.(4)
10.11 Note Purchase Agreement, dated as of November 25, 1998, relating to the
purchase of a subordinated convertible note.(4)
10.12 Registration Rights Agreement, dated as of November 25, 1998, relating
to the purchase and sale of the subordinated convertible note.(4)
10.13 Stockholders' Agreement, dated as of November 25, 1998, relating to the
purchase and sale of the subordinated convertible note.(4)
10.14 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.
10.15 Consulting Agreement dated as of June 1, 2000 between the Company and
TechOne.
10.16 Consulting Agreement dated as of June 1, 2000 between the Company and
Hades Advisors, LLC.
10.17 Registration Rights and Lock-Up Agreement dated as of May 10, 2000 by
and among the Company and the former ParaComm stockholders.
10.18 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
21.1 Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP.
27.1 Financial Data Schedule (electronic filings only).
------------------
(1) Incorporated herein by reference to Registrant's Quarterly Report on Form
10-Q (File No. 0-25552) for the quarter ended March 31, 2000.
(2) 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.
(3) Incorporated herein by reference to Registrant's Annual Report on Form
10-K (File No. 0-25552) for the fiscal year ended June 30, 1998.
(4) Incorporated herein by reference to Registrant's Quarterly Report on Form
10-Q (File No. 0-25552) for the quarter ended December 31, 1998.
(B) REPORTS ON FORM 8-K
The registrant filed a Current Report on Form 8-K on April 6, 2000
reporting an Item 5 event.
(C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
The exhibits listed under (a)(2) of this Item 14, are filed with this
Report.
<PAGE>
(D) FINANCIAL STATEMENT SCHEDULES REQUIRED BY REGULATION S-X WHICH ARE
EXCLUDED FROM THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS FOR THE
FISCAL YEAR ENDED JUNE 30, 2000
None.
<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 Class
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
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
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 and cash equivalents cash 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
15,000 Class D 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 5,000 113,450
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
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
DUALSTAR TECHNOLOGIES CORPORATION
By /s/ GREGORY CUNEO
--------------------------------------
Gregory Cuneo
President and
Chief Executive Officer
Dated: September 28, 2000
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ GREGORY CUNEO President and Chief September 28, 2000
----------------------- Executive Officer
Gregory Cuneo
/s/ ROBERT J. BIRNBACH Executive Vice President, Chief September 28, 2000
----------------------- Financial Officer [Principal Financial
Robert J. Birnbach Officer]
/s/ JOSEPH C. CHAN Vice President and Chief September 28, 2000
----------------------- Accounting Officer [Principal
Joseph C. Chan Accounting Officer]
/s/ RAYMOND L. STEELE Director September 28, 2000
-----------------------
Raymond L. Steele
/s/ JARED E. ABBRUZZESE Director and Chairman September 28, 2000
----------------------- of the Board
Jared E. Abbruzzese
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
EXHIBITS TO
FORM 10-K
Commission file number 0-25552
DUALSTAR TECHNOLOGIES CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
For the Fiscal Year Ended June 30, 2000
Delaware 13-3776834
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Park Avenue, New York, New York 10016
-----------------------------------------
(Address of principal executive offices) (Zip Code)
(718) 340-6655
--------------
(Registrant's telephone number, including area code)
<PAGE>
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.(1)
2.2 Stock Purchase Agreement dated as of March 28, 2000 between the
Registrant and M/E Contracting Corp.(1)
2.3 Agreement and Plan of Merger dated as of May 11, 2000 between the
Registrant, DCI Acquisition Co. and ParaComm, Inc.(1)
3.1 Certificate of Incorporation, filed June 14, 1994, as restated. (2)
3.2 Amended and Restated By-Laws. (1)
4.1 Specimen Copy of Common Stock Certificate. (1)
4.2 DualStar Technologies Corporation 1994 Stock Option Plan, as amended. (2)
4.3 Amendment to DualStar Technologies Corporation 1994 Stock Option Plan,
as amended.
10.1 Employment Agreement between the Registrant and Gregory Cuneo, dated
August 31, 1994. (2)
10.2 Employment Agreement between the Registrant and Stephen J. Yager, dated
August 31, 1994. (2)
10.3 Employment Agreement between the Registrant and Ronald Fregara, dated
August 31, 1994. (2)
10.4 Employment Agreement between the Registrant and Robert J. Birnbach
dated June 7, 2000.
10.5 Employment Agreement between the Registrant and Nicholas Ahel dated
June 1, 2000.
10.6 Employment Agreement between the Registrant and Barry Halpern dated
June 1, 2000.
10.7 Employment Agreement between DualStar Communications, Inc. and Jill
Thoerle dated March 1, 2000.(1)
10.8 Employment Agreement between DualStar Communications, Inc. and Peter
Sach dated March 17, 2000.
10.9 Secured Promissory Note and Security Agreement between the Registrant
and Technology Investors Group, LLC, dated July 24, 1998.(3)
10.10 Non-Negotiable, Non-Transferable Subordinated, Convertible Promissory
Note, dated November 25, 1998.(4)
10.11 Note Purchase Agreement, dated as of November 25, 1998, relating to the
purchase of a subordinated convertible note.(4)
10.12 Registration Rights Agreement, dated as of November 25, 1998, relating
to the purchase and sale of the subordinated convertible note.(4)
10.13 Stockholders' Agreement, dated as of November 25, 1998, relating to the
purchase and sale of the subordinated convertible note.(4)
10.14 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.
10.15 Consulting Agreement dated as of June 1, 2000 between the Company and
TechOne.
10.16 Consulting Agreement dated as of June 1, 2000 between the Company and
Hades Advisors, LLC.
10.17 Registration Rights and Lock-Up Agreement dated as of May 10, 2000 by
and among the Company and the former ParaComm stockholders.
10.18 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
21.1 Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP.
27.1 Financial Data Schedule (electronic filings only).
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(1) Incorporated herein by reference to Registrant's Quarterly Report on Form
10-Q (File No. 0-25552) for the quarter ended March 31, 2000.
(2) 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.
(3) Incorporated herein by reference to Registrant's Annual Report on Form
10-K (File No. 0-25552) for the fiscal year ended June 30, 1998.
(4) Incorporated herein by reference to Registrant's Quarterly Report on Form
10-Q (File No. 0-25552) for the quarter ended December 31, 1998.
(ii)
