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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 2002
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to __________
COMMISSION FILE NUMBER 0-25552
DUALSTAR TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3776834
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
11-30 47TH AVENUE, LONG ISLAND CITY, NEW YORK 11101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 340-6655
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant as of September 19, 2002 was approximately
$2,680,514 based upon the closing price ($0.20) for such Common Stock on such
date. The number of shares outstanding of Registrant's Common Stock, as of
September 19, 2002, was 16,501,568.
PART I
The statements contained in this Annual Report on Form 10-K, including the
exhibits hereto, relating to operations of DualStar Technologies Corporation and
its subsidiaries (DualStar or the Company) may constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Please note that the words intends, expects, plans, estimates,
projects, believes, anticipates and similar expressions are intended to identify
forward-looking statements. Actual results of the Company may differ materially
from those in the forward-looking statements and may be affected by a number of
factors including the Company's ability to continue operations, including if
Madeleine L.L.C. were to call its loan, the ability of OnTera, Inc., a wholly
owned subsidiary of the Company, to continue to implement its cost reduction
plan, the ability of the Company to raise and provide the capital resources to
fund the continuing communications operating losses, the Company's ability to
continue to obtain insurance and suretyship coverage, regulatory or legislative
changes, the Company's dependence on key personnel, and the Company's ability to
manage growth, in addition to those risk factors set forth below and in the
section captioned Risk Factors and the assumptions, risks and uncertainties set
forth below in the section captioned Management's Discussion and Analysis of
Financial Condition and Results of Operations, as well as other factors
contained herein and in DualStar's other filings with the SEC. The Company can
give no assurance that its plans, intentions, and expectations will be achieved
and actual results could differ materially from forecasts and estimates.
ITEM 1 - BUSINESS
OVERVIEW
DualStar Technologies Corporation ("DualStar" or the "Company"), through its
wholly owned subsidiaries, operates two separate lines of business: (a)
construction and (b) communications. As a result of the limited availability of
capital and a significant change in market conditions, in December 2000 the
Company's board of directors determined to refocus its communications business
efforts by concentrating on core communications assets located in the New York
City and Los Angeles areas and by operating subscription video provider,
ParaComm Inc., in several southern and western states.
The Company incurred significant losses in the last several fiscal years,
primarily in the communications segment, and it expects that the communications
segment will continue to incur losses going forward and will require additional
capital to fund those losses. The Company has implemented and will continue to
implement cost reductions designed to minimize such losses. There can be no
assurance that these efforts will be successful or that the construction segment
will sustain profitability or positive cash flow from future operations or that
any positive cash flow will be sufficient to offset continued losses from the
communications segment. Given the current U.S. economic climate and market
conditions and the financial condition of the Company, there is a substantial
likelihood that the Company will be unable to raise additional funds on terms
satisfactory to it, if at all, to fund the expected operating losses. Moreover,
the Company presently owes Madeleine L.L.C. ("Madeleine") over $15 million and
is in default under the loan. Madeleine may call the loan due and payable at any
time, and, if it is not paid, foreclose on significant assets of the Company's
subsidiaries that secure such loan. If the Company cannot raise additional funds
or if Madeleine demands payment on its loan, the Company will likely be forced
to cease operations. Accordingly, there is substantial doubt about the Company's
ability to continue as a going concern.
In fiscal year 2002, the Company decided to further limit its communications
business efforts and resources to the Internet and subscription video businesses
in the New York City metropolitan area and in Florida. The Company's
communications segment discontinued its telephone business in New York City and,
in April 2002, informed their telephone customers and the FCC that telephone
services would be phased out starting June 2002. The Company has not yet
received final regulatory approval for its discontinuance of the provision of
voice service. In addition, the Company decided to sell certain communications
assets in locations outside of the New York City metropolitan area and Florida.
In April 2002, the Company sold certain communications assets for $0.4 million.
The transaction resulted in a loss of $0.5 million. In August 2002, the Company
sold certain access agreements on properties located in the Los Angeles area and
the communications assets located in the properties for $0.4 million. The
transaction resulted in a gain of $0.1 million.
Due to the Company's continuing re-focus of its communications business efforts
and resources, a $2.5 million charge for the impairment of certain remaining
communications assets was recorded in fiscal year 2002.
On November 8, 2000, the Company consummated a $12.5 million senior secured loan
transaction with Madeleine, an affiliate of Blackacre Capital Management L.L.C.
("Blackacre"). The loan, which is due and payable on November 8, 2007, bears
interest at a fixed rate of 11% per annum. The loan is a senior secured
obligation of the Company and is guaranteed by certain subsidiaries of the
Company, including OnTera, which have pledged substantially all of their
respective assets to collateralize such guarantee. In connection with the loan,
the Company issued warrants to purchase 3,125,000 shares of common stock at an
exercise price of $4.00 per share, subject to antidilution provisions, expiring
in December 2007, to an affiliate of Madeleine. A portion of the $12.5 million
loan proceeds was used to retire existing indebtedness of the Company in the
principal amount of $7 million owed to Madeleine and to pay expenses of
obtaining the loan. The remaining proceeds were used for the Company's working
capital purposes. No value was allocated to the warrants because the value was
deemed immaterial.
Since March 2001, the Company has not made regularly scheduled interest payments
to Madeleine pursuant to the $12.5 million loan agreement. In addition, the
de-listing of the Company's common shares from the Nasdaq National Market
created a default under the loan agreement. In August 2002, the Company,
Blackacre and Madeleine began negotiating to eliminate the loan by selling
certain of the Company's communications assets to Blackacre at fair market value
and by converting the remaining loan balance to stock of the Company. There is
no assurance that the Company, Blackacre and Madeleine will be able to reach
agreement on valuation issues, or that they will reach final agreement to
eliminate or reduce the loan. The Company presently owes Madeleine over $15
million and is in default under the loan agreement. Madeleine has the right to
call the loan due and payable at any time. If Madeleine were to demand payment,
the Company would be unable to make such payment. In such an event, Madeleine
would have the right to foreclose on significant assets of the Company that
collateralize the loan. Such foreclosure would result in the Company being
unable to continue in business. See also Note A - Company Background and
significant Accounting Policies of the Notes to the Financial Statements
referred to in Item 8 hereof.
DualStar is a Delaware corporation. Its principal place of business is located
at 11-30 47th Avenue, Long Island City, New York 11101. DualStar's telephone
number is (718) 340-6655.
DualStar's common stock, par value $.01 per share (the Common Stock), trades on
the Over-the-Counter Bulletin Board under the symbol DSTR. As of September 19,
2002, there were 16,501,568 shares of Common Stock issued and outstanding.
BUSINESS AND OPERATING STRATEGIES
DualStar Historical Background. DualStar was incorporated in the State of
Delaware on June 17, 1994. The construction-related subsidiaries of DualStar
consist of Centrifugal/Mechanical Associates, Inc. (CMA), formed in June 1995;
High-Rise Electric, Inc. (High-Rise), formed in July 1995, Integrated Controls
Enterprises, Inc. (ICE), formed in August 1996, and BMS Electric, Inc. (BMS),
formed in July 2000. Property Control, Inc. (PCI) was formed in June 1995. The
communications-related subsidiaries of DualStar consist of OnTera, Inc. (OnTera)
(formerly known as DualStar Communications, Inc.), formed in February 1996, and
ParaComm, Inc. (ParaComm), acquired by DualStar in May 2000. DualStar wholly
owns each subsidiary.
The Company historically has engaged in two business segments: construction and
communications. For financial information concerning the two segments, see Note
N - Segment Information of the Notes to the Financial Statements referred to in
Item 8 hereof.
CONSTRUCTION BUSINESS AND OPERATING STRATEGIES.
Overview. High-Rise designs and installs sophisticated electrical systems for
newly constructed residential and commercial high-rise buildings. CMA engages in
mechanical contracting services, i.e. heating, ventilation and air conditioning
(HVAC) services. High-Rise's and CMA's engagements are generally performed under
fixed price long-term contracts undertaken with general contractors, with the
lengths of such long-term contracts varying, but typically ranging from one to
two years.
ICE supplies, installs and services facility management, energy management,
building automation, and commercial temperature control systems. In general, ICE
acts as a subcontractor to mechanical subcontractors, including those of the
Company. ICE also works directly for real property owners and general
contractors. BMS installs and services electrical systems, concentrating on
low-voltage work in the areas of building management systems and controls, and
fire and security, mostly in new construction.
PCI owns or manages the Company's fixed asset or office peripheral needs, e.g.,
ownership and maintenance of real property.
Major Customers. The Company's construction customers, which are concentrated in
the New York Metropolitan area, include various general contractors, real estate
developers, hotels, governmental agencies, and subcontractors. For the year
ended June 30, 2002, revenue from one customer (Bovis Lend Lease, Inc. (formerly
Lehrer McGovern Bovis, Inc.)) amounted to approximately 64% of the Company's
total revenues. For the year ended June 30, 2001, revenue from two customers
(Bovis Lend Lease, Inc. and Rockrose Construction Corp.) amounted to
approximately 60% and 15% of the Company's total revenues, respectively. For the
year ended June 30, 2000, revenue from two customers (Bovis Lend Lease, Inc. and
HRH Construction Corporation) amounted to approximately 49%
and 16% of the Company's total revenue, respectively. In addition, for the
fiscal years ended June 30, 2002 and 2001, approximately 0.2% and 2.0% of the
Company's total revenues, respectively, derived from HRH Construction Corp.
DualStar's President and Chief Executive Officer is also the Chairman of HRH
Construction Corp. HRH Construction Corp. is an affiliate of Blackacre. In
addition, as of June 30, 2002 and 2001, contract and retainage receivable from
Bovis Lend Lease, Inc. amounted to approximately 52% and 58% of the Company's
total contract and retainage receivable, respectively.
Manufacturing. The Company's production facilities are capable of fabricating
and assembling mechanical and electrical systems and subsystems. The Company
maintains a test and inspection program to ensure that such systems meet
customer requirements for performance and quality workmanship. In addition, pipe
fabrication and machine shops allow for the manufacture of both prototype and
production hardware. To support its internal operation and to extend its overall
capacity, the Company purchases a wide variety of components, assemblies and
services from outside manufacturers, distributors and service organizations.
Marketing and Sales. For High-Rise and CMA, the Company's marketing strategy has
focused on cultivating and maintaining long-term relationships with developers,
general contractors, electrical and mechanical engineers and architects. The
relatively high dollar value of each contract (generally ranging from $2 million
to $15 million), combined with the technically complex nature of the projects
covered by the Company's contracts result in an in-depth and complex purchase
decision process for each contract. The selling cycle for the Company's
contracts may last approximately 90 days. In general, sales activities are
handled by senior management or direct sales personnel. Due to the depth of
analysis involved in the customer's purchase decision, management must often
maintain frequent interaction with the buyer throughout the selling process.
ICE solicits property owners, general contractors, and mechanical contractors in
addition to serving CMA. BMS sells most of its services to ICE. For ICE and BMS,
some work is performed for unaffiliated entities such as mechanical contractors,
general contractors and owners directly.
Sources of Supply and Backlog. The raw materials, such as pipe, fittings and
valves, and electrical components used in the development and manufacture of the
Company's mechanical and electrical systems and subsystems are generally
available from domestic suppliers at competitive spot prices; fabrication of
certain major components may be subcontracted for on an as-needed basis. The
Company does not have any long-term contracts for its raw materials. The Company
has not experienced any significant difficulty in obtaining adequate supplies to
perform under its contracts.
At June 30, 2002, the backlog of the Company's construction business was
approximately $38 million as contrasted with approximately $62 million at June
30, 2001. The Company believes that most of its backlog at June 30, 2002 will be
completed prior to December 31, 2003, but no assurances can be given with
respect thereto. Backlog represents the total value of unrealized revenue on all
contracts awarded on or before a specified date. The Company does not believe
that its backlog at any particular time is necessarily indicative of its future
business or performance.
Competition. The electrical, mechanical, electronic, control and environmental
businesses are characterized by intense and substantial competition. The
Company's construction competitors range from small firms to large multinational
companies. Competition for private sector work generally is based on several
factors, including quality of work, reputation, price and marketing approach.
The Company believes that it is established in the electrical and mechanical
contracting industries, and will be able to maintain a strong competitive
position in its areas of expertise by adhering to its basic philosophy of
delivering high-quality work in a timely fashion within client budget
constraints.
In both the private and public sectors, the Company, acting either as a prime
contractor or as a subcontractor, occasionally joins with other firms to form a
team that competes for contracts by submitting a jointly prepared proposal.
Because a team of firms will usually offer a stronger set of qualifications than
any single firm, teaming arrangements are generally advantageous to the
Company's success. These teaming relationships, however, generate risk to the
Company in the event that a non-DualStar team member experiences financial
difficulty or is otherwise unable to fulfill its responsibilities on the
project. The Company maintains a large network of business relationships with
other companies and has drawn repeatedly upon these relationships to form
winning teams. Moreover, each DualStar subsidiary may market its services
independently, with the potential to offer in concert with other DualStar
subsidiaries, comprehensive and complementary services on multi-million dollar
construction projects.
Most of the Company's construction contracts with public sector clients are
awarded through a competitive bidding process that places no limit on the number
or type of bidders that may compete. The process usually begins with a
government Request for Proposal (RFP) that delineates the size and scope of the
proposed contract. Proposals submitted by the Company and others are evaluated
by the government on the basis of technical merit, response to mandatory
solicitation provisions, corporate and personnel qualifications and experience,
management capabilities and cost. While each RFP sets out specific criteria for
the choice of a successful offeror, RFP selection criteria in the government
services market often tend to weigh the technical merit of the proposal more
heavily than cost. The Company believes that its experience and ongoing work
strengthen its technical qualifications and thereby enhance its ability to
compete successfully for future government work. However, the Company can make
no assurances that it may be able to continue to successfully bid and compete in
its marketplace.
COMMUNICATIONS BUSINESS AND OPERATING STRATEGY.
Overview. The Company's communications businesses are conducted through OnTera
and ParaComm. OnTera was originally launched as a retail provider of integrated
communications services to the MDU market in the metropolitan New York area. In
furtherance of this, OnTera is a Competitive Local Exchange Carrier (CLEC), an
Internet Service Provider (ISP), and a provider of subscription television
services. ParaComm is also a provider of subscription television services.
OnTera offers a variety of services utilizing several delivery techniques and
technologies. High-speed Internet access services are offered via Ethernet and
Digital Subscriber Line (DSL). Subscription television services offerings
consist of DirecTV, Dish Network or a satellite master antenna television system
for basic and premium channels, which are combined with local programming by
OnTera for the MDU.
OnTera faces substantial competition for the services provided to residential
consumers in the metropolitan New York area. OnTera's main competitors in the
metropolitan New York area include (1) Internet service providers (ISPs) and
cable companies providing high-speed Internet and data access services, such as
Verizon Avenue, AOL, AT&T and RCN; and (2) cable franchise operators, such as
TimeWarner. OnTera attempts to differentiate itself in this highly competitive
environment by improving the MDU's communications infrastructure, providing
responsive support for property owners and residents, and by providing residents
a single source for a variety of services. Many of OnTera's competitors are well
financed, have significant market share and significantly more resources than
are available to OnTera. There can be no assurance that OnTera will be able to
successfully compete with respect to the services that it currently provides.
OnTera uses a DSL-based infrastructure in MDUs at which it has right of entry
agreements, in combination with satellite-based subscription television service.
OnTera believes that its infrastructure results in a lower cost to provide
service to an MDU than fiber- or coaxial cable-based providers. The DSL-based
infrastructure offers property owners the selling advantages of faster Internet
access, along with in-building sales and marketing support and the flexibility
to address an owner's entire residential portfolio. Moreover, OnTera believes
that its infrastructure is designed to be flexible enough to be upgraded in the
future to provide extremely high-speed services.
OnTera believes that the MDU market continues to be under-served by current
communications service providers, with a majority of MDUs being restricted to
(i) cable television service from franchise cable operators, and (ii) possible
high-speed Internet access service provided by second- and third-tier carriers
and cable overbuilders.
Due to significantly increased demand for high-speed data access fueled by the
explosive growth of the Internet, DualStar had previously announced its
intention to expand its communications businesses aggressively. Specifically,
DualStar had sought to become principally an access provider of broadband
communications services to residential and commercial properties. The expansion
would have required significant capital expenditures to construct and operate
the infrastructure necessary to provide access services for broadband
communications services, and to acquire access rights to provide such services
in residential and commercial buildings. However, as a result of the limited
availability of capital and a significant change in market conditions, in
December 2000 the Company's board of directors determined to refocus its
communications business efforts by concentrating on core communications assets
located in the New York City and Los Angeles areas and by operating subscription
video provider, ParaComm Inc. In connection with this effort, the Company's
communications segment have implemented and will continue to implement cost
reductions, including reductions in personnel, infrastructure and capital
expenditures. There can be no assurance that the Company will be able to
implement this cost-reduction plan in a commercially successful manner. Given
the current U.S. economic climate and market conditions and the financial
condition of the Company, there is a substantial likelihood that the Company
will be unable to raise additional funds on terms satisfactory to it, if at all,
to fund the expected operating losses. There can also be no assurance that the
Company will be able to attract or retain the communications service providers
to deliver communications services over the Company's infrastructure. There can
be no assurance that the Company will obtain such financing on sufficiently
favorable terms and conditions. Should the Company be unable to secure such
additional capital, the Company may have to discontinue its communications
operations.
In fiscal year 2002, the Company decided to further limit its communications
business efforts and resources to the Internet and subscription video businesses
in the New York City metropolitan area and in Florida. The Company's
communications segment discontinued its telephone business in New York City and,
in April 2002, informed their telephone customers and the FCC that telephone
services would be phased out starting June 2002. The Company has not yet
received final regulatory approval for its discontinuance of the provision of
voice service. In addition, the Company decided to sell certain communications
assets in locations outside of the New York City metropolitan area and Florida.
Due to the Company's continuing re-focus of its communications business efforts
and resources, a $2.5 million charge for the impairment of certain remaining
communications assets was recorded in the three months ended March 31, 2002.
In April 2002, the Company sold certain communications assets for $0.4 million.
The transaction resulted in a loss of $0.5 million. In addition, in August 2002,
the Company sold certain access agreements on properties located in the Los
Angeles area and the communications assets located in the properties for $0.4
million. The transaction resulted in a gain of $0.1 million.
Competition. OnTera's remaining lines of business are highly competitive. While
OnTera believes that its market and product plans acknowledge the current state
of competition in the consumer communications market and take advantage of the
latest technologies, OnTera cannot provide assurance that it will be able to
compete successfully with the companies providing all or some of the services
provided by the Company. Several of OnTera's competitors are much larger,
established companies, having significantly more resources than are currently
available to the Company.
While OnTera believes that it may benefit from new and advanced technologies for
video and data access that are in various stages of development, these
technologies are also being developed and supported by entities having
significantly greater financial and other resources than the Company. New
technologies and/or the competition faced by OnTera from one of the types of
competitors identified above could have a materially adverse affect on the
ability of OnTera to enter into access agreements with MDU owners. The Company
cannot assure that it will be able to compete successfully with existing
competitors or new entrants in the market for video and data access services.
PATENT, TRADEMARK, SERVICE MARK, COPYRIGHT AND PROPRIETARY RIGHTS.
Seven service marks, Global Hiring Hall, CyberBuilding, CyberBuilders,
CyberCierge, DualStar Communications, DualStar and DualStar Technologies, were
registered with the U.S. Patent & Trademark Office (USPTO) from 1997 through
1999. Three trademarks, CyberBuilding, CyberView and Building Area Network, were
registered with the USPTO in 1998 and 1999.
On June 30, 2000, OnTera filed with the USPTO a Provisional Patent Application
respecting the structure, applications and processes used in the nation-wide
network that OnTera had intended to build to deliver its Broadband Access
Services. On June 29, 2001 OnTera filed a patent application with reference to
the previously filed provisional application. All rights to the patent have been
assigned by the inventor, OnTera's current president, to OnTera. On September
12, 2001, an Official Filing Receipt was received from the USPTO.
The Company has the authority to and utilizes trademarks, logos and other
intellectual property owned or controlled by third parties in the promotion of
the Company's video offerings.
The Company may in the future file patent or copyright applications, or
additional trademark or service mark applications, relating to certain of the
Company's mechanical, electrical, electronic, control, environmental,
information technology, security, entertainment and communications products and
services. Nevertheless, if patents are issued, or trademarks, service marks or
copyrights are registered, there can be no assurance as to the extent of the
protection that will be granted to the Company as a result of having such
patents, trademarks, service marks or copyrights, or that the Company will be
able to afford the expenses of any complex litigation which may be necessary to
enforce its proprietary rights. Failure of any future or existing patents,
trademark, service mark and copyright applications may have a material adverse
impact on the Company's business since the Company may not otherwise be able to
protect the proprietary or trade secret aspects of its business and operations,
thereby diluting the Company's ability to compete in the marketplace. Except as
may be required by the filing of patent, trademark, service mark and copyright
applications, the Company will attempt to keep all other proprietary information
secret and to take such actions as may be necessary to insure the results of its
development activities are not disclosed and are protected under the common law
concerning trade secrets. Such steps may include the execution of nondisclosure
agreements by key Company personnel and may also include the imposition of
restrictive agreements on purchasers of the Company's products and services.
There is no assurance that the execution of such agreements will be effective to
protect the Company, that the Company will be able to enforce the provisions of
such nondisclosure agreements or that technology and other information acquired
by the Company pursuant to its development activities will be deemed to
constitute trade secrets by any court of competent jurisdiction.
CONSTRUCTION BUSINESSES REGULATION.
Substantial environmental laws have been enacted in the United States and in the
New York Metropolitan area in response to public concern over the environment.
These federal, state and local laws and the implementing regulations affect
nearly every customer of the Company. Efforts to comply with the requirements of
these laws may increase demand for the Company's construction services, and the
Company believes there will be a trend toward increasing regulation and
government enforcement in the environmental area. The necessity that the
Company's clients comply with these laws and implementing regulations subjects
the Company to substantial liability. The Company believes that, to the best of
its information and knowledge, it is in compliance with all material federal,
state and local laws and regulations governing its construction operations.
COMMUNICATIONS BUSINESSES REGULATION.
Overview. OnTera's services are subject to federal, state and sometimes local
government regulation. For all OnTera services, federal regulation as well as
state regulation affects OnTera's access to inside wiring in the MDUs that make
up primary target market. OnTera's access to inside wiring can be affected by
(1) definitions of the point dividing inside wiring ownership between the
traditional telephone company and the property owner or (2) regulatory decisions
regulating the telephone company's unbundled network elements (UNEs) (i.e.,
various portions of a traditional telephone company's network that a CLEC needs
to build or fill in missing parts of its facilities network). The jurisdictional
reach of the various federal, state, and local authorities is subject to ongoing
controversy and judicial review. The outcome of such reviews cannot be
predicted.
Federal Regulation. OnTera must comply with the requirements of the
Communications Act of 1934, as amended by the 1996 Telecommunications Act, as
well as applicable FCC regulations. The applicable FCC regulations impose on the
traditional telephone companies various requirements that are intended to foster
competition by entrants such as OnTera.
Local Regulation. To the extent OnTera provides regulated intrastate services or
decides to otherwise submit itself to the jurisdiction of the relevant state
telecommunications regulatory commission, OnTera is and could be subject to such
jurisdiction. There are many state commission proceedings now underway to
determine the rates, charges and terms and conditions for UNEs and, in some
cases, owner control of inside wiring. If a decision increases the cost of UNEs
or restricts a property owner's ability to make inside wiring available to
OnTera, OnTera's business could be negatively affected. The effect of state
regulation on OnTera's business varies from state to state. For instance, states
(or municipalities) sometimes accord to the franchised cable companies (that are
OnTera's competitors not only for its television services but also potentially
for data, including Internet Access) rights of access to MDUs, which could
reduce OnTera's penetration rates and may adversely affect its business.
Like OnTera, ParaComm's business is potentially affected by the state or
municipal actions granting rights of access to franchised cable companies and by
FCC and state regulation respecting inside wiring. Additionally, federal
legislation that confers rights on tenants to purchase and operate their own
satellite signal reception equipment can result in tenant bypass of ParaComm's
services and could, in some cases, adversely affect penetration rates.
In fiscal year 2002, the Company decided to further limit its communications
business efforts and resources to the Internet and subscription video businesses
in the New York City metropolitan area and in Florida. The Company's
communications segment discontinued its telephone business in New York City and,
in April 2002, informed their telephone customers and the FCC that telephone
services would be phased out starting June 2002. The Company has not yet
received final regulatory approval for its discontinuance of the provision of
voice service.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation affecting the telecommunications
industry or that could affect OnTera. Judicial review of existing regulations,
legislative hearings, legislation, and administrative proposals could negatively
influence U.S. communications companies' operations, including OnTera's
operations. Additionally, OnTera cannot predict the impact, if any, that future
regulation or regulatory changes may have on its business and does not offer
assurance that such future regulation or regulatory changes will not harm
OnTera's business.
EMPLOYEES.
As of June 30, 2002, the Company employed 316 full-time employees, of which 26
are engaged in administration and finance. Of the remaining full-time employees,
276 are employed by the various construction subsidiaries of the Company, with
275 engaged in manufacturing, engineering and production and 1 in marketing and
sales. The remaining 14 employees are engaged in the communications business of
the Company, with 11 engaged in network development, 2 in marketing and sales,
and 1 in operations and development. Many of the Company's employees have
overlapping responsibilities in these job descriptions.
The Company believes that its future success will depend, in part, upon its
continued ability to recruit and retain qualified management, technical and
communications personnel. Competition for qualified personnel is significant,
particularly in the geographic areas in which DualStar and its subsidiaries are
located. The Company depends upon its ability to retain the services of key
employees. The loss of services of one or more key employees could have a
material adverse impact on the Company. As of June 30, 2002, the Company had 259
employees that were represented by labor organizations. The Company has never
experienced a work stoppage. Management of the Company believes that it has a
healthy relationship with its employees.
RISK FACTORS
AN INVESTMENT IN THE COMPANY'S SECURITIES INVOLVES A HIGH DEGREE OF RISK AND
SHOULD BE CONSIDERED ONLY BY INVESTORS WHO CAN AFFORD THE RISK OF LOSS OF THEIR
ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS BEFORE INVESTING IN THE COMPANY'S SECURITIES. SEE ALSO NOTE ON
FORWARD-LOOKING STATEMENTS.
THE COMPANY MAY BE UNABLE TO CONTINUE OPERATIONS
The Company incurred significant losses in the last several fiscal years,
primarily in the communications segment, and it expects that the communications
segment will continue to incur losses going forward and will require additional
capital to fund those losses. The Company has implemented and will continue to
implement cost reductions designed to minimize such losses. There can be no
assurance that these efforts will be successful or that the construction segment
will sustain profitability or positive cash flow from future operations or that
any positive cash flow will be sufficient to offset continued losses from the
communications segment. Given the current U.S. economic climate and market
conditions and the financial condition of the Company, there is a substantial
likelihood that the Company will be unable to raise additional funds on terms
satisfactory to it, if at all, to fund the expected operating losses. Moreover,
the Company presently owes Madeleine over $15 million and is in default under
the loan. Madeleine may call the loan due and payable at any time, and, if it is
not paid, foreclose on significant assets of the Company's subsidiaries that
secure such loan. If the Company cannot raise additional funds or if Madeleine
demands payment on its loan, the Company will likely be forced to cease
operations. Accordingly, there is substantial doubt about the Company's ability
to continue as a going concern.
THE COMPANY IS IN DEFAULT ON THE MADELEINE LOAN
The Company owes Madeleine over $15 million and is presently in default under
the loan documents. Madeleine has the right to call the loan due and payable at
any time. If Madeleine were to demand payment, the Company would be unable to
make such payment. In such an event, Madeleine would have the right to foreclose
on significant assets of the Company that collateralize the loan. Such
foreclosure would result in the Company being unable to continue in business.
OPERATING LOSSES AND CAPITAL REQUIREMENTS
The Company incurred significant losses in fiscal years 2002 and 2001,
especially in the communications segment, and expects the communications segment
will continue to incur losses going forward. The communications segment has
implemented and will continue to implement cost reductions to minimize such
losses. There can be no assurance either that the Company will be able to raise
and provide the capital resources to fund the expected communications losses or
that the construction segment will sustain profitability or positive cash flow
from future operations. In order to continue operations, the Company must raise
additional working capital. If it cannot, the Company believes it may have to
discontinue its communications operations.
NO ASSURANCE OF FUTURE PROFITABILITY OR PAYMENT OF DIVIDENDS
No assurance can be given that the future operations of the Company will be
profitable. Should the future operations of the Company be profitable, it is
likely that the Company would retain much or all of its earnings in order to
finance future growth and expansion. As a result, the Company does not presently
intend to pay dividends and it is not likely that any dividends will be paid in
the foreseeable future.
SUBSTANTIAL COMPETITION
Electrical and mechanical contracting, which represent the Company's core
businesses, are characterized by intense and substantial competition. As a
result of the competition in those areas, the bidding process whereby the
Company seeks to obtain new contracts has also become more competitive and the
profit margins capable of being achieved through such contracts fluctuate based
upon competitive and economic conditions. There can be no assurance that the
Company will continue to obtain new contracts with satisfactory profit margins.
The businesses of Company's communications segment involve rapid technological
change and are also characterized by intense and substantial competition. In
this communications segment, the Company has encountered substantial competition
from companies that are substantially larger and have substantially greater
financial, marketing and technical resources and greater name recognition than
the Company and which are established providers of these services. The Company
faces intense competition from local exchange carriers, including the regional
bell operating companies which currently dominate their local telecommunications
markets. Other competitors of the Company include cable and satellite television
companies, competitive access providers, Internet service providers, competitive
local exchange carriers, integrated communications providers, wireless,
microwave and satellite carriers and private
networks owned by large end users. There can be no assurance that the Company,
with its more limited resources and experience, will be able to successfully
compete in these fields.
SURETY BONDS
As a result of the recent turmoil in corporate America, the bonding industry is
under increased scrutiny. In general, the bonding market has tightened. As a
result, it may be more difficult for the Company to secure surety bonds in the
future. The Company's ability to obtain bonds may be adversely affected by its
financial position as well as by overall market conditions. If the Company is
unable to obtain surety bonds as needed, this is likely to have a material
adverse affect on the Company.
SOCIAL, POLITICAL AND ECONOMIC RISKS AFFECTING OPERATIONS
Recent acts of terrorism have caused major instability in the U.S. and other
financial markets. There could be further acts of terrorism in the United States
or elsewhere that could have a similar impact. Leaders of the U.S. government
have announced their intention to actively pursue and take military and other
action against those behind the September 11, 2001 attacks and to initiate
broader action against national and global terrorism. Armed hostilities or
further acts of terrorism would cause further instability in financial markets
and could directly impact the Company's financial condition and results of
operations. Furthermore, the recent terrorist attacks and future developments
may result in reduced demand from the Company's customers for its services or
may negatively impact the Company's customers' demand for its services. These
developments will subject the Company's operations to increased risks and,
depending on their magnitude, could have a material adverse effect on the
Company's business. There can be no assurance as to the future effect of changes
in social, political and economic conditions on the Company's business or
financial condition.
DEPENDENCE ON MAJOR CUSTOMERS
The Company's customers include various general contractors, government
agencies, hospitals, hotels, insurance companies, securities exchanges and
subcontractors. For the year ended June 30, 2002, revenue from one customer
(Bovis Lend Lease, Inc. (formerly Lehrer McGovern Bovis, Inc.)) amounted to
approximately 64% of the Company's total revenues. In addition, as of June 30,
2002, contract and retainage receivable from Bovis Lend Lease, Inc. amounted to
approximately 52% of the Company's total contract and retainage receivable. The
dependence on major customers subjects the Company to significant financial
risks in the operation of its business should a major customer terminate, for
any reason, its business relationship with the Company. In such event, the
financial condition of the Company may be adversely affected and the Company may
be required to seek additional financing.
DEPENDENCE ON MANAGEMENT
The Company's business is dependent upon a small number of key executives. The
loss of the services of key executives or the inability of the Company to
attract additional qualified personnel could have a material adverse effect on
the Company.
POTENTIAL LIABILITY AND INSURANCE
The Company's operations involve electrical, mechanical, electronic, control,
environmental, information technology, security, Internet and television
infrastructure contracting of major residential, commercial and institutional
buildings and facilities. The Company is exposed to a significant risk of
liability for damage and personal injury. The Company maintains quality control
programs in an attempt to reduce the risk of potential damage to persons and
property and any associated potential liability. In addition, the Company
maintains general liability insurance covering damage resulting from bodily
injury or property damage to third parties. The policy, however, does not
include coverage for comprehensive environmental impairment or professional
liability which may be caused by the Company's actions.
The Company endeavors contractually to limit its potential liability to the
amount and terms of its insurance policy and to be indemnified by its clients
from potential liability to third parties. However, the Company is not always
able to obtain such limitations on liability or indemnification, and such
provisions, when obtained, may not adequately shelter the Company from
liability. Consequently, a partially or completely uninsured claim, if
successful and of sufficient magnitude, may have a material adverse effect on
the Company and its financial condition.
ENVIRONMENTAL RISK FACTORS
Substantial environmental laws have been enacted in the United States and in the
New York metropolitan area in response to public concern over the environment.
These federal, state and local laws and the implementing regulations affect
nearly every customer of the Company. Efforts to comply with the requirements of
these laws may increase demand for the Company's services, and the Company
believes that there will be a trend toward increasing regulation and government
enforcement in the environmental area. The
necessity that the Company's clients comply with these laws and implementing
regulations subjects the Company to substantial liability. The Company believes
that, to the best of its information and knowledge, it is in compliance with all
material federal, state and local laws and regulations governing its operations.
ITEM 2 - PROPERTIES
In August 1996, PCI acquired real property, including a building containing
approximately 22,000 square feet of office and warehouse space, at 11-30 47th
Avenue, Long Island City, New York 11101. The cost of the real property was
$1,109,000, of which $900,000 was financed by a mortgage loan. The mortgage loan
was refinanced on November 22, 1999, thereby increasing the loan balance to
$1.75 million.
CMA leases, on a month-to-month basis, approximately 7,500 square feet of
manufacturing space located at 88 Dobbins Street, Brooklyn, New York 11222.
Previously, CMA had leased, on a month-to-month basis, approximately 5,000
square feet of manufacturing space located at 141 47th Street, Brooklyn, New
York 11232 from FIS Management, Inc. in which Messrs. Cuneo and Fregara own an
interest. That lease was terminated in March 2002.
OnTera sublets, on a month-to-month basis, office space in New York, NY from
Starrett Corporation (of which the Company's president and Chief Executive
Officer is (non-Director) Chairman and the Company's Chief Financial Officer was
director, president and Chief Executive Officer). Starrett is majority owned by
Blackacre and an affiliate of HRH Construction Corporation. Additionally, OnTera
and ParaComm lease, on a month-to-month basis, office space in Clermont,
Florida.
The Company believes that adequate office and warehouse space is available in
each of the markets in which it currently transacts its construction and
communications business and in the markets in which it intends to transact
business. The Company further believes that the productive use of its current
facilities represents approximately 70 percent of capacity. Total rental expense
for the Company for recent periods is as follows:
PERIOD EXPENSE
----------- -------------
Year ended June 30, 2002.......................$440,000
Year ended June 30, 2001.......................$502,000
ITEM 3 - LEGAL PROCEEDINGS
(a) Until 1995, Centrifugal was a partner with DAK Electric Contracting Corp.
("DAK") in a joint venture that performed mechanical and electrical services for
a general contractor on a construction project in Manhattan known as the Lincoln
Square project. Centrifugal was responsible for the mechanical portion of the
contract, and its co-venturer, DAK, was responsible for the electrical portion.
In 1995, DAK became insolvent, thereby obligating Centrifugal to complete the
work on this project. As a result, in fiscal 1996 the Company wrote off
approximately $3.7 million with respect to accounts receivable, loans
receivable, claims and other costs that the Company incurred on behalf of DAK in
fulfillment of DAK's obligations under the contract on the Lincoln Square
project.
As of June 30, 1996, all of the known claims and liens of subcontractors of the
joint venture were settled and discharged, and all of the vendor lawsuits which
arose out of these claims were also settled with the exception of the following:
The joint venture's bonding companies have claims over for indemnity against
Centrifugal and under a guarantee agreement against the Company in the event
that a judgment is rendered against the bonding companies in a suit brought by
an employee benefit fund for DAK's employees' union seeking contributions to the
fund which the fund claims were due but not paid by DAK. The complaint alleges
several causes of action against several defendants in connection with several
projects and seeks a total of approximately $450,000 in damages on all of these
causes against the named defendants; however, only one of the several causes of
action, which seeks an unspecified portion of the total damages demanded,
relates to the Company. The Company has been informed that plaintiff will assert
that more than half of the total sums it seeks is due under the bond which the
Company provided, with the remainder of the sums demanded due on the claims
unrelated to the Company. The Company may also be exposed for interest.
Additionally, it may be exposed to such legal fees and other expenses as the
Company's bonding company may incur in its defense against plaintiff's claims;
however, many years into this matter, no demand for any of these sums has been
made. The bonding companies, Centrifugal and the Company have asserted, among
other defenses, that such contributions were not guaranteed under the terms of
the joint venture's bonds.
(b) On August 11, 1999, Triangle Sheet Metal Works, Inc. ("Triangle"), a
subcontractor of Centrifugal/Mechanical Associates, Inc. ("CMA"), filed a
petition under Chapter 11 of Title 11 of the United States Code in the United
States Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court"). Triangle's Chapter 11 case was subsequently converted to a case under
Chapter 7 of the Bankruptcy Code and a Chapter 7 trustee was appointed to
administer Triangle's estate. Triangle was a sheet metal subcontractor for CMA
on six projects in New York City (the "Subcontractor Projects"). CMA was also
the subcontractor of Triangle on one additional project in New York City (the
"Contractor Project"). Prior to Triangle's Chapter 11 filing, Triangle ceased
operation and defaulted on its obligations under the Subcontractor Projects and
the Contractor Project. On or about January 18, 2000, Triangle's Chapter 7
trustee made a written request to CMA stating that Triangle's records reflected
that CMA was indebted to Triangle in the aggregate sum of $2.4 million based
upon work performed by Triangle on the Subcontractor Projects. Triangle's
Chapter 7 trustee stated CMA was not entitled, under applicable law, to offset
amounts owed to CMA on particular Subcontractor Projects against amounts owed by
CMA to Triangle on other Subcontractor Projects. CMA had claims and
counterclaims against Triangle for breaches, defaults, completion costs and
damages in respect of the Subcontractor Projects and the Contractor Project. CMA
believed that it was entitled setoff and/or recoup part of the damages by
offsetting any monies owed by CMA to Triangle.
Subsequently, Triangle's Chapter 7 trustee commenced five (5) lawsuits against
CMA, Trident Mechanical Systems, Inc. ("Trident") (a dormant, wholly owned
subsidiary of the Company) and CMA's bonding company arising from the various
Subcontractor Projects and the Contractor Project, and claimed CMA owed Triangle
a total of $2.9 million. CMA and its bonding company asserted counterclaims
claiming damages in the aggregate amount of $9.6 million arising from the
Subcontractor Projects.
To minimize legal and other costs in connection with these claims, in April
2002, CMA paid $220,000 to settle with Triangle and, in return, mutual releases
from liability were given by the parties, including Trident and CMA's bonding
company.
(c) In 2000, OnTera purchased various items of equipment from Nokia and in 2001,
OnTera executed a promissory note to Nokia in the face amount of $668,000
covering the outstanding balance due on the purchased items. In August 2002,
Nokia filed suit in the District Court of Dallas County, Texas claiming damages
of $607,000 plus interest, costs and attorneys on the promissory note.
(d) In 1999, ParaComm purchased from Golden Sky Systems (GSS) GSS's contract
with DirecTV which authorized it to be a DirecTV Master Systems Operator (MSO).
Along with the contract so purchased, ParaComm acquired a GSS contract with one
of its System Operators, Cable America, Inc. In May, 2002 Cable America, Inc.
filed suit in the Circuit Court of Cook County, Illinois against ParaComm,
OnTera, DirecTV, GSS and Pegasus Communications Inc., which had subsequently
acquired GSS. The suit claims damages for allegedly unpaid commissions in the
claimed amount of $339,000 and also seeks an accounting. The Company believes
the suit to be without merit and intends to contest it.
(e) In July 2002, plaintiff Harvey Wayne, as an alleged shareholder of the
Company, filed a verified shareholders' derivative complaint against directors
and officers of the Company, various other entities and the Company as a nominal
defendant, in the United States District Court for the Eastern District of New
York. The complaint alleges breach of fiduciary duties and seeks to compel the
Company to hold a shareholders meeting for the election of directors. The
complaint seeks injunctive relief and unspecified damages. Neither the Company
nor any officer or director of the Company has been served with a complaint in
this matter.
(f) In the ordinary course of business, the Company is involved in claims
concerning personal injuries and property damage, all of which the Company
refers to its insurance carriers. The Company believes that no loss to the
Company is probable and the claims are covered under its liability policies. No
provision for such claims has been made in the accompanying financial
statements.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the NASD Over-the-Counter
(OTC) Bulletin Board under the symbol DSTR. The Company's Common Stock was
previously traded on the Nasdaq National Market, but was delisted on June 13,
2001.
The following table sets forth, on a per share basis, the high and low sale
prices of the Company's Common Stock on NASDAQ National Market for the fiscal
year ended June 30, 2001 (through June 13, 2001). The following table also sets
forth, on a per share basis, the range of reported high and low bid quotations
on the OTC Bulletin Board, as derived from publicly available sources on the
Internet, for the period from June 13, 2001 to June 30, 2001, for the fiscal
year ended June 30, 2002 and for the first quarter (through September 19, 2002)
of the Company's fiscal year ending June 30, 2003. Such quotations reflect
inter-dealer prices, without retail mark-up, mark- down or commission and may
not necessarily reflect actual transactions.
Sale Prices
-----------
High Low
---- ---
Fiscal 2001
- -----------
First Quarter $4.375 $1.1875
Second Quarter $1.9375 $0.06
Third Quarter $0.8125 $0.25
Fourth Quarter (through June 12, 2001) $0.85 $0.3125
Bid Quotations
--------------
High Low
---- ---
Fiscal 2001
- -----------
Fourth Quarter (June 13, 2001 through June 30, 2001) $0.60 $0.30
Fiscal 2002
- -----------
First Quarter $0.37 $0.23
Second Quarter $0.33 $0.18
Third Quarter $0.27 $0.20
Fourth Quarter $0.26 $0.10
Fiscal 2003
- -----------
First Quarter (through September 19, 2002) $0.28 $0.06
As of September 19, 2002, there were 118 record holders of the Company's Common
Stock.
The Company has not declared any dividends since its incorporation. The Company
does not anticipate the declaration or payment of dividends in the foreseeable
future. Future dividend policy will be subject to the discretion of the Board of
Directors and will be contingent upon future earnings, the Company's financial
condition, capital requirements, general business conditions and other factors.
ITEM 6 - SELECTED FINANCIAL DATA
DUALSTAR TECHNOLOGIES CORPORATION
SELECTED FINANCIAL DATA(1)
(Dollars in thousands, except per share data)
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenue $81,181 $83,218 $87,285 $92,650 $94,280
(Loss) income from operations (5,883) (14,176) (8,056) 703 597
Net (loss) income (9,583) (15,713) (8,651) 1,322 556
Basic (loss) income per share $(0.58) $(0.95) $(0.67) $0.15 $0.06
Diluted (loss) income per share $(0.58) $(0.95) $(0.67) $0.13 $0.06
JUNE 30,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $(4,274) $13,836 $16,404 $ 3,818 $365
Total assets 37,440 43,573 58,400 38,595 33,345
Long-term liabilities 14,850 14,340 1,921 3,430 977
Stockholders' equity (deficit) (603) 8,778 24,605 6,689 5,367
(1) The Selected Financial Data represent the consolidated data for the years
ended June 30, 2002, 2001, 2000, 1999 and 1998.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
DualStar Technologies Corporation ("DualStar" or the "Company"), through its
wholly owned subsidiaries, operates two separate lines of business: (a)
construction and (b) communications. As a result of the limited availability of
capital and a significant change in market conditions, in December 2000 the
Company's board of directors determined to refocus its communications business
efforts by concentrating on core communications assets located in the New York
City and Los Angeles areas and by operating subscription video provider,
ParaComm Inc., in several southern and western states.
In fiscal 2002, the Company decided to further limit its communications business
efforts and resources to the Internet and subscription video businesses in the
New York City metropolitan area and in Florida. The Company's communications
segment discontinued its telephone business in New York City and, in April 2002,
informed their telephone customers and the FCC that telephone services would be
phased-out starting June 2002. In addition, the Company decided to sell certain
communications assets in locations outside of the New York City metropolitan
area and Florida. Due to the Company's continuing re-focus of its communications
business efforts and resources, a $2.5 million charge for the impairment of
certain remaining communications assets was recorded in the three months ended
March 31, 2002.
In April 2002, the Company sold certain communications assets for $0.4 million.
The transaction resulted in a loss of $0.5 million. In addition, in August 2002,
the Company sold certain access agreements on properties located in the Los
Angeles area and the communications assets located in the properties for $0.4
million. The transaction resulted in a gain of $0.1 million.
In January 2001, the Company's board of directors determined not to divest most
of DualStar's construction-related businesses, which it had previously decided
to do. Accordingly, the financial position of such businesses as of June 30,
2001, and their financial results and cash flows for the fiscal years ended June
30, 2001 and 2000 are no longer presented as discontinued operations in the
accompanying audited consolidated financial statements. In addition, certain
reclassifications have been made to prior year amounts to conform to the June
30, 2002 presentation.
CAPITAL RESOURCES AND LIQUIDITY
The Company incurred significant losses in the last several fiscal years,
primarily in the communications segment, and it expects that the communications
segment will continue to incur losses going forward and will require additional
capital to fund those losses. The Company has implemented and will continue to
implement cost reductions designed to minimize such losses. There can be no
assurance that these efforts will be successful or that the construction segment
will sustain profitability or positive cash flow from future operations or that
any positive cash flow will be sufficient to offset continued losses from the
communications segment. Given the current U.S. economic climate and market
conditions and the financial condition of the Company, there is a substantial
likelihood that the Company will be unable to raise additional funds on terms
satisfactory to it, if at all, to fund the expected operating losses. Moreover,
the Company presently owes Madeleine L.L.C. ("Madeleine") over $15 million and
is in default under the loan. Madeleine may call the loan due and payable at any
time, and, if it is not paid, foreclose on significant assets of the Company's
subsidiaries that secure such loan. If the Company cannot raise additional funds
or if Madeleine demands payment on its loan, the Company will likely be forced
to cease operations. Accordingly, there is substantial doubt about the Company's
ability to continue as a going concern.
Cash balances at June 30, 2002 and 2001 were approximately $2.5 million and $3.7
million, respectively. In fiscal 2002, 2001 and 2000, the Company used
approximately $1.6 million, $12.7 million and $12.1 million, respectively, of
net cash in its operating activities. These net uses of cash were primarily to
pay trade payables and fund operating losses incurred in the Company's
communications businesses.
During fiscal 2002, the Company acquired capital assets of approximately $0.4
million, primarily for investment in communications infrastructure systems for
multiple dwelling unit ("MDU") buildings in return for rights to provide
Internet and television services to the buildings' residents in Florida. During
fiscal 2001, the Company acquired capital assets of approximately $3.3 million,
of which approximately $0.7 million was financed by a note. During fiscal 2000,
the Company acquired capital assets of approximately $1.2 million, of which
approximately $0.2 million was financed by capital leases. The capital assets
acquired during fiscal 2001 and 2000 were primarily for investment in
communications infrastructure systems for MDU buildings in return for rights to
provide telephone, Internet, television and other services to the buildings'
residents in various states.
As a result of the recent turmoil in corporate America, the bonding industry is
under increased scrutiny. In general, the bonding market has tightened. As a
result, it may be more difficult for the Company to secure surety bonds in the
future. The Company's ability to obtain bonds may be adversely affected by its
financial position as well as by overall market conditions. If the Company is
unable to obtain surety bonds as needed, this is likely to have a material
adverse effect on the Company.
Senior Secured Promissory Note
On November 8, 2000, the Company consummated a $12.5 million senior secured loan
transaction with Madeleine, an affiliate of Blackacre Capital Management L.L.C.
("Blackacre"). The loan, which is due and payable on November 8, 2007, bears
interest at a fixed rate of 11% per annum. The loan is a senior secured
obligation of the Company and is guaranteed by certain subsidiaries of the
Company, including OnTera, which have pledged substantially all of their
respective assets to collateralize such guarantee. In connection with the loan,
the Company
issued warrants to purchase 3,125,000 shares of common stock at an exercise
price of $4.00 per share, subject to antidilution provisions, expiring in
December 2007, to an affiliate of Madeleine. A portion of the $12.5 million loan
proceeds was used to retire existing indebtedness of the Company in the
principal amount of $7 million owed to Madeleine and to pay expenses of
obtaining the loan. The remaining proceeds were used for the Company's working
capital purposes. No value was allocated to the warrants because the value was
deemed immaterial.
Since March 2001, the Company has not made regularly scheduled interest payments
to Madeleine pursuant to the $12.5 million loan agreement. In addition, the
de-listing of the Company's common shares from the Nasdaq National Market
created a default under the loan agreement. In August 2002, the Company,
Blackacre and Madeleine began negotiating to eliminate the loan by selling
certain of the Company's communications assets to Blackacre at fair market value
and by converting the remaining loan balance to stock of the Company. There is
no assurance that the Company, Blackacre and Madeleine will be able to reach
agreement on valuation issues, or that they will reach final agreement to
eliminate or reduce the loan.
The Company presently owes Madeleine over $15 million and is in default under
the loan agreement. Madeleine has the right to call the loan due and payable at
any time. If Madeleine were to demand payment, the Company would be unable to
make such payment. In such an event, Madeleine would have the right to foreclose
on significant assets of the Company that collateralize the loan. Such
foreclosure would result in the Company being unable to continue in business.
Mortgage payable
In November 1999, the Company refinanced its mortgage loan, borrowing an
additional $1 million, thereby increasing the loan balance to $1.75 million. The
new mortgage loan will expire on December 1, 2004 and can be renewed for an
additional five years. The mortgage loan bears interest at a fixed rate of 8.5%
per annum for five years, and is secured by the related building. Interest
during the renewal term will be paid at a fixed rate per annum equal to the
prime rate in effect on November 1, 2004. Principal of the loan is amortized on
a 25-year basis. The mortgage loan agreement requires the Company to comply with
certain covenants, including maintaining certain net working capital and
tangible net worth amounts. If the Company fails to meet any of the
requirements, the loan shall become immediately due and payable. At June 30,
2002, the Company failed to maintain the tangible net worth and working capital
requirements. Accordingly, the mortgage payable of $1.7 million was reclassified
as a current liability. The Company has not been notified of any intention by
the bank to accelerate such repayments. The Company is current with monthly
payment obligations.
CHANGE OF INDEPENDENT ACCOUNTANTS
On April 30, 2002, the Company dismissed Grant Thornton LLP ("Grant Thornton")
as the Company's independent accountants. As previously reported in a Current
Report on Form 8-K filed with the Securities and Exchange Commission on May 6,
2002 (SEC File No. 000-25552) (to which reference is made), Grant Thornton's
reports on the financial statements of the Company for either of the fiscal
years ended June 30, 2001 or June 30, 2000 did not contain an adverse opinion or
a disclaimer of opinion; they were not qualified or modified as to uncertainty,
audit scope, or accounting principles; and there were no reportable events or
disagreements with Grant Thornton on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreement(s), if not resolved to the
satisfaction of Grant Thornton, would have caused Grant Thornton to make
reference to the subject matter of such disagreement(s) in connection with their
report. On May 2, 2002, the Company engaged Grassi & Co., CPAs, P.C. as the
Company's independent accountants to review the Company's financial statements
for the quarter ended March 31, 2002 and to audit the Company's financial
statements for the fiscal year ended June 30, 2002.
INFLATION
The Company has continued to experience the benefits of a low inflation economy
in the New York metropolitan area. In general, the Company's
construction-related businesses enter into long-term fixed price contracts which
are largely labor intensive. Accordingly, future wage rate increases may affect
the profitability of its long-term contracts. Short-term contracts are less
susceptible to inflationary conditions.
RESULTS OF OPERATIONS
The Company incurred significant losses in the last several fiscal years,
primarily in the communications segment, and it expects that the communications
segment will continue to incur losses going forward and will require additional
capital to fund those losses. The Company has implemented and will continue to
implement cost reductions designed to minimize such losses. There can be no
assurance that these efforts will be successful or that the construction segment
will sustain profitability or positive cash flow from future operations or that
any positive cash flow will be sufficient to offset continued losses from the
communications segment. Given the current U.S. economic climate and market
conditions and the financial condition of the Company, there is a substantial
likelihood that the Company will be unable to raise additional funds on terms
satisfactory to it, if at all, to fund the expected operating losses. Moreover,
the Company presently owes Madeleine over $15 million and is in default under
the loan. Madeleine may call the loan due and payable at any time, and, if it is
not paid, foreclose on significant assets of the Company's subsidiaries that
secure such loan. If the Company cannot raise additional funds or if Madeleine
demands payment on its loan, the Company will likely be forced to cease
operations. Accordingly, there is substantial doubt about the Company's ability
to continue as a going concern.
NET REVENUES BY SEGMENT
2002 2001 2000
---- ---- ----
% of % of % of
Segments ($ million) Total ($ million) Total ($ million) Total
---------------------------------------------------------------------------------
Construction 77.9 95.9 79.8 95.9 85.3 97.7
Communications 3.3 4.1 3.4 4.1 2.0 2.3
---------------------------------------------------------------------------------
Total revenues 81.2 100.0 83.2 100.0 87.3 100.0
=================================================================================
OPERATING (LOSS) INCOME BY SEGMENT
2002 2001 2000
---- ---- ----
% of % of
Segments ($ million) Total ($ million) % of Total ($ million) Total
---------------------------------------------------------------------------------
Construction 2.4 (48.0) 0.5 (4.3) (1.0) 16.7
Communications (7.4) 148.0 (12.1) 104.3 (5.0) 83.3
=================================================================================
Total operating (loss) income (5.0) 100.0 (11.6) 100.0 (6.0) 100.0
=================================================================================
Fiscal 2002 Compared to Fiscal 2001
Construction revenue decreased $1.9 million or 2.4% from $79.8 million in 2001
to $77.9 million in 2002. The decrease was primarily due to fewer construction
contracts started in 2002.
Revenues on long-term construction contracts are recognized under the
percentage-of-completion method. Under this method, progress towards completion
is recognized according to engineering estimates. This method is used because
management considers this method the most appropriate in the circumstances.
Changes in job performance, job conditions, and estimated profitability,
including those arising from final contract settlements, may result in revisions
to costs and income, and such changes are recognized in the period in which the
revisions are determined. An amount equal to costs incurred attributable to
pending change orders is included in revenues when recovery is probable.
Management determines these estimates quarterly through discussions with the
construction managers of each contract and with customers for changes and final
contract settlement. These estimates require the best judgment by management
utilizing the information available, and it is possible that final results could
be materially different than those estimated.
Cost of construction revenue decreased $3.0 million or 4.2% from $71.8 million
in 2001 to $68.8 million in 2002. In addition to the decrease in construction
revenue, the decrease in costs in 2002 over 2001 was due primarily to higher
profit margin of construction contracts started in 2002. Gross margin percentage
increased to 11.7% in 2002 from 10.0% in 2001. The improvement in gross margin
percentage was due primarily to better control of direct costs.
Construction operating income increased $1.9 million or 380.0% from $0.5 million
in 2001 to $2.4 million in 2002. The improvement was due primarily to the
increase in gross profit margin in 2002. There can be no assurance that the
construction segment will sustain profitability or positive cash flow from
future operations.
Communications revenue decreased $0.1 million or 2.9% from $3.4 million in 2001
to $3.3 million in 2002. The decrease was primarily due to the Company's
decision to discontinue telephone services in New York City starting June 2002.
Cost of communications revenue decreased $0.4 million or 18.2% from $2.2 million
in 2001 to $1.8 million in 2002. The decrease was primarily due to the closing
of Internet facility locations in various states and the elimination of
associated costs.
Consequently, gross profit margin percentage increased to 45.5% in 2002 from
35.3% in 2001.
In 2001, due to the expected future losses in the communications businesses and
the decreasing market values of subscriber list and access rights, the Company
wrote down by $1.2 million the carrying values of goodwill, subscriber list and
access rights capitalized in May 2000 in connection with the purchase of
ParaComm.
In 2002, the Company decided to further limit its communications business
efforts and resources to the Internet and subscription video businesses in the
New York City metropolitan area and in Florida. The Company's communications
segment discontinued its telephone business in New York City and, in April 2002,
informed their telephone customers and the FCC that telephone services would be
phased out starting June 2002. In addition, the Company decided to sell certain
communications assets in locations outside of the New York City metropolitan
area and
Florida. Due to the Company's continuing refocus of its communications business
efforts and resources, a $2.5 million charge for the impairment of certain
remaining communications assets was recorded in 2002.
Excluding the $2.5 million and $1.2 million charges for impairment of assets in
2002 and 2001, respectively, the operating loss of the communications segment
decreased $6.0 million or 55.0% from ($10.9) million in 2001 to ($4.9) million
in 2002. The improvements were due primarily to decreases in general and
administrative expenses as a result of a restructuring of the communications
businesses commenced in the second half of fiscal 2001; however, operating
losses are expected to continue.
In April 2002, the Company sold certain communications assets for $0.4 million.
The transaction resulted a loss of $0.5 million. In addition, in August 2002,
OnTera sold certain access agreements on properties located in the Los Angeles
area and the communications assets located in the properties for $0.4 million.
The transaction resulted a gain of $0.1 million.
As a result of a restructuring of the communications businesses commenced in the
second half of 2001, on a consolidated basis, the general and administrative
expenses decreased $8.0 million or 40.0% from $20.0 million in 2001 to $12.0
million in 2002. The decrease in general and administrative expenses included a
$5.2 million decrease in payroll and related costs, a $1.9 million decrease in
professional fees, a $0.4 million decrease in travel, meals and entertainment, a
$0.3 million decrease in rent, and a $0.2 million decrease in office supplies
and telephone.
Depreciation and amortization decreased $0.2 million or 9.1% from $2.2 million
in 2001 to $2.0 million in 2002. The decrease was primarily due to the $2.5
million and $1.2 million charges for impairment of assets recorded in 2002 and
2001, respectively.
Interest income decreased $0.4 million or 66.7% from $0.6 million in 2001 to
$0.2 million in 2002. The decrease was due to a decrease in investment of the
Company's excess cash that was used instead to fund the operating losses of the
communications businesses.
Interest expense increased $0.5 million or 35.7% from $1.4 million in 2001 to
$1.9 million in 2002. The increases were due primarily to the Company's issuance
of a $12.5 million senior secured promissory note to Madeleine in November 2000
and the unpaid interest that was capitalized and added to the principal due to
the proposed amendment to the promissory note.
In 2002, the Company sold marketable securities to continue to provide working
capital to the communications businesses. The transaction resulted a capital
loss of $0.3 million.
Based on the Company's continuing refocus of its communications business efforts
and resources, in addition to the substantial losses incurred in current fiscal
year, management believes that the Company will less than likely generate
sufficient taxable earnings or utilize tax planning opportunities to realize the
deferred tax benefits of $1.1 million as of June 30, 2001. Therefore, the
Company has increased its valuation allowance by $1.1 million to $21.4 million
as of June 30, 2002. Accordingly, a provision for deferred income taxes of $1.1
million was recorded in 2002. In 2001, the Company increased its valuation
allowance by $0.7 million and recorded a provision for deferred income taxes of
$0.7 million.
Fiscal 2001 Compared to Fiscal 2000
Construction revenue decreased $5.5 million or 6.4% from $85.3 million in 2000
to $79.8 million in 2001. The decrease was primarily due to fewer construction
contracts started in 2001.
Cost of construction revenue decreased $7.0 million or 8.9% from $78.8 million
in 2000 to $71.8 million in 2001. In addition to the decrease in construction
revenue, the decrease in costs in 2001 over 2000 was due primarily to $2.6
million in additional costs incurred in 2000 on five projects in completing the
work of a sheetmetal subcontractor that filed for bankruptcy in 2000. Gross
margin percentage increased to 10.0% in 2001 from 7.6% in 2000. The improvement
in gross margin percentage was due primarily to favorable close-outs on several
electrical contracting jobs in 2001 and the $2.6 million additional costs
incurred in 2000 to complete the failed sheetmetal subcontractor's work in 2000.
Excluding the $2.6 million additional costs, the gross margin percentage would
have been 8.9% in 2000.
Construction operating income was $0.5 million in 2001, compared to operating
loss of $0.1 million in 2000. The improvement was due primarily to the increase
in gross profit margin in 2001.
Communications revenue increased $1.4 million or 70.0% from $2.0 million in 2000
to $3.4 million in 2001. The increase was primarily due to an increase in the
number of cable television customers and additional revenue generated by
ParaComm. Revenue generated by ParaComm was $1.0 million in 2001, and $0.1
million for the period from May 11 to June 30, 2000.
Cost of communications revenue increased $0.7 million or 46.7% from $1.5 million
in 2000 to $2.2 million in 2001. The increase was primarily due to increases in
communications revenue. Gross profit margin percentage increased to 35.3% in
2001 from breakeven in 2000. The increase in gross profit margin percentage was
primarily due to the higher profit margin in cable television revenue. Cost of
revenue generated by ParaComm was $0.4 million in 2001 and immaterial for the
period from its acquisition on May 11 to June 30, 2000, and gross profit margin
percentage was 63.6% in 2001 and 85.2% for the period from May 11 to June 30,
2000.
Operating loss of the communications segment increased $7.1 million or 142.0%
from ($5.0) million in 2000 to ($12.1) million in 2001. The increase was due
primarily to a write-down of intangible assets and increases in operating
expenses in connection to the implementation of the newly developed wholesale
market model commenced in the third quarter of fiscal 2000. Those operating
expenses include payroll and related expenses, professional fees, travel and
entertainment. Operating loss of ParaComm was ($1.5) million and ($0.2) million
for the year ended June 30, 2001 and the period from May 11 to June 30, 2000,
respectively.
Due to increased costs associated with the previous expansion of the
communications businesses, on a consolidated basis, the Company's general and
administrative expenses increased $7.0 million or 53.8% from $13.0 million in
2000 to $20.0 million in 2001. As a result of the limited availability of
capital and a significant change in market conditions, in December 2000 the
Company's board of directors adopted a plan to refocus its communications
business expansion efforts by concentrating on core communications assets
located in the New York City and Los Angeles areas and by operating subscription
video provider, ParaComm, Inc. In connection with this effort, the Company's
communications subsidiaries have implemented and will continue to implement cost
reductions, including reductions in personnel, infrastructure and capital
expenditures. A restructuring charge of $1.0 million reflecting the impact of
such reductions and refocus of markets was recorded in 2001. A benefit from a
reversal of bonus accruals of
$0.9 million was also recorded in 2001 because those bonuses would no longer be
paid due to the restructuring.
In addition to the $0.1 million restructuring charge, net of the reversal of
bonus accruals in 2001, the increase in general and administrative expenses
included a $5.0 million increase in payroll and related costs, a $0.8 million
increase in professional fees, a $0.7 million increase in rent and operating
leases, a $0.3 million increase in telephone and office supplies, and a $0.2
million increase in insurance.
Depreciation and amortization increased $1.2 million or 120.0% from $1.0 million
in 2000 to $2.2 million in 2001. The increase was primarily due to additional
property, equipment and infrastructure acquired during the current and prior
fiscal years in connection with the expansion of the communications businesses.
In fiscal year 2001, due to the expected future losses in the communications
businesses and the decreasing market values of subscriber list and access
rights, the Company wrote down the carrying values of goodwill, subscriber list
and access rights capitalized in May 2000 in connection with the purchase of
ParaComm by $1.2 million. In fiscal year 2000, due to the expansion of the
Company's communications business model, certain telephone equipment deployed in
1997 was not to be utilized under the new delivery strategy and was to be sold.
Accordingly, in fiscal year 2000, the Company wrote down the carrying value of
the equipment by $0.3 million to $0.4 million to reflect the estimated resale
value of the equipment.
In March 2000, options to purchase 975,000 shares of the Company's common stock
were granted to employees with an exercise price lower than the closing price of
the Company stock. One-third of the options vested at the date of the grants and
the remaining two-thirds would have vested ratably on a monthly basis beginning
on the last day of each of the 24 calendar months following March 2001. As a
result of the grants, a compensation charge of $1.8 million was incurred, of
which $0.6 million, or one-third, was recognized in 2000. In February 2001, the
employees resigned and forfeited the stock options, and the unamortized deferred
compensation was reversed.
Interest income increased $0.3 million or 100% from $0.3 million in 2000 to $0.6
million in 2001. The increase was due to investment of the Company's excess cash
in an institutional money market mutual fund and marketable securities.
Interest expense increased $0.6 million or 75.0% from $0.8 million in 2000 to
$1.4 million in 2001. The increases were due primarily to the Company's issuance
of a $7.0 million secured promissory note and a $12.5 million senior secured
promissory note to Madeleine in December 1999 and November 2000, respectively. A
portion of the $12.5 million loan proceeds was used to repay the $7.0 million
note.
Based on the refocus and restructuring of the Company's communications
businesses, in addition to the substantial losses incurred in fiscal year 2001,
management believed that the Company would more than likely generate sufficient
taxable earnings or utilize tax planning opportunities to ensure realization of
the deferred tax benefits of $1.1 million, reduced from $1.8 million as June 30,
2000, but would less than likely realize the benefit on the balance of the
deferred tax assets. Therefore, the Company increased its valuation allowance
by $15.1 million to $21.8 million as of June 30, 2001. Accordingly, a provision
for deferred income taxes of $0.7 million was recorded in 2001.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission ("SEC") recently issued proposed guidance
for disclosure of critical accounting policies. The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effects of matters that are inherently uncertain and
may change in subsequent periods. To the extent that final SEC rules on this
subject may require disclosures in addition to those the Company already makes,
the Company intends to adopt such additional disclosure requirements once the
final rules required are adopted.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, "Business Combinations," and SFAS
142, "Goodwill and Intangible Assets." SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for fiscal
years beginning after December 15, 2001; however, certain provisions of this
Statement apply to goodwill and other intangible assets acquired between July 1,
2001 and the effective date of SFAS 142. Major provisions of these Statements
and their effective dates for the Company are as follows:
- - All business combinations initiated after June 30, 2001 must use the purchase
method of accounting. The pooling of interest method of accounting is
prohibited except for transactions initiated before July 1, 2001.
- - Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal rights
or are separable from the acquired entity and can be sold, transferred,
licensed, rented or exchanged, either individually or as part of a related
contract, asset or liability.
- - Goodwill, as well as intangible assets with indefinite lives, will no longer
be amortized. Goodwill and intangible assets with indefinite lives will be
tested for impairment annually and whenever there is an impairment indicator.
- - All acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
Management's assessment is that these Statements will not have a material impact
on the Company's financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 "Accounting for the Impairment or Disposal of Long Lived Assets," ("SFAS
144"). This statement is effective for the fiscal years beginning after December
15, 2001. This supercedes SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," while retaining many of the
requirements of such statement. The Company is currently evaluating the impact
of the statement. Management's assessment is that this Statement will not have a
material impact on the Company's financial position or results of operations.
On April 30, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No.13, and
Technical Corrections." The rescission of
SFAS No.4, "Reporting Gains and Losses from Extinguishments," and SFAS No.64,
"Extinguishments of Debt made to Satisfy Sinking Fund Requirements," which
amended SFAS No.4, will affect income statement classification of gains and
losses from extinguishment of debt. SFAS No.4 requires that gains and losses
from extinguishment of debt be classified as an extraordinary item, if material.
Under SFAS No. 145, extinguishment of debt is now considered a risk management
strategy by the reporting enterprise and the FASB does not believe it should be
considered extraordinary under the criteria in APB Opinion No.30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," unless the debt extinguishment meets the unusual in nature and
infrequency of occurrence criteria in APB Opinion No. 30. SFAS No. 145 will be
effective for fiscal years beginning after May 15, 2002. Upon adoption,
extinguishments of debt shall be classified under the criteria in APB Opinion
No. 30.
In June 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company has not yet determined the
impact of SFAS No.146 on its financial position and results of operations, if
any.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. As of June
30, 2002, the Company had debt of $17.1 million with various fixed interest
rates from 8.5% to 11.0%. The fixed rate debt may have its fair value adversely
affected if interest rates decline; however, the amount is not expected to be
material. The Company's cash is primarily invested in an institutional money
market mutual fund. The Company does not have any derivative financial
instruments as of June 30, 2002. The Company believes that the interest rate
risk associated with its investments is not material to the results of
operations of the Company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements following Item 15 herein.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 30, 2002, the Company dismissed Grant Thornton LLP ("Grant Thornton")
as the Company's independent accountants. As previously reported in a Current
Report on Form 8-K filed with the Securities and Exchange Commission on May 6,
2002 (to which reference is made), Grant Thornton's reports on the financial
statements of the Company for either of the fiscal years ended June 30, 2001 or
June 30, 2000 did not contain an adverse opinion or a disclaimer of opinion;
they were not qualified or modified as to uncertainty, audit scope, or
accounting principles; and there were no reportable events or disagreements with
Grant Thornton on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement(s), if
not resolved to the satisfaction of Grant Thornton, would have caused Grant
Thornton to make reference to the subject matter of such disagreement(s) in
connection with their report. On May 2, 2002, the Company engaged Grassi & Co.,
CPAs, P.C. as the Company's independent accountants to review the Company's
financial statements for the quarter ended March 31, 2002 and to audit the
Company's financial statements for the fiscal year ended June 30, 2002.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
NAME AGE POSITION WITH THE COMPANY
Jared E. Abbruzzese 48 Director(1)(2)
Gregory Cuneo 43 President, Chief Executive Officer and Director
Raymond Steele 67 Director(1)(2)
Robert J. Birnbach 37 Executive Vice President, Chief Financial Officer and Secretary
Joseph C. Chan 41 Vice President and Chief Accounting Officer
Ronald Fregara 53 President - CMA
Stephen Yager 50 Vice President - CMA
Barry Halpern 50 President - High-Rise
Nicholas Ahel 59 Vice President - High-Rise
Vincent D'Onofrio 42 President - OnTera & ParaComm
(1) Member of the Compensation and Governance Committee. The Compensation and
Governance Committee (the Compensation Committee) reviews and approves
management's recommendations as to executive compensation, reviews, approves and
administers executive compensation and DualStar's 1994 Stock Option Plan, as
amended, reviews and approves management's recommendation for organizational
structure and recommends to the DualStar board nominees for election as
directors of DualStar, including nominees recommended by stockholders.
(2) Member of the Audit Committee. The Audit Committee recommends to the
DualStar board independent auditors to serve DualStar, reviews the scope and
results of the annual audit, assures that the independent auditors act
independently, reviews with management and the independent auditors DualStar's
internal accounting controls, and reviews DualStar's annual and quarterly
reports.
Jared E. Abbruzzese has been a director of DualStar since September 1999 and he
served as Chairman from February 2000 to June 2001. Mr. Abbruzzese is a founder
and Chairman of TechOne Capital Group LLC, a consulting and private investment
firm concentrating in the telecommunications and technology sectors. Mr.
Abbruzzese was the founder and served as Chairman and Chief Executive Officer of
CAI Wireless Systems, Inc., an MMDS operator located in Albany, New York, from
August 1991 until CAI's acquisition by WorldCom, Inc. in August 1999 (Mr.
Abbruzzese served in such capacities for CAI during CAI's 1998 Chapter 11
proceeding). He is also a co-founder of Crest Communications LLC, a private
communications fund; a member of the governing board of VenInfoTel LLC, a
Venezuelan telephone and cable company. Mr. Abbruzzese also serves on the Board
of Directors of Motient Corporation and Globix Corporation, both public
companies.
Gregory Cuneo has been President and Chief Executive Officer of DualStar since
the Company was founded in August 1994. He has also served as a director since
August 1994 and served as Chairman of the Company from December 1998 until
February 2000. Mr. Cuneo is also (non-Director) Chairman of Starrett
Corporation, an affiliate of Blackacre, since August 1999, Chairman of HRH
Construction Corp., an affiliate of Starrett and Blackacre, since August 1999,
and Chairman of HRH Construction LLC, an affiliate of Blackacre and possibly TIG
and/or Brad Singer, since January 2001. Mr. Cuneo and Mr. Birnbach are first
cousins.
Raymond L. Steele, a retired businessman, has been a director of the Company
since December 1998. In addition to the Company, Mr. Steele has been a member of
the board of directors of ICH Corp. since June 1997. From August 1997 until
October 2000, Mr. Steele served as a board member of Video Services Corp. Prior
to his retirement, Mr. Steele held various senior positions such as Executive
Vice President of Pacholder Associates, Inc. (from August 1990 until September
1993), Executive Advisor at the Nickert Group (from 1989 through 1990), and Vice
President, Trust Officer and Chief Investment Officer of the Provident Bank
(from 1984 through 1988).
Robert J. Birnbach, a founder of the Company, has been Chief Financial Officer
of DualStar since December 1996, Executive Vice President since July 1999 and
Secretary since February 2000. He was a member of DualStar's board of directors
from September 1999 until February 2000. From December 1996 until July 1999, Mr.
Birnbach served as Vice President of DualStar and from August 1994 until
December 1996, he was DualStar's Director of Corporate Development/Mergers &
Acquisitions. Mr. Birnbach was President and Chief Executive Officer and a
member of the board of directors of Starrett Corporation, an affiliate of
Blackacre, from January 2000
until November 2000. He was also a member of the board of directors of HRH
Construction Corp., an affiliate of Starrett and Blackacre, from January 2000
until November 2000. Prior to joining DualStar, Mr. Birnbach was an advisor with
the financial advisory and consulting firm of Coopers & Lybrand from 1991 to
August 1994.
Joseph C. Chan served as Vice President and Chief Accounting Officer of DualStar
from December 1996 until September 24, 2002. He was controller of DualStar from
November 1994 until December 1996. Prior to joining the Company, Mr. Chan was a
certified public accountant with Konigsberg, Wolf & Co. P.C. from October 1987
to November 1994.
Ronald Fregara, a founder of the Company, served as an Executive Vice President
of the Company from December 1996 until February 2000, and served as a Vice
President from August 1994 until December 1996. Mr. Fregara has been President
of CMA since December 1996. Mr. Fregara was a member of the Company's board of
directors from August 1994 until February 2000.
Stephen Yager, a founder of the Company, served as an Executive Vice President
of the Company from August 1994 until February 2000, and served as Secretary of
the Company from August 1994 until February 2000. Mr. Yager was the Company's
Chief Financial Officer from August 1994 until November 1996. Mr. Yager has been
Vice President of CMA since December 1996. Mr. Yager was a member of the
Company's board of directors from August 1994 until February 2000.
Barry Halpern has served as President of High-Rise since July 1995.
Nicholas Ahel has served as Vice President of High-Rise since July 1995.
Vincent M. D'Onofrio has served as President and Chief Technology Officer of
OnTera since February 2001 and is responsible for the day to day operations of
OnTera. From March 2000 to February 2001, Mr. D'Onofrio served as OnTera's
Executive Vice President and Chief Technology Officer. From March 1996 until
February 2000, Mr. D'Onofrio served as President and Chief Executive Officer of
OnTera. Mr. D'Onofrio has also served as President of ParaComm since March 2001.
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation paid or awarded for each of DualStar's last three completed fiscal
years to DualStar's Chief Executive Officer and its four most highly compensated
officers (collectively, the "Named Executives") for the year ended June 30,
2002.
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------------
(A) (B) (C) (D) (G) (I)
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION(2)
---- ---------- ---------------
Gregory Cuneo 2002 $275,000 - - $4,038
Chief Executive Officer 2001 $275,000 $25,000 - $33,238
2000 $270,961 - 200,000(1) $35,038
Barry Halpern 2002 $260,000 $379,167 - $1,954
President - High-Rise 2001 $260,000 $706,712 - $1,954
2000 $230,000 $251,065 100,000(3) $1,954
Nicholas Ahel 2002 $260,000 $379,167 - $1,652
Vice President - High-Rise 2001 $260,000 $706,712 - $1,652
2000 $230,000 $251,065 100,000(3) $1,652
Ronald Fregara 2002 $235,000 - - $5,861
President - CMA 2001 $235,000 - - $5,861
2000 $235,408 $25,000 200,000(1) $5,861
Stephen Yager 2002 $235,000 - - $6,371
Vice President - CMA 2001 $235,000 - - $6,371
2000 $235,408 $25,000 200,000(1) $6,371
(1) Consists of options granted under the Company's 1994 Stock Option Plan, as
amended (the Plan), to purchase 200,000 shares granted on August 12, 1999 at an
exercise price of $4.00 per share and vest in five installments on each of
December 31, 1999, 2000, 2001, 2002 and 2003.
(2) Includes the value of personal benefits, such as disability insurance,
automobile expenses and/or director fees, pursuant to each officer's employment
agreement. See Employment Agreements.
(3) Consists of options granted under the Plan on February 15, 2000.
The options have an exercise price of $5.25 per share and were 100% vested on
February 15, 2000.
COMPENSATION OF DIRECTORS
Directors of the Company are paid an annual fee of $25,000 and a fee of $1,000
per board meeting attended in person, and $600 per telephonic meeting or
committee meeting (regardless of attendance in person or by telephone), plus, in
all cases, reimbursement of out-of-pocket expenses. For the year ended June 30,
2002, no meetings were held and the Company paid no director fees to Messrs.
Abbruzzese, Cuneo and Steele.
OPTION GRANTS IN LATEST FISCAL YEAR
No stock options were granted to any of the Named Executives during fiscal year
2002.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with regard to the
outstanding options to purchase DualStar Common Stock as of the end of the
fiscal year ended June 30, 2002 for the five Named Executives in the Summary
Compensation Table above.
(A) (B) (C) (D) (E)
SHARES ACQUIRED VALUE NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISED OPTIONS AT JUNE 30, 2002 OPTIONS AT JUNE 30, 2002
--------------- ------------ ------------------------------------ ------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Gregory Cuneo - - 120,000 80,000 $ - $ -
Barry Halpern - - 301,000 - $ - $ -
Nicholas Ahel - - 226,000 - $ - $ -
Ronald Fregara - - 120,000 80,000 $ - $ -
Stephen Yager - - 120,000 80,000 $ - $ -
EMPLOYMENT AGREEMENTS
Effective August 1994, DualStar entered into employment agreements with Messrs.
Cuneo, Yager and Fregara. The employment agreements expired in August 1997 and
have been renewed for two additional three-year terms through August 2003. Mr.
Cuneo's current salary is $275,000, with a guaranteed minimum bonus of $25,000,
up to a maximum of $100,000 based on certain performance objectives which are to
be determined by the Board and the Compensation Committee. Messrs. Fregara and
Yager's current salaries are each $235,000, with a guaranteed minimum bonus of
$25,000, up to a maximum of $100,000 based on certain performance objectives
which are to be determined by the Board and the Compensation Committee. The
salaries under these executive's employment agreements, as amended, may be
increased to reflect annual cost of living increases and may be supplemented by
discretionary merit and performance increases as determined by the Compensation
Committee.
The employment agreements provide, among other things, for participation in an
equitable manner in any profit-sharing or retirement plan for employees or
executives and for participation in other employee benefits applicable to
employees and executives of the Company. The employment agreements provide that
the Company will establish a performance incentive bonus plan providing each
executive the opportunity to earn an annual bonus of up to five percent of the
increase, if any, in the Company's pretax income, based upon the attainment of
performance goals to be established by the Compensation Committee. The
employment agreements further provide for the use of an automobile and other
fringe benefits commensurate with their duties and responsibilities, and for
benefits in the event of disability.
Pursuant to the employment agreements, employment may be terminated by the
Company with cause or by the executive with or without good reason. Termination
by the Company without cause, or by the executive for good reason, would subject
the Company to liability for liquidated damages in an amount equal to the
terminated executive's current salary for the remainder of the scheduled term of
employment and bonuses for the remainder of the scheduled term of employment
based upon the prior year's annual bonus and the maximum incentive bonus
payable. Such amounts shall be payable in equal monthly installments, without
any set-off for compensation received from any new employment. In addition, the
terminated executive would be entitled to continue to participate in and accrue
benefits under all employee benefit plans and to receive supplemental retirement
benefits to replace benefits under any qualified plan for the remaining term of
the employment agreements to the extent permitted by law.
The employment agreements provide for the purchase by the Company of insurance
policies in the amount of $1,000,000 on the lives of each of Messrs. Cuneo,
Yager and Fregara. The Company will pay the premiums under these policies, and a
portion of the payment will be treated as taxable income to the insured
executive. Upon the death of any of the insureds, the Company would be paid from
the insurance proceeds an amount equal to the total premiums it paid under the
policy, with the remaining proceeds to be paid to the deceased executive's
designated beneficiary. To date, each of Messrs. Cuneo, Yager and Fregara has
declined to have the Company purchase such insurance.
On June 1, 2000, the Company entered into employment agreements with each of
Barry Halpern and Nicholas Ahel, President and Vice President, respectively, of
High-Rise, which agreements expired on July 1, 2002. The Company and the
executives are discussing new employment agreements. Mr. Halpern continues to
serve as President of High-Rise at a current annual base salary of $260,000. Mr.
Ahel continues to serve as Vice President of High-Rise at a current annual base
salary of $260,000. Each of Messrs. Halpern and Ahel continue to receive such
other benefits, including medical, disability, pension and severance plans, as
are made generally available to executive employees of the Company from time to
time, and a life insurance benefit in the amount of one times such executive's
current annual base salary.
In connection with Robert J. Birnbach's role as the Company's Executive Vice
President, Chief Financial Officer and Secretary, the Company and Mr. Birnbach
entered into an employment agreement dated June 7, 2000, but effective as of
June 1, 1999. Under the terms of his employment agreement, Mr. Birnbach has
agreed to serve as Executive Vice President, Chief Financial Officer and
Secretary of the Company at a current base salary of $220,000. Mr. Birnbach's
agreement contemplates that he is eligible for a bonus of up to 50% of his
annual base salary upon the achievement by the Company and Mr. Birnbach of
performance targets agreed-upon by the Board of Directors and Mr. Birnbach. Mr.
Birnbach's annual base salary and bonus percentage may be increased, but not
decreased by the Company's Board of Directors.
Mr. Birnbach's employment with the Company may be terminated by the Company with
Cause (as defined in the agreement) or by Mr. Birnbach with or without good
reason (as defined in the agreement). Upon termination, all vested options
remain exercisable for the duration of the option. Termination of employment by
the Company without cause, or by Mr. Birnbach with good reason would entitle Mr.
Birnbach to severance in the amount of two times Mr. Birnbach's annual base
salary, plus other perquisites for the one-year period following the date of
termination; additionally, all unvested options to purchase Company Common Stock
would vest immediately.
In fiscal year 2000, OnTera entered into an employment agreement with Vincent
D'Onofrio, currently President and Chief Technology Officer, at a current annual
base salary of $250,000; in addition, he is eligible for a bonus of up to 40% of
his annual base salary, upon the achievement of specified performance targets.
Annual base salary and bonus percentage may be increased, but not decreased, by
the OnTera board of directors.
Pursuant to the OnTera employment agreement, employment may be terminated by
OnTera with Cause (as defined in the agreements) or by Mr. D'Onofrio with or
without good reason (as defined in the agreements). Termination of employment by
OnTera without Cause, or by Mr. D'Onofrio with good reason would entitle the
executive to severance in the amount of executive's then annual base salary,
plus a pro rata portion of the bonus that would be payable in the year of
termination. In the event of a termination of employment by OnTera with Cause,
the Mr. D'Onofrio is entitled to receive all base salary through the date of
termination. All unvested options lapse. In the event of a voluntary termination
of employment by the executive, the executive is entitled to receive his annual
base salary through the date of termination and be eligible for a pro rata
portion of any bonus.
THE 1994 STOCK OPTION PLAN
On October 17, 1994, the Board of Directors adopted, and the stockholders
subsequently approved and amended, the 1994 Stock Option Plan (as amended, the
1994 Plan) pursuant to which officers, directors, employees and consultants of
the Corporation and its affiliates are eligible to be granted stock option
awards (Awards). Stockholders approved the amendments to the 1994 Plan at the
1998 Annual Meeting of Stockholders. On April 13, 2000, the Company's Board of
Directors approved an amendment to the 1994 Plan providing that for all Awards
granted under the 1994 Plan from and after April 13, 2000, the Compensation
Committee shall determine the definition of Change of Control and the treatment
of such Awards upon a Change of Control, in the Committee's sole a