Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended December 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From to .
Commission file number 0-25552
DUALSTAR TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3776834
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Park Avenue, New York, NY 10016
(Address, including zip code of principal executive offices)
(718) 340-6655
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
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 .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's common
stock, as of the latest practicable date.
Common Stock, $.01 Par Value --- 13,265,824 shares as of February 10, 2000
Index
DualStar Technologies Corporation
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - December 31, 1999 and
June 30, 1999
Condensed consolidated statements of income - Three and six months
ended December 31, 1999 and 1998
Condensed consolidated statements of cash flows - Three and six
months ended December 31, 1999 and 1998
Notes to condensed consolidated financial statements - December
31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1999 1999
(unaudited)
ASSETS
Current assets:
Cash $ 4,310,629 $ 583,995
Contracts receivable, net 21,053,454 23,653,712
Retainage receivable 6,134,674 6,213,201
Costs and estimated earnings
in excess of Billings on
uncompleted contracts 1,968,213 1,360,412
Deferred tax asset - current 178,000 178,000
Prepaid expenses and sundry
receivable 419,299 303,713
Total current assets 34,064,269 32,293,033
Property and equipment, net 3,019,352 3,147,068
Other assets:
Deferred tax asset - long-term 1,574,000 1,574,000
Other 1,568,863 1,580,486
Total assets $40,226,484 $38,594,587
See notes to condensed consolidated financial statements
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1999 1999
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $19,218,440 $21,053,418
Billings in excess of costs
and estimated earnings on
uncompleted contracts 4,192,813 2,994,996
Promissory note payable 7,000,000 -
Subordinated note payable - 1,000,000
Accrued expenses and other
liabilities 2,255,509 3,426,508
Total current liabilities 32,666,762 28,474,922
Mortgage payable - long-term 1,750,000 723,750
Other liabilities 172,517 206,498
Subordinated convertible note - 2,500,000
Total liabilities 34,589,279 31,905,170
Contingencies
Shareholders' equity:
Common stock 107,910 90,000
Additional paid-in capital 17,451,254 14,995,836
Accumulated deficit (11,921,959) (8,396,419)
Total shareholders' equity 5,637,205 6,689,417
Total liabilities and shareholders'
equity $40,226,484 $38,594,587
See notes to condensed consolidated financial statements
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the six months ended
December 31, Decemebr 31,
1999 1998 1999 1998
Contract revenues
earned $19,242,280 $21,150,276 $44,131,051 $41,089,481
Cost of revenues
earned 19,782,453 19,254,155 42,045,925 37,066,695
Gross (loss) profit (540,173) 1,896,121 2,085,126 4,022,786
General and
administrative
expenses 3,190,649 2,139,024 5,610,666 4,254,614
Loss before provision
for income taxes (3,730,822) (242,903) (3,525,540) (231,828)
Provision for income
taxes - - - -
Net loss (3,730,822) $ (242,903) $(3,525,540) $ (231,828)
Basic loss per share:
Net loss per share $(0.35) $(0.03) $(0.33) $(0.03)
Weighted average shares
outstanding 10,791,000 9,000,000 10,791,000 9,000,000
Diluted loss per share:
Net loss per share $(0.35) $(0.03) $(0.33) $(0.03)
Weighted average shares
outstanding 10,791,000 9,000,000 10,791,000 9,000,000
See notes to condensed consolidated financial statements
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31,
(UNAUDITED)
1999 1998
Cash used in operating activities $(2,887,003) $(2,043,856)
Cash flows from investing activities:
Acquisition of property and
equipment (328,350) (179,746)
Net cash used in investing activities (328,350) (179,746)
Cash flows from financing activities:
(Repayment of) Proceeds from
subordinated note payable (1,000,000) 1,000,000
Proceeds from promissory note 7,000,000 -
Proceeds from subordinated
convertible note - 2,500,000
Principal payments on capital
lease obligations (39,263) (100,947)
Proceeds from refinancing of
mortgage loan 995,956 -
Principal payments on mortgage loan (14,706) (22,500)
Net cash provided by financing
activities 6,941,987 3,376,553
Net increase in cash 3,726,634 1,152,951
Cash - beginning of period 583,995 1,356,228
Cash - end of period $4,310,629 $2,509,179
Non-cash transactions:
In July 1999, Technology Investors Group, LLC ("TIG") converted its $2.5
million convertible note and a portion of unpaid interest into 1,791,000
shares of the Company's common stock at the conversion price of $1.40. In
addition, the Company issued a promissory note in the amount of $120,000 (the
"TIG Stub Loan") representing the remaining indebtedness to TIG. In
connection with the conversion, the Company incurred costs of approximately
$41,000 which has been charged to additional paid-in capital. Accordingly,
the Company's common stock (in par value) was increased by $17,910 and
additional paid-in capital by $2,455,418.
In November 1999, the Company refinanced its mortgage loan and increased the
loan balance to $1,750,000. The unpaid balance of $754,044 of the original
mortgage loan was paid off from the proceeds of the refinancing.
See notes to condensed consolidated financial statements
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-and six-month periods ended December 31, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ending
June 30, 2000. For further information, refer to the financial statements
and footnotes thereto included in DualStar Technologies Corporation and
Subsidiaries' Annual Report on Form 10-K for the fiscal year ended June
30, 1999.
NOTE B - NET LOSS PER SHARE
The computation of basic net (loss) income per share is based on the weighted
average number of shares of common stock outstanding. For diluted net income
(loss) per share, when dilutive, stock options and warrants are included as
share equivalents using the treasury stock method.
The weighted average number of shares and earnings (loss) per share for the
three months presented is as follows:
Income (Loss) Shares Per share
(Numerator) (Denominator) Amount
Three Months Ended December 31, 1999:
Basic Earnings (Loss) Per Share
Net loss $(3,730,822) 10,791,000 $(0.35)
Effect of Dilutive Securities
Options and warrants -
Diluted Earnings (Loss) Per
Share
Net loss $(3,730,822) 10,791,000 $(0.35)
Three Months Ended December 31, 1998:
Basic Earnings (Loss) Per Share
Net loss $(242,903) 9,000,000 $(0.03)
Effect of Dilutive Securities
Options and warrants -
Diluted Earnings (Loss) Per
Share
Net loss $(242,903) 9,000,000 $(0.03)
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1999
NOTE B (continued)
The weighted average number of shares and earnings (loss) per share for the
six months presented is as follows:
Income (Loss) Shares Per share
(Numerator) (Denominator) Amount
Six Months Ended December 31, 1999:
Basic Earnings (Loss) Per Share
Net loss $(3,525,540) 10,791,000 $(0.33)
Effect of Dilutive Securities
Options and warrants -
Diluted Earnings (Loss) Per
Share
Net loss $(3,525,540) 10,791,000 $(0.33)
Six Months Ended December 31, 1998:
Basic Earnings (Loss) Per Share
Net loss $(231,828) 9,000,000 $(0.03)
Effect of Dilutive Securities
Options and warrants -
Diluted Earnings (Loss) Per
Share
Net loss $(231,828) 9,000,000 $(0.03)
NOTE C - SUBORDINATED CONVERTIBLE NOTE
In November 1998, the Company sold to TIG a subordinated convertible note in
the principal amount of $2.5 million, due and payable on May 25, 2001. The
note had an interest rate of 7.5% per annum and was payable semi-annually at
the option of the Company. Interest that was not paid was added to the
principal. In the event of default, TIG had the right to declare the
principal and unpaid interest immediately due and payable, and the
outstanding amount would have had an interest rate of 12.5% per annum
thereafter.
The note was subordinated to the first mortgage on the Company's building and
to the rights of financial lenders and sureties of the Company.
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1999
NOTE C (continued)
During the term of the note, TIG had an option to convert the note into
fully-paid and nonassessable shares of the Company's common stock. The number
of shares to be issued upon the conversion was not to exceed 1,791,000
shares, or 19.9% of the Company's outstanding shares on November 25, 1998.
Initially, the conversion price was $1.40 per share and could have been reset
on the 180th day following closing and every 90 days thereafter. The reset
conversion price was to be calculated as the lower of: (i) the average
closing price of the Company's common stock on the 20 trading days immediately
preceding the reset date or (ii) the initial conversion price of $1.40. The
number of shares received upon conversion would have been adjusted
proportionately for certain transactions, such as stock splits and
stockholder distributions.
If the number of shares issued upon the conversion multiplied by the
conversion price was less than the note principal and unpaid interest, the
difference, at the Company's option, was payable in cash or a one-year term
note.
The Company also had the right to require the TIG to convert the note into
shares of the Company's common stock at the applicable conversion price in
effect on such date if, at anytime after the 181st day following closing, the
closing price of the common stock, for 20 consecutive days, was $3.00 or more
per share. On July 7, 1999, the Company required TIG to convert the note
into 1,791,000 shares of the Company's common stock at the conversion price
of $1.40. In addition, the Company issued a promissory note in the amount of
$120,000 (the "TIG Stub Loan") representing the remaining indebtedness to
TIG. The TIG Stub Loan was repaid in full in December 1999.
The Company also agreed to the designation by TIG of one member to the
Company's Board of Directors. In February 1999, TIG's nominee was elected to
the Company's Board of Directors.
NOTE D - STOCK OPTION PLAN
In August 1999, the Company's Board of Directors granted 829,000 additional
options to various employees and directors. In general, these options vest
over 5 years and have an option exercise price of $4.00.
In October 1999, the Company's Board of Directors granted 300,000 additional
options to an employee. In general, these options vest over 3 years and have
an option exercise price of $5.00.
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1999
NOTE D (continued)
In January 2000, the Company's Board of Directors granted 30,000 additional
options to an employee. These options vest over 5 years and have an option
exercise price of $6.50.
NOTE E - SHORT TERM NOTES
On December 16, 1999, the Company sold a $7 million secured Promissory Note
(the "Madeleine Bridge Loan") to Madeleine, L.L.C. ("Madeleine"), an affiliate
of Cerberus Capital Management L.P. ("Cerberus") and Blackacre Capital
Management L.L.C. ("Blackacre"). The note has an interest rate of 11% per
annum and is due on April 30, 2000. The Madeleine Bridge Loan is guaranteed
by certain subsidiaries of the Company and secured by such subsidiaries' assets
and capital stock and the Company's assets. See Forms 8-K, dated December 3,
1999 and December 21, 1999.
On October 26, 1999, the Company's subsidiary, Centrifugal/Mechanical
Associates, Inc., ("CMA") sold a $1 million promissory note (the "TIG Bridge
Note") to Technology Investors Group, L.L.C. ("TIG"). The TIG Bridge Note had
an interest rate of 10% per annum and was due December 15, 1999. The loan was
guaranteed by the Company and collateralized by certain Company assets. The
TIG Bridge Loan was paid in full in December 1999 from the proceeds of the $7
million Madeleine Bridge Loan.
On October 26, 1999 the Company issued to TIG the Stub Loan in the amount of
$120,000 representing the remaining indebtedness to TIG under a certain
convertible promissory note, dated November 25, 1998 in the original principal
amount of $2,500,000. The TIG Stub Loan had an interest rate of 10% per annum
and was due on December 15, 1999. The TIG Stub Loan was paid in full in
December 1999 from the proceeds of the $7 million Madeleine Bridge Loan.
NOTE F - MORTGAGE PAYABLE
On November 22, 1999, the Company refinanced its mortgage loan, borrowing an
additional $996,000. The new mortgage loan will expire on November 1, 2004
and can be renewed for an additional five years. The mortgage loan bears
interest at a fixed rate of 8.5% per annum. Interest during the renewal term
will be paid at a fixed rate per annum equal to the prime rate in effect on
November 1, 2004. Principal of the loan is amortized on a 25-year basis. As
of December 31, 1999, the mortgage balance was $1.75 million.
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1999
NOTE G - CONTINGENCIES
(1) On August 11, 1999, Triangle Sheet Metal Works, Inc. ("Triangle"), a
subcontractor of Centrifugal/Mechanical Associates, Inc. ("CMA"), a subsidiary
of the Company, filed a petition under Chapter 11 of Title 11 of the United
States Code in the United States Bankruptcy Court for the Southern District of
New York (the "Bankruptcy Court"). Triangle's Chapter 11 case was subsequently
converted to a case under Chapter 7 of the Bankruptcy Code and a Chapter 7
trustee was appointed to administer Triangle's estate. Triangle was a sheet
metal subcontractor for CMA on six projects in New York City (the
"Subcontractor Projects"). CMA was also the subcontractor of Triangle on one
additional project in New York City (the "Contractor Project"). Prior to
Triangle's Chapter 11 filing, Triangle ceased operation and defaulted on its
obligations under the Subcontractor Projects and Contractor Project. In
pleadings filed with the Bankruptcy Court prior to the appointment of a
Chapter 7 trustee, Triangle alleged, among other things, that CMA is
indebted to Triangle in an amount ranging between $1,400,000 and $3,000,000.
Triangle also suggested in such pleadings that there may exist potential
causes of action by Triangle against the Company and/or CMA, including breach
of contract, tortious interference and unfair competition. Triangle did not
commence any formal legal actions or proceedings with respect to any of such
allegations (other than seeking to obtain discovery from CMA and DualStar).
On or about January 18, 2000, Triangle's Chapter 7 trustee made a written
request on CMA stating that Trinagle's records reflected that CMA was indebted
to Triangle in the aggregate sum of $2,435,097 based upon work performed by
Triangle on the Subcontractor Projects. Triangle's Chapter 7 trustee stated
CMA was not entitled, under applicable law, to offset amounts owed to CMA on
particular Subcontractor Projects against amounts owed by CMA to Triangle on
other Subcontractor Projects. Triangle's Chapter 7 trustee stated its
intention to institute legal proceedings in the Bankruptcy Court against CMA
and the owners of the Subcontractor Projects to recover such funds. CMA and
DualStar dispute Triangle's and the Chapter 7 trustee's allegations and
assertions and believe that they are without merit. CMA has claims and
counterclaims against Triangle for breaches, defaults, completion costs and
damages in respect of the Subcontractor Projects and the Contractor Project.
Although such claims and counterclaims are not fully liquidated and cannot be
fully ascertained at this time, CMA believes that it is entitled setoff
and/or recoup part of the damages by offsetting any monies owed by CMA to
Triangle. The Company can make no assurances, however, that such offsets and
recoupment will be either (a) allowed and that CMA will prevail in any such
litigation with Triangle's Chapter 7 trustee, or (b) sufficient to cover all
of CMA's damages resulting from Triangle's defaults under the Subcontractor
Projects and Contractor Project. Based upon currently available information,
it appears that a significant portion of CMA's claims against Triangle may
not be recoverable after such setoff and/or recoupment.
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1999
NOTE G (continued)
(2) High-Rise Electric, Inc., a wholly owned subsidiary of the Company, is a
defendant in two lawsuits filed in April 1999. The plaintiffs are seeking
$5,000,000 and $2,000,000, respectively, for claims related to bodily
injuries on job sites where High-Rise and other trades were working.
Management of High-Rise believes that the plaintiffs' claims are without
merit and, in any event, are covered under the Company's general and umbrella
liability insurance policies.
(3) In connection with the $7 Madeleine Bridge Loan, on December 16, 1999, the
Company signed a letter of intent with Blackacre and Cerberus pursuant to which
Blackacre and Cerberus would purchase approximately $46.2 million of
convertible debt and/or equity securities of the Company and enter into a
strategic alliance with the Company. See Forms 8-K, dated December 3, 1999
and December 21, 1999.
In connection with such letter of intent, as a form of "break-up" protection,
the Company issued 1,440,000 Class B warrants to Cerberus and Blackacre under
which they would have the right, under certain terms and conditions, to
purchase shares of Company common stock at an exercise price of $6.1656 per
share. The Class B warrants are exercisable only if the Company enters into a
letter of intent or an agreement for a competing transaction with an entity
other than Cerberus or its affiliates within a specified time period. In
such event, the Class B warrants will become exercisable and, in addition,
the Company would have to pay Cerberus and Blackacre an amount in cash equal to
the number of shares of common stock issuable upon exercise of Class B warrants
multiplied by the difference between the warrants' exercise price of $6.1656
and $4.861.
NOTE H - SEGMENT INFORMATION
The Company has the following two reportable segments: construction and
telecommunications. The construction segment primarily engages in mechanical
and electrical contracting services in the United States. The
telecommunications segment primarily installs communication systems and
provides telephone, Internet, television and other services to buildings in
the New York Tri-State area.
The accounting policies used to develop segment information correspond to those
disclosed in the Company's financial statements for the fiscal year ended June
30, 1999. The Company does not allocate certain corporate expenses to its
segments. Segment profit (loss) is based on profit (loss) from operations
before income taxes (benefits). Sales and transfers between segments are
accounted for at cost. The reportable segments are distinct business units
operating in different industries. They are separately managed, with
separate marketing systems.
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1999
NOTE H (continued)
Reportable Segment Information
Construction Telecommunications Totals
For the Three Months Ended December 31, 1999
Revenues from external customers $18,722,437 $519,843 $19,242,280
Intersegment revenues (92,688) 13,750 (78,938)
Segment loss (2,722,251) (432,610) (3,154,861)
For the Three Months Ended December 31, 1998
Revenues from external customers $20,658,497 $491,779 $21,150,276
Intersegment revenues 746,782 13,218 760,000
Segment loss (24,409) (150,627) (175,036)
For the Six Months Ended December 31, 1999
Revenues from external customers $43,053,136 $1,077,915 $44,131,051
Intersegment revenues 683,234 27,500 710,734
Segment loss (1,928,284) (821,427) (2,749,711)
For the Six Months Ended December 31, 1998
Revenues from external customers $40,027,069 $1,062,412 $41,089,481
Intersegment revenues 804,868 26,865 831,733
Segment profit (loss) 80,973 (264,893) (183,920)
Reconciliation to Consolidated Amounts
For the Three Months For the six Months
Ended December 31, Ended December 31,
1999 1998 1999 1998
Loss
Total loss for reportable
segments $(3,154,861) $(175,036) $(2,749,711) $(183,920)
Unallocated amounts:
Corporate (575,961) (67,867) (775,829) (47,908)
Total consolidated loss from
operations $(3,730,822) $(242,903) $(3,525,540) $(231,828)
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1999
NOTE I - SUBSEQUENT EVENT
The Company's publicly-traded Class A warrants entitle holders to acquire one
share of the Company's common stock at a purchase price of $4.00 per share. The
warrants expire on February 13, 2000. As of December 31, 1999, no warrants
were exercised; however, through February 10, 2000, there were approximately
2.47 million warrants exercised.
Trident Mechanical Systems, Inc. ("TMS"), a wholly owned subsidiary of the
Company, is a defendant in a lawsuit filed in January 2000. The plaintiff is
seeking $30,000,000 for claims related to property damage on a job site where
TMS and other trades were working. The claim, as currently constituted,
exceeds the Company's general as well as umbrella liability policy limits in
the aggregate. However, management believes that TMS is not responsible for
the damage and, accordingly, no provision for loss in excess of the insurance
coverage has been made in the accompanying financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
DualStar Technologies Corporation, through its wholly owned subsidiaries,
provides mechanical, electrical, electronic, control, environmental, security,
communications, telephone, Internet and television systems, services and
solutions to a wide range of customers primarily in the New York Tri-State
area.
When used in this Report, the words "intends," "expects," "plans," "estimates,"
"projects," "believes," "anticipates," and similar expressions are intended to
identify forward-looking statements. Except for historical information
contained herein, the matters discussed and the statements made herein
concerning the Company's future prospects are "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of
the Securities Exchange Act. Although the Company believes that its plans,
intentions, and expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such plans, intentions and
expectations will be achieved, and actual results could differ materially
from forecasts and estimates. In addition, such forward-looking statements
are necessarily based on assumptions and estimates that may be incorrect or
imprecise and involve known and unknown risks and other facts. Important
factors that could cause actual results to differ materially include, but are
not limited to, changes in the pricing environment for the Company's goods
and services, regulatory or legislative changes, the Company's dependence on
key personnel, the impact of Year 2000 issues which may be more significant
than currently anticipated, and the Company's ability to manage growth, in
addition to those risk factors set forth in DualStar Technologies Corporation
and Subsidiaries' Annual Report on Form 10-K for the fiscal year ended June
30, 1999 and which speaks only as of the date thereof. Many of the factors are
beyond the Company's ability to control or predict. Given these uncertainties,
readers of this Report are cautioned not to place undue reliance upon such
forward-looking statements. The Company undertakes no obligation to publicly
release any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document.
Capital Resources and Liquidity
Cash balances at December 31, and June 30, 1999 were approximately $4.3
million and $0.6 million, respectively. The Company's operations used
approximately $2.9 million and $2.0 million of cash in the six months ended
December 31, 1999 and 1998, respectively. The net use of cash in operating
activities for the six months ended December 31, 1999 was due primarily to
the use of the proceeds from the sale of the $7.0 million promissory note to
pay trade payables. The net use of cash in operating activities for the six
months ended December 31, 1998 was due primarily to the use of the proceeds
of the sale of a $2.5 million subordinated convertible note to pay trade
payables.
In the six months ended December 31, 1999 and 1998, the Company acquired
capital assets of approximately $328,000 and $180,000, primarily for
investment in communications infrastructure systems for buildings in return for
rights to provide telephone, Internet, television and other services to the
buildings' residents and tenants.
In July 1998, the Company entered into a $1 million loan agreement with TIG.
The loan was due and payable on demand and had an interest rate of 10% per
annum. The loan, subordinate to the building's first mortgage, was
collateralized by the Company's building, cash and accounts receivable. In
November 1998, the maturity date of the subordinated note was extended to
November 25, 1999 and provisions relating to events of default were added.
The loan and unpaid interest were repaid in full in December 1999 from the
proceeds of the Madeleine Bridge Loan.
In July 1999, TIG converted the $2.5 million convertible note and a portion of
the unpaid interest into 1,791,000 shares of the Company's common stock at the
conversion price of $1.40.
On October 26, 1999, CMA sold a $1 million promissory note (the "TIG Bridge
Note") to Technology Investors Group, L.L.C. ("TIG"). The TIG Bridge Note has
an interest rate of 10% per annum and was due December 15, 1999. The loan was
guaranteed by the Company and collateralized by certain Company assets. The
TIG Bridge Loan was paid in full in December 1999 from the proceeds of the $7
million Madeleine Bridge Loan.
On October 26, 1999 the Company issued to TIG a promissory note in the amount
of $120,000 representing the remaining indebtedness to TIG under a certain
convertible promissory note, dated November 25, 1998 in the original
principal amount of $2,500,000. The TIG Stub Note has an interest rate of 10%
per annum as was due on December 15, 1999. The TIG Stub was paid in full in
December 1999 from the proceeds of the $7 million Madeleine Bridge Loan.
On December 1, 1999, the Company sold a $7 million secured Promissory Note
"Madeleine Bridge Loan") to Madeleine, L.L.C. The note has an interest rate
of 11% per annum and is due on April 30, 2000. The Madeleine Bridge Loan is
guaranteed by certain subsidiaries of the Company and secured by such
subsidiaries' assets and capital stock.
In connection with the $7 Madeleine Bridge Loan, on December 16, 1999, the
Company signed a letter of intent with Blackacre and Cerberus pursuant to which
Blackacre and Cerberus would purchase approximately $46.2 million of
convertible debt and/or equity securities of the Company and enter into a
strategic alliance with the Company.
In connection with such letter of intent, as a form of "break-up" protection,
the Company issued 1,440,000 Class B warrants to Cerberus and Blackacre under
which they would have the right, under certain terms and conditions, to
purchase shares of Company common stock at an exercise price of $6.1656 per
share. The Class B warrants are exercisable only if the Company enters into a
letter of intent or an agreement for a competing transaction with an entity
other than Cerberus or its affiliates within a specified time period. In
such event, the Class B warrants will become exercisable and, in addition,
the Company would have to pay Cerberus and Blackacre an amount in cash equal
to the number of shares of common stock issuable upon exercise of Class B
warrants multiplied by the difference between the warrants' exercise price of
$6.1656 and $4.861.
The Company's publicly-traded Class A warrants entitle holders to acquire one
share of the Company's common stock at a purchase price of $4.00 per share.
The warrants expire on February 13, 2000. As of December 31, 1999, no warrants
were exercised; however, through February 10, 2000, there were approximately
2.47 million warrants exercised.
Year 2000 Compliance
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such
computer systems will be unable to interpret dates beyond the year 1999,
which could cause a system failure or other computer errors, leading to
disruptions in operations. The Company developed and implemented a program
for Y2K compliance. The Company has identified two major areas determined to
be critical for successful Y2K compliance: (1) financial and informational
system applications, and (2) system and software suppliers.
The Company internally reviewed its systems and contacted suppliers to
determine major areas of exposure to Y2K issues. In the financial and
informational systems area, a number of applications were identified as Y2K
compliant due to their then-recent implementation. The Company's core
financial and reporting systems were upgraded and tested to be Y2K compliant.
The Company's informational systems were upgraded to be Y2K compliant. The
Company contacted its major suppliers with regard to Y2K compliance. These
suppliers stated that they were, or intended to be, Y2K compliant by January
1, 2000. The Company has not experienced any major computer hardware and
software problems related to the Y2K since the coming of year 2000. Minor
problems were corrected promptly and did not have any material affect on the
Company's operations. The Company does not expect any major computer hardware
or software problems due to Y2K issues in the future, although there can be no
assurance of this.
Results of Operations
Contract revenues decreased 9.0% in the three months ended December 31, 1999 to
$19.2 million, down $1.9 million from the comparable period of 1998. The
decrease in revenues was primarily due to the cancellation of a $24 million
project, which was originally planned to start in November 1999 and to be
completed in mid 2001. The cancellation of the project was caused by a
sheetmetal subcontractor filing for bankruptcy and the Company's decision to
limit its potential loss on the project because of such subcontractor's
bankruptcy. Contract revenues increased 7.4% in the six months ended
December 31, 1999 to $44.1 million, up $3.0 million from the comparable
period of 1998. The increase was due primarily to the Company substantially
completing a few large fast-pace contracts in the first fiscal quarter,
partially offset by the loss of revenues in the second fiscal quarter.
For the three months ended December 31, 1999, the Company had a gross loss of
$0.5 million and a gross loss margin of (2.8%) compared to a gross profit of
$1.9 million and a gross profit margin of 9.0% for the three months ended
December 31, 1998. The loss was primarily due to an additional $2.6 million in
costs incurred to complete the failed sheetmetal subcontractor's work in five
projects. Excluding the $2.6 million additional costs, the Company would
have had a gross profit of $2.1 million and a gross profit margin of 10.9%.
For the six months ended December 31, 1999, gross profit decreased $1.9
million to $2.1 million from the comparable period of 1998. The gross profit
margins were 4.7% and 9.8% for the six months ended December 31, 1999 and
1998, respectively. The decreases in gross profit and gross profit margin were
due primarily to the $2.6 million additional costs incurred to complete the
failed sheetmetal subcontractor's work. Excluding the $2.6 million
additional costs, the gross profit would have been $4.7 million and the gross
profit margin would have been 10.7% for the six months ended December 31, 1999.
In anticipation of the future expansion of its business, the Company increased
its general and administrative expenses by $1.1 million in the three months
ended December 31, 1999 to $3.2 million from the comparable period of 1998.
As a percentage of revenue, general and administrative expenses increased to
16.6% for the three months ended December 31, 1999 from 10.1% for the three
months ended December 31, 1998. The increase in general and administrative
expenses was primarily due to increases in officers salaries and bonus of
$495,000, professional fees of $308,000, and payroll taxes and fringe
benefits of $205,000.
General and administrative expenses increased $1.3 million in the six months
ended December 31, 1999 to $5.6 million from the comparable period of 1998. As
a percentage of revenue, general and administrative expenses increased to 12.7%
for the six months ended December 31, 1999 from 10.3% for the three months
ended December 31, 1998. The increase in general and administrative expenses
was primarily due to increases in officers salaries and bonuses of $417,000,
professional fees of $472,000, payroll taxes and fringe benefits of $164,000,
and write-offs of bad debts of $107,000.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(b) (i) A Current Report on Form 8-K was filed on December 3, 1999 with
respect to Item 5 of Form 8-K.
(ii) A Current Report on Form 8-K was filed on December 21, 1999 with
respect to Item 5 of Form 8-K.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DualStar Technologies Corporation
Date: February 14, 2000 By: GREGORY CUNEO
Gregory Cuneo
Chairman of Board, President
and Chief Executive Officer
Date: February 14, 2000 By: ROBERT BIRNBACH
Robert Birnbach
Executive Vice President
and Chief Financial Officer
Date: February 14, 2000 By: JOSEPH CHAN
Joseph Chan
Vice President and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-2000
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 4310629 4310629
<SECURITIES> 0 0
<RECEIVABLES> 21053454 21053454
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 34064269 34064269
<PP&E> 3019352 3019352
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 40226484 40226484
<CURRENT-LIABILITIES> 32666762 32666762
<BONDS> 0 0
0 0
0 0
<COMMON> 107910 107910
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 40226484 40226484
<SALES> 19242280 44131051
<TOTAL-REVENUES> 19242280 44131051
<CGS> 19782453 42045925
<TOTAL-COSTS> 19782453 42045925
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (3730822) (3525540)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3730822) (3525540)
<EPS-BASIC> (0.35) (0.33)
<EPS-DILUTED> (0.35) (0.33)
</TABLE>
