<PAGE>
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 September 30, 2000.
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Transition Period From _______________ to _______________.
Commission file number 0-25552
DUALSTAR TECHNOLOGIES CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3776834
(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 --- 16,501,568 SHARES AS OF NOVEMBER 9, 2000
--------------------------------------------------------------------------------
<PAGE>
INDEX
DUALSTAR TECHNOLOGIES CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - September 30, 2000 and June 30,
2000
Condensed consolidated statements of operations - Three months ended
September 30, 2000 and 1999
Condensed consolidated statements of cash flows - Three months ended
September 30, 2000 and 1999
Notes to condensed consolidated financial statements - September 30,
2000
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
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2000 2000
-------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $8,147,063 $13,823,267
Accounts receivable, net 1,974,661 1,427,856
Net assets of discontinued operations 12,836,764 11,738,852
Deferred tax asset - current 178,000 178,000
Prepaid expenses and other current assets 485,758 393,287
-------------- --------------
TOTAL CURRENT ASSETS 23,622,246 27,561,262
PROPERTY AND EQUIPMENT, NET 5,687,956 5,210,383
OTHER ASSETS:
Deferred tax asset - long-term 1,574,000 1,574,000
Intangible assets, net 2,120,061 2,056,036
Other 646,808 678,731
-------------- --------------
TOTAL ASSETS $33,651,071 $37,080,412
============== ==============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2000 2000
-------------- -------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,122,424 $ 1,111,377
Promissory note payable 7,000,000 7,000,000
Accrued expenses and other current liabilities 2,379,116 2,442,896
-------------- -------------
TOTAL CURRENT LIABILITIES 10,501,540 10,554,273
Mortgage payable - net of current portion 1,710,595 1,715,948
Other liabilities 166,588 205,112
-------------- -------------
TOTAL LIABILITIES 12,378,723 12,475,333
-------------- -------------
CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 164,988 164,766
Additional paid-in capital 42,688,138 42,613,550
Accumulated deficit (20,454,778) (17,047,237)
Deferred compensation (1,126,000) (1,126,000)
-------------- -------------
TOTAL SHAREHOLDERS' EQUITY 21,272,348 24,605,079
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $33,651,071 $37,080,412
============== =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2000 1999
------------- --------------
Revenues $1,848,962 $1,823,753
------------- --------------
Operating expenses:
Cost of revenues 1,189,381 1,367,959
General and administrative expenses 3,888,160 717,791
Depreciation and amortization 381,837 87,026
------------- --------------
Total operating expenses 5,459,378 2,172,776
------------- --------------
Operating loss (3,610,416) (349,023)
------------- --------------
Interest (income) expense:
Interest income (212,292) -
Interest expense 242,084 95,173
------------- --------------
Interest expense - net 29,792 95,173
------------- --------------
Loss from continuing operations (3,640,208) (444,196)
Income from discontinued operations 232,667 649,478
------------- --------------
Net (loss) income $(3,407,541) $205,282
============= ==============
Basic and diluted (loss) income per share:
Continuing operations $(0.22) $(0.04)
Discontinued operations 0.01 0.06
============= ==============
Total $(0.21) $ 0.02
============= ==============
Weighted average shares outstanding 16,485,303 10,791,000
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
--------------- --------------
<S> <C> <C>
Net cash used in operating activities of continuing operations $(3,968,552) $(380,336)
--------------- --------------
Net cash (used in) provided by operating activities of discontinued
operations (286,942) 1,561,669
--------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (798,954) (135,957)
--------------- --------------
Net cash used in investing activities (798,954) (135,957)
--------------- --------------
Cash flows from financing activities:
Principal payments on capital lease obligations (4,640) (17,293)
Principal payments on mortgage (38,813) (11,250)
--------------- --------------
Net cash used in financing activities (43,453) (28,543)
--------------- --------------
Net (decrease) increase in cash and cash equivalents (5,097,901) 1,016,833
Cash and cash equivalents of continuing operations at beginning of period 13,823,267 473,992
Cash of discontinued operations at beginning of period 977,043 110,003
--------------- --------------
Cash and cash equivalents at end of period $9,702,409 $1,600,828
=============== ==============
Cash and cash equivalents of continuing operations at end of period $8,147,063 66,561
Cash of discontinued operations at end of period 1,555,346 1,534,267
---------------------------------
Total cash and cash equivalents at end of period $9,702,409 $1,600,828
=================================
</TABLE>
NON-CASH TRANSACTION:
(1) In connection with the Casden agreement in exchange for access rights, the
Company issued 22,231 shares of Company common stock and warrants to purchase
876 shares of Company common stock in August and September 2000. The warrants
are non-forfeitable, fully vested and immediately exercisable at a price of
$4.446 per share. Accordingly, the Company's common stock was increased by $222
and additional paid-in capital was increased by $74,589.
(2) In July 1999, Technology Investors Group, LLC ("TIG") converted the $2.5
million convertible note and a portion of unpaid interest into 1,791,000 shares
of Company common stock at the conversion price of $1.40 per share. In addition,
the Company issued a one-year term note for approximately $110,000 to TIG for
the balance of the unpaid interest that was not converted into common stock. In
connection with this transaction, the Company incurred costs of $41,471 which
has been charged to additional paid-in capital. Accordingly, the Company's
common stock was increased by $17,910 and additional paid-in capital by
$2,455,418.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
DualStar Technologies Corporation ("DualStar" or the "Company"), through its
wholly owned subsidiaries, operates two separate lines of business: (a)
communications businesses; and (b) construction-related businesses. In light of
significantly increased demand for high-speed data access fueled by the
explosive growth of the Internet, DualStar has begun to pursue its
communications business plan more aggressively. Specifically, DualStar seeks to
become principally an access provider of broadband communications services to
residential and commercial properties. The DualStar board of directors believes
that future prospects of the Company are highly dependent on the rapid expansion
of its communications business. This expansion requires significant capital
expenditures to construct and operate the infrastructure necessary to provide
access services for broadband communications services, and to acquire access
rights to provide such services in residential and commercial buildings. In
connection with DualStar's communications focus, the DualStar board of directors
has determined to divest most of DualStar's construction-related businesses, and
has entered into that certain Stock Purchase Agreement dated as of March 28,
2000 with M/E Contracting Corp.
Accordingly, the financial position of such businesses as of September 30, and
June 30, 2000, and their financial results and cash flows for the three months
ended September 30 2000 and 1999 are presented as the discontinued operations in
the accompanying unaudited condensed consolidated financial statements. In
addition, certain reclassifications have been made to prior period amounts to
conform to the September 30, 2000 presentation.
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-month period ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2001. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2000.
7
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE B - PER SHARE DATA
The computation of basic and diluted net income (loss) per share is based on the
weighted average number of shares of common stock outstanding. For diluted net
income per share, when dilutive, stock options and warrants are included as
share equivalents using the treasury stock method, and shares available for
conversion under the convertible note are included as if converted at the date
of issuance. For the three months ended September 30, 2000 and 1999, stock
options and warrants have been excluded from the calculation of diluted loss per
share as their effect would have been antidilutive.
NOTE C - CONTINGENCIES
(1) 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
Contractor Project. In pleadings filed with the Bankruptcy Court prior to the
appointment of a Chapter 7 trustee, Triangle alleged, among other things, that
CMA is indebted to Triangle in an amount ranging between $1,400,000 and
$3,000,000. Triangle also suggested in such pleadings that there may exist
potential causes of action by Triangle against the Company and/or CMA, including
breach of contract, tortious interference and unfair competition. Triangle did
not commence any formal legal actions or proceedings with respect to any of such
allegations (other than seeking to obtain discovery from CMA and DualStar). On
or about January 18, 2000, Triangle's Chapter 7 trustee made a written request
on CMA stating that Triangle's records reflected that CMA was indebted to
Triangle in the aggregate sum of $2,435,097 based upon work performed by
Triangle on the Subcontractor Projects. Triangle's Chapter 7 trustee stated CMA
was not entitled, under applicable law, to offset amounts owed to CMA on
particular Subcontractor Projects against amounts owed by CMA to Triangle on
other Subcontractor Projects. Triangle's Chapter 7 trustee stated its intention
to institute legal proceedings in the Bankruptcy Court against CMA and the
owners of the Subcontractor Projects to recover such funds. CMA and DualStar
dispute Triangle's and the Chapter 7 trustee's allegations and assertions and
believe that they are without merit.
8
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE C (CONTINUED)
CMA has claims and counterclaims against Triangle for breaches, defaults,
completion costs and damages in respect of the Subcontractor Projects and the
Contractor Project. Although such claims and counterclaims are not fully
liquidated and cannot be fully ascertained at this time, CMA believes that it is
entitled setoff and/or recoup part of the damages by offsetting any monies owed
by CMA to Triangle. The Company can make no assurances, however, that such
offsets and recoupment will be either (a) allowed and that CMA will prevail in
any such litigation with Triangle's Chapter 7 trustee, or (b) sufficient to
cover all of CMA's damages resulting from Triangle's defaults under the
Subcontractor Projects and Contractor Project. Based upon currently available
information, it appears that a significant portion of CMA's claims against
Triangle may not be recoverable after such setoff and/or recoupment.
On June 1, 2000, Triangle's Chapter 7 trustee commenced a lawsuit in the
Bankruptcy Court against CMA and its bonding company and claimed CMA was
indebted to Triangle in the amount of $411,002 based upon worked performed by
Triangle on one of the Subcontractor Projects. A motion to dismiss, or abstain
from exercising jurisdiction over, the complaint has been filed by CMA and is
pending before the Court. For the reasons discussed above, the Company can make
no assurances that CMA will prevail in the litigation commenced by the
Triangle's Chapter 7 trustee.
(2) The Company and Trident Mechanical Systems, Inc. ("Trident"), a dormant,
wholly owned subsidiary of the Company, are defendants in a lawsuit filed in
January 2000. The plaintiff is seeking in excess of $30,000,000 for claims
related to property damage on a job site where Trident and other trades were
working. The claim, as currently constituted, exceeds the Company's general as
well as umbrella liability policy limits in the aggregate. However, management
believes that the Company and Trident are not responsible for the damage and,
accordingly, no provision for loss in excess of the insurance coverage has been
made in the accompanying financial statements.
(3) On September 29, 1997, Centrifugal Associates, Inc. ("Centrifugal") filed a
complaint in the Supreme Court of the State of New York, Kings County, against
DAK Electric Contracting Corp. ("DAK") and two of DAK's officers, Donald Kopec
and Al Walker, for breach of contract in the amount of $4.1 million.
9
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE C (CONTINUED)
In prior years, Centrifugal was a partner in a joint venture that performed
mechanical and electrical services for a general contractor on the Lincoln
Square project. Centrifugal was responsible for the mechanical portion of the
contract, and its co-venturer, DAK, was responsible for the electrical portion.
The joint venture's work on this project has been completed. The joint venture
received demands for payment from certain vendors used by the co-venturer of
Centrifugal. These vendors filed liens and/or made demands against the joint
venture payment bond amounting to approximately $1.7 million. Some of these
vendors also filed lawsuits against the joint venture, the joint venture
partners and related bonding companies, to secure payment on their claims. These
claims were based on the alleged failure of the joint venture partner to pay for
electrical goods provided to it as the electrical subcontractor of the joint
venture. The joint venture's bonding companies proposed settling with the
claimants; the bonding companies would then seek indemnification from the joint
venture. It was management's opinion that it would cost the Company less if this
settlement process was managed and completed by the Company.
Based on these developments, the Company wrote off in fiscal 1996 approximately
$2.3 million with respect to accounts and loans receivable, and $1.4 million of
claims and other costs that the Company incurred on behalf of Centrifugal's
co-venturer in fulfillment of the electrical co-venturer's obligations under the
contract on the Lincoln Square Project. Nevertheless, the Company commenced the
above identified action in an attempt to recover its losses, expenses and costs
as above set forth. As of the date of this report, both the corporate defendant,
DAK and Donald Kopec have defaulted, and motions are being made for judgment
against each.
As of June 30, 1996, all of the known claims and liens of subcontractors of the
joint venture were settled and discharged, and all of the vendor lawsuits which
arose out of these claims were also settled with the exception of the following:
The joint venture's bonding companies have claims over for indemnity against
Centrifugal and under a guarantee agreement against the Company in the event
that a judgment is rendered against the bonding companies in a suit brought by
an employee benefit fund for DAK's employees' union seeking contributions to the
fund which the fund claims were due but not paid by DAK. The bonding companies,
Centrifugal and the Company have asserted, among other defenses, that such
contributions were not guaranteed under the terms of the joint venture's bonds.
(4) In the ordinary course of business, the Company is involved in claims,
generally concerning personal injuries and other matters, which the Company
refers to its insurance carriers. The Company believes the claims are covered
under its general and umbrella liability policies. No provision for loss in
excess of the insurance coverage have been made in the accompanying financial
statements.
10
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE D - STOCK OPTION PLAN
The Plan provides for 3,500,000 shares of Company common stock to be reserved
and available for distribution as grants under the Plan. On February 18, 2000,
subject to stockholder approval, the Company's Board of Directors approved an
amendment to the Plan to increase the number of shares reserved and available
for distribution as awards under the Plan from 3,500,000 to 6,000,000. The
Company anticipates seeking such stockholder approval at the next annual meeting
of its stockholders. Options granted in excess of the number of shares of
Company common stock currently authorized by the Company's stockholders as being
reserved and available for distribution as awards under the Plan and identified
above are subject to such stockholder approval. At September 30, 2000, 2,406,475
options with exercise prices ranging from $4.50 to $7.06 have been granted
subject to stockholder approval of the amendment of the Plan. To the extent that
such stockholder approval is not obtained, the Company has agreed to provide
certain officers with the same economic benefit as would have been provided by
the options.
NOTE E - SEGMENT INFORMATION
Other than the mechanical and electrical contracting business segment, which is
now reported as discontinued operations, the Company has the following two
reportable segments: communications and automated temperature controls. The
communications segment primarily installs communication systems and provides
telephone, Internet, television and other services to buildings. The automated
temperature controls segment primarily installs automated temperature controls
systems 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 Annual Report on Form 10-K for the fiscal year ended
June 30, 2000. 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.
11
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE E (CONTINUED)
<TABLE>
<CAPTION>
AUTOMATED TEMPERATURE
REPORTABLE SEGMENT INFORMATION COMMUNICATIONS CONTROLS TOTALS
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
Revenues from external customers $968,555 $623,916 $1,592,471
Revenues from discontinued operations 5,000 251,491 256,491
Segment (loss) profit (3,044,212) 156,438 (2,887,774)
Segment assets at September 30, 2000 8,495,106 1,283,432 9,778,538
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers $560,572 $606,278 $1,166,850
Revenues from discontinued operations 7,500 649,403 656,903
Segment (loss) profit (388,817) 144,489 (244,328)
Segment assets at June 30, 2000 7,729,240 1,116,237 8,845,477
</TABLE>
RECONCILIATION TO CONSOLIDATED AMOUNTS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
---- ----
<S> <C> <C>
LOSS
Total loss for reportable segments $(2,887,774) $(244,328)
Unallocated amounts:
Corporate (752,434) (199,868)
-----------------------------------------
Total consolidated loss from continuing operations $(3,640,208) $(444,196)
=========================================
</TABLE>
12
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE F - DISCONTINUED OPERATIONS
In connection the proposed sale of the Company's electrical and mechanical
contracting subsidiaries to M/E, the electrical and mechanical contracting
operations are reflected as discontinued operations for all periods presented.
Accordingly, the net assets of the contracting subsidiaries have been segregated
from the net assets of continuing operations in the accompanying condensed
consolidated balance sheets and their operating results are segregated from
continuing operations and are reported as discontinued operations in the
accompanying condensed consolidated statements of operations and cash flows.
Summary financial information of the discontinued operations are as follows:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
2000 1999
---- ----
Revenues $20,116,698 $23,075,018
Net income 232,667 649,478
Current assets and current liabilities of the discontinued operations consist
mainly of contracts receivable and trade accounts payable, respectively.
The Company is unable to reasonably and accurately project the profit or loss
from the discontinued operations from the measurement date (March 8, 2000, the
date the Board of Directors approved the plan to sell the electrical and HVAC
contracting businesses) to the ultimate disposal date and the gain or loss on
the sale of the discontinued operations. Accordingly, the operating results of
the discontinued operations for all periods presented reflect only the actual
results incurred
NOTE G - EMPLOYMENT AGREEMENT
In September 2000, in connection with enhancing DualStar's communications
business, DualStar Communications, Inc. ("DCI") has entered into an employment
agreement with an officer of DCI. The agreement is for annual base salary of
$240,000. In addition to the annual base salary, the DCI executive is eligible
for bonuses of 40% of the annual base salary upon achievement of specified
targets, as defined in the agreements. The officer will be entitled to severance
in the amount of the annual base salary plus the pro-rata portion of the
performance bonus in the year of termination if he is terminated as defined in
the agreements.
13
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE H - PURCHASE AGREEMENT
Effective July 28, 2000, DCI entered into an equipment/software Master Purchase
and License Agreement (MPLA) with Nokia who will provide the primary components
for DCI's network infrastructure. The term of the MPLA is three (3) years during
which a minimum purchase commitment of $30 million must be met. There are
related agreements with Nokia for installation and support services. Payments
made under these related agreements are included in calculating the satisfaction
of the minimum purchase commitment. DCI's obligation to meet the minimum
commitment is expressly contingent on obtaining vendor supported financing and
if such financing is not obtained by January 1, 2001, either party may terminate
the MPLA. The related installation and support services agreements can also be
terminated by DCI if the MPLA is terminated.
NOTE I - ACCESS AGREEMENT
In August 2000, DualStar Communications, Inc. ("DCI"), a wholly owned subsidiary
of DualStar, entered into an agreement with Casden Properties, Inc. (in which
Blackacre is a substantial investor) and Casden Properties Operating Partnership
L.P. to provide broadband services to up to 45 buildings encompassing
approximately 9,000 units within Casden's portfolio of nationwide properties.
Pursuant to this agreement, DCI would pay access fees to Casden Properties
Operating Partnership, L.P., in the form of cash payments, shares of Company
stock and stock warrants for each individual Casden property for which DCI
agrees to provide service. Under the agreement, DCI has rights to provide
services to Casden properties but DCI is not obligated to do so. As of September
30, 2000 total shares and warrants issued under this agreement were 22,231 and
876 respectively.
14
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE J - SUBSEQUENT EVENTS
(1) On October 26, 2000, DCI, the Company's primary communications subsidiary,
changed its name to OnTera, Inc. OnTera intends to transact business under
"OnTera" and under the brand name "OnTera Broadband."
(2) On November 8, 2000, the Company consummated a $12.5 million senior secured
loan transaction with Madeleine L.L.C. ("Madeleine"). The loan, 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 the material
subsidiaries of the Company, including OnTera, Inc. (formerly known as DualStar
Communications, Inc.), 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 to Madeleine. A portion of the $12.5 million loan
proceeds will be used to retire existing indebtedness of the Company in the
principal amount of $7 million owed to Madeleine. The remaining $5.5 million
will be used to pay expenses of obtaining the loan and for the Company's working
capital purposes.
Under the terms of the agreement, an additional loan of $7.5 million may be made
to the Company by Madeleine, on the same terms as the $12.5 million loan. This
additional loan is subject to certain conditions, including, without limitation,
receipt of stockholder approval. The nature of the conditions precedent to
Madeleine's obligation to make the additional loan result in such additional
loan being available at Madeleine's sole discretion. If the loan is made, the
Company will issue to Madeleine, subject to stockholder approval, additional
warrants to purchase 1,875,000 shares of its common stock at an exercise price
of $4.00 per share. There can be no assurance that the Company will be able to
satisfy the conditions to obtaining the additional $7.5 million loan from
Madeleine or that Madeleine will waive the conditions precedent.
15
<PAGE>
ITEM 2. 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)
communications businesses; and (b) construction-related businesses. In light of
significantly increased demand for high-speed data access fueled by the
explosive growth of the Internet, DualStar has begun to pursue its
communications business plan more aggressively. Specifically, DualStar seeks to
become principally an access provider of broadband communications services to
residential and commercial properties. The DualStar board of directors believes
that future prospects of the Company are highly dependent on the rapid expansion
of its communications business. This expansion requires significant capital
expenditures to construct and operate the infrastructure necessary to provide
access services for broadband communications services, and to acquire access
rights to provide such services in residential and commercial buildings. In
connection with DualStar's communications focus, the DualStar board of directors
has determined to divest most of DualStar's construction-related businesses, and
has entered into that certain Stock Purchase Agreement dated as of March 28,
2000 with M/E Contracting Corp.
Accordingly, the financial position of such businesses as of September 30, and
June 30, 2000, and their financial results and cash flows for the three months
ended September 30 2000 and 1999 are presented as the discontinued operations in
the accompanying condensed consolidated financial statements.
The statements contained in this Quarterly Report on Form 10-Q, including the
exhibits hereto, relating to future operations of DualStar may constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Please note that the words "intends,"
"expects," "plans," "estimates," "projects," "believes," "anticipates" and
similar expressions are intended to identify forward-looking statements. Actual
results of the Company may differ materially from those in the forward-looking
statements and may be affected by a number of factors including, without
limitation, the execution of definitive documentation for, and consummation of
the financing transaction with, Blackacre Capital Management L.L.C. and its
affiliates, the ability of DualStar Communications, Inc., a wholly owned
subsidiary of the Company, to implement its business plan, the ability of the
Company to sell its discontinued operations, regulatory or legislative changes,
the Company's dependence on key personnel, and the Company's ability to manage
growth, in addition to those risk factors set forth in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2000 and the assumptions,
risks and uncertainties set forth below in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as other factors contained herein and in DualStar's other filings with the
SEC. Although the Company believes that its plans, intentions, and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such plans, intentions, and expectations will be achieved and
actual results could differ materially from forecasts and estimates. Many of the
factors are beyond the Company's ability to control or predict. In
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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. 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 of the Company's continuing operations at September 30, and June
30, 2000 were approximately $8.1 million and $13.8 million, respectively. The
Company's continuing operations used approximately $4.0 million of cash in the
three months ended September 30, 2000 for operating activities. The net use of
cash was primarily used to fund operating expenses associated with the expansion
of the communications business.
In the three months ended September 30, 2000 and 1999, the Company acquired
capital assets of approximately $0.8 million and $0.1 million, respectively,
primarily for investment in communications infrastructure systems for high-rise
buildings to enable the Company to provide telephone, Internet, video and other
services to the buildings' residents.
On November 8, 2000, the Company consummated a $12.5 million senior secured loan
transaction with Madeleine L.L.C. ("Madeleine.") The loan, 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 the material
subsidiaries of the Company, including OnTera, Inc. (formerly known as DualStar
Communications, Inc.) 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 to Madeleine. A portion of the $12.5 million loan
proceeds will be used to retire existing indebtedness of the Company in the
principal amount of $7 million owed to Madeleine. The remaining $5.5 million
will be used to pay expenses of obtaining the loan and for the Company's working
capital purposes.
Under the terms of the agreement, an additional loan of $7.5 million may be made
to the Company by Madeleine, on the same terms as the $12.5 million loan. This
additional loan is subject to certain conditions, including, without limitation,
receipt of stockholder approval. The nature of the conditions precedent to
Madeleine's obligation to make the additional loan result in such additional
loans being available at Madeleine's sole discretion. If the loan is made, the
Company will issue to Madeleine, subject to stockholder approval, additional
warrants to purchase 1,875,000 shares of its common stock at an exercise price
of $4.00 per share. There can be no assurance that the Company will be able to
satisfy the conditions to obtaining the additional $7.5 million loan from
Madeleine or that Madeleine will waive the conditions precedent.
The Company is in its initial stages of implementing its expansion of
communications business. There can be no assurance that the Company will be able
to implement this expansion as it is currently contemplated, or that the
expansion, if successfully implemented, will be deployed in a commercially
successful manner. Furthermore, the implementation of the expansion will require
significant capital resources. There can be
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no assurance that the Company will be able to raise and provide the capital
resources necessary to implement all or part of the expansion.
Convertible note
In November 1998, the Company sold to Technology Investors Group, LLC ("TIG") a
subordinated convertible note in the principal amount of $2.5 million, due and
payable on May 25, 2001. The note had an interest rate of 7.5% per annum and was
payable semi-annually at the option of the Company. The note was subordinated to
the first mortgage on the Company's building and to the rights of financial
lenders and sureties of the Company.
In accordance with the terms of the note, on July 7, 1999, the Company exercised
its right to require TIG to convert the note into 1,791,000 shares of the
Company's common stock at a conversion price of $1.40 per share. In addition,
the Company issued a promissory note in the amount of $120,000 (the "TIG Stub
Loan") representing the remaining indebtedness to TIG. The TIG Stub Loan was
repaid in full in December 1999.
Recent developments
(1) In August 2000, DualStar Communications, Inc. ("DCI"), a wholly owned
subsidiary of DualStar, entered into an agreement with Casden Properties, Inc.
(in which Blackacre is a substantial investor) and Casden Properties Operating
Partnership L.P. to provide broadband services to up to 45 buildings
encompassing approximately 9,000 units within Casden's portfolio of nationwide
properties. Pursuant to this agreement, DCI would pay access fees to Casden
Properties Operating Partnership, L.P., in the form of cash payments, shares of
Company stock and stock warrants for each individual Casden property for which
DCI agrees to provide service. Under the agreement, DCI has rights to provide
services to Casden properties but DCI is not obligated to do so. As of September
30, 2000 total shares and warrants issued under this agreement were 22,231 and
876 respectively.
(2) On October 26, 2000, DCI, the Company's primary communications subsidiary,
changed its name to OnTera, Inc. OnTera intends to transact business under
"OnTera" and under the brand name "OnTera Broadband."
RESULTS OF OPERATIONS
Revenues from continuing operations increased by 1% in the three months ended
September 30, 2000 from the comparable period of 1999. This revenue growth
reflects an incremental growth in the Company's retail communications customer
base including revenue from ParaComm's video operation, which was acquired in
May 2000.
Cost of revenues decreased $0.2 million in the three months ended September 30,
2000 to $1.2 million from the comparable period in 1999. The decrease was due
primarily to a decrease in payroll and related costs of the automated
temperature control business. General and administrative expenses increased $3.2
million in the three months ended September 30, 2000 to $3.9 million from the
comparable period of 1999. The increase in general and administrative expenses
was due to increased costs associated with the
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expansion of the communications business, and included a $2.0 million increase
in payroll and related costs and a $0.6 million increase in professional
services.
Depreciation and amortization increased $0.3 million in the three months ended
September 30, 2000 to $0.4 million from the comparable period of 1999. The
increase was primarily due to additional property and equipment and
infrastructure costs acquired during the current and prior fiscal years.
Interest income was $0.2 million in the three months ended September 30, 2000
and was insignificant in the comparable period of 1999. The increase was due to
investment of the Company's excess cash in an institutional money-market mutual
fund in the current period.
Interest expense increased $0.1 million in the three months ended September 20,
2000 to $0.2 million from the comparable period of 1999. The increase was due
primarily to the Company's issuance of a $7.0 million promissory note in
connection with the Madeleine Bridge Loan.
Income from discontinued operations decreased $0.4 million or 64% from $0.6
million in the three months ended September 30, 1999 to $0.2 million in the
three months ended September 30, 2000. The decrease was due primarily to a
decrease in contract revenues.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. As of
September 30, 2000, the Company had debt of $8.7 million with various fixed
interest rates from 8.5% to 11.0%. The fixed rate debt may have its fair value
adversely affected if interest rates decline; however, the amount is not
expected to be material. The Company's cash is primarily invested in an
institutional money market mutual fund. The Company does not have any derivative
financial instruments as of September 30, 2000. The Company believes that the
interest rate risk associated with its investments is not material to the
results of operations of the Company.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The following Exhibit is filed herewith:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Exhibit Number Description Page
Number
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation, filed June 14, 1994, as restated. (1)
-------------------------------------------------------------------------------------------------------------
3.2 Amended and Restated By-Laws. (2)
-------------------------------------------------------------------------------------------------------------
10.19 Employment Agreement between DualStar Communications, Inc. and Dennis S.
Rosatelli dated September 7, 2000.
-------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-1, File No. 33-83722, ordered effective by the Securities and Exchange
Commission on February 13, 1995.
(2) Incorporated herein by reference to Registrant's Quarterly Report on Form
10-Q (File No. 0-25552) for the quarter ended March 31, 2000.
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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: November 14, 2000 By: GREGORY CUNEO
------------------------ -----------------------------------
Gregory Cuneo
President
and Chief Executive Officer
Date: November 14, 2000 By: ROBERT BIRNBACH
-------------------------- -----------------------------------
Robert Birnbach
Executive Vice President
and Chief Financial Officer
Date: November 14, 2000 By: JOSEPH CHAN
-------------------------- -----------------------------------
Joseph Chan
Vice President and
Chief Accounting Officer
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Exhibit Index
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Exhibit Number Description Page
Number
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation, filed June 14, 1994, as restated. (1)
-------------------------------------------------------------------------------------------------------------
3.2 Amended and Restated By-Laws. (2)
-------------------------------------------------------------------------------------------------------------
10.19 Employment Agreement between DualStar Communications, Inc. and Dennis S.
Rosatelli dated September 7, 2000.
-------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-1, File No. 33-83722, ordered effective by the Securities and Exchange
Commission on February 13, 1995.
(2) Incorporated herein by reference to Registrant's Quarterly Report on Form
10-Q (File No. 0-25552) for the quarter ended March 31, 2000.
