DSTR news and filing out. This is another of my "long" ones, in at $7 something.
DUALSTAR TECHNOLOGIES CORP (DSTR)
Quarterly Report (SEC form 10-Q)
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.
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