DSTR continues :-)) on financial news ???
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, 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 March 31, 2000 and June 30, 1999 were approximately $16.5 million and $0.1 million, respectively. The increase in cash at March 31, 2000 was
due primarily to the proceeds of $20.4 million from the exercise of Class A Warrants and an underwriter purchase option. The Company's continuing operations
used approximately $3.8 million and $1.2 million of cash in the nine months ended March 31, 2000 and 1999, respectively. The net use of cash in operating activities
of continuing operations for the nine months ended March 31, 2000 was primarily attributable to the use of the proceeds from the exercise of Class A Warrants and
the purchase option to pay trade payables and to fund the loss from operations. The net use of cash in operating activities of continuing operations for the nine
months ended March 31, 1999 was due primarily to the use of the proceeds of the sale of a $2.5 million subordinated convertible note to pay trade payables and to
fund the loss from operations.
The Company's discontinued operations used approximately $6.7 million and $1.9 million of cash in the nine months ended March 31, 2000 and 1999, respectively.
In the nine months ended March 31, 2000 and 1999, the Company acquired capital assets of approximately $633,000 and $250,000, 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 Technology Investors Group, LLC ("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 (defined below).
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 per share.
On October 26, 1999, CMA sold a $1 million promissory note (the "TIG Bridge Note") to 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 Note 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 (the "TIG Stub 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 convertible promissory note ("Madeleine Bridge Loan") to Madeleine, L.L.C. The note has an
interest rate of 11% per annum and is due on May 31, 2000. The Madeleine Bridge Loan is guaranteed by certain subsidiaries of the Company and secured by such
subsidiaries' assets and capital stock. Contemporaneous with the advance of the Madeleine Bridge Loan, TIG purchased from Blackacre a $2 million participation
interest in such loan, which was subsequently resold to Blackacre in March 2000.
On March 28, 2000, the Company entered into a Securities Purchase Agreement with Blackacre and certain of its affiliates pursuant to which, subject to the
approval of the Company's stockholders, Blackacre would invest $46.2 million in the Company through the purchase, at Blackacre's election, of either: (A) a $30
million ten-year convertible promissory note bearing interest at the rate of 3% per annum, convertible into shares of the Company's common stock at a conversion
price of $4.00 per share, and 4,050,000 shares of the Company's common stock at a purchase price of $4.00 per share; or (B)11,550,000 shares of the
Company's common stock at a purchase price of $4.00 per share. See the Company's Form 8-K, filed on April 6, 2000.
In connection with its $46.2 million investment, Blackacre would enter into a "strategic alliance" with the Company under which the Company would be granted the
right of first negotiation to acquire access rights to deliver voice, video, data and related services to properties owned, controlled by, managed or affiliated with
Blackacre and/or its affiliates. If the $46.2 million Blackacre investment is consummated, Blackacre will nominate a majority of the members of the Company's
Board of Directors. Additionally, as one of the conditions to the Blackacre investment, and as an incentive to Messrs. Cuneo and Birnbach to continue to serve as
President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, respectively, of the Company, Messrs. Cuneo and Birnbach or an
entity owned by them, will be issued Class C Warrants to purchase an aggregate of 400,000 shares of the Company's common stock at $6.50 per share,
exercisable over a period of 7 years. Also in connection with Blackacre's $46.2 million investment, as a form of "break-up" protection, the Company issued
1,440,000 Class B Warrants to Blackacre and Cerberus under which they would have the right, under certain terms and conditions, to purchase shares of the
Company's 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 (as defined) with an entity other than Cerberus or its affiliates within a specified period of time. In such event, the Class B
Warrants will become exercisable and, in addition, the Company would have to pay Blackacre and Cerberus an amount in cash equal to the number of shares of the
Company's common stock issuable upon exercise of the Class B Warrants multiplied by the difference between the warrants' exercise price of $6.1656 and $4.861,
approximately $1.88 million.
In addition, on March 28, 2000, the Company entered into a definitive agreement with M/E Contracting Corp. ("M/E"), an affiliate of Blackacre, to sell to M/E,
subject to the approval of the Company's stockholders and the consummation of the $46.2 million Blackacre investment, the Company's electrical contracting
subsidiary, High-Rise Electric, Inc., and the Company's heating, ventilation and air conditioning ("HVAC") contracting subsidiaries, Centrifugal Associates, Inc. and
Mechanical Associates, Inc. The aggregate purchase price is $11 million, consisting of $1 million in cash and a $10 million secured ten-year note bearing interest at
10% per annum. The definitive agreements relating to the Blackacre $46.2 million investment and the M/E sale transactions described above are subject to
customary and other closing conditions including, with respect to the sale to M/E, M/E's right to terminate the transaction for any reason at any time prior to closing.
See the Company's Form 8-K, filed on April 6, 2000. To fully implement the Company's telecommunications services business plan, the Company continues to
explore strategic relationships.
During January and February 2000, a total of 4,510,571 shares of the Company's common stock were issued pursuant to exercises of the Company's Class A
Warrants which expired on February 14, 2000. The Class A Warrants entitled holders to acquire one share of the Company's common stock at a purchase price of
$4.00 per share. In addition, 400,000 shares of the Company's common stock were issued upon exercise of a purchase option previously granted to an underwriter
in connection with the Company's February 1995 initial public offering. The aggregate proceeds to the Company from the exercise of the warrants and the option
were $20,352,285.
RESULTS OF OPERATIONS
Revenues from continuing operations decreased 43.2% in the three months ended March 31, 2000 to $0.8 million, down $0.6 million from the comparable period of
1999. Revenues from continuing operations decreased 23.9% in the nine months ended March 31, 2000 to $3.7 million, down $1.2 million from the comparable
period of 1999. The decreases in revenues were primarily due to the Company's decision of closing-out a small electrical contracting subsidiary at the beginning of
the current fiscal year, and to a $0.2 million adjustment of the accounts receivable of the Company's telecommunication business. The adjustment was to correct
errors found in a third party billing service company's computer systems and related primarily to prior periods.
For the three months ended March 31, 2000, the Company's continuing operations had a gross loss of ($0.3) million and a gross loss margin of (31.8%) compared
to a gross profit of $0.3 million and a gross profit margin of 21.6% for the three months ended March 31, 1999. The loss was primarily due to the decrease in
revenues and increases in fixed costs, such as depreciation and amortization and direct labor costs.
For the nine months ended March 31, 2000, gross profit decreased $1.1 million to $0.1 million from the comparable period of 1999. The gross profit margins were
3.8% and 26.3% for the nine months ended March 31, 2000 and 1999, respectively. The decreases in gross profit and gross profit margin were due primarily to the
decrease in revenues and increases in fixed costs, such as depreciation and amortization and direct labor costs.
In anticipation of the future expansion of its telecommunications business, the Company increased its general and administrative expenses by $1.9 million in the three
months ended March 31, 2000 to $2.5 million from the comparable period of 1999. The increase in general and administrative expenses was primarily due to a $1.1
million charge for stock options granted on March 1 and March 10, 2000 which were granted with an exercise price lower than the closing price of the Company's
stock on the dates on which such options were granted. In addition, the increase in general and administrative expenses was due to increases in professional fees of
$0.3 million, payroll costs of $0.2 million, and interest expense of $0.1 million.
General and administrative expenses increased $2.6 million in the nine months ended March 31, 2000 to $4.5 million from the comparable period of 1999. The
increase in general and administrative expenses was primarily due to a $1.1 million charge for stock options granted on March 1 and March 10, 2000 which were
granted with an exercise price lower than the closing price of the Company's stock on the dates on which such options were granted. In addition, the increase in
general and administrative expenses was due to increases in professional fees of $0.8 million, payroll costs of $0.3 million, and interest expense of $0.2 million. |
