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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, 2003.
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period From to .
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Commission file number 0-25552
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DUALSTAR TECHNOLOGIES CORPORATION
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(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.)
11-30 47TH AVENUE, LONG ISLAND CITY, NY 11101
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(Address, including zip code of principal executive offices)
(718) 340-6655
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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 .
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X .
--- ---
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 --- 24,161,467 SHARES AS OF NOVEMBER 10, 2003
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INDEX
DUALSTAR TECHNOLOGIES CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2003 (Unaudited)
and June 30, 2003
Condensed Consolidated Statements of Operations for the Three months
ended September 30, 2003 and 2002 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Three months
ended September 30, 2003 and 2002 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) -
September 30, 2003
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
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
SEPTEMBER 30, JUNE 30,
2003 2003
------------------ ----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $1,573,586 $ 3,055,255
Accounts receivable - net of allowance for doubtful accounts 16,783,377 17,067,241
Retainage receivable 2,544,234 3,049,667
Costs and estimated earnings in excess of billings on uncompleted
contracts 2,965,628 768,409
Assets held for sale 1,031,849 483,756
Prepaid expenses and other current assets 208,532 220,823
-------------------- ------------------
Total current assets 25,107,206 24,645,151
Property and equipment - net of accumulated depreciation and amortization 82,741 1,144,282
Other 409,687 431,363
-------------------- ------------------
Total assets $25,599,634 $26,220,796
==================== ==================
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $4,581,534 $ 5,466,501
Senior secured promissory note payable 12,991,798 16,827,583
Billings in excess of costs and estimated earnings on uncompleted
contracts 2,621,517 2,788,820
Liabilities held for sale - 52,575
Accrued expenses and other current liabilities 4,716,841 4,521,913
-------------------- ------------------
Total current liabilities 24,911,690 29,657,392
-------------------- ------------------
Total liabilities 24,911,690 29,657,392
-------------------- ------------------
Commitments and contingencies
Shareholders' equity (deficit):
Common stock 165,016 165,016
Additional paid-in capital 41,832,721 41,832,721
Accumulated deficit (41,309,793) (45,434,333)
-------------------- ------------------
Total shareholders' equity (deficit) 687,944 (3,436,596)
-------------------- ------------------
Total liabilities and shareholders' equity (deficit) $25,599,634 $26,220,796
==================== ==================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2003 2002
------------------ -----------------
Revenues earned $16,220,561 $14,097,095
Costs of revenues earned, excluding depreciation and amortization 13,798,853 12,300,921
-------------------- -----------------
Gross profit 2,421,708 1,796,174
Operating expenses:
General and administrative expenses, excluding depreciation
and amortization 1,682,300 1,572,800
Depreciation and amortization 72,559 68,350
-------------------- -----------------
Operating income 666,849 155,024
-------------------- -----------------
Other income (expense):
Interest income 1,424 3,665
Interest expense (426,216) (476,194)
Gain on sale of communications assets 4,018,853 -
-------------------- -----------------
Other income (expense) - net 3,594,061 (472,529)
-------------------- -----------------
Income (loss) before provision for income taxes 4,260,910 (317,505)
Provision for income taxes 10,881 20,260
-------------------- -----------------
Net income (loss) from continuing operations 4,250,029 (337,765)
Discontinued operations
Loss from discontinued communications business 125,490 649,952
Income tax (benefit) - -
-------------------- -----------------
Loss from discontinued operations 125,490 649,952
-------------------- -----------------
Net income (loss) $4,124,539 $(987,717)
==================== =================
Basic and diluted income (loss) per share:
Income (loss) from continuing operations $0.26 $(0.03)
(Loss) from discontinued operations, net of taxes (0.01) (0.03)
-------------------- -----------------
Basic income (loss) $0.25 $(0.06)
==================== =================
Diluted income (loss) $0.18 $(0.06)
==================== =================
Weighted average shares outstanding 16,501,568 16,501,568
==================== =================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2003 2002
-------------------- ------------------
Net cash provided by (used in) operating activities $(1,460,257) $2,343,674
-------------------- ------------------
Cash flows from investing activities:
Acquisition of property and equipment (21,412) (70,112)
Proceeds from sale of communications assets - 295,418
-------------------- ------------------
Net cash provided by (used in) investing activities (21,412) 225,306
-------------------- ------------------
Cash flows from financing activities:
Principal payments on mortgage - (5,994)
-------------------- ------------------
Net cash used in financing activities - (5,994)
-------------------- ------------------
Net increase (decrease) in cash (1,481,669) 2,562,986
Cash and cash equivalents at beginning of period 3,055,255 2,535,419
-------------------- ------------------
Cash and cash equivalents at end of period $1,573,586 $5,098,405
==================== ==================
NON-CASH TRANSACTIONS:
During the three months ended September 30, 2003, accrued interest of $394,570
was capitalized to the senior secured promissory note payable.
During the three months ended September 30, 2003, the senior secured promissory
note was reduced by $4,230,355, which was the consideration for the sale of the
communications assets and related liabilities with a net carrying value of
$211,502.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DualStar, through its wholly owned subsidiaries, (collectively, "DualStar" or
the "Company") operates construction-related businesses. The Company completed
the discontinuance of its communications business in August 2003.
On August 1, 2003, the Company and its wholly owned subsidiary, ParaComm, Inc.
("ParaComm"), consummated the sale to an affiliate of its senior lender,
Madeleine, LLC ("Madeleine"), of substantially all of ParaComm's assets,
pursuant to an Asset Purchase Agreement dated as of July 2003 by and among the
Company, ParaComm, Madeleine, and PCM Acquisitions Corp. Such assets related to
ParaComm's satellite television and private cable services business in Florida.
The consideration for the sale was the reduction of $4.2 million (principal plus
capitalized accrued interest) of the amount of a note of the Company to
Madeleine. Such reduction was subject to certain post-closing adjustments, which
were not material.
The Company incurred significant losses in the last several fiscal years,
primarily in the communications business. The Company completed the
discontinuance of its communications business in August 2003. There can be no
assurance that the construction segment will sustain profitability or positive
cash flow from future operations. Given the current U.S. economic climate and
market conditions and the financial condition of the Company, there is a
substantial likelihood that the Company will be unable to raise additional funds
on terms satisfactory to it, if at all, to fund any operating losses that may
occur through the operation of the construction business.
The outstanding principal and accrued interest with respect to the senior
secured indebtedness owed by the Company to Madeleine totaled approximately $13
million at September 30, 2003.
Until October 27, 2003, the Company owed Madeleine, LLC, ("Madeleine")
approximately $13.1 million and was in default under the Madeleine Loan (defined
below). Madeleine had the ability to call that loan due and payable at any time,
and, if it was not paid, foreclose on significant assets of the Company's
subsidiaries that secured such loan. As reported in the Company's Current Report
on Form 8-K filed on November 12, 2003, the Company completed transactions by
which the Company reduced to zero its indebtedness to Madeleine on October 27,
2003. On that date, the Company and its wholly owned subsidiary Property
Control, Inc. sold and conveyed to an affiliate of Madeleine certain real
property in Long Island City, New York. The consideration for the sale was the
reduction of $3 million principal amount of the Company's outstanding note to
Madeleine. Also on October 27, 2003, the Company issued to Madeleine an
aggregate of 7,659,899 shares of the Company's common stock. The issuance of
such shares was in consideration of the reduction to zero of the Company's
remaining indebtedness to Madeleine in the aggregate amount of $10,100,000
(principal plus capitalized accrued interest). The Company also granted certain
registration rights to Madeleine. In connection with the transaction, certain
officers and management employees surrendered options to purchase an aggregate
of 2,248,000 shares of common stock and an affiliate of Madeleine terminated
warrants to purchase 3,125,000 shares of common stock. New options may be
granted to management, subject to shareholder approval. Madeleine currently owns
approximately 31.7% of the total outstanding common stock of the Company.
The issuance of the common stock in connection with the exchange was deemed to
be exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
on Section 4(2) of the Securities Act or Regulation D promulgated thereunder.
The Company had reason to believe that the purchaser was familiar with or had
access to information concerning its operations and financial condition, and the
purchaser represented that it was an accredited investor as defined in the
Securities Act. At the time of the issuance, the common stock was deemed to be
restricted securities for purposes of the Securities Act and the instruments
representing such securities included legends to that effect.
On November 8, 2000, the Company consummated a $12.5 million senior secured loan
transaction with Madeleine, an affiliate of Blackacre Capital Management L.L.C.
and Cerberus Capital Management L.P., (the "Madeleine Loan"). The Company did
not make payments to Madeleine pursuant to the Madeleine Loan agreement and was
in default under the terms of the agreement relating to the outstanding debt to
Madeleine. The de-listing of the Company's common shares from the Nasdaq
National Market in June 2001 also created a default under the Madeleine Loan
agreement. With the consummation of the transactions with Madeleine and its
affiliates, which occurred on August 1, 2003 and on October 27, 2003, the
Company extinguished $17.3 million of indebtedness to Madeleine. The Company
presently has no indebtedness to Madeleine and is not in default with respect to
the Madeleine Loan.
With the economic downturn affecting corporate America, the bonding industry has
come under increased pressure and claims, and in general, the bonding market has
tightened. Consequently, it has become more difficult for the Company to secure
surety bonds in connection with its construction business due to the Company's
financial position as well as overall market conditions. The Company is
currently considering ways to improve its ability to obtain bonding. There can
be no assurance that the Company will be able to obtain bonding or, if so, at a
reasonable cost. If the Company is unable to obtain surety bonds as needed, this
may have a material adverse effect on the Company.
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 certain information and
disclosures required by accounting principles generally accepted in the United
States of America for complete consolidated financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included and are of normal and recurring nature. Operating results for the
three-month period ended September 30, 2003 are not necessarily indicative of
the results that may be expected for the fiscal year ending June 30, 2004. The
interim statements should be read in conjunction with the financial statements
and notes, thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2003.
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 (loss) per share, when dilutive, stock options and warrants are included
as share equivalents using the treasury stock method. For the three months ended
September 30, 2002, stock options and warrants have been excluded from the
calculation of diluted income (loss) per share as their effect would have been
antidilutive.
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - CONTINGENCIES
(a) In connection with its construction-related businesses, the Company is
contingently liable to sureties under a general indemnity agreement. The Company
agrees to indemnify the sureties for any payments made on contracts of
suretyship, guarantee or indemnity. That is, on certain work at the request of
the Company, the sureties provide a full guarantee of performance and/or payment
to third parties in the form of a bond. If the sureties pay an amount to third
parties pursuant to such bond, the Company is obligated to fully reimburse the
sureties. There is no dollar amount limit on the amount of the indemnity
provided to the sureties.
(b) Until 1995, Centrifugal was a partner with DAK Electric Contracting Corp.
("DAK") in a joint venture that performed mechanical and electrical services for
a general contractor on a construction project in Manhattan known as the Lincoln
Square project. Centrifugal was responsible for the mechanical portion of the
contract, and its co-venturer, DAK, was responsible for the electrical portion.
In 1995, DAK became insolvent, thereby obligating Centrifugal to complete the
work on this project. As a result, in fiscal 1996 the Company wrote off
approximately $3.7 million with respect to accounts receivable, loans
receivable, claims and other costs that the Company incurred on behalf of DAK in
fulfillment of DAK's obligations under the contract on the Lincoln Square
project.
As of June 30, 1996, all of the known claims and liens of subcontractors of the
joint venture were settled and discharged, and all of the vendor lawsuits which
arose out of these claims were also settled with the exception of the following:
The joint venture's bonding companies have claims over for indemnity against
Centrifugal and under a guarantee agreement against the Company in the event
that a judgment is rendered against the bonding companies in a suit brought by
an employee benefit fund for DAK's employees' union seeking contributions to the
fund which the fund claims were due but not paid by DAK. The complaint alleges
several causes of action against several defendants in connection with several
projects and seeks a total of approximately $450,000 in damages on all of these
causes against the named defendants; however, only one of the several causes of
action, which seeks an unspecified portion of the total damages demanded,
relates to the Company. In February 2003, the Company was informed that the
bonding company reached a settlement with the union on account of the claim for
unpaid benefits on the Lincoln Square project in the amount of $270,000. The
bonding company expressed its intent to pursue reimbursement for such settlement
amount through the cross-claims alleged against the Company in such action.
Additionally, the Company may be exposed to such legal fees and other expenses
as the Company's bonding company may have incurred or will incur in connection
with this claim. Centrifugal and the Company have asserted, among other
defenses, that such contributions were not guaranteed under the terms of the
joint venture's bonds.
(c) In August 2001, OnTera signed a promissory note and security agreement with
Nokia to finance the purchase of various network equipment totaling
approximately $668,000. The note bears interest at a rate of 11% per annum and
requires eighteen monthly installments effective April 1, 2001. The note is
secured by the network equipment financed by the note. OnTera has not made
monthly installments since June 2001, therefore the Company is in default of the
agreement. As such, the remaining balance at June 30, 2003 of $564,370 is
included in accrued expenses and other current liabilities. In August 2002,
Nokia filed suit in the District Court of Dallas County, Texas, claiming damages
of approximately $607,000 plus interest, costs and attorneys on the promissory
note. The Company believes that the final amount will not exceed amounts
accrued.
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C (CONTINUED)
(d) In 1999, ParaComm purchased from Golden Sky Systems (GSS) GSS's contract
with DirecTV which authorized it to be a DirecTV Master Systems Operator (MSO).
Along with the contract so purchased, ParaComm acquired a GSS contract with one
of its System Operators, Cable America, Inc. In May, 2002 Cable America, Inc.
filed suit in the Circuit Court of Cook County, Illinois against ParaComm,
OnTera, DirecTV, GSS and Pegasus Communications Inc., which had subsequently
acquired GSS. The suit claims damages for allegedly unpaid commissions in the
claimed amount of $339,000 and also seeks an accounting.
(e) In July 2002, plaintiff Harvey Wayne filed a verified shareholders'
derivative complaint against directors and officers of the Company, various
other entities and the Company as a nominal defendant, in the United States
District Court for the Eastern District of New York. The complaint alleges
breach of fiduciary duties and seeks to compel the Company to hold a
shareholders' meeting for the election of directors. The complaint seeks
injunctive relief and unspecified damages. Motions to dismiss have been filed by
the Company and other defendants and are pending before the Court.
(f) In the ordinary course of business, the Company is involved in claims
concerning personal injuries and property damage, all of which the Company
refers to its insurance carriers. The Company believes that the claims are
covered under its liability policies and that no loss to the Company is
probable. No provision for such claims has been made in the accompanying
condensed consolidated financial statements.
NOTE D - DEBT
Senior Secured Promissory Note
On November 8, 2000, the Company consummated a $12.5 million senior secured loan
transaction with Madeleine, an affiliate of Blackacre Capital Management L.L.C.
("Blackacre") and Cerberus Capital Management L.P., (the "Madeleine Loan"). The
outstanding principal and accrued interest with respect to the senior secured
indebtedness owed by the Company to Madeleine totaled approximately $13 million
at September 30, 2003.
The Company did not make payments to Madeleine pursuant to the Madeleine Loan
agreement and was in default under the terms of the agreement relating to the
outstanding debt to Madeleine. With the consummation of the transactions with
Madeleine and its affiliates which occurred on August 1, 2003 and on October 27,
2003, the Company extinguished $17.3 million of indebtedness to Madeleine. The
Company presently has no indebtedness to Madeleine and is not in default with
respect to the Madeleine Loan.
NOTE E- DISCONTINUED OPERATIONS
In August 2003, the Company sold, substantially, all of the assets of ParaComm.
The carrying value of the ParaComm assets sold, represented, substantially, all
of the assets of the Company's communications business. The communications
operations for the three months ended September 30, 2003 are reported as
discontinued on the Company's condensed consolidated statement of operations for
the three months ended September 30, 2003. Additionally, the Company's condensed
consolidated statement
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E (CONTINUED)
of operations for the three months ended September 30, 2002 has been restated to
report the communications operations as discontinued.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
DualStar Technologies Corporation, through its wholly owned subsidiaries
(collectively, "DualStar" or the "Company"), operates construction-related
businesses. For a description of the Company's businesses and operations, see
Item 1 of the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2003.
With the economic downturn affecting corporate America, the bonding industry has
come under increased pressure and claims, and in general, the bonding market has
tightened. Consequently, it has become more difficult for the Company to secure
surety bonds in connection with its construction business due to the Company's
financial position as well as overall market conditions. The Company is
currently considering ways to improve its ability to obtain bonding. There can
be no assurance that the Company will be able to obtain bonding or, if so, at a
reasonable cost. If the Company is unable to obtain surety bonds as needed, this
may have a material adverse effect on the Company.
The statements contained in this Quarterly Report on Form 10-Q, including the
exhibits hereto, relating to operations of the Company may constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Please note that the words "intends,"
"expects," "plans," "estimates," "projects," "believes," "anticipates" and
similar expressions are intended to identify forward-looking statements. Actual
results of the Company may differ materially from those in the forward-looking
statements and may be affected by a number of factors including the ability of
the Company to raise and provide the capital resources to fund any continuing
operating losses, the Company's ability to obtain bonding or insurance coverage,
regulatory or legislative changes, the Company's dependence on key personnel,
and the Company's ability to manage growth, in addition to those risk factors,
set forth in the section captioned "Risk Factors" and the assumptions, risks and
uncertainties set forth in the other sections of the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2003 as well as in DualStar's other
filings with the SEC. The Company can give no assurance that its plans,
intentions, and expectations will be achieved and actual results could differ
materially from forecasts and estimates.
CAPITAL RESOURCES AND LIQUIDITY
Cash balances at September 30, and June 30, 2003 were $1.6 million and $3.1
million, respectively. The Company used $1.5 million of cash in the three months
ended September 30, 2003 by operating activities. The net use of cash was
primarily due to the increase of costs and estimated earnings in excess of
billings on uncompleted contracts which resulted from the Company's difficulties
in obtaining surety bonds. In the three months ended September 30, 2002, the
Company was provided with $2.3 million of cash. The net provision of cash was
primarily due to the decrease in receivables of the construction businesses. Due
to the relatively high dollar value of each construction contract, generally
ranging from $5 million to $10 million, should the collection of contract
receivables be delayed, it may have a material adverse effect on the Company's
operations.
The Company incurred significant losses in the last several fiscal years,
primarily in the communications segment. The Company completed the
discontinuance of its communications business in August 2003. There can be no
assurance that the construction segment will sustain profitability or positive
cash flow from future operations. Given the current U.S. economic climate and
market conditions and the financial condition of the Company, there is a
substantial likelihood that the Company will be unable to raise additional funds
on terms satisfactory to it, if at all, to fund any future operating losses that
may occur through the operation of the construction business.
Moreover, until October 27, 2003, the Company owed Madeleine, LLC, ("Madeleine")
approximately $13.1 million and was in default under the Madeleine Loan (defined
below). Madeleine had the ability to call that loan due and payable at any time,
and, if it was not paid, foreclose on significant assets of the Company's
subsidiaries that secured such loan. As reported in the Company's Current Report
on Form 8-K filed on November 12, 2003, the Company completed transactions by
which the Company reduced to zero its indebtedness to Madeleine on October 27,
2003. On that date, the Company and its wholly owned subsidiary Property
Control, Inc. sold and conveyed to an affiliate of Madeleine certain real
property in Long Island City, New York. The consideration for the sale was the
reduction of $3 million principal amount of the Company's outstanding note to
Madeleine. Also on October 27, 2003, the Company issued to Madeleine an
aggregate of 7,659,899 shares of the Company's common stock. The issuance of
such shares was in consideration of the reduction to zero of the Company's
remaining indebtedness to Madeleine in the aggregate amount of $10,100,000
(principal plus capitalized accrued interest). The Company also granted certain
registration rights to Madeleine. Madeleine currently owns approximately 31.7%
of the total outstanding common stock of the Company.
Senior Secured Promissory Note
On November 8, 2000, the Company consummated a $12.5 million senior secured loan
transaction with Madeleine, an affiliate of Blackacre Capital Management L.L.C.
and Cerberus Capital Management L.P., (the "Madeleine Loan"). The outstanding
principal and accrued interest with respect to the senior secured indebtedness
owed by the Company to Madeleine totaled approximately $13 million at September
30, 2003.
The Company did not make payments to Madeleine pursuant to the Madeleine Loan
agreement and was in default under the terms of the agreement relating to the
outstanding debt to Madeleine. With the consummation of the transactions with
Madeleine and its affiliates, which occurred on August 1, 2003 and on October
27, 2003, the Company extinguished $17.3 million of indebtedness to Madeleine.
The Company presently has no indebtedness to Madeleine and is not in default
with respect to the Madeleine Loan.
RESULTS OF OPERATIONS
Revenue increased $2.1 million or 14.9% from $14.1 million in the three months
ended September 30, 2002 to $16.2 million in the three months ended September
30, 2003. The increase was primarily due to revenues being recognized on amounts
billed in the prior year on contracts whose final profits were higher than the
estimates used while they were in process.
Cost of revenue increased $1.5 million or 12.2% from $12.3 million in the three
months ended September 30, 2002 to $13.8 million in the three months ended
September 30, 2003. The increase was primarily due to the increase in
construction revenue. Gross profit percentages were 14.9% and 12.7% in the three
months ended September 30, 2003 and 2002, respectively. The improvement in gross
profit percentage was due primarily to revenues being recognized on amounts
billed in the prior year on contracts whose final profits were higher than the
estimates used while they were in process.
Operating income increased $0.5 million or 250% from $0.2 million in the three
months ended September 30, 2002 to $0.7 million in the three months ended
September 30, 2003. The increase was due primarily to the increase in gross
profit.
General and administrative expenses increased $0.1 million or 6.3% from $1.6
million in the three months ended September 30, 2002 to $1.7 million in the
three months ended September 30, 2003. The increase was due primarily to the
increase in professional fees.
Depreciation and amortization remained unchanged at $0.1 million in the three
months ended September 30, 2003 and 2002, respectively.
Interest expense decreased $0.1 million or 20.0% from $0.5 million in the three
months ended September 30, 2002 to $0.4 million in the three months ended
September 30, 2003. The decrease was due to the reduction of the Company's
senior secured promissory note to Madeleine resulting from the sale of
substantially all of the assets of ParaComm, Inc. The decrease was also due to
the satisfaction of the Company's mortgage in March 2003.
NEW ACCOUNTING STANDARDS ADOPTED
None.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
None.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2003, the Company had debt of $13 million with a fixed
interest rate of 11.0%. The Company had no derivative financial instruments as
of September 30, 2003. The Company believes that the interest rate risk
associated with its investments is not material to the results of operations of
the Company.
With the consummation of the transaction with Madeleine and its affiliates,
which occurred on October 27, 2003, the Company is presently debt free.
ITEM 4 -- CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Regulations under the
Securities Exchange Act of 1934 require public companies, including our company,
to maintain "disclosure controls and procedures," which are defined to mean a
company's controls and other prodedures that are designed to ensure that
information required to be disclosed in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms.
Our Chief Executive Officer and our Chief Financial Officer, based on their
evaluation of our disclosure controls and procedures as of the end of the period
covered by this report, concluded that our disclosure controls and procedures
were effective for this purpose.
Changes in Internal Control Over Financial Reporting. Regulations under the
Securities Exchange Act of 1934 require public companies, including our company,
to evaluate any change in our "internal control over financial reporting," which
is defined as a process to provide reasonable assurance regarding the
reliability of financial reporting and preparation of financial statements for
external purposes in accordance with generally accepted accounting principles in
the United States. In connection with their evaluation of our disclosure
controls and procedures as of the end of the period covered by this report, our
Chief Executive Officer and Chief Financial Officer did not identify any change
in our internal control over financial reporting during the three-month period
ended September 30, 2003 that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 2. -- CHANGES IN SECURITIES AND USE OF PROCEEDS.
On October 27, 2003, the Company issued an aggregate of 7,659,899 shares of the
Company's Common Stock to its senior lender Madeleine, LLC in consideration of
the reduction to zero of the Company's remaining indebtedness to Madeleine in
the aggregate amount of $10,100,000 (principal plus capitalized accrued
interest). The Company also granted certain registration rights to Madeleine. In
connection with the transaction, certain officers and management employees
surrendered options to purchase an aggregate of 2,248,000 shares of common stock
and an affiliate of Madeleine terminated warrants to purchase 3,125,000 shares
of common stock. New options may be granted to management, subject to
shareholder approval. Madeleine currently owns approximately 31.7% of the total
outstanding common stock of the Company.
The Company relied on an exemption from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended ("Securities Act"), as a transaction by
an issuer not involving a public offering. Madeleine has represented to the
Company that it is an accredited investor as defined in Regulation D promulgated
under the Securities Act, and that it has received or had access to adequate
information about the Company. Madeleine agreed, as a condition of the issuance,
not to transfer or distribute the shares except pursuant to a registration
statement or an exemption from registration under the Securities Act.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Until October 27, 2003, the Company owed Madeleine, LLC approximately $13.1
million and was in default under the Madeleine Loan. Madeleine had the ability
to call that loan due and payable at any time, and, if it was not paid,
foreclose on significant assets of the Company's subsidiaries that secured such
loan. As reported in the Company's Current Report on Form 8-K filed on November
12, 2003, the Company completed transactions by which the Company reduced to
zero its indebtedness to Madeleine on October 27, 2003.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are furnished in accordance with the
provisions of Item 601 of Regulation S-K.
Exhibit No.
Regulation S-K
Item 601
Designation Exhibit Description
31.1 Rule 13a-14(a)/15d-14(a) Certification by Mr. Cuneo.
31.2 Rule 13a-14(a)/15d-14(a) Certification by Mr. Birnbach
32.1 Section 1350 Certification by Mr. Cuneo
32.2 Section 1350 Certification by Mr. Birnbach
(b) Reports on Form 8-K. During the period covered by this Report on
Form 10-Q, the Company filed a Current Report, dated August 19, 2003, which
reports DualStar's sale of the assets of ParaComm, Inc. to an affiliate of its
senior lender Madeleine, LLC.
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, 2003 By: /s/ GREGORY CUNEO
Gregory Cuneo
President and Chief Executive Officer
Date: November 14, 2003 By: /s/ ROBERT BIRNBACH
Robert Birnbach
Executive Vice President and Chief
Financial Officer
Date: November 14, 2003 By: /s/ MICHAEL GIAMBRA
Michael Giambra
Vice President, Chief Accounting Officer,
and Corporate Controller
EXHIBIT INDEX
Following is the list of Exhibits, as required by Item 601 of
Regulation S-K, filed as part of this Report on Form 10-Q:
Exhibit No.
Regulation S-K
Item 601
Designation EXHIBIT DESCRIPTION
31.1 Rule 13a-14(a)/15d-14(a) Certification by Mr. Cuneo.
31.2 Rule 13a-14(a)/15d-14(a) Certification by Mr. Birnbach
32.1 Section 1350 Certification by Mr. Cuneo
32.2 Section 1350 Certification by Mr. Birnbach