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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 December 31, 2003.
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.)
11-30 47th Avenue, Long Island City, NY 11101
________________________________________________________________________________
(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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 --- 24,161,467 shares as of February 11, 2004
________________________________________________________________________________
1
Index
DualStar Technologies Corporation
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2003 (Unaudited)
and June 30, 2003
Condensed Consolidated Statements of Operations for the Three months
and Six months ended December 31, 2003 and 2002 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Six months
ended December 31, 2003 and 2002 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) -
December 31, 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 6. Exhibits and Reports on Form 8-K
Signatures
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2003 2003
-------------------- ------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $379,047 $3,055,255
Accounts receivable - net of allowance for doubtful accounts 18,438,742 17,067,241
Retainage receivable 3,927,470 3,049,667
Costs and estimated earnings in excess of billings on uncompleted
contracts 3,200,443 768,409
Assets held for sale - 483,756
Prepaid expenses and other current assets 177,853 220,823
-------------------- ------------------
Total current assets 26,123,555 24,645,151
Property and equipment - net of accumulated depreciation and amortization 92,203 1,144,282
Other 74,555 431,363
-------------------- ------------------
Total assets $26,290,313 $26,220,796
==================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $9,311,364 $5,466,501
Senior secured promissory note payable - 16,827,583
Billings in excess of costs and estimated earnings on uncompleted
contracts 145,559 2,788,820
Liabilities held for sale - 52,575
Accrued expenses and other current liabilities 4,419,349 4,521,913
-------------------- ------------------
Total current liabilities 13,876,272 29,657,392
-------------------- ------------------
Total liabilities 13,876,272 29,657,392
-------------------- ------------------
Commitments and contingencies
Shareholders' equity (deficit):
Common stock 241,615 165,016
Additional paid-in capital 51,854,613 41,832,721
Accumulated deficit (39,682,187) (45,434,333)
-------------------- ------------------
Total shareholders' equity (deficit) 12,414,041 (3,436,596)
-------------------- ------------------
Total liabilities and shareholders' equity (deficit) $26,290,313 $26,220,796
==================== ==================
See notes to condensed consolidated financial statements
3
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended December 31, For the Six Months Ended December 31,
---------------------------------------- ----------------------------------------
2003 2002 2003 2002
------------------- ----------------- ------------------ ------------------
Revenues earned $20,328,652 $14,172,669 $36,549,213 $28,269,764
Costs of revenues earned, excluding
depreciation and amortization 18,289,616 11,834,854 32,088,469 24,135,775
------------------- ----------------- ------------------ ------------------
Gross profit 2,039,036 2,337,815 4,460,744 4,133,989
------------------- ----------------- ------------------ ------------------
Operating expenses:
General and administrative expenses,
excluding depreciation and amortization 1,898,951 2,215,400 3,581,251 3,788,199
Depreciation and amortization 14,729 69,067 87,288 137,417
------------------- ----------------- ------------------ ------------------
Operating income 125,356 53,348 792,205 208,373
------------------- ----------------- ------------------ ------------------
Other income (expense):
Interest income 44 7,941 1,468 11,606
Interest expense (106,694) (546,593) (532,910) (1,022,787)
Gain on disposition of property and
Equipment 1,608,900 - 5,627,753 -
------------------- ----------------- ------------------ ------------------
Other income (expense) - net 1,502,250 (538,652) 5,096,311 (1,011,181)
------------------- ----------------- ------------------ ------------------
Income (loss) before provision for
income taxes 1,627,606 (485,304) 5,888,516 (802,808)
Provision for income taxes - - 10,881 20,260
------------------- ----------------- ------------------ ------------------
Net income (loss) from continuing
operations 1,627,606 (485,304) 5,877,635 (823,068)
Discontinued operations
Loss from discontinued communications
business - 1,043,227 125,490 1,693,179
Income tax (benefit) - - - -
------------------- ----------------- ------------------ ------------------
Loss from discontinued operations - 1,043,227 125,490 1,693,179
------------------- ----------------- ------------------ ------------------
Net income (loss) $1,627,606 $(1,528,531) $5,752,145 $(2,516,247)
=================== ================= ================== ==================
Basic and diluted income (loss) per share:
Income (loss) from continuing operations $0.07 $(0.03) $0.24 $(0.05)
(Loss) from discontinued
operations, net of taxes 0.00 (0.06) (0.01) (0.10)
------------------- ----------------- ------------------ ------------------
Basic income (loss) $0.07 $(0.09) $0.23 $(0.15)
=================== ================= ================== ==================
Diluted income (loss) $0.07 $(0.09) $0.23 $(0.15)
=================== ================= ================== ==================
Weighted average shares outstanding 24,161,467 16,501,568 24,161,467 16,501,568
=================== ================= ================== ==================
See notes to condensed consolidated financial statements
4
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
December 31,
-------------------- ------------------
2003 2002
-------------------- ------------------
Net cash provided by (used in) operating activities $(2,630,606) $5,329,439
-------------------- ------------------
Cash flows from investing activities:
Acquisition of property and equipment (45,602) (73,644)
Proceeds from sale of communications assets - 295,279
-------------------- ------------------
Net cash provided by (used in) investing activities (45,602) 221,635
-------------------- ------------------
Cash flows from financing activities:
Principal payments on mortgage - (14,979)
-------------------- ------------------
Net cash used in financing activities - (14,979)
-------------------- ------------------
Net increase (decrease) in cash and cash equivalents (2,676,208) 5,536,095
Cash and cash equivalents at beginning of period 3,055,255 2,535,419
-------------------- ------------------
Cash and cash equivalents at end of period $379,047 $8,071,514
==================== ==================
Non-cash transactions:
Schedule of non-cash investing and financing activities:
Property and equipment exchanged for reduction of note payable $1,515,825
==================
Interest capitalized to note payable $501,264
==================
Reduction of note payable related to exchange of property and equipment $7,230,356
==================
Note payable exchanged for stock $10,098,491
==================
See notes to condensed consolidated financial statements
5
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.
Until October 27, 2003, the Company owed 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 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. 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.
6
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 and six-month periods ended December 31, 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 loss per share is based on the weighted
average number of shares of common stock outstanding. For diluted net loss and
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 and six months ended December 31, 2002, stock options
and warrants have been excluded from the calculation of diluted loss per share
as their effect would have been antidilutive. On October 27, 2003, the
outstanding options and warrants were surrendered.
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, a wholly owned subsidiary of the Company, 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
7
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - CONTINGENCIES (continued)
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, a wholly owned subsidiary of the Company,
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 December 31, 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.
(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.
8
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - CONTINGENCIES (continued)
(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 - 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 and six months ended December 31, 2003 are reported as
discontinued on the Company's condensed consolidated statement of operations for
the three and six months ended December 31, 2003.
9
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
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. The Company completed the discontinuance of its communications
business in August 2003. As discussed herein, in the fourth quarter of 2003, the
Company completed transactions by which the Company reduced to zero its
indebtedness to Madeleine, L.L.C. ("Madeleine"), an affiliate of Blackacre
Capital Management L.L.C. As a result of such transactions, at October 27, 2003,
Madeleine owned approximately 31.7% of the Company's total outstanding common
stock.
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 December 31, 2003 and June 30, 2003 were $0.4 million and $3.1
million, respectively. The Company used $2.6 million of cash in the six months
ended December 31, 2003 in 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. The Company used $0.1 million for the
acquisition of property and equipment. The Company was provided with $5.3
million of cash in the six months ended December 31, 2002 by operating
activities. The net provision of cash was primarily due to decrease in
receivables of the construction businesses. Due to the relatively high dollar
value of each construction contract, generally ranging from $2 million to $20
million, should the collection of contract receivables be delayed, it may have a
material adverse effect on the Company's operations.
10
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 approximately $13.1 million
and was in default under a $12.5 million senior secured loan agreement (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. 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.
Results of Operations
Revenue increased $6.1 million or 43.0% from $14.2 million in the three months
ended December 31, 2002 to $20.3 million in the three months ended December 31,
2003. The increase was primarily due to more construction contracts started in
2003.
Revenue increased $8.2 million or 29.0% from $28.3 million in the six months
ended December 31, 2002 to $36.5 million in the six months ended December 31,
2003. The increase was primarily due to more construction contracts started in
2003.
Cost of revenue increased $6.5 million or 55.1% from $11.8 million in the three
months ended December 31, 2002 to $18.3 million in the three months ended
December 31, 2003. The increase was primarily due to the increase in
construction revenue. Gross profit percentages were 10.0% and 16.5% in the three
months ended December 31, 2003 and 2002, respectively. The drop in gross profit
percentage was due primarily to a lower gross margin percentage in the new
contracts started in 2003.
Cost of revenue increased $8.0 million or 33.2% from $24.1 million in the six
months ended December 31, 2002 to $32.1 million in the six months ended December
31, 2003. The increase was primarily due to the increase in construction
revenue. Gross profit percentages were 12.2% and 14.6% in the six months ended
December 31, 2003 and 2002, respectively. The drop in gross profit percentage
was due primarily to a lower gross margin percentage in the new contracts
started in 2003.
Operating income remained unchanged at $0.1 million in the three months ended
December 31, 2003 and the three months ended December 31, 2002.
11
Operating income increased $0.6 million or 300.0% from $0.2 million in the six
months ended December 31, 2002 to $0.8 million in the six months ended December
31, 2003. The increase was due primarily to the increase in construction
revenue.
General and administrative expenses decreased $0.3 million or 13.6% from $2.2
million in the three months ended December 31, 2002 to $1.9 million in the three
months ended December 31, 2003. The decrease in general and administrative
expenses included a $0.3 million decrease in payroll and related costs.
General and administrative expenses decreased $0.2 million or 5.3% from $3.8
million in the six months ended December 31, 2002 to $3.6 million in the six
months ended December 31, 2003. The decrease in general and administrative
expenses included a $0.2 million decrease in payroll and related costs.
Depreciation and amortization decreased $0.1 million or 100.0% from $0.1 million
in the three months ended December 31, 2002 to an immaterial amount in the three
months ended December 31, 2003. The decrease was primarily due to the exchange
of property and equipment for the reduction of the senior secured promissory
note payable to zero.
Depreciation and amortization remained unchanged at $0.1 million in the six
months ended December 31, 2003 and in the six months ended December 31, 2002.
Interest expense decreased $0.4 million or 80% from $0.5 million in the three
months ended December 31, 2002 to $0.1 million in the three months ended
December 31, 2003. The decrease was primarily due to the reduction of the senior
secured promissory note payable to zero. Interest expense decreased $0.5 million
or 50% from $1.0 million in the six months ended December 31, 2002 to $0.5
million in the six months ended December 31, 2003. The decrease was primarily
due to the reduction of the senior secured promissory note payable to zero.
New Accounting Standards Adopted
Recently Issued Accounting Pronouncement
In December 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 132 (SFAS 132) (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits - an
amendment of FASB Statements No. 87, 88, and 106." SFAS 132 revises employers'
disclosures about pension plans and other postretirement benefit plans. It does
not change the measurement or recognition of those plans required by FASB
Statements No. 87, "Employers' Accounting for Pensions," No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS 132 retains the disclosure
requirements contained in the original FASB Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which it
replaces. It requires additional disclosures to those in the original Statement
132 about the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit postretirement plans.
The required information needs to be provided separately for pension plans and
for other postretirement benefit plans. SFAS 132 is effective for financial
statements with fiscal years ending after December 15, 2003. The interim-period
disclosures are effective for interim periods beginning after December 15, 2003.
Disclosure of information about foreign plans is effective for fiscal years
ending after June 15, 2004. Disclosure of estimated future benefit payments is
effective for fiscal years ending after June 15, 2004. Disclosure of information
for nonpublic entities is effective for fiscal years ending after June 15, 2004.
The Company believes the adoption of SFAS 132 will not have a material impact on
the Company's financial condition, results of operations or liquidity.
12
New Accounting Standards Not Yet Adopted
None.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
None.
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 procedures 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 December 31, 2003 that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
13
PART II - OTHER INFORMATION
Item 2. -- Changes in Securities and Use of Proceeds.
For purposes of general information, as previously reported in the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 2003, 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 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
_____________ ___________________
2.5 Securities Purchase Agreement by and among Dualstar Technologies
Corporation and Madeleine, L.L.C., dated October 27, 2003 (1)
10.19 Bargain and Sale Deed, dated October 27, 2003, by and between
Property Control, Inc. and 11-30 47th Avenue Company LLC (1)
10.20 Registration Rights Agreement by and between Dualstar
Technologies Corporation and Madeleine, L.L.C. dated October 27,
2003 (1)
10.21 Form of Agreement to Surrender Options (1)
10.22 Warrant Termination Agreement by and between DSTR Warrant Co.,
LLC and DualStar Technologies Corporation, dated October 27, 2003
(1)
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
(1) Incorporated herein by reference to Registrant's Current Report on Form 8-K
(File No. 000-25552), filed November 12, 2003.
(b) Reports on Form 8-K. During the period covered by this Report on
Form 10-Q, the Company filed a Current Report, dated November 12,
2003, which reports the Company completed transactions by which
the Company reduced to zero its indebtedness to Madeleine on
October 27, 2003.
14
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DualStar Technologies Corporation
Date: February 17, 2004 By: /s/ GREGORY CUNEO
--------------------------------------
Gregory Cuneo
President and Chief Executive Officer
Date: February 17, 2004 By: /s/ ROBERT BIRNBACH
--------------------------------------
Robert Birnbach
Executive Vice President and Chief
Financial Officer
Date: February 17, 2004 By: /s/ MICHAEL GIAMBRA
--------------------------------------
Michael Giambra
Vice President, Chief Accounting Officer
and Corporate Controller
15
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
_____________ ___________________
2.5 Securities Purchase Agreement by and among Dualstar Technologies
Corporation and Madeleine, L.L.C., dated October 27, 2003 (1)
10.19 Bargain and Sale Deed, dated October 27, 2003, by and between
Property Control, Inc. and 11-30 47th Avenue Company LLC (1)
10.20 Registration Rights Agreement by and between Dualstar
Technologies Corporation and Madeleine, L.L.C. dated October 27,
2003 (1)
10.21 Form of Agreement to Surrender Options (1)
10.22 Warrant Termination Agreement by and between DSTR Warrant Co.,
LLC and DualStar Technologies Corporation, dated October 27, 2003
(1)
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
(1) Incorporated herein by reference to Registrant's Current Report on Form 8-K
(File No. 000-25552), filed November 12, 2003.
16