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 March 31, 1999
[ ] 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 .
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 --- 9,000,000 shares as of May 12, 1999
<PAGE>
Index
DualStar Technologies Corporation
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - March 31, 1999 and
June 30, 1998
Condensed consolidated statements of income - Three and nine
months ended March 31, 1999 and 1998
Condensed consolidated statements of cash flows - Nine months
ended March 31, 1999 and 1998
Notes to condensed consolidated financial statements - March 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K*
Signatures
* No exhibits are included in this filing
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
1999 1998
(unaudited)
ASSETS
Current assets:
Cash $ 1,300,901 $ 1,356,228
Contracts receivable, net 20,447,388 19,321,514
Retainage receivable 4,967,592 4,574,252
Costs and estimated earnings in excess
of billings on uncompleted contracts 3,446,864 1,507,471
Deferred tax asset - current 178,000 178,000
Prepaid expenses and sundry receivable 634,291 427,725
------------ ------------
Total current assets 30,975,036 27,365,190
Property and equipment, net 3,240,114 3,400,470
Other assets:
Deferred tax asset - long-term 924,000 924,000
Other 1,824,336 1,655,099
------------ ------------
Total assets $36,963,486 $33,344,759
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $18,429,556 $19,086,827
Billings in excess of costs and
estimated earnings on uncompleted
contracts 5,138,181 3,882,797
Accrued expenses and other liabilities 3,645,034 4,030,890
------------ ------------
Total current liabilities 27,212,771 27,000,514
Subordinated convertible note 2,500,000 -
Mortgage payable - long-term 735,000 772,500
Other liabilities 300,413 204,576
------------ ------------
Total liabilities 30,748,184 27,977,590
------------ ------------
Contingencies
Shareholders' equity:
Common stock 90,000 90,000
Additional paid-in capital 14,995,836 14,995,836
Deficit (8,870,534) (9,718,667)
------------ ------------
Total shareholders' equity 6,215,302 5,367,169
------------ ------------
Total liabilities and shareholders'
equity $36,963,486 $33,344,759
============ ============
See notes to condensed consolidated financial statements
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
For the Three Months For the Nine Months
Ended March 31, Ended March 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Contract revenues earned $20,343,044 $23,242,049 $61,432,525 $72,126,401
Cost of revenues earned 17,072,331 21,250,759 54,139,026 65,311,089
------------ ------------ ------------ ------------
Gross profit 3,270,713 1,991,290 7,293,499 6,815,312
General and administrative
expenses 2,190,752 1,887,410 6,445,366 5,988,986
------------ ------------ ------------ ------------
Income before provision
for income taxes 1,079,961 103,880 848,133 826,326
Provision for income taxes - - - -
------------ ------------ ------------ ------------
Net income $ 1,079,961 $ 103,880 $ 848,133 $ 826,326
============ ============ ============ ============
Basic income per share:
Net income per share $0.12 $0.01 $0.09 $0.09
Weighted average shares
outstanding 9,000,000 9,000,000 9,000,000 9,000,000
Diluted income per share:
Net income per share $0.10 $0.01 $0.08 $0.09
Weighted average shares
outstanding 11,594,766 9,480,933 10,652,955 9,458,781
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31,
(UNAUDITED)
1999 1998
Cash (used in) provided by operating
activities $(3,148,135) $ 1,609,296
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (250,989) (732,302)
------------ ------------
Net cash used in investing activities (250,989) (732,302)
------------ ------------
Cash flows from financing activities:
Proceeds from subordinated note 1,000,000 -
Proceeds from subordinated convertible
note 2,500,000 -
Principal payments on capital lease
obligations (118,703) (43,589)
Principal payments on mortgage (37,500) (30,000)
------------ ------------
Net cash provided by (used in) financing
activities 3,343,797 (73,589)
------------ ------------
Net (decrease) increase in cash (55,327) 803,405
Cash - beginning of period 1,356,228 1,110,615
------------ ------------
Cash - end of period $1,300,901 $ 1,914,020
============ ============
See notes to condensed consolidated financial statements
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three- and nine-month periods ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ending
June 30, 1999. For further information, refer to the financial statements
and footnotes thereto included in DualStar Technologies Corporation and
Subsidiaries' Annual Report on Form 10-K for the fiscal year ended June
30, 1998.
NOTE B - NET INCOME PER SHARE
Basic income per share is based on the average number of common shares
outstanding during each period. Diluted income per share is based on an
assumption that the convertible subordinated debentures issued in November
1998 were converted into common stock as of its issuance date at the stated
conversion rate, with a corresponding elimination of related interest
expense, net of any income taxes. In addition, the dilutive effect of option
and warrants is included in the dilutive computation. Convertible debt,
options and warrants are not included in the computation when their effect is
anti-dilutive.
The table below presents the information used to compute diluted income per
share:
Three months ended Nine months ended
March 31, March 31,
1999 1998 1999 1998
Numerator
Net income - basic $1,079,961 $ 103,880 $ 848,133 $ 826,326
Interest expense 46,875 - 62,500 -
----------- ----------- ----------- -----------
Net income - diluted $1,126,836 $ 103,880 $ 910,633 $ 826,326
=========== =========== =========== ===========
Denominator
Basic shares 9,000,000 9,000,000 9,000,000 9,000,000
Effect of convertible
debt 1,791,000 - 796,000 -
Effect of options 803,766 480,933 856,955 458,781
----------- ----------- ----------- -----------
Diluted shares 11,594,766 9,480,933 10,652,955 9,458,781
=========== =========== =========== ===========
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
NOTE C - SUBORDINATED CONVERTIBLE NOTE
On November 25, 1998, the Company sold to an investment group a subordinated
convertible note in the principal amount of $2.5 million, due and payable on
May 25, 2001. The note and unpaid interest bear an interest rate of 7.5% per
annum and is payable semi-annually at the option of the Company. Interest
that is not paid is added to the principal. In the event of default, the
lender may declare the principal and unpaid interest immediately due and
payable, and the outstanding amount will bear an interest rate of 12.5% per
annum thereafter.
The note is subordinated to the first mortgage of the Company's building and to
the rights of financial institutions lending money to the Company.
During or at the maturity of the note, the lender has an option to convert the
note into fully-paid and nonassessable shares of the Company's common stock.
The number of shares issued upon the conversion shall not exceed 1,791,000
shares, or 19.9% of the Company's outstanding shares on November 25, 1998.
Initially, the conversion price is $1.40 per share and will be reset on the
180th day following closing and every 90 days thereafter. The reset
conversion price will be the lower of: (i) the average closing price of the
Company's common stock on the 20 trading days immediately preceding the reset
date or (ii) the initial conversion price of $1.40. The number of shares that
can be received upon conversion will be adjusted proportionately for certain
transactions, such as stock dividends and splits, and stockholder distributions.
If the number of shares issued upon the conversion times the conversion price is
less than the note principal and unpaid interest, the difference, at the
Company's option, will be payable in cash or a one-year term note. The term
note will be secured by the Company's assets and bear an interest rate of
12.5% per annum.
The Company may require the lender to convert the note into shares of the
Company's common stock at the applicable conversion price in effect on such
date if, at anytime after the 181st day following closing, the closing price
of the common stock, for 20 consecutive days, is $3.00 or more per share.
Also at the end of the term, at the option of the Company, in lieu of paying
the lender the entire note amount, the Company shall have the right to force
the conversion of 25% of the outstanding balance of the note amount into
common stock.
Under the $2.5 million note agreement, the Company has certain restrictions
on certain transactions, such as acquisition of additional indebtedness,
related party transactions, transfer and disposition of assets, issuance of
stock options, stock dividends and splits, and stock repurchases.
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCHR 31, 1999
NOTE C - (continued)
The Company also agreed to increase the total number of directors to eight.
The investment group has the right to designate, and the Company will use its
best efforts to cause the election of, a person reasonably acceptable to the
Board of Directors to fill such newly created directorship. On February 11,
1999, the investment group's nominee was elected to the Company's Board of
Directors.
NOTE D - SUBORDINATED NOTE
In July 1998, the Company sold to an investment group a $1 million
subordinated note. The note bears an interest rate of 10% per annum and is
collateralized by the Company's building, subordinate to the building's first
mortgage, in addition to the Company's cash and accounts receivable. The
note and any interest were due and payable on demand.
On November 25, 1998, in connection with the $2.5 million subordinated
convertible note, referred to in Note C above, the maturity date of the $1
million subordinated note was extended to November 25, 1999 and provisions
relating to events of default were added.
NOTE E - STOCK OPTION PLAN
In March 1999, the Company granted a total of 979,000 stock options to various
employees and members of the board of directors. In general, the options
have a term of seven years from the date of grant and vest over a period of
two to five years. The exercise price of each option was higher than the
market price of the Company's stock on the date of grant.
<PAGE>
Item 2. 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 and control, environmental,
security, telecommunications, direct broadcast satellite and cable
television, and high-speed Internet access 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. Important factors that could cause actual
results to differ materially include, but are not limited to, changes in the
pricing environment for the Company's goods and services, regulatory or
legislative changes, the Company's dependence on key personnel, the impact of
Year 2000 issues which may be more significant than currently anticipated,
and the Company's ability to manage growth, in addition to those risk factors
set forth in DualStar Technologies Corporation and Subsidiaries' Annual
Report on Form 10-K for the fiscal year ended June 30, 1998 and which speaks
only as of the date thereof. Many of the factors are beyond the Company's
ability to control or predict. 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. 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, 1999 and June 30, 1998 were $1.3 million and $1.4
million, respectively. The Company's operations used $3.1 million of cash in
the nine months ended March 31, 1999 primarily to pay trade payables. The
Company's operations provided $1.6 million of cash in the nine months ended
March 31, 1998.
In the nine months ended March 31, 1999 and 1998, the Company acquired
capital assets of $0.2 million and $0.7 million, respectively. Substantially
all of the capital asset acquisitions represented investments in
telecommunications infrastructure systems for buildings in return for rights
to provide telephone, television and Internet services to the buildings'
residents.
In July and November 1998, the Company entered into a $1 million subordinated
note agreement and a $2.5 million subordinated convertible note agreement,
respectively, with an investment group.
Year 2000 Compliance
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such
computer systems will be unable to interpret dates beyond the year 1999,
which could cause a system failure or other computer errors, leading to
disruptions in operations. In 1998, the Company developed a three-phase
program for Y2K compliance. Phase I is the identification of those systems
through which the Company has exposure to Y2K issues. Phase II is the
development and implementation of action plans to be Y2K compliant in all
areas by the end of June 1999. Phase III, to be completed by September 1999,
is the final testing of each major area of exposure to ensure compliance.
The Company has identified two major areas determined to be critical for
successful Y2K compliance: (1) financial and informational system
applications, and (2) system and software suppliers.
The Company, in accordance with Phase I of the program, conducted an internal
review of its systems and contacted suppliers to determine major areas of
exposure to Y2K issues. In the financial and informational systems area,
a number of applications have been identified as Y2K compliant due to their
recent implementation. The Company's core financial and reporting systems
have been upgraded to be Y2K compliant. The final testing of the upgraded
systems is scheduled to be completed by August 1999 to ensure Y2K compliance.
The Company's non-compliant informational systems are scheduled for
replacement by the end of June 1999 and are scheduled to be tested for
compliance by September 1999. The Company believes the currently estimated
replacement and labor costs to bring the core financial, reporting and
informational system applications into compliance should not have a material
adverse effect on the Company's financial condition in fiscal 1999 and 2000,
although there can be no assurance of this.
The Company has contacted its major suppliers with regards to Y2K compliance.
All of these suppliers state that they are, or intend to be, Y2K compliant by
January 1, 2000. There can be no assurance of such a result and the Company
cannot predict the outcome if the suppliers do not become Y2K compliant by
January 1, 2000.
<PAGE>
Results of Operations
Contract revenues decreased 12.5% in the three months ended March 31, 1999 to
$20.3 million, down $2.9 million from the comparable period of 1998.
Contract revenues decreased 14.8% in the nine months ended March 31, 1999 to
$61.4 million, down $10.7 million from the comparable period in 1998. The
decreases were due primarily to the result of the Company's marketing plan of
being more selective in bidding new contracts in order to meet certain
profitability criteria.
Gross profit increased $1.3 million in the three months ended March 31, 1999
to $3.3 million, from the comparable period in 1998. Gross profit increased
$0.5 million in the nine months ended March 31, 1999 to $7.3 million from the
comparable period in 1998. The gross profit margins were 16.1% and 8.6% for
the three months ended March 31, 1999 and 1998, respectively. The gross
profit margins were 11.9% and 9.4% for the nine months ended March 31, 1999
and 1998, respectively. The increases in gross profit and gross margin were
primarily due to the results of the implementation of the Company's marketing
plan to emphasize contracts that return higher profit margins.
General and administrative expenses increased $0.3 million in the three
months ended March 31, 1999 to $2.2 million from the comparable period in
1998. General and administrative expenses increased $0.5 million in the nine
months ended March 31, 1999 to $6.4 million from the comparable period in
1998. The increases were due primarily to the additional interest costs
incurred for the notes the Company issued in July and November 1998 and to
increases in payroll costs. As a percentage of revenue, general and
administrative expenses increased to 10.8% for the three months ended March
31, 1999 from 8.1% for the comparable period in 1998, and 10.5% for the nine
months ended March 31, 1999 from 8.3% for the comparable period in 1998. The
increases were due primarily to the decrease in contract revenues.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the three-month period ended March
31, 1999
<PAGE>
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: May 14, 1999 By: GREGORY CUNEO
Gregory Cuneo
Chairman of Board, President
and Chief Executive Officer
Date: May 14, 1999 By: ROBERT BIRNBACH
Robert Birnbach
Vice President and Chief Financial Officer
Date: May 14, 1999 By: JOSEPH CHAN
Joseph Chan
Vice President and Chief Accounting Officer
</TEXT
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-END> MAR-31-1999 MAR-31-1999
<CASH> 1300901 1300901
<SECURITIES> 0 0
<RECEIVABLES> 20447388 20447388
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 30975036 30975036
<PP&E> 3240114 3240114
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<TOTAL-ASSETS> 36963486 36963486
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0 0
0 0
<COMMON> 90000 90000
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<TOTAL-LIABILITY-AND-EQUITY> 36963486 36963486
<SALES> 20343044 61432525
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<CGS> 17072331 54139026
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</TABLE>
