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, 1999
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 .
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 --- 1,0791,000 shares as of November 12, 1999
<PAGE>
Index
DualStar Technologies Corporation
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - September 30, 1999 and
June 30, 1999
Condensed consolidated statements of income - Three months ended
September 30, 1999 and 1998
Condensed consolidated statements of cash flows - Three months ended
September 30, 1999 and 1998
Notes to condensed consolidated financial statements
- September 30, 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
September 30, June 30,
1999 1999
(unaudited)
ASSETS
Current assets:
Cash $ 1,600,828 $ 583,995
Contracts receivable, net 20,526,169 23,653,712
Retainage receivable 5,938,699 6,213,201
Costs and estimated earnings in excess
of billings on uncompleted contracts 3,361,367 1,360,412
Deferred tax asset - current 178,000 178,000
Prepaid expenses and sundry receivable 390,874 303,713
------------ ------------
Total current assets 31,995,937 32,293,033
Property and equipment, net 3,066,410 3,147,068
Other assets:
Deferred tax asset - long-term 1,574,000 1,574,000
Other 1,618,231 1,580,486
------------ ------------
Total assets $38,254,578 $38,594,587
============ ============
See notes to condensed consolidated financial statements
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1999 1999
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $20,471,571 $21,053,418
Billings in excess of costs and
estimated earnings on uncompleted
contracts 2,533,915 2,994,996
Subordinated note payable 1,000,000 1,000,000
Accrued expenses and other liabilities 3,970,174 3,426,508
------------ ------------
Total current liabilities 27,975,660 28,474,922
Mortgage payable - long-term 712,500 723,750
Other liabilities 198,391 206,498
Subordinated convertible note - 2,500,000
------------ ------------
Total liabilities 28,886,551 31,905,170
Contingencies
Shareholders' equity:
Common stock 107,910 90,000
Additional paid-in capital 17,451,254 14,995,836
Deficit (8,191,137) (8,396,419)
------------ ------------
Total shareholders' equity 9,368,027 6,689,417
------------ ------------
Total liabilities and shareholders'
equity $38,254,578 $38,594,587
============ ============
See notes to condensed consolidated financial statements
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1999 1998
Contract revenues earned $24,888,771 $19,939,205
Cost of revenues earned 22,263,472 17,812,540
------------ ------------
Gross profit 2,625,299 2,126,665
General and administrative expenses 2,420,017 2,115,590
------------ ------------
Net income $ 205,282 $ 11,075
============ ============
Basic income per share:
Net income per share $0.02 $ -
Weighted average shares outstanding 10,791,000 9,000,000
Diluted income per share:
Net income per share $0.01 $ -
Weighted average shares outstanding 13,718,086 9,946,968
See notes to condensed consolidated financial statements
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1999 1998
Cash provided by (used in) operating
activities $ 1,181,333 $(1,343,033)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (135,957) (22,845)
------------ ------------
Net cash used in investing activities (135,957) (22,845)
------------ ------------
Cash flows from financing activities:
Proceeds from short-term loan - 1,000,000
Principal payments on capital lease
obligations (17,293) (74,223)
Principal payments on mortgage (11,250) (11,250)
------------ ------------
Net cash (used in) provided by financing
activities (28,543) 914,527
------------ ------------
Net increase (decrease) in cash 1,016,833 (451,351)
Cash - beginning of period 583,995 1,356,228
------------ ------------
Cash - end of period $ 1,600,828 $ 904,877
============ ============
Non-cash transaction:
In July 1999, the investment group converted the $2.5 million convertible note
and a portion of unpaid interest into 1,791,000 shares of the Company's
common stock at the conversion price of $1.40. In addition, the Company
issued a one-year term note for approximately $110,000 to the investment
group for the balance of the unpaid interest that was not converted into
common stock. In connection with this transaction, the Company incurred
costs of approximately $41,000 which has been charged to additional paid-in
capital. Accordingly, the Company's common stock was increased by $17,910 and
additional paid-in capital by $2,455,418.
See notes to condensed consolidated financial statements
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 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-month period ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ending
June 30, 2000. 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, 1999.
NOTE B - NET INCOME PER SHARE
The computation of basic net income per share is based on the weighted
average number of shares of common stock outstanding. For diluted net income
per share, when dilutive, stock options and warrants are included as share
equivalents using the treasury stock method.
The weighted average number of shares and earnings per share for the three
months presented is as follows:
Income Shares Per share
(Numerator) (Denominator) Amount
Three Months Ended September 30, 1999:
Basic Earning Per Share
Net income $205,282 10,791,000 $0.02
Effect of Dilutive Securities
Options and warrants 2,927,086
---------- ----------- -------
Diluted Earning Per Share
Net income $205,282 13,718,086 $0.01
========== =========== =======
Three Months Ended September 30, 1998:
Basic Earning Per Share
Net income $11,075 9,000,000 $ -
Effect of Dilutive Securities
Options 946,968
---------- ----------- -------
Diluted Earning Per Share
Net income $11,075 9,946,968 $ -
========== =========== =======
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
NOTE C - SUBORDINATED CONVERTIBLE NOTE
In November 1998, the Company sold to Technology Investors Group, LLC (the
"Investment Group") a subordinated convertible note in the principal amount
of $2.5 million, due and payable on May 25, 2001. The note had an interest
rate of 7.5% per annum and was payable semi-annually at the option of the
Company. Interest that was not paid was added to the principal. In the
event of default, the Investment Group had the right to declare the principal
and unpaid interest immediately due and payable, and the outstanding amount
would have had an interest rate of 12.5% per annum thereafter.
The note was subordinated to the first mortgage on the Company's building and
to the rights of financial lenders and sureties of the Company.
During the term of the note, the Investment Group had an option to convert
the note into fully-paid and nonassessable shares of the Company's common
stock. At all times, the number of shares to be issued upon the conversion
was not to exceed 1,791,000 shares, or 19.9% of the Company's outstanding
shares on November 25, 1998. Initially, the conversion price was $1.40 per
share and could have been reset on the 180th day following closing and every
90 days thereafter. The reset conversion price was to be calculated as 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 received upon conversion
would have been adjusted proportionately for certain transactions, such as
stock splits and stockholder distributions.
If the number of shares issued upon the conversion multiplied by the conversion
price was less than the note principal and unpaid interest, the difference,
at the Company's option, was payable in cash or a one-year term note.
The Company also had the right to require the Investment Group 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, was
$3.00 or more per share. On July 7, 1999, the Company required the
Investment Group to convert the note into 1,791,000 shares of the Company's
common stock at the conversion price of $1.40 and subsequently issued a
one-year term note for approximately $110,000 to the Investment Group. The
term note is collateralized by the Company's assets and has an interest rate
of 12.5% per annum.
The Company also agreed to the designation by the Investment Group of one
member to the Company's Board of Directors. In February 1999, the Investment
Group's nominee was elected to the Company's Board of Directors.
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
NOTE D - STOCK OPTION PLAN
In August 1999, the Company's Board of Directors granted an additional
829,000 options to various employees and directors. In general, these
options vest over 5 years and have an option exercise price of $4.00.
NOTE E - CONTINGENCIES
High-Rise Electric, Inc., a wholly owned subsidiary of the Company, is a
defendant in two lawsuits filed in April 1999. The plaintiffs are seeking
$5,000,000 and $2,000,000, respectively, for claims related to bodily
injuries on job sites where High-Rise and other trades were working.
Management of High-Rise believes that the plaintiffs' claims are without
merit and, in any event, are covered under the Company's general and umbrella
liability insurance policies.
On August 11, 1999, Triangle Sheet Metal Works, Inc. ("Triangle"), a
subcontractor of Centrifugal/Mechanical Associates, Inc. and its divisions
("CMA"), a subsidiary of the Company, filed a petition under Chapter 11 of
Title 11 of the United States Code in the United States Bankruptcy Court for
the Southern District of New York (the "Bankruptcy Court"). Triangle's
Chapter 11 case was subsequently converted to a case under Chapter 7 of the
Bankruptcy Code. Triangle was a sheet metal subcontractor for CMA on six
projects in New York City (the "Subcontractor Projects"). CMA is also the
subcontractor of Triangle on one additional project in New York City (the
"Contractor Project"). Prior to Triangle's Chapter 11 filing, Triangle
ceased operation and defaulted on its obligations under the Subcontractor
Projects and Contractor Project. In pleadings filed with the Bankruptcy
Court, Triangle alleges, among other things, that CMA is indebted to Triangle
in an amount ranging between $1,400,000 and $3,000,000. Triangle also
suggested in such pleadings that there may exist potential causes of action
by Triangle against DualStar and/or CMA, including breach of contract,
tortious interference and unfair competition. Triangle has not commenced any
formal legal actions or proceedings with respect to any of such allegations
(other than seeking to obtain discovery from CMA and DualStar). CMA and
DualStar dispute Triangle's allegations in toto and believe that they are
wholly without merit. CMA has claims and counterclaims against Triangle for
breaches and defaults in respect of the Subcontractor Projects and the
Contractor Project. Although such claims and counterclaims are unliquidated
and cannot be ascertained at this time, CMA believes that it will setoff
and/or recoup part of the damages by offsetting any monies owed by CMA to
Triangle. The Company can make no assurances, however, that such recoupment
will be sufficient to cover all of CMA's damages resulting from Triangle's
defaults under the Subcontractor Projects and Contractor Project. Based upon
currently available information, it appears that a significant portion of
CMA's claims against Triangle may not be recoverable after such setoff and/or
recoupment.
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
NOTE F - SEGMENT INFORMATION
The Company has the following two reportable segments: construction and
telecommunications. The construction segment engages primarily in mechanical
and electrical contracting services in the United States. The
telecommunications segment installs primarily communication systems and
provides telephone, Internet, television and other services to multiple
dwelling units in New York City.
The accounting policies used to develop segment information correspond to
those disclosed in the Company's financial statements for the fiscal year
ended June 30, 1999. The Company does not allocate certain corporate
expenses to its segments. Segment profit (loss) is based on profit (loss)
from operations before income taxes (benefits). Sales and transfers between
segments are accounted for at cost. The reportable segments are distinct
business units operating in different industries. They are separately managed,
with separate marketing systems.
Reportable Segment
Information Construction Telecommunications Totals
For the Three Months Ended
September 30, 1999
Revenues from external customers $24,330,699 $558,072 $24,888,771
Intersegment revenues 775,922 13,750 789,672
Segment profit (loss) 793,967 (388,817) 405,150
For the Three Months Ended
September 30, 1998
Revenues from external customers $19,368,572 $570,633 $19,939,205
Intersegment revenues 58,086 13,647 71,733
Segment profit (loss) 105,382 (114,266) (8,884)
Reconciliation to Consolidated Amounts
For the Three Months Ended
September 30,
1999 1998
Profit (Loss)
Total profit (loss) for reportable segments $405,150 $ (8,884)
Unallocated amounts:
Corporate (199,868) 19,959
--------- ----------
Total consolidated income from operations $205,282 $ 11,075
========= ==========
<PAGE>
DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
NOTE G - SUBSEQUENT EVENT
In October 1999, CMA sold a $1 million promissory note to the Investment Group.
The note has an interest rate of 10% per annum and is due on December 15,
1999. The loan is guaranteed by the Company and collateralized by certain
assets of the Company and its subsidiaries.
<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, control, environmental,
security, communications, telephone, Internet and television systems,
services and solutions to a wide range of customers primarily in the New York
Tri-State area.
When used in this Report, the words "intends," "expects," "plans," "estimates,"
"projects," "believes," "anticipates," and similar expressions are intended
to identify forward-looking statements. Except for historical information
contained herein, the matters discussed and the statements made herein
concerning the Company's future prospects are "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of
the Securities Exchange Act. Although the Company believes that its plans,
intentions, and expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such plans, intentions and
expectations will be achieved, and actual results could differ materially
from forecasts and estimates. Important factors that could cause actual
results to differ materially include, but are not limited to, changes in the
pricing environment for the Company's goods and services, regulatory or
legislative changes, the Company's dependence on key personnel, the impact of
Year 2000 issues which may be more significant than currently anticipated,
and the Company's ability to manage growth, in addition to those risk factors
set forth in DualStar Technologies Corporation and Subsidiaries' Annual
Report on Form 10-K for the fiscal year ended June 30, 1999 and which speaks
only as of the date thereof. Many of the factors are beyond the Company's
ability to control or predict. 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 September 30, and June 30, 1999 were approximately $1.6
million and $0.6 million, respectively. The Company's operations provided
approximately $1.2 million of cash in the three months ended September 30,
1999. The increase in cash was due primarily to a collection of
approximately $1.0 million of contracts receivable at September 30, 1999.
The Company's operations used approximately $1.3 million of cash in the three
months ended September 30, 1998. The net use of cash in operating activities
was due primarily to the use of the proceeds of the sale of a $1.0 million
subordinated note to pay trade payables.
<PAGE>
In the three months ended September 30, 1999 and 1998, the Company acquired
capital assets of approximately $136,000 and $23,000, primarily for
investment in communications infrastructure systems for high-rise buildings
in return for rights to provide telephone, Internet, television and other
services to the buildings' residents.
In July 1998, the Company entered a $1 million loan agreement with the
Investment Group. The loan was due and payable on demand and bears an
interest rate of 10% per annum. The loan, subordinate to the building's first
mortgage, is collateralized by the Company's building, cash and accounts
receivable. In November 1998, the maturity date of the subordinated note was
extended to November 25, 1999 and provisions relating to events of default
were added.
In July 1999, the Investment Group converted the $2.5 million convertible
note and a portion of the unpaid interest into 1,791,000 shares of the
Company's common stock at the conversion price of $1.40. In addition, the
Company issued a one-year term note for approximately $110,000 to the
Investment Group for the balance of the unpaid interest that was not
converted into common stock. The term note is collateralized by the Company's
assets and has an interest rate of 12.5% per annum.
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 was the identification of those systems
through which the Company has exposure to Y2K issues. Phase II was the
development and implementation of action plans to be Y2K compliant in all
areas. These two phases have been completed. Phase III, to be completed by
November 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 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 and tested
to be Y2K compliant. The Company's informational systems have been upgraded
to be Y2K compliant. All the informational systems are scheduled for final
testing by November 1999 to ensure Y2K compliance. Should the informational
systems continue to be non-compliant after testing, the information can be
obtained in a less efficient manner. The Company believes the currently
estimated replacement and labor costs to bring the informational systems into
compliance should not have a material adverse effect on the Company's
financial condition in fiscal 2000, although there can be no assurance of this.
<PAGE>
The Company has contacted its major suppliers with regards to Y2K compliance.
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. Should the Company have a non-compliant supplier, the
Company believes that it will be able to utilize an alternate supplier.
Results of Operations
Contract revenues increased 24.8% in the three months ended September 30,
1999 to $24.9 million, up $4.9 million from the comparable period of 1998.
The increase was due primarily to the Company substantially completing a few
large fast-pace contracts in the three months ended September 30, 1999.
Gross profit increased $0.5 million in the three months ended September 30,
1999 to $2.6 million from the comparable period in 1998. The gross profit
margins were 10.5% and 10.7% for the three months ended September 30, 1999
and 1998, respectively. The increase in gross profit was attributable to the
increase in contract revenues.
General and administrative expenses increased $0.3 million in the three
months ended September 30, 1999 to $2.4 million from the comparable period of
1998. As a percentage of revenue, general and administrative expenses
decreased to 9.7% for the three months ended September 30, 1999 from 10.6%
for the three months ended September 30, 1998. The decrease in general and
administrative expenses as a percentage of revenue was due primarily to the
increase in contract revenues.
<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: November 15, 1999 By: GREGORY CUNEO
Gregory Cuneo
Chairman of Board, President
and Chief Executive Officer
Date: November 15, 1999 By: ROBERT BIRNBACH
Robert Birnbach
Executive Vice President
and Chief Financial Officer
Date: November 15, 1999 By: JOSEPH CHAN
Joseph Chan
Vice President and
Chief Accounting Officer
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