<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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Commission file number 0-16011
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USTMAN Technologies, Inc.
(Exact name of small business issuer as specified in its charter)
California
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(State or other jurisdiction of
incorporation or organization)
95-2873757
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(I.R.S. Employer Identification No.)
12265 W. Bayaud Ave #110
Lakewood, CO
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(Address of principal executive offices)
80228
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(Zip Code)
(303) 986-8011
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. X Yes No
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date: 19,855,243 shares of Common Stock as of
November 5, 1998.
Transitional Small Business Disclosure Format (check one): X Yes No
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
September
30,1998 June 30,
(unaudited) 1998
-------------------- -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 354,000 $ 366,000
Accounts receivable, net 869,000 826,000
Inventory 232,000 112,000
Prepaid expenses and other current assets 92,000 70,000
-------------------- -------------------
1,547,000 1,374,000
PROPERTY AND EQUIPMENT, NET 526,000 544,000
INTANGIBLES AND GOODWILL 9,390,000 9,699,000
-------------------- -------------------
11,463,000 11,617,000
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses
and other liabilities 1,242,000 1,135,000
Current portion of long-term debt 1,000,000 875,000
-------------------- -------------------
2,242,000 2,010,000
LONG-TERM DEBT AND OTHER LIABILITIES 9,796,000 9,784,000
DEFERRED EMPLOYEE BENEFITS 434,000 435,000
SHAREHOLDERS' EQUITY
Common stock 12,810,000 12,810,000
Additional paid-in capital 2,863,000 2,517,000
Accumulated deficit (16,682,000) (15,939,000)
-------------------- -------------------
(1,009,000) (612,000)
-------------------- -------------------
$ 11,463,000 $ 11,617,000
==================== ===================
</TABLE>
2
<PAGE> 3
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
(unaudited) (unaudited)
------------------- -------------------
<S> <C> <C>
Sales $ 1,523,000 $ 1,560,000
Cost of sales 544,000 580,000
------------------- -------------------
Gross profit 979,000 980,000
Selling, general and administrative expenses 603,000 958,000
Depreciation and amortization 312,000 304,000
Interest expense, net of interest income 807,000 272,000
------------------- -------------------
Loss from operations before benefit for income taxes (743,000) (554,000)
Benefit for income taxes - -
------------------- -------------------
Net loss $ (743,000) $ (554,000)
=================== ===================
Basic and diluted, net loss, per share $ (0.04) $ (0.03)
=================== ===================
</TABLE>
3
<PAGE> 4
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
(unaudited) (unaudited)
------------------- -------------------
<S> <C> <C>
Operating Activities
Net loss $ (743,000) $ (554,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 420,000 391,000
Loss on sale and write-off of property and equipment 54,000
Warrants to be issued under Senior Subordinated Note
agreement 346,000 -
Interest converted to long-term debt 212,000 199,000
Net Changes in operating assets and liabilities (79,000) (352,000)
------------------- -------------------
Cash flows provided by (used in) operating activities 156,000 (262,000)
Investing Activities
Purchase of property and equipment (43,000) (65,000)
------------------- -------------------
Cash flows used in investing activities: (43,000) (65,000)
Financing Activities
Proceeds from issuance of common stock and options - 27,000
Borrowings, net of repayments (125,000) 125,000
------------------- -------------------
Cash flows provided by financing activities (125,000) 152,000
Decrease in cash (12,000) (175,000)
Cash and equivalents, beginning of period 366,000 799,000
=================== ===================
Cash and equivalents, end of period $ 354,000 $ 624,000
=================== ===================
</TABLE>
4
<PAGE> 5
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. The financial information furnished herein has not been audited by
independent accountants; however, in the opinion of management, all
adjustments (only consisting of normal recurring accruals) necessary for a
fair presentation of the results of operations for the three month period
ending September 30, 1998 have been included.
2. On May 22, 1997, Watson General Corporation (Watson) completed the private
placement of $7 million 10% Senior Subordinated Notes Due 2002 and 7,304,520
shares of its common stock (the Private Placement). In connection with the
valuation of the common stock issued in the transaction, an original issue
discount of $1,000,000 was recorded. Approximately $17,000 of the discount
is amortized into interest expense monthly.
Interest on the Senior Subordinated Notes is 10% per annum for the first
year, payable quarterly, and increases by one percent each year during the
term of the Notes. As of September 30, 1998 the interest rate was 11%. At
the option of the Company, interest payments due can be converted to debt
under the same terms as the original principal. During the quarter ended
September 30, 1998, the Company converted interest due of $212,000 to long
term debt. In addition, if on the earlier of (i) the third anniversary of
the date of the Securities Purchase Agreement or such other date thereafter
designated by the Investors, (ii) the date of a stock offering or (iii) a
sale of the Company (the "Adjustment Date"), the Company's cumulative
adjusted earnings before taxes, depreciation and amortization ("EBTDA") fail
to meet specific projections provided by the Company to the Investors,
additional interest is payable in the form of warrants to the Investors. If
the resulting actual percentage of EBTDA per share is less than 70% of the
projected amount, an adjustment to interest expense is calculated and
warrants are issued in an amount equal to the additional interest expenses
divided by the fair market value of the common stock on the Adjustment Date.
The adjusted interest rate cannot exceed 29.76%. Due to the lower than
expected performance in fiscal 1998, the Company determined it was unlikely
to meet these projections in the future. Accordingly, the Company recorded
interest expense on the Senior Subordinated Notes at a rate of 29.76% as of
the beginning of the agreement and reflected the adjustment as a change in
accounting estimate. Therefore interest in the first quarter of 1998 is
accrued at 10% while interest for the first quarter of fiscal year 1999 is
recorded at 29.76%. The Company reflected additional interest as warrants to
be issued.
On December 17, 1997, the Company obtained $3.75 million in financing from
BankBoston and used the proceeds to, among other things, acquire all of the
outstanding common stock of Advanced Tank Certification, Inc. (ATC),
pursuant to stock purchase agreements between the Company and all of the
shareholders of ATC. The ATC acquisition was accounted for using the
purchase method.
3. Inventory consists of tank gauge equipment and is accounted for using the
weighted average method.
4. Included in interest expense on the Statements of Operations is amortization
of the original issue discount and deferred debt costs. These amounts are
shown as depreciation and amortization on the Statements of Cash Flows.
5. Certain amounts for the prior period have been reclassified to conform to
the current quarter presentation.
6. Due to the Company's loss position, diluted net loss per share is the same
as basic earnings per share as the result would be antidilutive.
5
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Results of Operations:
In the first quarter of fiscal 1999 the Company reported a net loss of $743,000
or $0.04 per share as compared to a net loss of $554,000 or $0.03 per share in
the prior year. Sales for the quarter were $1,523,000 compared with $1,560,000
in the prior year. The 2% decrease in sales from the same quarter in the prior
year is due primarily to the sale of Toxguard Fluid Technologies, Inc.
("Toxguard") which was divested as part of the Company's strategic plan in
January 1998. Toxguard's revenue represented approximately 13% of the Company's
total revenues in the same period of the prior year. Although revenues
decreased, gross margins remained relatively consistent compared to the same
period of prior year. This is due to an expected corresponding decrease in cost
of sales. The Company's strategic plan calls for it to reposition itself in
pursuit of its most significant market opportunity, leak detection/monthly
monitoring of underground storage tanks.
Included in the loss of $743,000 for the quarter is $558,000 of interest expense
related to the Senior Subordinated Notes (see Note 2 of the Notes to
Consolidated Financial Statements). Of the total interest, $212,000 was
converted to long term debt and $346,000 represents warrants to be issued.
The Company's depreciation and amortization decreased 7% compared to the same
period in prior year due to the write off of certain proprietary software during
the prior fiscal year. Selling, general and administrative expenses decreased by
34% due to the reduction of expenses incurred in the prior year related to the
merger of USTMAN Industries, Inc. and Watson General Corporation and the
Advanced Tank Certification, Inc. acquisition. These expenses consisted
primarily of fees for relocating offices, severance of terminated employees,
exit costs, attorneys' fees, and accounting fees. Management believes the
selling, general and administrative expenses will continue throughout the fiscal
year at the lower level.
The Company's sales depend in part upon its customers' decisions as to when and
how to implement measures to meet the December 22, 1998 Environmental Protection
Agency ("EPA") underground storage tank compliance requirements. These
requirements require, among other things, some form of permanent monthly
monitoring of underground storage tanks. The Company believes that the market
for its services may accelerate as compliance deadlines approach.
Financial Condition and Liquidity:
At September 30, 1998 the Company's current liabilities exceeded current assets
by $695,000 compared to $636,000 at June 30, 1998. This is a result of the
current portion of long term debt on the BankBoston term loan. The Company's
business does not require material ongoing capital expenditures. The Company's
management believes that it has adequate resources for the next twelve months
of operations.
Except for historical information contained herein, the statements in this
report are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the actual results in future periods to differ materially from
forecasted results. These risks and uncertainties include, among other things,
product demand, customers' strategies regarding the December 22, 1998 EPA
compliance requirements, and market competition.
6
<PAGE> 7
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 20, 1997, the Company filed a Demand for Arbitration pursuant to the
Commercial Arbitration Rules of the American Arbitration Association with the
American Arbitration Association against Southwest Environmental Systems, Inc.
(formerly doing business as Michael E. Gibson and EnviroQuest Southwest)
claiming the breach of an agreement with a predecessor of the Company. The
Company saught damages of $110,000 or more and its attorney fees, costs and
expenses of $100,000 or more. Southwest Environmental Systems, Inc. (formerly
doing business as Michael E. Gibson and EnviroQuest Southwest) counterclaimed
against the Company alleging breach of the same affiliate agreement and sought
damages of $180,000 or more and its attorney fees, costs and expenses. The
matter was heard by a three member panel of the American Arbitration Association
in July 1998. In October 1998, the Company was awarded approximately $65,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description of Document
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Exhibit 27 Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
USTMAN TECHNOLOGIES, INC.
(Registrant)
Date: 11/6/98 By /s/ Dan R. Cook
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Dan R. Cook
President and CEO
7
<PAGE> 8
EXHIBIT INDEX
Exhibit Number Description of Document
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Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 354,000
<SECURITIES> 0
<RECEIVABLES> 869,000
<ALLOWANCES> 0
<INVENTORY> 232,000
<CURRENT-ASSETS> 1,547,000
<PP&E> 526,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,463,000
<CURRENT-LIABILITIES> 2,242,000
<BONDS> 0
0
0
<COMMON> 12,810,000
<OTHER-SE> (13,819,00)
<TOTAL-LIABILITY-AND-EQUITY> 11,463,000
<SALES> 1,523,000
<TOTAL-REVENUES> 1,523,000
<CGS> 544,000
<TOTAL-COSTS> 915,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 807,000
<INCOME-PRETAX> (743,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (743,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (743,000)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
