<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 March 31, 1998
--------------
Commission file number 0-16011
-------
USTMAN Technologies, Inc.
(Exact name of small business issuer as specified in its charter)
California
----------
(State or other jurisdiction of
incorporation or organization)
95-2873757
----------
(I.R.S. Employer Identification No.)
12265 W. Bayaud Ave #110
------------------------
Lakewood, CO
------------
(Address of principal executive offices)
80228
-----
(Zip Code)
(303) 986-8011
--------------
(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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date: 19,855,043 shares of Common Stock as of
May 12, 1998.
Transitional Small Business Disclosure Format (check one): X Yes No
--- ---
1
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
March
31,1998 June 30,
(unaudited) 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 518,000 $ 799,000
Accounts receivable 1,175,000 662,000
Prepaid expenses and other current assets 199,000 418,000
------------ ------------
1,892,000 1,879,000
PROPERTY AND EQUIPMENT 870,000 755,000
INTANGIBLES AND GOODWILL 10,602,000 8,546,000
============ ============
13,364,000 11,180,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses
and other liabilities 1,181,000 915,000
Current portion of long-term debt 769,000 1,083,000
------------ ------------
1,950,000 1,998,000
LONG-TERM DEBT AND OTHER LIABILITIES 9,167,000 6,423,000
DEFERRED EMPLOYEE BENEFITS 414,000 434,000
SHAREHOLDERS' EQUITY
Common stock 11,516,000 10,373,000
Additional paid-in capital 2,168,000 1,947,000
Accumulated deficit (11,851,000) (9,995,000)
------------ ------------
1,833,000 2,325,000
------------ ------------
$ 13,364,000 $ 11,180,000
============ ============
</TABLE>
2
<PAGE> 3
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Sales $ 1,597,000 $ 870,000
Cost of sales 517,000 449,000
----------- -----------
Gross profit 1,080,000 421,000
Selling, general and administrative expenses 688,000 735,000
Research and development -- 82,000
Depreciation and amortization 321,000 77,000
Transition expense 242,000 --
Compensation expense to third parties 222,000 --
Gain on sale of Toxguard Fluid Technologies, Inc. 28,000 --
Interest expense, net of interest income 427,000 31,000
----------- -----------
Loss from operations before benefit for income taxes (792,000) (504,000)
Benefit for income taxes -- --
----------- -----------
Net loss $ (792,000) $ (504,000)
=========== ===========
Net loss per share, basic $ (0.04) $ (0.05)
=========== ===========
</TABLE>
3
<PAGE> 4
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Nine Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Sales $ 4,302,000 $ 3,718,000
Cost of sales 1,478,000 1,992,000
----------- -----------
Gross profit 2,824,000 1,726,000
Selling, general and administrative expenses 1,866,000 2,625,000
Research and development -- 145,000
Depreciation and amortization 786,000 358,000
Transition expense 683,000 --
Compensation expense to third parties 222,000
Gain on sale of Toxguard Fluid Technologies, Inc. 28,000 --
Interest expense, net of interest income 1,118,000 104,000
----------- -----------
Loss from operations before benefit for income taxes (1,823,000) (1,506,000)
Benefit for income taxes -- (5,000)
----------- -----------
Net loss $(1,823,000) $(1,511,000)
=========== ===========
Net loss per share, basic $ (0.09) $ (0.14)
=========== ===========
</TABLE>
4
<PAGE> 5
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Operating Activities
Net loss $(1,823,000) $(1,511,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,301,000 358,000
Net Changes in operating assets and liabilities (40,000) 226,000
----------- -----------
Cash flows used in operating activities (562,000) (927,000)
----------- -----------
Investing Activities
Purchase of Advanced Tank Certification, Inc. (2,190,000) --
Purchase of subsidiary -- (40,000)
Sale of Toxguard Fluid Technologies, Inc. 28,000 --
Improvements on property held for sale -- (41,000)
Deposit increase -- (11,000)
(Purchase) sale of property and equipment (164,000) 286,000
----------- -----------
Cash flows provided by (used in) investing activities: (2,326,000) 194,000
----------- -----------
Financing Activities
Deferred debt issuance cost (74,000) (18,000)
Proceeds from issuance of common stock & options 249,000 622,000
Borrowings, net of repayments 2,432,000 (241,000)
----------- -----------
Cash flows provided by financing activities: 2,607,000 363,000
----------- -----------
Decrease in cash (281,000) (370,000)
Cash, beginning of period 799,000 635,000
=========== ===========
Cash, end of period $ 518,000 $ 265,000
=========== ===========
</TABLE>
5
<PAGE> 6
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to 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 and nine month
periods ending March 31, 1998 have been included.
2. On January 20, 1998, USTMAN Technologies, Inc. (the "Company") sold all of
the outstanding capital stock of Toxguard Fluid Technologies, Inc.
("Toxguard"), a California corporation, for $92,000 in cash. At the date of
sale, the Company's investment in Toxguard was valued at a negative
$336,000. Additionally, the Company wrote off approximately $400,000 in
advances to Toxguard. For the period ending January 20, 1998, the following
table summarizes the results of Toxguard's operations since June 30, 1997:
<TABLE>
<S> <C>
Sales $ 402,000
Cost of sales 263,000
---------
139,000
General and administrative 168,000
Interest expense 1,000
---------
Net loss $ (30,000)
=========
</TABLE>
3. On March 16, 1998, the Company agreed to modify 200,000 stock options
formerly granted to Drake Capital Securities, Inc. The options were
modified to extend the expiration date one year, until March 16, 1999. In
exchange for the lengthened exercise period, the holders agreed to an
exercise price of $1.75 per share. Prior to the modification these options
could have been exercised for stock at $1.50 per share. As a result of the
modification, the Company recognized $222,000 in compensation expense to
third parties.
4. 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 monthly. This amortization increased the debt
balance and interest expense.
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.
5. Any outstanding options or warrants would have an antidilutive effect on
earnings per share because the Company's loss position. Based on this,
fully diluted earnings per share is not presented.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Results of Operations:
In the third quarter of fiscal 1998 the Company reported a net loss of
$792,000 or $0.04 per share as compared to a net loss of $504,000 or $0.05
per share in the prior year. Sales for the quarter were $1,597,000 compared
with $870,000 in the prior year. The 84% increase in sales over the same
quarter in the prior year is due primarily to the merger of Watson General
Corporation (Watson) and USTMAN Industries, Inc. (USTMAN) in May 1997 and
to a lesser extent to the acquisition of Advanced Tank Certification, Inc.
(ATC) on December 17, 1997.
Included in the loss of $792,000 for the quarter were transition costs of
approximately $242,000 relating to the restructuring of the Company's
operations including moving ATC's operations from Knoxville, Tennessee to
Lakewood, Colorado. Additionally, included in the net loss is $222,000
related to the modification of existing options (see Note 2 to the
Financial Statements).
The loss of $1,823,000 for the nine months ended March 31, 1998 includes
transition costs related to the Watson and USTMAN merger of approximately
$441,000 and approximately $242,000 related to the ATC acquisition.
Additionally, included in the net loss is $222,000 related to the
modification of existing options (see Note 2 to the Consolidated Financial
Statements).
The increase in gross margins from 46% at March 31, 1997 to 66% at March
31, 1998 were achieved by focusing the Company's business in the monitoring
of underground storage tanks using Statistical Inventory Reconciliation.
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 and to eliminate the remaining
holding company structure. As part of this strategic plan, the Company
divested its Toxguard Fluid Technologies, Inc. subsidiary.
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") 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 March 31, 1998 the Company's current liabilities exceeded current assets
by $58,000 compared to $119,000 at June 30, 1997. This change is due to the
remainder of the proceeds from the BankBoston loan (see Note 4 to the
Consolidated Financial Statements) being included in current assets as of
March 31, 1998. 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.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)
Financial Condition and Liquidity (continued):
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.
8
<PAGE> 9
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting was held on January 28, 1998.
(b) At the Annual Meeting the five directors named in paragraph (c) below were
elected to hold office until the next annual meeting and until their
successors are elected and qualified. There are no other directors of the
Company.
(c) At the Annual Meeting, the shareholders of the Company voted on the
following matters:
<TABLE>
<CAPTION>
Votes Against or Abstentions and
Description of Matter Votes For Withheld Broker Non-Votes
--------------------------------- ------------------- ---------------------- --------------------------
<S> <C> <C> <C>
Election of Directors:
Dan R. Cook 10,453,963 4,140
Ronald G. Crane 10,401,463 56,640
Donald W. Phillips 10,453,963 4,140
Barry S. Rosenstein 10,400,763 57,340
Marc A. Weisman 10,400,763 57,340
Amendments to Articles of
Incorporation to Change Name of the
Company to USTMAN Technologies, Inc. 10,386,013 70,740 1,359
Amendment to Articles of Incorporation
to Increase Authorized Number of
Shares of Common Stock from 25,000,000
to 40,000,000
10,433,113 17,840 7,150
Amendment to Articles of Incorporation
to Authorize two new classes of Common
Stock, designated Class A Voting
Common Stock and Class B Non-voting
Common Stock 10,274,329 178,986 4,788
</TABLE>
9
<PAGE> 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -----------------------
<S> <C>
Exhibit 3(i)(1) Certificate of Amendment to the Articles of Incorporation
Exhibit 3(i)(2) Certificate Amendment to the Articles of Incorporation
Exhibit 27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
On March 2, 1998, the Company filed a Current Report on Form 8-K/A which
reported events under Item 2 (Acquisition and Disposition of Assets), Item 5
(Other Events), and Item 7 (Financial Statements and Exhibits). Financial
Statements of Advanced Tank Certification, Inc. were presented for the years
ended September 30, 1997 and 1996, together with Report of Independent
Auditors. Pro Forma Financial Information included the following:
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the nine months ended June 30, 1997
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the six months ended December 31, 1997
Notes to the Unaudited Pro Forma Condensed Consolidated Financial
Statements
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: 5/14/98 By /s/ Dan R. Cook
-----------------------
Dan R. Cook
President and CEO
Date: 5/14/98 By /s/ David Booth
-----------------------
David Booth
Chief Financial Officer
10
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -----------------------
<S> <C>
Exhibit 3(i)(1) Certificate of Amendment to the Articles of Incorporation
Exhibit 3(i)(2) Certificate Amendment to the Articles of Incorporation
Exhibit 27 Financial Data Schedule
</TABLE>
<PAGE> 1
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
USTMAN TECHNOLOGIES, INC.
ENDORSED-FILED
In the office of the Secretary of State
of the State of California
FEB 6, 1998
BILL JONES, SECRETARY OF STATE
Dan R. Cook and David Booth hereby certify that:
1. They are the President and Secretary, respectively, of USTMAN
TECHNOLOGIES, INC.
2. Paragraph 1, of Article THIRD of the Articles of Incorporation of this
corporation is amended to read in its entirety as follows:
"1. Authorized Capital. The Corporation shall be authorized to
issue four classes of shares which shall be designated,
respectively, Common Stock, Preferred Stock, Class A Voting
Common Stock, and Class B Non-Voting Common Stock. The total
number of shares which the Corporation shall have authority to
issue is 71,000,000. The total number of shares of Common Stock
which this Corporation is authorized to issue is 40,000,000. The
total number of shares of Preferred Stock which this Corporation
is authorized to issue is 1,000,000. The total number of shares
of Class A Voting Common Stock which this Corporation is
authorized to issue is 15,000,000. The total number of shares of
Class B Non-Voting Common Stock which this Corporation is
authorized to issue is 15,000,000.
3. New paragraphs designated 3., 4. and 5. are added to Article THIRD of
the Articles of Incorporation to read as follows:
"3. Class A Voting Common Stock. Shares of Class A Voting Common
Stock shall have the same voting rights as shares of Common
Stock, and each share of Class A Voting Common Stock shall be
entitled to 46.118% of the amount of any dividends,
distributions, powers, preferences, or other rights or privileges
to which one share of Common Stock shall be entitled. Without
limiting the foregoing, each share of Class A Voting Common Stock
shall receive 46.118% of the consideration to which a share of
Common Stock shall be entitled in the event of a merger or
consolidation of the Corporation with or into another entity
(whether or not the Corporation is the surviving corporation).
"4. Class B Non-Voting Common Stock. Shares of Class B
Non-Voting Common Stock shall no voting rights, except as
otherwise required by law, and each share of Class B Non-Voting
Common Stock shall be entitled to 53.882% of the amount of any
dividends, distributions, powers, preferences, or other rights or
privileges to which one share of Common Stock shall be entitled.
Without limiting the foregoing, each share of Class B Non-Voting
Common Stock shall receive 53.882% of the consideration to which
a share of Common Stock shall be entitled in the event of a
merger or consolidation of the Corporation with or into another
entity (whether or not the Corporation is the surviving
corporation).
"5. Exchange of Class A Voting Common Stock and Class B
Non-Voting Common Stock for Shares of Common Stock. At any time,
a holder may exchange (a) one share of Class A Voting Common
Stock, plus (b) one share of Class B Non-Voting Common Stock, for
one share of Common Stock."
1
<PAGE> 2
4. Each of the foregoing amendments has been duly approved by the Board
of Directors of the corporation.
5. Each of the foregoing amendments was duly approved by the required
vote of shareholders in accordance with section 902 of the California
Corporations Code. The total number of outstanding shares entitled to vote with
respect to the amendment was 18,361,000, the favorable vote of a majority of
such shares is required to approve the amendment, and the number of such shares
voting in favor of the amendment equated or exceeded the required vote.
IN WITNESS WHEREOF, the undersigned have executed this certificate this
3rd day of February, 1998.
/s/ DAN R. COOK
------------------------
Dan R. Cook, President
/s/ DAVID BOOTH
------------------------
David Booth, Secretary
Each of the undersigned declares under penalty of perjury that the
statements contained in the foregoing certificate are true and correct of his
own knowledge, and that this declaration was executed on February 3, 1998 at
Lakewood, Colorado.
/s/ DAN R. COOK
------------------------
Dan R. Cook
/s/ DAVID BOOTH
------------------------
David Booth
[SEAL]
2
<PAGE> 1
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
WATSON GENERAL CORPORATION
ENDORSED-FILED
In the office of the Secretary of State
of the State of California
FEB 5, 1998
BILL JONES, SECRETARY OF STATE
Dan R. Cook and David Booth hereby certify that:
1. They are the President and Secretary, respectively, of Watson General
Corporation, a California corporation.
2. Article FIRST of the Articles of Incorporation of this corporation is
amended to read in its entirety as follows:
"FIRST: NAME. The name of this Corporation is USTMAN
Technologies, Inc."
3. Paragraph 1, of Article THIRD of the Articles of Incorporation of
this corporation is amended to read in its entirety as follows:
"1. Authorized Capital. The Corporation shall be authorized to
issue two classes of shares which shall be designated,
respectively, Common Stock and Preferred Stock. The total number
of shares which the Corporation shall have authority to issue is
41,000,000. The total number of shares of Common Stock which this
Corporation is authorized to issue is 40,000,000. The total
number of shares of Preferred Stock which this Corporation is
authorized to issue is 1,000,000.
4. Each of the foregoing amendments has been duly approved by the Board
of Directors of the corporation.
5. Each of the foregoing amendments was duly approved by the required
vote of shareholders in accordance with section 902 of the California
Corporations Code. The total number of outstanding shares entitled to vote with
respect to the amendment was 18,361,000, the favorable vote of a majority of
such shares is required to approve the amendment, and the number of such shares
voting in favor of the amendment equaled or exceeded the required vote.
IN WITNESS WHEREOF, the undersigned have executed this certificate this
2nd day of February, 1998.
/s/ DAN R. COOK
------------------------
Dan R. Cook, President
/s/ DAVID BOOTH
------------------------
David Booth, Secretary
1
<PAGE> 2
Each of the undersigned declares under penalty of perjury that the
statements contained in the foregoing certificate are true and correct of his
own knowledge, and that this declaration was executed on February 2, 1998 at
Lakewood, Colorado.
/s/ DAN R. COOK
------------------------
Dan R. Cook
/s/ DAVID BOOTH
------------------------
David Booth
[SEAL]
2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 518,000
<SECURITIES> 0
<RECEIVABLES> 1,175,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,892,000
<PP&E> 870,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,364,000
<CURRENT-LIABILITIES> 1,950,000
<BONDS> 0
0
0
<COMMON> 11,516,000
<OTHER-SE> (9,683,000)
<TOTAL-LIABILITY-AND-EQUITY> 13,364,000
<SALES> 1,597,000
<TOTAL-REVENUES> 1,597,000
<CGS> 517,000
<TOTAL-COSTS> 1,251,000
<OTHER-EXPENSES> 194,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 427,000
<INCOME-PRETAX> (792,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (792,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (792,000)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
