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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, 1999
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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
-------------------------------
(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: 19,879,243 shares of Common Stock as of
November 1, 1999.
Transitional Small Business Disclosure Format (check one): Yes X No
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USTMAN TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
1999 June 30,
(unaudited) 1999
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<S> <C> <C>
Assets:
Current assets:
Cash and equivalents $ 612,000 $ 411,000
Accounts receivable, less allowance for doubtful accounts
(September 30, 1999, $163,000; June 30, 1999, $167,000) 1,010,000 1,079,000
Inventory 63,000 68,000
Prepaid expenses and other current assets 149,000 117,000
---------- ----------
Total current assets 1,834,000 1,675,000
Furniture and equipment:
Machinery and equipment 85,000 81,000
Computers and equipment 968,000 940,000
Furniture and fixtures 102,000 102,000
Leasehold improvements 4,000 4,000
---------- ----------
1,159,000 1,127,000
Accumulated depreciation 706,000 648,000
---------- ----------
453,000 479,000
Intangibles and other assets, less accumulated amortization
(September 30,1999, $2,160,000; June 30, 1999, $1,922,000) 7,270,000 7,490,000
========== ==========
$9,557,000 $9,644,000
========== ==========
</TABLE>
See accompanying notes.
2
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<TABLE>
<CAPTION>
September 30,
1999 June 30,
(unaudited) 1999
------------- ------------
<S> <C> <C>
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 224,000 $ 385,000
Accrued expenses:
Salaries and wages 102,000 50,000
Other 292,000 253,000
Deferred revenue 189,000 218,000
Current portion of long-term debt 1,500,000 1,375,000
------------ ------------
Total current liabilities 2,307,000 2,281,000
Long-term debt, less current portion 1,500,000 1,750,000
Deferred employee benefits 430,000 432,000
------------ ------------
Total liabilities 4,237,000 4,463,000
------------ ------------
Shareholders' equity:
Preferred stock, no par value: Authorized shares- 1,000,000,
issued and outstanding- 9,717 shares at September 30, 1999 and
June 30, 1999. Liquidation preference before payment to holders
of common stock of $16,500,000 at September 30, 1999 9,717,000 9,717,000
Common stock, no par value: Authorized shares-40,000,000,
Issued and outstanding-19,879,243 at September 30, 1999 and
June 30, 1999 12,826,000 12,826,000
Class A common stock , no par value; 15,000,000 shares
authorized, none issued and outstanding -- --
Class B common stock , no par value; 15,000,000 shares
authorized, none issued and outstanding -- --
Additional paid-in capital 1,165,000 1,134,000
Accumulated deficit (18,388,000) (18,496,000)
------------ ------------
Total shareholders' equity 5,289,000 5,181,000
============ ============
$ 9,557,000 $ 9,644,000
============ ============
</TABLE>
See accompanying notes.
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USTMAN TECHNOLOGIES, INC.
Consolidated Statements of Operations
Three Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
(unaudited) (unaudited)
------------ ------------
<S> <C> <C>
Net sales $ 1,710,000 $ 1,523,000
Cost of sales 559,000 544,000
------------ ------------
Gross profit 1,151,000 979,000
Selling, general and administrative expenses 958,000 915,000
Other income (expense):
Interest expense (86,000) (807,000)
Interest income 1,000 --
------------ ------------
Net income (loss) $ 108,000 $ (743,000)
============ ============
Basic and diluted net income (loss) per common share $ .01 $ (0.04)
============ ============
Weighted average shares outstanding 19,879,243 19,855,243
============ ============
</TABLE>
See accompanying notes.
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USTMAN TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
Three Months Ended September, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Operating activities:
Net income (loss) $ 108,000 $(743,000)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 58,000 60,000
Amortization of intangible assets 228,000 220,000
Amortization included in interest expense 10,000 140,000
Warrants to be issued under Senior Subordinated Note
Agreement -- 346,000
Interest converted to long-term debt -- 212,000
Loss on sale of equipment 1,000 --
Net changes in operating assets and liabilities (46,000) (79,000)
--------- ---------
Net cash provided by operating activities 359,000 156,000
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Investing activities:
Purchase of property and equipment (33,000) (43,000)
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Net cash used in investing activities: (33,000) (43,000)
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Financing activities:
Principal payments on long-term debt (125,000) (125,000)
--------- ---------
Net cash used in financing activities: (125,000) (125,000)
--------- ---------
Increase (decrease) in cash 201,000 (12,000)
Cash and cash equivalents, beginning of period 411,000 366,000
========= =========
Cash and cash equivalents, end of period $ 612,000 $ 354,000
========= =========
</TABLE>
See accompanying notes.
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USTMAN TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
BASIS OF PRESENTATION
The consolidated financial statements of USTMAN Technologies, Inc. (the
"Company") included in this Form 10-QSB have been prepared without audit (except
that the balance sheet information as of June 30, 1999 has been derived from
consolidated financial statements which were audited) in accordance with the
rules and regulations of the Securities and Exchange Commission. Although
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, the Company believes that the disclosures are
adequate to make the information presented not misleading. The accompanying
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1999.
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 periods ended September 30, 1999 and 1998 have
been included. The results of operations for the interim periods presented are
not necessarily indicative of the results to be expected for the full year.
Certain amounts for the prior period have been reclassified to conform to the
current quarter presentation.
NOTES PAYABLE AND LONG-TERM DEBT
On May 22, 1997, the Company, then doing business as 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)
with Sagaponack Partners, L.P., and Sagaponack International Partners, L.P. (the
"Investors"). In connection with the valuation of the common stock issued in the
transaction, an original issue discount of $1,000,000 was recorded.
In December 1998, the Investors reached an agreement to convert all of the
Private Placement and accrued interest totaling $9,717,000 to Series A Preferred
Stock ("Preferred Stock"). Warrants previously to be issued to the investors for
additional interest expense were also canceled upon exchange of notes. The
Preferred Stock has an aggregate allocation amount (the "Allocation Amount") of
$15,000,000 for the purposes of liquidation priority and dividends. The
Preferred Stock will bear an annual 8% dividend, if and when, declared by the
Board of Directors. The Allocation Amount will increase by the amount of any
dividends not declared for payment by the Company. At September 30, 1999 the
allocation amount was $16,500,000. The Preferred Stock has no mandatory
redemption or voting rights and is not convertible into Common Stock.
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
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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.
INVENTORY
Inventory consists of tank gauge equipment and is stated at the lower of cost of
market. Cost is determined principally using the weighted average method.
EARNINGS (LOSS) PER SHARE
Basic and diluted net earnings (loss) per share are the same because the
exercise price on options outstanding exceeded the Company's average price
during the quarter ended September 30, 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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, and market competition.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Sales for the 1999 quarter were $1,710,000 compared with $1,523,000 in the prior
year. Sales increased approximately 12% as a result of an increase in the number
of customers and related tanks anlayzed. The average tank price charged for our
services has decreased compared to prior year. Gross profit increased slightly
as a result of increased sales while management maintained operating payroll and
other costs at a level consistent with the prior year. Cost of sales increased
only 3% compared to the comparable period of the prior year.
Selling, general and administrative expenses increased 5% in the first quarter
compared to the first quarter of the prior year from $915,000 to $958,000. This
increase is partially a result of more aggressive marketing and advertising
during the current year.
In December 1998, Sagaponack agreed to convert all debt issued to it by USTMAN
to Series A Preferred Stock. As a result of the conversion, interest that had
been accruing at 29.76% per year was eliminated. Additionally, amortization of
deferred debt costs and original issue discount, which were included in
interest, were eliminated. Interest expense, including deferred debt cost and
original issue discount amortization, decreased 89% as a result of the
conversion.
Because of prior net operating loss carryforwards, the Company has no taxes due.
As a result of increases in sales and decreases in expenses, the Company is
profitable during the first quarter of the year. The Company believes it can
maintatin profitability based on current projections and management's continued
focus on increasing productivity and maintaining current cost levels.
YEAR 2000 ASSESSMENT
The following disclosure is made pursuant to the Year 2000 Information and
Readiness Disclosure Act. The following disclosure originated from the Company
and concerns (1) assessments, projections, or estimates of Year 2000 processing
capabilities; (2) plans, objectives or timetables for implementing or verifying
Year 2000 processing capabilities; (3) test plans dates or results; and/or (4)
reviews and comments concerning Year 2000 processing capabilities as defined by
the Act.
The Company has assessed Year 2000 compliance matters and has determined that it
has potential for exposure regarding Year 2000 compliance in three areas of its
internal and external
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business activities. These areas include (1) its own internal hardware and
software systems which are utilized to process and provide the Company's
operations and accounting information, (2) the hardware and software systems it
has provided to its clients for automation of the SIR process and (3) clients'
hardware and software systems which are utilized to provide data to the Company.
The following discusses management's assessment of those risks and the steps it
is taking to minimize them.
Internal hardware and software
Over the last three years, the Company has purchased computers, servers and
other equipment, which are certified by the vendor as being Year 2000 compliant.
Because of this, the telephone system, servers and the majority of the Company's
workstations are Year 2000 compliant. The Company has gathered an inventory of
current revisions needed on older workstations. Those computers which were not
compliant will be thoroughly tested and have the needed revisions by December
31, 1999.
The Company's software consists primarily of three distinct areas: network
operating system, commercial software and proprietary software. The network
operating system has been certified by the vendor to be Year 2000 compliant
subsequent to the completion of certain patches which the Company has applied.
The commercial software the Company runs is very diverse. The Company has
identified over thirty types of commercial software that are currently used both
internally and externally. The Company has attempted to contact the
manufacturers to determine if the software is Year 2000 compliant. For those
software packages which will not be Year 2000 compliant, the Company will make a
determination to either replace the software with a different vendor or continue
to use the software in a "quarantined" environment. Software, which is used by a
significant number of users, such as the e-mail software, has been replaced and
or updated to Year 2000 compliant software. It is not anticipated that any new
software other than that discussed below will be a material capital expenditure.
The Company has contracted for the replacement of its accounting and information
computer software. One criterion in the selection of the new accounting software
was a warranty that the software is Year 2000 compliant. It is estimated that
the system will be installed and functional by November 30, 1999. The cost of
this system is expected to be approximately $50,000 including software, hardware
and implementation expense.
The Company runs internal software developed by the Company's software
engineers. The Company does not believe that the software code will have to be
rewritten or recompiled because most of the software is simply a front end to
well known commercial software which has Year 2000 compliance built into the
core software.
In order to ensure that all software and hardware will function properly in the
Year 2000, the Company has constructed a separate testing facility. This
facility is dedicated entirely to Year 2000 testing on live customer data. This
facility has a server and other hardware to mirror the Company's. The Company
plans to set the internal date at this facility to December 31, 1999 and run
analysis for two months to verify that no Year 2000 issues occur as the clock
approaches, reaches and passes the century mark. The equipment has been
purchased for this facility and
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preliminary testing has begun. In addition, the Company is planning on having
software engineers on site immediately after December 31, 1999 to avoid any
unforeseen problems.
Hardware and software provided to customers
Over the past couple of years, the Company has provided to its customers
Extreme(TM), TankTrax(TM), and SIRSend(TM) software for use by its customers in
providing data to the Company. The Company has tested and believes the
Extreme(TM) software is Year 2000 compliant but the TankTrax(TM) and SIRSend(TM)
software packages are not. The Company believes the TankTrax(TM) software can be
corrected with few programming changes. The Company has evaluated and identified
the specific changes needed. The Company has obtained the programming revision
needed for the SIRSend(TM) software. These revisions are currently in the
process of being made. Because the Company's software engineers are doing these
revisions, the incremental cost to the Company is expected to be minimal.
In addition to software, the Company has furnished computer equipment to run the
above-mentioned software and tank gauges. The Company believes all computer
equipment sold to current customers is Year 2000 compliant. The Company has made
provisions with customers so that the Company will not be responsible for any
Year 2000 issues due to customers moving the proprietary software from the
machine provided by the Company to other equipment without the signed consent of
the Company. The Company has obtained a written warranty from the manufacturer
of its tank gauge that the tank gauge is Year 2000 compliant.
Clients' hardware and software
In order to assess the preparedness of its customers, the Company requested that
its top two hundred customers complete a Year 2000 survey to determine the
status of Year 2000 compliance of the customers' software and the data provided
to the Company. The Company has received responses and based on the
representations of these customers, does not believe there will be significant
Year 2000 problems. The Company does not believe that any data received either
electronically or in hard copy which is not Year 2000 compliant will have a
negative effect on the systems, but may affect services provided due to
additional manual labor required to correct problems with the data. The Company
will be working closely with its customers known to generate data from legacy
equipment which is not Year 2000 compliant to determine what the customers' own
Year 2000 compliance program encompasses. The Company believes by working
together with these customers potential problems will be avoided. Because the
Company does not foresee any significant issues even in the instances of data
which is not Year 2000 compliant, no contingency plan has been developed.
FINANCIAL CONDITION AND LIQUIDITY
At September 30, 1999 the Company's current liabilities exceeded its current
assets by $436,000 compared to $606,000 at June 30, 1999. The Company has
implemented several plans to address its financial condition and to increase
profitability. This includes cost reduction efforts and the conversion of the
Senior Subordinated Notes to equity. The Company has formulated plans and
strategies to continue to address the Company's financial condition and increase
profitability. This includes further cost reduction efforts, and consideration
of raising additional capital
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through the sale of additional stock or through the issuance of debt. Management
believes the Company will generate sufficient cash flows to enable it to fund
operations and satisfy all capital requirements.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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: 11/5/99 By /s/ Dan R. Cook
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Dan R. Cook
President and CEO
Date: 11/5/99 By /s/ Heather Murphy
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Heather Murphy
Controller
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 612,000
<SECURITIES> 0
<RECEIVABLES> 1,010,000
<ALLOWANCES> 0
<INVENTORY> 63,000
<CURRENT-ASSETS> 1,786,000
<PP&E> 453,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,557,000
<CURRENT-LIABILITIES> 2,307,000
<BONDS> 0
0
9,717,000
<COMMON> 12,826,000
<OTHER-SE> (17,223,000)
<TOTAL-LIABILITY-AND-EQUITY> 9,557,000
<SALES> 1,710,000
<TOTAL-REVENUES> 1,710,000
<CGS> 559,000
<TOTAL-COSTS> 958,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,000
<INCOME-PRETAX> 108,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 108,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,000
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
