<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
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
------------------
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: 19,855,243 shares of Common Stock as of
November 5, 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>
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
------------ ------------
Total current assets 1,547,000 1,374,000
PROPERTY AND EQUIPMENT, NET 526,000 544,000
INTANGIBLES AND GOODWILL, NET 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
------------ ------------
Total current liabilities 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
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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
provided by (used in) operating activities:
Depreciation and amortization 420,000 391,000
Warrants to be issued under Senior Subordinated Note
Agreement 346,000 --
Loss on sale and write-off of property and equipment -- 54,000
Issuance of common stock to settle lawsuit -- 27,000
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 (235,000)
Investing Activities
Purchase of property and equipment (43,000) (65,000)
--------- ---------
Cash flows used in investing activities: (43,000) (65,000)
Financing Activities
Borrowings/Repayments (125,000) 125,000
--------- ---------
Cash flows (used in) provided by financing activities (125,000) 125,000
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>
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USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. The interim 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 has 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.
In December 1998, the Investors reached an agreement to convert all of
the Private Placement and accrued interest to Series A Preferred Stock
("Preferred Stock") effective July 1, 1998. The Preferred Stock will
have 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% cumulative 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.
The Preferred Stock has no mandatory redemption or voting rights and is
not convertible into Common Stock.
In February 1999, the Company filed an amended September 30, 1998 Form
10-Q which gave effect to this transaction as of July 1, 1998. However,
because the agreement was not finalized until December 1998, this
treatment was incorrect. Accordingly , this amended filing restates the
notes, interest and debt costs at their original amounts at September
30, 1998 and does not reflect the issuance of the preferred stock.
5
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USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
2. (continued)
During the three months ended September 30, 1998, interest expense
attributable to the Senior Subordinated Notes which was converted to
equity (including warrants to be issued for additional interest expense)
was $558,000 $.03 per share.
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.
6
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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.
7
<PAGE> 8
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 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 Company's statistical inventory reconciliation ("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. As of September 30,
1998, the Company has gathered an inventory of current revisions needed on
older workstations. Those computers which were not compliant will be
thoroughly tested in the upcoming months 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 completed
applying as of September 30, 1998. 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. Over the
next eight months, the Company will 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. Until responses from all vendors
are received, it is not possible to estimate costs associated with the new
software. However it is not anticipated that any new software other than
that discussed below will be a material capital expenditure. All assessments
required and the related determinations are expected to be made prior to
June 30, 1999. The Company will contract for the replacement of its
accounting and information computer software. One criterion in the selection
of the new accounting software will be a warranty that the software is Year
2000 compliant. It is estimated that the system will be installed and
functional by August 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 planned to construct a separate testing
facility. This facility will be dedicated entirely to Year 2000 testing on
live customer data. This facility will have 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 the
facility is expected to be in use some time after March 1999.
8
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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)
and SIRSend(TM) software can be corrected with few programming changes. The
Company is currently evaluating the specific changes needed. Because the
Company's software engineers will do these revisions, the 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 does not believe that any data received
either electronically or in hard copy which is not Year 2000 compliant will
have a negative affect 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 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.
9
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description of Document
-------------- -----------------------
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: 4/9/99 By /s/ Dan R. Cook
-----------------------
Dan R. Cook
President and CEO
Date: 4/9/99 By /s/ Heather Murphy
-----------------------
Heather Murphy
Controller
10
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EXHIBIT INDEX
Exhibit Number Description of Document
- -------------- -----------------------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<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> (13,819,000)
<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>
