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As filed with the Securities and Exchange Commission on April 20, 1999
Registration No. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
USTMAN TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
California 7371 95-2873757
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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12265 W. Bayaud Avenue Suite 110
Lakewood, CO 80228
(303) 986-8011
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Dan R. Cook, President
USTMAN Technologies, Inc.
12265 W. Bayaud Avenue Suite 110
Lakewood, CO 80228
(303) 986-8011
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
Edward T. Swanson, Esq.
Case, Knowlson, Burnett & Wright LLP
2049 Century Park East, Suite 3350
Los Angeles, California 90067
(310) 552-2766
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Amount of maximum maximum Amount of
Title of each class of securities to offering price aggregate registration
securities to be registered be registered per share offering price fee
<S> <C> <C> <C> <C>
Common Stock................... 9,941,624 shares $0.25 $2,485,406 $885
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Neither the SEC nor any State securities commission has made any +
+determination regarding the truthfulness or completeness of this prospectus +
+or approved or disapproved of anyone's investment in these securities. Any +
+representation to the contrary is a criminal offense. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 20, 1999
PROSPECTUS
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USTMAN TECHNOLOGIES, INC.
9,941,624 Shares of Common Stock
RIGHTS OFFERING
We are offering to our shareholders of record on April , 1999 the right to
subscribe for shares of our common stock for $0.25 per share.
. The rights are not transferable.
. The rights will expire at 5:00 P.M. (Los Angeles time) on May , 1999.
. You have the right to purchase one share of common stock for every two
shares of Common Stock you owned on April , 1999.
. You also can subscribe for shares of common stock not purchased by other
shareholders.
Sagaponack Partners L.P. and Sagaponack International Partners L.P. own
approximately 37% of our common stock. They have agreed to purchase the
3,672,260 shares which they have the right to purchase and to subscribe for at
least 327,740 shares of common stock not purchased by other shareholders.
Drake & Co. Inc. will act as soliciting agent for us in connection with this
offering. Drake will receive a fee equal to 5% of the gross proceeds received
by us from this rights offering from shareholders other than Sagaponack.
Our common stock is traded on the OTC Bulletin Board under the symbol "USTX".
On April , 1999, the last reported sale price for our common stock on the OTC
Bulletin Board was $ per share.
See Risk Factors beginning on page 5 to read about certain risks you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
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Per Share Total
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Public offering price................................... $ 0.25 $2,485,406
Soliciting agent fees................................... $0.0125 $ 78,087(1)
Proceeds to us.......................................... $0.2375 $2,407,309
</TABLE>
(1) No soliciting agent fees will be paid on shares purchased by Sagaponack.
-----------
Soliciting Agent:
DRAKE & CO., INC.
The date of this Prospectus is May , 1999
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TABLE OF CONTENTS
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Page
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Special Note of Caution Regarding Forward-Looking Statements............. 2
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
How We Intend to Use the Proceeds From the Offering...................... 11
Price Range of Our Common Stock.......................................... 11
Dividend Policy.......................................................... 12
Capitalization........................................................... 12
Dilution................................................................. 13
The Rights Offering...................................................... 14
Selected Historical Consolidated Financial Data.......................... 18
Managements Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 19
Business................................................................. 22
Recent Developments...................................................... 26
Management............................................................... 27
Description of Capital Stock............................................. 29
Principal Shareholders................................................... 30
Indemnification of Directors, Officers and Controlling Persons Against
Securities Act Liabilities.............................................. 30
Legal Matters............................................................ 31
Experts.................................................................. 31
Where You Can Find More Information...................................... 31
Index to Financial Statements............................................ F-1
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SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus and the documents
incorporated by reference into this Prospectus may constitute "forward-looking
statements" within the meaning of the federal securities laws. Forward-looking
statements are based on our management's beliefs, assumptions and expectations
of our future economic performance, taking into account the information
currently available to them. These statements are not statements of historical
fact. Forward-looking statements involve risks and uncertainties that may cause
our actual results, performance or financial condition to be materially
different from the expectations of future results, performance or financial
condition we express or imply in any forward-looking statements. Some of the
important factors that could cause our actual results, performance or financial
condition to differ materially from our expectations are discussed under "Risk
Factors". When used in our documents, the words "anticipate," "estimate,"
"expect," "objective," "projection," "forecast," "goal," or similar words are
intended to identify forward-looking statements.
2
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being offered pursuant
to this rights offering and our financial statements and notes to those
statements appearing elsewhere in this prospectus.
USTMAN TECHNOLOGIES, INC.
We provide statistical inventory reconciliation or "SIR" leak detection
services to owners and operators of underground storage tanks. We believe that
we are the world's leading provider of this form of leak detection. We also
license fuel management software and sell related fuel management products,
including automatic tank gauges.
"USTMAN" and the "Company" refer in this prospectus to USTMAN Technologies,
Inc. Our principal executive offices are at 12265 W. Bayaud Avenue, Suite 110,
Lakewood, Colorado 80228, and our telephone number at that address is 1-800-
253-8054.
RECENT DEVELOPMENTS
During December 1998, we entered into an agreement with Sagaponack to issue
our new Series A Preferred Stock in exchange for $7,000,000 face amount of
debt, accrued interest on the debt of $3,164,000, and the cancellation of
certain rights of Sagaponack.
Also in February 1999, our common stock was delisted from the Nasdaq
SmallCap Market for failure to meet the continued listing requirements. Our
common stock now is traded on the OTC Bulletin Board.
In August 1998, we entered into significant new agreements with BP Australia
and BP New Zealand.
THE RIGHTS OFFERING
We are offering to our shareholders of record on April , 1999 the right to
subscribe for an aggregate of 9,941,624 shares of our common stock. If you hold
shares of common stock on that day, you will have the right to purchase one new
share of our common stock for every two shares of common stock you hold. The
purchase price is $0.25 per share. This rights offer will expire at 5:00 P.M.
Los Angeles time on May , 1999, unless extended by us for up to two
additional weeks. You can exercise your right in whole or in part at any time
prior to the expiration of the offer.
If you fully exercise your right, you can also subscribe for additional
shares which are not purchased by other shareholders. If shareholders subscribe
for more shares than we are offering, subscriptions for additional shares will
be satisfied in proportion to the number of shares owned by each shareholder
who has subscribed for additional shares.
If you own an odd number of shares of common stock, the number will be
rounded up to the next even number to determine the number of new shares of
common stock you have the right to purchase.
The rights are non-transferable and therefore may not be purchased or sold.
3
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Summary Consolidated Financial Data
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Six months Six months
ended ended Year ended Nine months
December 31, December 31, June 30, ended June 30,
1998 1997 1998 1997
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(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $ 3,174,000 $ 3,081,000 $ 5,988,000 $ 2,325,000
Cost of sales........... 1,157,000 1,203,000 2,464,000 836,000
Gross profit............ 2,017,000 1,878,000 3,524,000 1,489,000
Selling, general and
administrative......... 1,874,000 2,232,000 6,247,000 2,912,000
Operating profit
(Loss)................. 143,000 (354,000) (2,723,000) (1,807,000)
Net loss................ (2,482,000) (1,460,000) (5,944,000) (1,979,000)
Basic and diluted net
loss per share......... (.12) (.05) (.31) (.17)
Balance Sheet Data:
Total current assets.... $ 1,508,000 $ 1,374,000 $ 1,879,000
Total assets............ 9,916,000 11,617,000 11,180,000
Current liabilities..... 2,235,000 2,010,000 1,998,000
Long-term liabilities... 2,684,000 10,219,000 6,857,000
Preferred stock......... 9,717,000 -- --
Common stock............ 12,826,000 12,810,000 10,373,000
Additional paid-in
capital................ 875,000 2,517,000 1,947,000
Accumulated deficit..... (18,421,000) (15,939,000) (9,995,000)
Total equity............ 4,997,000 (612,000) 2,325,000
Total liabilities and
equity................. 9,916,000 11,617,000 11,180,000
</TABLE>
4
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RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in additional shares of common stock involves a high degree of risk.
Any of the following risks could materially adversely affect our business,
operating results and financial condition and could result in a complete loss
of your investment.
We Have Had Significant Losses Which May Continue.
We have incurred significant losses, including losses of $1,979,000,
$5,944,000, and $2,482,000, respectively, for the nine months ended June 30,
1997, the year ended June 30, 1998, and the six months ended December 31, 1998.
There can be no assurance that we will generate increased levels of revenues or
achieve profitable operations.
We May Need Additional Financing.
We have been dependent on the issuance of debt and equity securities to
finance our operations and to undertake acquisitions. The inability to obtain
additional financing, if required, would have a material adverse effect on us.
We may determine to seek additional debt or equity financing to fund the cost
of continuing expansion. To the extent that we finance an acquisition with
equity securities, the issuance of such equity securities would result in
dilution to the interests of our stockholders. Additionally, if we incur
indebtedness or issue debt securities in connection with any acquisition, we
will be subject to risks that interest rates may fluctuate and cash flow may be
insufficient for the payment of principal and interest on any such
indebtedness.
We Have Restrictive Loan Covenants In Our Bank Loan and In Our Agreement with
Sagaponack.
Our loan agreement with BankBoston contains numerous financial and other
covenants. If we fail to satisfy the covenants or fulfill our payment
obligations to the Bank, the Bank could elect to declare the unpaid principal
and accrued interest under such loan agreement to be immediately due and
payable. Substantially all of our assets secure our indebtedness to the Bank.
In October 1998, the Bank waived our compliance with certain covenants
contained in the loan agreement as of June 30, 1998, and agreed to certain
modifications to the provisions of the loan agreement for future periods. In
March 1999, the Bank agreed to amend the loan agreement to further modify
certain provisions of the loan agreement. In lieu of the March 1999 quarter
installment, we agreed to pay $750,000 from the proceeds of this offer to
reduce the loan. In addition, we must make quarterly payments of $125,000 in
June, September and December 1999 and March 2000. The quarterly payments then
increase to $250,000, and the balance of the loan will be due on December 31,
2001. There can be no assurance that we will be able to comply with the terms
of our loan agreement with the Bank in the future.
Our 1997 purchase agreement with Sagaponack imposes a significant number of
negative covenants. Unless permitted by Sagaponack, we are prohibited, among
other things, from: (i) declaring or paying any dividends or distributions on
our capital stock, or redeeming, retiring, purchasing or otherwise acquiring
any shares of our capital stock; (ii) engaging in any business activities or
operations substantially different from or unrelated to our present business;
(iii) incurring any indebtedness, other than unsecured indebtedness and other
liabilities incurred in the ordinary course of business (other than through the
borrowing of money) and certain other permitted indebtedness; (iv) creating or
suffering to exist any unpermitted lien or other type of preferential
arrangement; (v) guaranteeing unpermitted indebtedness; (vi) merging with
another entity; (vii) selling or disposing of any property, other than as
permitted; (viii) paying fees to any person for consulting services or the
management of the Company or any of our assets, other than as permitted;
(ix) amending our articles of incorporation or bylaws; and (x) issuing any
shares of Common Stock or our other capital stock or any option, warrant, or
convertible security. Sagaponack has consented to the issuance of the
securities in connection with this offering.
5
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We Are Controlled By Sagaponack.
Sagaponack currently owns approximately 37% of the outstanding shares of our
common stock. As a result of such ownership and the shareholders agreement
described below, Sagaponack will control us. Under our agreement with
Sagaponack, we agreed that our Board of Directors will consist of five members,
and that we will nominate two persons designated by the Sagaponack (currently
Barry Rosenstein and Marc Weisman, who are each a Managing Partner of
Sagaponack) and one person selected from a list of persons (currently vacant),
to serve on the Board. We also agreed to nominate Dan R. Cook, our Chief
Executive Officer, as a member of the Board. In addition, Sagaponack has a
shareholders agreement with certain shareholders, including Mr. Cook and Ronald
G. Crane. The agreement obligates those shareholders to vote their shares
during any election of directors for the two nominees of the Sagaponack and for
the person nominated from the list of persons, unless Sagaponack has sufficient
votes to cause the election of such persons.
Our Future Success Depends on Market Acceptance of SIR Technology and Continued
Government Regulation.
Our success is largely dependent upon market acceptance of SIR software and
services. The markets for SIR are rapidly evolving. Accordingly, the ultimate
demand for our services and market acceptance of SIR are subject to a high
level of uncertainty. The market for our products and services is created in
large part by Environmental Protection Agency regulation. If government
regulation is relaxed or not enforced, demand for our products and services
could be materially adversely affected. There can be no assurance that SIR will
gain significant or continued market acceptance. Achieving market acceptance
will require substantial expenditures and efforts on our part. Revenues from
SIR will depend on a number of factors, including (i) the influence of market
competition, (ii) technological changes, (iii) our ability to design, develop
and introduce enhancements on a timely basis, and (iv) our ability to
successfully establish and maintain distribution channels. Existing and future
competition may make it more difficult to achieve market acceptance for SIR.
Most of Our Revenues Derive from SIR Services and Products.
Substantially all of our revenues are derived from the sale or license of
our SIR software products and services to a limited customer base. For the year
ended June 30, 1998 and the six months ended December 31, 1998, revenues from
SIR software and services accounted for approximately 82% and 71%,
respectively, of our revenues. A decline in revenues from SIR software and
services would have a material adverse effect on us.
We Are Dependent On Three Significant Clients.
Sales of SIR services to a limited number of clients has accounted for a
significant portion of our revenues. For the year ended June 30, 1998 and the
six months ended December 31, 1998, contracts with three clients accounted for
approximately 10% and 14%, respectively, of our revenues. Termination of such
contracts or a decline in the economic prospects of principal customers could
have an adverse effect on us. There can be no assurance that we will not
continue to be dependent on a limited customer base for a substantial portion
of our revenues.
Our Markets Experience Rapid Technological Change.
The markets for software products are characterized by rapid technological
advances, increasingly sophisticated and changing customer requirements,
frequent new product introductions and enhancements and evolving industry
standards in computer hardware and software technology. As a result, we must
continually enhance and improve our products in response to such advances and
changes in operating systems, application software, computer hardware,
programming tools and computer language technology. The introduction of
products embodying new technologies and the emergence of new industry standards
may render our existing products and services obsolete and unmarketable.
6
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We Have The Risk of Product Defects.
Software products as complex as those offered by us may contain undetected
errors or result in failures when first introduced or when new versions are
released. There can be no assurance that errors will not be found in new
products or enhancements after installation. The occurrence of these errors
could result in adverse publicity, loss of or delay in market acceptance,
claims by customers against us or could cause us to incur additional costs, any
of which could have a material adverse effect on us.
We Face Significant Competition.
We are aware of at least two major monitoring panel manufacturers who offer
proprietary software monitoring systems. We believe that this software is
written only for use on equipment designed by such manufacturers, whereas we
believe that our software currently interfaces with all major brands. Major oil
companies could decide to build proprietary systems for their own station
outlets, and such software could be designed to compete directly with our
products and services. In addition, third parties could enter this market at
any time. Many of our competitors are well established, have substantially
greater financial and other resources than ours, and have established
reputations for success in the industry. There can be no assurance that we will
be able to compete successfully.
Our Business Involves Potential Liability.
Our engagements often involve development, implementation and maintenance of
software applications that are critical to the operations of our clients'
businesses. Our failure or inability to meet a client's expectations in the
performance of our services could harm our business reputation or result in a
claim for substantial damages against us, regardless of our responsibility for
such failure or inability. In addition, in the course of performing services,
our personnel often gain access to confidential or proprietary client
information. Although we have implemented policies to prevent such client
information from being disclosed to unauthorized parties or used
inappropriately, any such unauthorized disclosure or use could result in a
claim for substantial damages. We attempt to limit liability and maintain
insurance coverage in the amount of $4,000,000, including coverage for errors
and omissions. There can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims. The successful assertion of one or more large
claims against us that are uninsured, exceed available insurance coverage or
result in changes to our insurance policies, including premium increases or the
imposition of a large deduction or co-insurance requirements, would materially
adversely affect us. We do not maintain environmental impairment insurance.
Our Outstanding Series A Preferred Stock Has Significant Dividend and
Liquidation Rights.
Our outstanding Series A Preferred Stock has a face amount of $9,717,000.
However, the Series A Preferred Stock has an allocation amount of $15,000,000
for the purposes of liquidation priority and dividends. The allocation amount
will increase by the amount of any dividends not declared for payment by us.
We Have Broad Discretion Over The Use Of The Proceeds.
We have broad discretion with respect to the specific application of the net
proceeds of this offering. Other than the use of $750,000 to reduce our
outstanding bank debt, we have not otherwise earmarked the net proceeds for
specific purposes. There can be no assurance that determinations ultimately
made by us relating to the specific allocation of the net proceeds will permit
us to achieve our business objectives.
We May Experience International Trade Risks.
For the year ended June 30, 1998 and the six months ended December 31, 1998,
revenues from international markets have not been significant. We are seeking
to increase our product sales in international
7
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markets pursuant to our relationship with British Petroleum. We are subject to
risks inherent in foreign trade, including credit risks, fluctuations in
foreign currency exchange rates, shipping delays and international political,
regulatory and economic developments, all of which could have a significant
impact on us.
We Have Conflicts of Interest.
We have and may engage in significant transactions with various parties
deemed to be our "affiliates," including Sagaponack. We do not have any
measures in place to assure that future transactions with related parties are
on terms at least as favorable to us than could have been obtained from
unaffiliated third-parties. Accordingly, there can be no assurance that future
transactions or arrangements between us and our affiliates will be advantageous
to us, that conflicts will not arise with respect thereto, or that if conflicts
do arise, they will be resolved in a manner favorable to us. See "Certain
Transactions."
We Have Only Limited Protection of Our Proprietary Rights.
Our success is dependent on our proprietary technologies. We do not hold any
patents and rely on copyright and trade secret laws, non-disclosure agreements
with employees, distributors and customers, and technical measures to protect
the ideas, concepts and documentation of our proprietary technologies and know-
how to protect our intellectual property rights. Such methods may not afford
complete protection, and there can be no assurance that third parties will not
independently develop equivalent or superior technologies or obtain access to
our technologies, ideas, concepts and documentation. Our inability to protect
our proprietary technologies could have a material adverse effect on us.
Although we believe that our technologies and products have been developed
independently and that our technologies and products do not infringe upon the
proprietary rights of others, there can be no assurance that our technologies
and products will not infringe on the intellectual rights of third parties or
that third parties will not assert infringement claims against us.
We Are Dependent on Key Personnel.
Our success depends to a significant extent on the efforts and abilities of
certain of our senior management, including Dan R. Cook, our Chief Executive
Officer. The loss of key employees could have a material adverse effect on us.
Competition for qualified personnel is intense, and there can be no assurance
that we will attract and retain qualified personnel.
Our Business May Be Impacted By The Year 2000 Compliance.
The Year 2000 issue is the result of computer system programs being written
with two digits rather than four to define the applicable year. As a result,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of normal business activities.
We have assessed Year 2000 compliance matters and have determined that we
have a potential for exposure regarding Year 2000 compliance in three areas of
our internal and external business activities. These areas include (1) our own
internal hardware and software systems which are utilized to process and
provide our operations and accounting information, (2) the hardware and
software systems we have provided to our clients for automation of the SIR
process, and (3) clients' hardware and software systems which are utilized to
provide data to us.
Over the last three years, we have purchased computers, servers and other
equipment which are certified by the vendor as being Year 2000 compliant.
Because of this, our telephone system, servers and the majority of our
workstations are Year 2000 compliant. We have 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.
8
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Our 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 after certain
patches were applied. The commercial software we run is very diverse. We have
identified over thirty types of commercial software that are currently used
both internally and externally. Over the next several months, we will contact
the manufacturers to determine if the software is Year 2000 compliant. For
those software packages which will not be Year 2000 compliant, we 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.
We will contract for the replacement of our 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. Our
management is currently evaluating systems. 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.
We run internal software developed by our software engineers. We do 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, we plan 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 ours. We plan 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.
Over the past two years, we have provided to our customers Extreme(TM),
TankTrax(TM), and SIRSend(TM) software for use by our customers in providing
data to us. We have tested the software and believe the Extreme(TM) software is
Year 2000 compliant. However, the TankTrax(TM) and SIRSend(TM) software
packages are not Year 2000 compliant. We believe the TankTrax(TM) software can
be corrected with few programming changes. We are currently evaluating the
specific changes needed. We have obtained, but not applied, the programming
revision needed for the SIRSend(TM) software. These revisions are expected to
be complete by June 30, 1999. Because our software engineers will do these
revisions, the cost to us is expected to be minimal.
In addition to software, we have furnished computer equipment to run the
above-mentioned software and tank gauges. We believe all computer equipment
sold to current customers is Year 2000 compliant. We have made provisions with
customers so that we will not be responsible for any Year 2000 issues due to
customers moving the proprietary software from the machine provided by us to
other equipment without our signed consent. We have obtained a written warranty
from the manufacturer of our tank gauge that the tank gauge is Year 2000
compliant.
In order to assess the preparedness of our customers, we have requested that
our 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 us. We have received several responses and are currently evaluating the
survey responses. We do 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. We will be
working closely with our customers known to generate data from equipment which
is not Year 2000 compliant to determine what the customers' own Year 2000
compliance program encompasses. We believe that by working together with these
customers potential problems will be avoided.
9
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Our Board Can Issue New Classes of Preferred Stock.
Our Board of Directors is authorized, without further action required on the
part of holders of Common Stock, to issue one or more classes of preferred
stock and to determine the rights, preferences and privileges of such preferred
stock, including voting, dividend and liquidation rights. The issuance of one
or more classes of preferred stock by the Board of Directors could materially
adversely affect the holders of the Common Stock. In the event of its issuance,
the preferred stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control of our Company. We
have issued Series A Preferred Stock to Sagaponack in connection with an
exchange of debt and rights for the Preferred Stock.
Our Authorized Outstanding Shares of Common Stock May Need To Be Increased.
If all shares offered in this rights offer are sold, we will have 29,820,667
shares of common stock issued and outstanding. We also have outstanding options
and warrants to purchase an additional 5,135,284 shares of common stock. Since
our authorized number of shares of Common Stock is 40,000,000, we will not have
available a significant number of unissued shares of Common Stock available for
acquisitions or other transactions. Our Board of Directors is considering
either a reverse stock split or an amendment to our Articles of Incorporation
to increase the authorized number of shares of common stock. Either action will
require shareholder approval.
Purchasers of Stock Will Experience Immediate Dilution.
Purchasers of the common stock offered hereby will be subject to substantial
dilution. As of December 31, 1998, the net tangible stock value per share of
outstanding Common Stock was $(0.15), compared to the offering price of $0.25
per share. Assuming the sale of all common stock offered hereby, the net
tangible stock value per share as of such date after giving effect to the
rights offer would be $(0.03). The above calculation of net book value per
common shares excluded the effect of the liquidation preference of the Series A
Preferred Stock. As of December 31, 1998, this amount totaled $15,600,000 or
$.78 per common share.
We Have A Substantial Number of Shares of Restricted Stock Eligible For Future
Sale.
As of March 31, 1999, there were approximately 10,997,000 restricted shares
of common stock outstanding, of which approximately 9,983,000 shares had been
held for more than one year and were eligible for resale pursuant to Rule 144
under the Securities Act. Although Rule 144, with certain exceptions, imposes
restrictions on the number of shares which may be sold pursuant to that rule by
a person during a three-month period, the sale of a significant number of the
shares eligible for resale under Rule 144 could adversely affect the market for
our Common Stock
We Have A Substantial Number of Options and Warrants Outstanding.
As of March 31, 1999, we had outstanding options and warrants to purchase an
aggregate of 5,135,284 shares of Common Stock at prices ranging from $.50 to
$2.50 per share. To the extent that options and/or warrants are exercised, the
interests of our shareholders will be diluted. The terms upon which we will be
able to obtain additional equity capital may be adversely affected because the
holders of such options and warrants can exercise them at a time when we would,
in all likelihood, be able to obtain any needed capital on terms more favorable
to us than those provided in those options and warrants.
We Have Not Paid Dividends.
We have not paid any cash dividends, nor do we contemplate or anticipate
paying dividends upon our Common Stock in the foreseeable future.
Delisted Common Stock.
In February 1999, our common stock was delisted from the NASDAQ Small Cap
Market for failure to meet the continued listing requirements. Our common stock
currently is traded on the OTC Bulletin Board.
10
<PAGE>
HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING
Our net proceeds from the sale of all of the shares of common stock we are
offering are estimated to be about $2,337,000, after deducting the soliciting
agent fee and other estimated offering expenses. If only Sagaponack purchases
shares pursuant to this offering, our net proceeds will be about $930,000.
We have agreed to use at least $750,000 of the net proceeds to reduce our
$3.25 million loan from BankBoston. We expect to use the remaining net proceeds
for working capital and other general corporate purposes. In addition, we may
use a portion of the net proceeds to acquire complementary businesses or
technologies; however, we currently have no commitments or agreements and are
not involved in any negotiations with respect to any such transactions. Pending
use of the net proceeds, we intend to invest the net proceeds in interest-
bearing, investment-grade securities.
PRICE RANGE OF OUR COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the symbol
"USTX". After the close of business on February 19, 1999, our common stock was
delisted from the Nasdaq SmallCap Market because we did not meet its continued
listing requirements. The following table sets forth, for the periods
indicated, the high and low sale prices per share of our common stock as
reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
1997 Fiscal Year (ended June 30, 1997)
First Quarter.................................................. 2 3/8 1 1/2
Second Quarter................................................. 2 5/16 7/8
Third Quarter.................................................. 2 1/8 7/8
Fourth Quarter................................................. 2 1/8 1 5/16
1998 Fiscal Year (ended June 30, 1998)
First Quarter.................................................. 1 15/16 15/16
Second Quarter................................................. 1 5/16 1 1/18
Third Quarter.................................................. 2 13/16 1 1/4
Fourth Quarter................................................. 2 9/16 1 1/2
1999 Fiscal Year (ending June 30, 1999)
First Quarter.................................................. 1 9/32 7/8
Second Quarter................................................. 1 1/2 15/32
Third Quarter..................................................
Fourth Quarter ((through April , 1999).......................
</TABLE>
On April , 1999, the last reported sale price of our common stock on the
OTC Bulletin Board was $ per share. As of March 31, 1999 we estimate that
there were approximately 400 holders of record and 1,800 beneficial owners of
the common stock.
11
<PAGE>
DIVIDEND POLICY
We have not paid and do not anticipate paying any cash dividends on our
common stock in the foreseeable future. We intend to retain future earnings, if
any, for use in the operation and expansion of our business. In addition, the
terms of our bank loan and our securities purchase agreement with Sagaponack
restrict our ability to pay dividends on our common stock.
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998 on
an actual basis and as adjusted to reflect our sale of all shares of common
stock being offered in this rights offering and the application of the net
proceeds as set forth in "Use of Proceeds". The capitalization information set
forth in the table below assumes that shareholders subscribe for all rights to
purchase shares of common stock. The capitalization information set forth in
the table below is qualified by the more detailed Consolidated Financial
Statements and Notes thereto beginning on page F-1 of this prospectus. The
table should be read in conjunction with such Consolidated Financial Statements
and Notes.
<TABLE>
<CAPTION>
December 31, 1998
Pro Forma
Historical Adjustments Pro Forma
----------- ----------- -----------
<S> <C> <C> <C>
Current portion of long-term debt..... $ 1,000,000 125,000 (1) $ 1,125,000
=========== ===========
Long-term debt, less current portion.. $ 2,250,000 (875,000)(1) $ 1,375,000
Preferred Stock....................... 9,717,000 9,717,000
Common Stock, no par value.
Authorized--40,000,000, issued and
outstanding--actual, 19,879,243, pro
forma--29,820,867.................... 12,826,000 2,337,000 (3) 15,163,000
Additional paid-in capital............ 875,000 875,000
Accumulated deficit................... (18,421,000) (18,421,000)
Total shareholders' equity............ 4,997,000 7,334,000
----------- -----------
Total capitalization.................. $ 8,247,000 $ 9,834,000
=========== ===========
</TABLE>
- --------
(1) Effective March 1999, the Company and BankBoston have agreed to amend the
payment terms of the BankBoston loan.
(2) The Company has agreed to use at least $750,000 as the net proceeds to
reduce the BankBoston loan.
(3) Represents the issuance of 9,941,624 shares of no par common stock at $.25
per share, net costs of issuance.
12
<PAGE>
DILUTION
The net tangible book value of the Company at December 31, 1998 was
approximately ($2,905,000), or ($.15) per share. The net tangible book value
per share is determined by dividing the tangible net worth of the Company
(total assets, excluding goodwill, less total liabilities) by the number of
shares outstanding. Without taking into account any changes in such net
tangible book value after December 31, 1998, other than to give effect to the
sale of all of the shares pursuant to this rights offering at a price of $0.25
per share, the net tangible book value of the Company as of December 31, 1998
would have been approximately $(544,000), or $(.03) per share. This represents
an immediate increase in the net tangible book value of $.12 per share for each
share of Common Stock outstanding prior to the completion of the rights
offering and an immediate dilution of $0.28 per share for shares of Common
Stock issued in the rights offering. Dilution is determined by subtracting the
net tangible book value per share after the rights offering from the
subscription price per share. The following table illustrates this per share
dilution:
<TABLE>
<S> <C>
Subscription price per share(1)...................................... $0.25
Net tangible book value per share at December 31, 1998 .............. (.15)
Increase per share attributable to the exercise of the rights (2).... .12
=====
Net tangible book value per share after the rights offering.......... (.03)
Dilution per share for shares issued upon exercise of the rights..... $0.28
</TABLE>
- --------
(1) Prior to deducting expenses of the rights offering to be paid by the
Company, which are estimated to be approximately $0.02 per share.
(2) Assumes that all rights are exercised.
(3) The above calculation of net book value per common shares excluded the
effect of the liquidation preference of the Series A Preferred Stock. As of
December 31, 1998, this amount totaled $15,600,000 or $.78 per common
share.
13
<PAGE>
THE RIGHTS OFFER
We are issuing to our shareholders of record on April , 1999 the right to
subscribe for up to 9,941,624 shares of our common stock for $0.25 per share.
If you hold shares of common stock on that day, you will have the right to
purchase one new share of our common stock for every two shares of common stock
you hold. The right to purchase a fractional share will be rounded up to the
next whole share. The rights offer will expire at 5:00 P.M. Los Angeles time on
May , 1999. Rights may be exercised at any time prior to the expiration of
the rights offer.
In addition, if you fully exercise your right, you can also subscribe for
additional shares which are not purchased by other shareholders. If
shareholders subscribe for more shares than we are offering, subscriptions for
additional shares will be satisfied in proportion to the number of shares owned
by each shareholder who has subscribed for additional shares.
The rights are evidenced by subscription certificates which are being sent
to shareholders of record on the record date for the rights offer. The number
of rights issued to each shareholder is stated on the subscription certificate.
The method by which rights may be exercised and shares paid for is set forth
below under "Method of Exercise of Rights" and "Payment for Shares."
Purposes of the Rights Offer.
Our Board of Directors has determined that we need additional capital for
working capital, to reduce our bank debt, and for possible acquisitions. We
attempted to raise additional funds in a private offering of common stock and
warrants in early 1999 but the private offering was unsuccessful. Sagaponack,
which owns approximately 37% of our common stock, advised us that it was
willing to contribute approximately $1,000,000 to us for shares of common
stock. Our Board of Directors decided to make a rights offering in order that
all shareholders could participate in the purchase of common stock if they
desired to do so. In approving the rights offering, our Board of Directors
considered the anticipated benefits and expense of the rights offer. The Board
also considered the benefits and drawbacks of non-transferable versus
transferable rights. Finally, the offer seeks to reward our shareholders by
giving them the right to purchase additional shares at a price that may be
below the market price of the shares without incurring any direct transaction
costs.
Non-Transferability of the Rights.
The rights are non-transferable and therefore may not be purchased or sold.
Subscription Agent.
The Subscription Agent is U.S. Stock Transfer Company, 1745 Gardena Avenue,
Suite 200, Glendale, California 91204-2991. The Subscription Agent will
receive, for its administrative, processing, invoicing and other services as
subscription agent, a fee estimated to be $10,000, plus reimbursement for its
out-of-pocket expenses related to the rights offer. Signed subscription
certificates must be sent, together with proper payment of the estimated total
purchase price for the total number of shares subscribed for, to U.S. Stock
Transfer Company by one of the methods described below. We will accept only
subscription certificates actually received on a timely basis as follows:
If by mail, overnight courier, or by hand:
U.S. Stock Transfer Company
1745 Gardena Avenue, Suite 200
Glendale, California 91204-2991
Attn: Richard Brown
14
<PAGE>
By facsimile (for Notice of Guaranteed Delivery only):
(818) 502-0057 with the original Subscription Certificate to be sent to
the above address
Confirm facsimile by telephone: (818) 502-1404.
Delivery to an address other than that above does not constitute good
delivery.
Method of Exercising Rights
Rights may be exercised by filling in and signing the subscription
certificate and mailing it in the envelope provided, or otherwise delivering
the completed and signed subscription certificate to the Subscription Agent,
together with payment for the shares as described below under "Payment for
Shares." Rights may also be exercised by contacting your broker, banker or
trust company, which can arrange, on your behalf, to guarantee delivery of
payment and a properly completed and executed subscription certificate. A fee
may be charged by your broker, banker or trust company for this service.
Completed subscription certificates must be received by the Subscription Agent
at the address set forth above.
Shareholders Who Are Record Owners. Shareholders who are record owners can
choose between either option set forth under "Payment for Shares" below. If
time is critical, option (2) will permit delivery of the Subscription
Certificate and payment after the Expiration Date.
Investors Whose Shares Are Held By A Nominee. Shareholders whose shares are
held by a nominee, such as a broker or trustee, must contact that nominee to
exercise their rights. In that case, the nominee will complete the
subscription certificate on behalf of the shareholder and arrange for proper
payment by one of the methods set forth under "Payment for Shares" below.
Nominees. Nominees who hold shares for the account of others should notify
the beneficial owners of such shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to the
rights.
Foreign Restrictions
Subscription certificates will not be mailed to shareholders on the record
date for the rights offer whose record addresses are outside the United States
(the United States includes its territories and possessions and the District
of Columbia). Those rights will be held by the Subscription Agent for such
foreign shareholders' accounts until instructions are received to exercise the
rights. If no instructions are received prior to the expiration of the rights
offer, such rights will expire.
Soliciting Agent.
Any questions or requests for assistance concerning the method of
subscribing for shares should be directed to Drake & Co. Inc., the Soliciting
Agent for the rights offer, at its address and telephone number listed below:
Drake & Co. Inc.
7 Hanhover Square
New York, NY 10004
Attn: Brandon T. Hole
212-742-1500
Shareholders may also contact their brokers or nominees for information
with respect to the rights offer.
Drake, as soliciting agent, will receive a commission of 5% of the gross
proceeds from the rights offer other than any proceeds received from
Sagaponack. Drake also will receive warrants to purchase 5% of the
15
<PAGE>
common stock purchased in this rights offer from shareholders other than
Sagaponack. The warrants will have an exercise price of $ per share and will
expire five years after issuance. Drake also will be reimbursed for its
accountable expenses up to a maximum of $10,000.
Payment for Shares.
If you elect to subscribe for shares, you can choose between the following
methods of payment:
(1) Shares may be subscribed for by delivering to the Subscription Agent the
subscription certificate together with payment of the total purchase price for
the shares you are subscribing for, including any oversubscription election you
make. The subscription will be accepted when such payment, together with the
properly completed and executed subscription certificate, is received by the
Subscription Agent, provided that the subscription certificate and such payment
are received by the Subscription Agent no later than 5:00 P.M., Los Angeles
time, on May , 1999. The Subscription Agent will deposit all checks received
by it for the purchase of shares in a segregated interest-bearing account (the
interest from which will accrue to our benefit) pending proration and
distribution of the shares. Payments pursuant to this method must be in U.S.
dollars, must be by money order or check drawn on a bank located in the United
States, must be payable to USTMAN Technologies, Inc., and must accompany a
properly completed and executed subscription certificate for the subscription
to be accepted. The Subscription Agent will not accept cash as a means of
payment for shares.
(2) Alternatively, a subscription will be accepted if, prior to 5:00 P.M.,
Los Angeles time, on May , 1999, the Subscription Agent has received a
properly completed and executed notice of guaranteed delivery in the form
accompanying this prospectus by facsimile or otherwise from a financial
institution that is a member of the Securities Transfer Agents Medallion
Program, the Stock Exchange Medallion Program or the New York Stock Exchange
Medallion Signature Program, guaranteeing delivery of (i) payment of the full
subscription price for the shares subscribed for, and (ii) a properly completed
and executed subscription certificate. The Subscription Agent will not honor a
notice of guaranteed delivery unless a properly completed and executed
subscription certificate, together with full payment, is received by the
Subscription Agent by the close of business on May , 1999 [use the third
business day after the expiration date].
Within eight business days following the expiration of the rights offer, a
confirmation will be sent by the Subscription Agent to subscribing shareholders
showing (i) the number of shares acquired; (ii) the subscription price and the
total purchase price for such shares; and (iii) any excess payment to be
refunded by us. Any excess payment refundable by us will be sent by the
Subscription Agent as soon as practicable.
Whichever of the two methods of payment described above is used, issuance
and delivery of the shares subscribed for are subject to collection of checks
or receipt of actual payment pursuant to a notice of guaranteed delivery.
Shareholders will have no right to rescind their subscriptions after receipt
of their payment for shares by the subscription agent.
Purchase and Sale of Rights.
The rights are non-transferable and therefore may not be purchased or sold.
Delivery of Stock Certificates.
Stock certificates for all shares purchased in the rights offer will be
mailed as soon as practicable after full payment for the shares subscribed for
has cleared and the shares have been allocated in the event of an
oversubscription.
16
<PAGE>
Certain Federal Income Tax Consequences.
The federal income tax consequences to holders of the Common Stock with
respect to the Offer generally will be as follows:
The distribution of rights to shareholders on the record date for the rights
offer will not result in taxable income to such shareholders. In addition, such
shareholders will not realize taxable income as a result of the exercise of
rights.
The basis of a right distributed to a shareholder will be zero unless the
shareholder elects (by filing a statement with his or her federal income tax
return for the year in which the right is received) to allocate the basis of
the common stock with respect to which the right is distributed between the
right and the common stock, based on their respective fair market values on the
date of distribution. The holding period of a right received by a shareholder
includes the holding period of the common stock with respect to which the right
is distributed.
A right issued to a shareholder will be a capital asset in the hands of such
shareholder if the common stock with respect to which the right was issued was
a capital asset in the hands of such shareholder. If a right expires
unexercised, no loss will be realized.
If rights are exercised for shares, the basis of the shares received will
include the basis allocated to the rights (if any) and the amount paid upon
exercise of the rights. The holding period for shares acquired upon the
exercise of rights begins on the date the rights are exercised.
For back-up withholding purposes, we may be required to withhold 31%of
reportable payments paid to certain non-corporate shareholders.
The foregoing is only a summary of applicable federal income tax
consequences and does not address any state or local tax consequences to
holders of rights. Shareholders should consult their tax advisers concerning
the tax consequences in their particular circumstances.
17
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto beginning of page F-1 of
this prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 21 of this prospectus.
The consolidated statement of operations data for each of the two fiscal
periods ended June 30, 1998 and 1997 and consolidated balance sheet data as of
June 30, 1998 and 1997 are derived from financial statements of the Company
which have been audited by Ernst & Young LLP, independent auditors, and are
included elsewhere herein. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Six months Six months Nine months
ended ended Year ended ended
December 31, December June 30, June 30,
1998 31, 1997 1998 1997
------------ ---------- ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Statement of Operations
Data
Net Sales................ $ 3,174,000 $3,081,000 $ 5,988,000 $ 2,325,000
Cost of Sales............ 1,157,000 1,203,000 2,464,000 836,000
Selling, general and
administrative.......... 1,874,000 2,232,000 6,247,000 2,912,000
Interest expense, net of
interest income......... 1,414,000 692,000 3,221,000 168,000
Write-off deferred debt
cost.................... 1,211,000 -- -- --
Write-off investment in
Toxguard Systems, Inc... -- -- -- 384,000
Net loss before provision
for income taxes........ (2,482,000) (1,046,000) (5,944,000) (1,975,000)
Provision for income
taxes................... -- -- -- (4,000)
Net loss................. (2,482,000) (1,046,000) (5,944,000) (1,979,000)
Basic and diluted net
loss per share.......... (.12) (.05) (.31) (.17)
Balance Sheet Data:
Cash..................... $ 24,000 $ 366,000 $ 799,000
Total current assets..... 1,508,000 1,374,000 1,879,000
Total assets............. 9,916,000 11,617,000 11,180,000
Current liabilities...... 2,235,000 2,010,000 1,998,000
Long-term liabilities.... 2,684,000 10,219,000 6,857,000
Preferred stock.......... 9,717,000 -- --
Common stock............. 12,826,000 12,810,000 10,373,000
Additional paid-in
capital................. 875,000 2,517,000 1,947,000
Accumulated deficit...... (18,421,000) (15,939,000) (9,995,000)
Total equity............. 4,997,000 (612,000) 2,325,000
Total liabilities and
equity.................. 9,916,000 11,617,000 11,180,000
</TABLE>
18
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with financial
statements and related notes included elsewhere in this prospectus. The results
shown in this prospectus are not necessarily indicative of the results to be
expected in any future periods. This discussion contains forward-looking
statements based on current expectations which involve risks and uncertainties.
Actual results and the timing of certain events may differ significantly from
those projected in such forward-looking statements due to a number of factors,
including those set forth in the section entitled "Risk Factors" and elsewhere
in this prospectus.
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.
Results of Operations for the six months ended December 31, 1998 compared to
the six months ended December 31, 1997
The Company reported a net loss of $2,482,000 or $0.12 per share as compared
to a net loss of $1,046,000 or $0.05 per share for the corresponding period of
the prior year. The write off of deferred debt cost related to the Private
Placement in the amount of $1,211,000 in the second quarter of the fiscal year
significantly contributed to the year to date loss. The Company wrote off the
deferred debt costs related to the Private Placement when the Investors agreed
to convert the Private Placement Notes to Preferred Stock.
Sales increased approximately 3% compared to prior year, this is a result of
an increase in the customer base as the December 22 EPA deadline approached and
increases in software and tank gauge sales. The increase in year to date sales
is not as great as the quarterly results 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. 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.
General and administrative expenses decreased by 29%. This is a result of
the elimination of expenses 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. All operations were integrated as of June 30, 1998 eliminating
duplication of costs and resulting in more efficient operations.
Financial Condition and Liquidity.
At December 31, 1998 the Company's current liabilities exceeded current
assets by $727,000 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.
In December 1998, Sagaponack agreed with the Company to convert all of its
debt 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.
19
<PAGE>
In February 1999, the Company filed an amended September 30, 1998 Form 10-Q
which gave affect to this transaction as of July 1, 1998. However, because the
terms of the agreement were 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.
The Company was not in compliance with the net tangible assets/market
capitalization/net income requirement for continued listing on the Nasdaq
SmallCap Market, and its common stock was delisted from trading on such market
in February 1999. The common stock now trades on the OTC Bulletin Board.
The year ended June 30, 1998 compared to the period ended June 30, 1997
The Company's operating results for the year ended June 30, 1998 included
significant costs related to the restructuring and consolidation of the Watson,
USTMAN Industries, Inc., and ATC organizations and the financing related to
those transactions.
The Company reported a net loss of $5,944,000 for the twelve months ended
June 30, 1998 compared to $1,979,000 for the nine months ended June 30, 1997.
This increase in net loss is due partially to the cost of moving and
consolidating the operations of Watson General Corporation, Watson Systems,
Inc., and ATC, to Lakewood, Colorado. These expenses totaled $736,000 as of
June 30, 1998.
Net sales for the twelve months ended June 30, 1998 were $5,988,000 an
increase from $2,325,000 for the nine months ended June 30, 1997. The increase
in revenues is partially attributable to the presentation of twelve months in
the current year as opposed to nine months in the prior year. Additionally, the
increase is due to the inclusion of twelve months of USTMAN revenue and six
months of ATC revenue in the current year total revenue. There were no material
price increases during the year. The Company's sales depend in part upon
decisions of customers as to when to implement measures to meet compliance
requirements and to more aggressively attempt to manage liquid petroleum
inventory.
Although the Company's gross margin decreased in the current fiscal year,
this is due to $506,000 of amortization of proprietary software being included
in cost of sales. This amortization relates to USTMAN software acquired in May
1997. Management does not expect any extraordinary amortization in subsequent
years.
Selling, general and administrative expenses increased to $6,247,000 in the
fiscal year ended June 30, 1998 compared to $2,912,000 for the fiscal year
ended June 30, 1997. The increase is in large part due to the twelve month
presentation in the current year as opposed to the nine month presentation in
the prior year. Additionally, general and administrative expenses increased
because of the depreciation, amortization and option expenses discussed below.
For the 1999 fiscal year, management expects general and administrative
expenses to stabilize at a lower level than experienced in the 1998 fiscal year
as a result of streamlining of operations.
The Company's amortization expenses and depreciation increased to $1,149,000
in the 1998 fiscal year, up 220% from the year before. This increase is
primarily due to expensing a full year of goodwill and proprietary software
resulting from the USTMAN acquisition. The Company also experienced an increase
in interest expense of 1,784% due to interest incurred on the Senior
Subordinated Notes for an entire year along with approximately $1.6 million in
interest expense as a result of failure to meet specific projections provided
by the Company to investors (additional interest is payable in the form of
warrants to investors) and interest on the $3.75 million BankBoston debt
incurred in December 1997.
During 1997, the Company issued warrants for 200,000 shares exercisable at
$1.50 per share through March 1998. In March 1998, these options were modified
to extend the exercise period through March 16, 1999 and to increase the
exercise price to $1.75. As a result, the Company recognized operating expense
of $222,000 representing the fair market value of these options at the time of
the modification.
20
<PAGE>
Financial Condition and Liquidity.
The Bank Boston loan which the Company used to facilitate the ATC
acquisition, to pay existing debt, and for working capital purposes bears
interest at the BankBoston Base Rate plus 2-1/2% (11% at June 30, 1998).
Repayment of the loan began March 31, 1998 and continues in quarterly
installments until December 31, 2000 when the remaining principal is due. In
March 1999, BankBoston and the Company agreed to amend the loan repayment
schedule. After this amendment, quarterly payments will continue until
December 31, 2001, when the remaining principal is due. The bank loan is
secured by substantially all of the assets of the Company. The agreement
contains financial covenants as well as restrictive covenants and other
obligations of the Company. If the Company fails to meet the covenants, the
unpaid principal and accrued interest will become immediately due. The Company
received a waiver from the bank for covenant violations at June 30, 1998. In
October 1998, the Company and BankBoston agreed to amend the terms of the
agreement and reduced the covenant requirements for the upcoming three quarters
beginning on September 30, 1998. In April 1999, the loan agreement was further
amended. Management believes the Company's operations for the fiscal year 1999
will be sufficient to enable the Company to be in compliance with the amended
covenants for the remaining periods of fiscal year 1999.
21
<PAGE>
BUSINESS
USTMAN is a worldwide environmental software and services company primarily
engaged in providing statistical inventory reconciliation ("SIR") leak
detection. We provide these services to owners and operators of underground
storage tanks ("USTs"). The USTMAN SIR System is a proprietary software program
designed to monitor USTs to detect leakage and assist with inventory management
and regulatory compliance. We believe we hold a 50% share of the SIR leak
detection market in the world. We believe that we are generally recognized as a
leader in the industry. We sell related fuel management products, including in-
tank, automatic tank gauges, network data gathering equipment and cathodic
protection for USTs.
We provide the majority of our services on a recurring monthly fee basis
under annually renewable agreements. We currently have more than 70,000 USTs
under contract. In addition, we license our SIR software to larger customers
who perform SIR analysis internally and submit results to us for quality
assurance and independent certification.
We have more than 2,400 clients, including Amoco, BP Australia and BP New
Zealand, Chevron, Hertz Rental Car Corporation, Convenient Food Mart, Ultramar
Diamond Shamrock, Speedway LLC/Emco Marketing Co., Herndon Oil Co., Murphy Oil
Co., Uni-Marts, Wesco, Kwik Trip, Tosco/Circle K and Shell Puerto Rico.
The international market for UST monitoring presents an opportunity for
growth as governments in Canada, Europe, Asia and Latin America begin to follow
the lead of the United States with respect to environmental legislation. We
believe we have secured an advantage over other SIR providers with respect to
the penetration of international markets which will allow it to succeed in
these markets.
In May 1997, the Company, doing business as Watson General Corporation, a
company engaged in SIR leak detection, acquired all of the outstanding capital
stock of USTMAN Industries, Inc. In December 1997, we acquired all of the
outstanding capital stock of Advanced Tank Certification, a company also
engaged in SIR leak detection.
We were incorporated in California in 1947. Our principal executive offices
are located at 12265 W. Bayaud Avenue, Suite 110, Lakewood, Colorado 80228 and
our telephone number is 1-800-253-8054.
Industry Background.
Adoption of Environmental Protection Agency Regulations. There have been
over 330,000 known leaks from substandard USTs during the past ten years. Many
of the leaks have caused serious environmental damage and health risks,
including contaminated water supplies. The Environmental Protection Agency
passed regulations which required monthly leak detection for most tanks and
their underground pipes by December 22, 1998.
There were approximately 2,750,000 USTs in the United States in 1988. Today,
that number has dropped to approximately 1,200,000 due to the phase-out of
older USTs. We believe that approximately 300,000 USTs still do not comply with
the Environmental Protection Agency regulations for monthly monitoring.
Monthly Leak Detection Methods. There are five approved monthly monitoring
methods for USTs:
1. Automatic tank gauges: they measure the product level and temperature
inside a UST continuously and automatically analyze and record data. The test
usually requires approximately three to eight hours to perform each month.
During the test, the tank cannot be used by the owner.
2. Secondary containment with interstitial monitoring: this detects leaks in
the space between the UST and a second barrier. The barrier holds any leak in
the space between the tank and the barrier until monitors detect the leak. The
monitors can be a simple dipstick or a sophisticated automated system. The
monitor must be checked at least every 30 days. Secondary containment requires
a significant up-front capital investment in addition to ongoing maintenance
costs.
22
<PAGE>
3. Vapor monitoring: this tests the soil around the tank for fumes caused by
leaking petroleum. Permanent holes must be drilled near the tank. In addition,
the owner must permanently install special equipment to analyze the soil or
hire a third party to provide monitoring services. Vapor monitoring is not
permitted in all states and can be used only for certain soil.
4. Groundwater monitoring: this tests the groundwater near the tank for any
liquids leaked by the tank. A well must be drilled close to the tank to monitor
the groundwater. This method can be used only in certain locations.
5. SIR: this uses sophisticated computer software to analyze inventory,
temperature, delivery and dispensing data, and other variables over a period of
time to determine whether a tank has a loss trend. At the end of each operating
day, product level is measured either manually or automatically. This data, and
any delivery and withdrawal information, is sent to a certified SIR vendor for
analysis. SIR has few product or site restrictions, tests the entire UST system
(including piping and dispensers), and requires no up-front capital investment.
The USTMAN Advantage
We believe that SIR is the most practical and cost-effective leak detection
method to meet the Environmental Protection Agency regulatory requirements for
the following reasons:
* traditional tank tightness testing does not meet the new regulatory leak
detection compliance requirements since it is too expensive to perform
monthly;
* many automatic tank gauges require a significant up-front capital
investment and require annual maintenance and servicing costs;
* secondary containment with interstitial monitoring requires a significant
up-front capital investment; and
* groundwater and soil monitoring are significantly restricted by soil
composition and groundwater levels. In addition, one or more holes or
wells must be drilled near the USTs. These methods also require the
purchase of expensive monitoring equipment or hiring independent
contracted services.
SIR, on the other hand, (a) meets the compliance requirement with no up-
front capital investment and a low monthly fee per tank; (b) requires no
maintenance downtime or costs; and (c) provides valuable management and
inventory control information.
We believe that we are the world's leading provider of SIR based upon the
number of USTs monitored. In addition, we believe we are well-positioned to
capture a significant share of the USTs which currently are not being tested
for leaks, or which are using tank tightness testing, because of the following:
* we are the only SIR provider with a national sales force and
infrastructure in place;
* we offer a wide range of integrated, cost-effective products and services
for leak detection, remote monitoring, automated information delivery and
inventory management;
* we have an established reputation for quality, consistency, reliability
and innovation;
* we are recognized by regulatory agencies as a leading SIR provider and
SIR expert;
* we have the largest number of trained analysts; and
* we believe we are currently the only SIR provider to require a quality
control program.
Products and Services
USTMAN SIR Monthly Monitoring: Remote leak detection/inventory management
for UST owners through the use of proprietary, certified SIR software. The
monthly fee for the USTMAN SIR service includes
23
<PAGE>
(i) Environmental Protection Agency leak detection compliance for tanks and
lines, (ii) monthly statistical analysis of inventory, (iii) monthly
compliance reports, (iv) monthly inventory management analysis,
(v) consultation regarding UST regulations and leak detection compliance, (vi)
service guarantee, (vii) false alarm guarantee, (viii) on-site training, and
(ix) the backing of our services by errors and omissions insurance.
Extreme: Regulatory compliance software for larger customers. The software
is installed at the customer's home office and automatically generates custom
reports for each UST in the system. Extreme acts as an extension of an
inventory control system. The Extreme package is sold for an up-front fee plus
a monthly monitoring fee.
Extreme Fuel Manager: Our automatic tank gauge. It continuously monitors
the level of liquids in USTs using ultrasonic technology rather than
traditional techniques. We believe it is at least as accurate as traditional
gauges, yet it is priced at about half the price of competing gauges.
TankTrax: This software application allows customers to enter their tank
data directly into a personal computer. The data can be reviewed and reports
printed before the data is sent electronically to USTMAN for analysis.
SirSend: A telephone-controlled, data entry product which allows 24 hour
direct access to the customer's home office. The technology enables customers
to transmit stick level readings, delivery volume and sales readings with the
simplicity of a phone call.
Cathodic Protection: A direct electrical current is applied to the soil
near the UST to prevent corrosion. We do not perform these services ourselves.
Instead we enter into joint ventures with regional providers of cathodic
protection, then offer the service to our existing customers for an additional
fee.
Research and Development
We support a research and software development team of eight full-time
individuals and three independent (PhDs) contractors. The team's
responsibilities include:
software installations and interfacing,
SIR software upgrades and gauge software development,
customer service requests and internal requirements.
We believe we have an excellent research and development team within the
SIR industry in terms of expertise, experience, size and budget.
Sales and Marketing
Our marketing strategy is to convince owners and operators of USTs that (i)
SIR is the most cost-effective and reliable, leak detection system available,
and (ii) our technology, experience, and market leadership make us a premier
SIR provider. Our marketing plan incorporates the following objectives:
Reinforce the market understanding that SIR is the most cost-effective
and convenient monthly monitoring method.
Enhance our position of leadership within the environmental services
industry and promote our technical expertise.
Integrate our product line into a cohesive package of value-added
products and services including products which fully automate the SIR
monitoring process to eliminate the human error risk while
simultaneously making compliance even more cost-effective and
convenient.
24
<PAGE>
Our sales strategy is threefold. First, we concentrate our sales and
marketing efforts through a direct in-house sales force domestically, and with
relationships with outside distributors and affiliates internationally.
Second, we promote our brand name awareness through national trade magazine
advertising, sponsorship by industry associations, and public speaking
opportunities. Third, we continue to identify related value-added products to
increase our sales to each customer.
Sales and marketing efforts in the United States are concentrated in three
levels of activity:
Sales to the major oil companies and large convenience store chains are
made through a national accounts manager with support from all levels of
our organization.
Sales to medium size dealers, medium size convenience store chains and
governmental agencies are made through our territory managers stationed
strategically throughout the United States.
Sales are made to other owners of USTs are sold through our
telemarketing department.
Each level of sales is supported through trade publications, advertising,
direct mail and strategic trade show attendance. In addition, independent
sales representatives are also used to support our sales and marketing effort.
We utilize distributors and affiliates to generate sales outside the United
States. We seek to find an organization with an established industry presence
to provide sales leads and technical demonstrations. We offer the organization
the opportunity to purchase a product license, share revenues and receive
ongoing quality control and sales support from our staff. We have entered into
license agreements with such organizations in Canada and Australia/New
Zealand.
Competition.
Our business is intensely competitive. We compete with other SIR service
providers as well as with providers of other methods of leak detection. Many
of our competitors have greater financial resources than us. We believe that
cost and the ability to satisfy regulatory requirements are the key factors
influencing sales.
Government Regulation.
Compliance with federal, state and local regulations has not had a material
effect on our capital expenditures, operations or competitive position.
However, environmental regulations relating to leak detection for underground
storage tank systems can affect the need for our services and products.
Trademarks.
We are the holder of United States trademarks, registration numbers
1,719,061; 1,730,019; 1,731,948; 2,163,138; and 1,790,965 which relate to the
names USTMAN SIR SYSTEM, USTMAN INDUSTRIES, INC., USTMAN INDUSTRIES, INC. &
Design, EXTREME & Design, and SIRAS, respectively. In addition, we have rights
in numerous unregistered trademarks which we use in interstate commerce and
which are subject only to common law protection
Employees.
On March 25, 1999, we employed a total of 51 persons, 49 of whom were full
time employees.
Facilities.
We operate out of leased office space located at 12265 W. Bayaud Avenue
Lakewood, Colorado, where we occupy approximately 7,080 square feet under a
lease expiring December 31, 2001. Monthly payments under the lease are
$9,440.00 and escalate during the term of the lease.
Legal Proceedings
There are no pending or asserted legal proceedings against us which we
expect to have a material adverse effect on us or our business operations.
25
<PAGE>
RECENT DEVELOPMENTS
Recent Agreements
In August 1998 we entered into agreements with BP Australia and BP New
Zealand to provide leak detection services for 1,500 locations having a total
of 6,000 USTs. The contracts also give us a significant foothold in a region
estimated to have over 100,000 underground storage tanks. SIR gross revenues of
the Company are expected to increase approximately 10% during the first year of
the contract and an additional 5% during the second year.
Issuance of Preferred Stock for Certain Debt and Rights
In December 1998, we agreed to issue Series A Preferred Stock to Sagaponack
Partners and its affiliated Sagaponack International Partners in exchange for
(i) $7,000,000 face amount of debt, (ii) accrued interest on the debt of
$3,164,000 (including interest payable as warrants), and (iii) the cancellation
of certain rights of Sagaponack. which would have increased the total value of
cash and securities payable to them by us within the next three years to nearly
$20,000,000. Sagaponack received preferred stock with a face amount equal to
$9,717,000. However, the preferred stock has an aggregate allocation amount for
the purposes of liquidation priority and dividends initially equal to
$15,000,000. The preferred stock bears an annual 8% cumulative dividend if and
when declared by our Board of Directors. The allocation amount of the preferred
stock will increase by the amount of any dividends not declared for payment by
us. The preferred stock has no mandatory redemption or voting rights and is not
convertible into common stock.
Delisting of Common Stock from Nasdaq SmallCap Market
On February 19, 1999 our common stock was delisted from the Nasdaq SmallCap
Market. Since then, our common stock has been traded on the OTC Bulletin Board.
Resignations
As described under "Management," during 1999 two persons have resigned as
directors of the Company due to other time commitments, and two other persons
(who are married to each other) have resigned as officers of the Company.
26
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth the executive officers and directors of the
Company and their ages and positions as of April 12, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Dan R. Cook 49 Chief Executive Officer, President and Director
Barry S. Rosenstein 40 Co-Chairman of the Board and Director
Marc A. Weisman 46 Co-Chairman of the Board and Director
</TABLE>
DAN R. COOK has served as a Director of the Company since May 1997. Mr. Cook
was appointed President of the Company in May 1997. Mr. Cook served as Chief
Operating Officer of USTMAN Industries from 1992 until it was merged into the
Company in May 1997, and additionally served as its President from January 1994
until its merger into the Company. Mr. Cook is also a certified public
accountant.
BARRY S. ROSENSTEIN has served as a Director of the Company since May 1997.
Mr. Rosenstein is a co-founder and Managing Partner of Sagaponack Partners,
L.P. and Sagaponack International Partners, L.P. Prior thereto, Mr. Rosenstein
founded and for the four years prior headed Genesis Merchant Group Securities'
Investment and Merchant Banking Group. Prior to his association with Genesis,
Mr. Rosenstein formed and acted as managing partner of Reatta Partners, a
transaction-specific investment partnership. Prior to Reatta, Mr. Rosenstein
was a principal in charge of corporate takeovers with Plaza Securities
Corporation. Mr. Rosenstein began his career as an investment banker primarily
specializing in mergers and acquisitions with Merrill Lynch in New York.. He
received his M.B.A. from the University of Pennsylvania's Wharton School of
Business and his B.S. from Lehigh University. Mr. Rosenstein is also a
certified public accountant. Mr. Rosenstein also serves on the Board of
Directors of Waterworks; Tuneup Masters, Inc.; TestAmerica, Inc.; and Marisa
Christina, Inc.
MARC A. WEISMAN has served as a Director of the Company since May 1997. Mr.
Weisman is a co-founder and Managing Partner of Sagaponack Partners, L.P. and
Sagaponack International Partners, L.P. From January 1996 to August 1996, Mr.
Weisman served as Director in the Principal Transactions Group at CS First
Boston where he ran the High Yield Real Estate Finance Division. From 1988 to
1996, Mr. Weisman was Chief Financial Officer and Executive Vice President of
the Adco Group, a privately held real estate and financial services company.
Mr. Weisman is currently a director of Product Resources, Inc.; Tuneup Masters,
Inc.; TestAmerica, Inc.; and Superior Bank FSB.
Donald Philips resigned as a director of the Company effective March 5, 1999
due to other commitments, and Ronald G. Crane resigned as a director of the
Company effective April 8, 1999 due to other commitments. No person has been
elected or nominated to replace Mr. Philips or Mr. Crane as of April , 1999.
In January 1999, Erica Bengtson resigned from the Company, where she had
served as Chief Operating Officer. In April 1999, her husband, David Booth,
also resigned from the Company, where he had served as a Vice President.
27
<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth information
concerning compensation provided to each officer or employee whose total annual
salary and bonus exceeded $100,000.00.
<TABLE>
<CAPTION>
Name and Fiscal All Other
Principal Position Year Salary Compensation
------------------ ------ -------- ------------
<S> <C> <C> <C>
Dan R. Cook(1)
President and CEO 1998 $130,000
1997 --
1996 --
</TABLE>
- --------
(1) Mr. Cook did not become an officer or employee of the Company until May
1997. Mr. Cook did not receive or exercise any options to purchase Common
Stock during the fiscal year ended June 30, 1998. Mr. Cook did not receive
any long-term incentive award during the fiscal year ended June 30, 1998.
Mr. Cook received no other compensation during the fiscal year ended June
30, 1998.
Option Grants In Last Fiscal Year. Shown below is information concerning
grants of options by the Company to the Named Executive Officers during the
fiscal year ended June 30, 1998:
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Expiration
Name Granted Fiscal Year Base Price Date
---- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Dan R. Cook 600,000 55% $1.00 4/30/01-
4/30/04(1)
</TABLE>
- --------
(1) The options vest as to 150,000 shares on each of April 30, 1998, 1999,
2000, and 2001 and expire three years from vesting.
Aggregate Options Exercised In Last Fiscal Year and Year-End Option
Value. There were no options exercised during the fiscal year ended June 30,
1998, and all options held by Named Executive Officers at June 30, 1998 had no
value.
28
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General.
The authorized capital stock of the Company currently consists of 40,000,000
shares of Common Stock; 1,000,000 shares of Preferred Stock; 15,000,000 shares
of Class A Voting common Stock; and 15,000,000 shares of Class B Non-Voting
Common Stock. None of the Company's classes of capital stock have any par
value.
Common Stock.
Each holder of Common Stock is entitled to one vote per share on all matters
submitted to a vote of shareholders, except in connection with the election of
directors. As required by California law, holders of Common Stock have
cumulative voting rights in the election of directors, permitting each holder
to cast such number of votes in the aggregate as equals the number of shares of
Common Stock held by the shareholder multiplied by the number of directors to
be elected. The holder may cast the whole number of such votes for one nominee
for director or may distribute votes among two or more nominees.
Holders of Common Stock do not have preemptive, subscription, redemption or
conversion rights. The Company has never declared a cash dividend on its Common
Stock.
Class A Voting Common Stock and Class B Non-Voting Common Stock.
There are no shares outstanding of Class A Voting Common Stock or Class B
Non-Voting Common Stock. Shares of Class A Voting Common Stock are entitled to
the same voting rights as Common Stock, but would not participate in
distributions or dividends. Shares of Class B Common Stock are not entitled to
any voting rights but have the same distribution or dividend rights as Common
Stock. One share of Class A Common Stock and one share of Class B Common Stock
have, in the aggregate, the same voting rights and rights to distributions and
dividends as one share of Common Stock.
Preferred Stock.
The Company has issued 9,717 shares of Series A Preferred Stock to
Sagaponack with a face amount equal to $9,717,000. However, the preferred stock
has an aggregate allocation amount for the purposes of liquidation priority and
dividends initially equal to $15,000,000. The preferred stock bears an annual
8% cumulative dividend if and when declared by our Board of Directors. The
allocation amount of the preferred stock will increase by the amount of any
dividends not declared for payment by us. The preferred stock has no mandatory
redemption or voting rights and is not convertible into common stock.
No other shares of Preferred Stock are outstanding at this time, and there
are no current plans to issue any additional shares of Preferred Stock except
as described below. The Board of Directors of the Company has the authority,
without shareholder approval, to determine the rights, preferences and
privileges of any class of Preferred Stock to be issued by the Company.
29
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of as of March 31, 1999 by (i) each person who
we know owns beneficially more than 5% of the common stock; (ii) each of our
directors, our Chief Executive Officer, and (iii) all of our directors and
executive officers as a group. Unless otherwise noted, the persons named in the
table have sole voting and investment power over the shares shown as
beneficially owned by them, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
Number of
Shares Percent of
Beneficially Outstanding
Name Owned Shares
- ---- ------------ -----------
<S> <C> <C>
Sagaponack Partners, L.P........................... 7,344,520(1) 36.9%
170 Columbus Ave., 5th Floor
San Francisco, CA 94133
Dan R. Cook........................................ 150,000(1) 0.8%
12265 W. Bayaud Ave., #110
Lakewood, CO 80228
Ronald G. Crane.................................... 1,101,500(2) 5.6%
12265 W. Bayaud Ave, #110
Lakewood, CO 80228
Barry S. Rosenstein................................ 7,344,520(3) 36.9%
170 Columbus Ave., 5th Floor.
San Francisco, CA 94133
Marc A. Weisman.................................... 7,344,520(3) 36.9%
645 Fifth Ave., 8th Floor
New York, NY 10022
All current executive officers and directors as a
group (5 persons)................................. 9,401,214(4) 45.3%
</TABLE>
- --------
(1) Includes options granted by the Company to purchase up to 150,000 shares of
Common Stock which are exercisable within 60 days.
(2) Includes options granted by the Company to purchase up to 700,000 shares of
Common Stock which are exercisable within 60 days.
(3) Includes 7,344,520 shares of Common Stock owned by Sagaponack Partners,
L.P. which are indirectly beneficially owned by Messrs. Rosenstein and
Weisman as managing members of RSP Capital, L.L.C. which is the general
partner of Sagaponack Partners, L.P. Does not include 2,625,432 warrants to
purchase shares of Common Stock which are exercisable at the times and
prices, and to the extent, that other options and warrants of the Company
are exercised after May 22, 1997 in order to maintain Sagaponack Partners,
L.P.'s percent ownership of the outstanding Common Stock of the Company.
(4) Includes options granted by the Company to purchase an aggregate of 880,000
shares of Common Stock which are exercisable within 60 days. In addition,
see note (3) above.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND CONTROLLING
PERSONS AGAINST SECURITIES ACT LIABILITIES
Section 317 of the California Corporations Code permits a corporation to
grant indemnification to directors, officers and other agents in terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities, including expenses, arising in connection with federal securities
laws, including but not limited to the Securities Act of 1933, as amended.
Pursuant to the Articles of Incorporation of the Company, as amended, and the
Bylaws of the Company, the Company is authorized to indemnify its directors,
officers and other agents to the full extent permitted by law and has
indemnified its directors for monetary
30
<PAGE>
damages to the full extent permitted by law. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in said Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the sale of the Shares, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for the
Company by Case, Knowlson, Burnett & Wright LLP, Los Angeles, California
EXPERTS
The consolidated financial statements of the Company at June 30, 1998 and
1997, and for year ended June 30, 1998 and the nine months ended June 30, 1997,
appearing in this Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). You may
read and copy, upon payment of a fee set by the SEC, any document that we file
with the SEC at its public reference rooms in Washington, D.C. (450 Fifth
Street, N.W., 20549), New York, New York (Seven World Trade Center, 13th Floor,
Suite 1300, 10048) and Chicago, Illinois (Citicorp Center, 500 West Madison
Street, 14th Floor, Suite 1400, 60661). You may also call the SEC at 1-800-432-
0330 for more information on the public reference rooms. Our filings are also
available to the public on the internet, through the SEC's EDGAR database. You
may access the EDGAR database at the SEC's web site at http://www.sec.gov.
This Prospectus is part of a registration statement (on Form S-3) we have
filed with the SEC relating to our common stock registered under this
Prospectus. As permitted by SEC rules, this Prospectus does not contain all of
the information contained in the registration statement and accompanying
exhibits and schedules we file with the SEC. You may refer to the registration
statement, the exhibits and schedules for more information about us and our
Common Stock. The registration statement, exhibits and schedules are also
available at the SEC's public reference rooms or through its EDGAR database on
the internet.
You may obtain a copy of these filings at no cost by writing to us at USTMAN
Technologies, Inc., 12265 W. Bayaud Avenue, Suite 110, Lakewood, Colorado
80228, Attention: Heather Murphy, or by telephoning us at 800-253-8054. In
order to obtain timely delivery, you must request the information no later than
five business days prior to the deadline for the rights offering.
31
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
USTMAN Technologies, Inc.
We have audited the accompanying consolidated balance sheets of USTMAN
Technologies, Inc. as of June 30, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
year ended June 30, 1998 and the nine months ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of USTMAN
Technologies, Inc. at June 30, 1998 and 1997, and the consolidated results of
its operations and its cash flows for the year ended June 30, 1998 and the nine
months ended June 30, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Denver, Colorado
October 9, 1998
F-2
<PAGE>
USTMAN Technologies, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30 December 31
1998 1997 1998
------------ ----------- ------------
(unaudited)
<S> <C> <C> <C>
Assets
Current Assets:
Cash................................ $ 366,000 $ 799,000 $ 24,000
Accounts receivable (less allowance
for doubtful accounts of $89,000 in
1997, $195,000 in 1998 and $195,000
at December 31, 1998).............. 826,000 662,000 1,193,000
Inventory........................... 112,000 188,000 166,000
Prepaid expenses and other current
assets............................. 70,000 230,000 125,000
------------ ----------- ------------
Total current assets.................. 1,374,000 1,879,000 1,508,000
Furniture and equipment:
Machinery and equipment............. 76,000 686,000 76,000
Computers and equipment............. 783,000 749,000 866,000
Furniture and fixtures.............. 88,000 219,000 88,000
Automobiles and trucks.............. -- 100,000 --
Leasehold improvements.............. 4,000 5,000 4,000
------------ ----------- ------------
951,000 1,759,000 1,034,000
Accumulated depreciation............ 407,000 1,004,000 528,000
------------ ----------- ------------
544,000 755,000 506,000
Intangible assets (less accumulated
amortization of $377,000 in 1997,
$1,351,000 in 1998 and $1,444,000 at
December 31, 1998)................... 9,699,000 8,546,000 7,902,000
------------ ----------- ------------
Total assets.......................... $ 11,617,000 $11,180,000 $ 9,916,000
============ =========== ============
Liabilities and shareholders' equity
(deficit)
Current liabilities:
Accounts payable.................... $ 327,000 $ 264,000 $ 292,000
Accrued expenses:
Salaries and wages................ 58,000 224,000 72,000
Other............................. 620,000 280,000 716,000
Deferred revenue.................... 130,000 147,000 155,000
Current portion of long-term debt... 875,000 1,083,000 1,000,000
------------ ----------- ------------
Total current liabilities............. 2,010,000 1,998,000 2,235,000
Long-term debt, less current portion.. 9,784,000 6,423,000 2,250,000
Deferred employee benefits............ 435,000 434,000 434,000
Shareholders' equity (deficit)
Preferred stock, no par value:
Authorized shares-- 1,000,000,
Issued and outstanding-- none in
1997 and 1998, and 9,717 at
December 31, 1998. Liquidation
preference before payment to
holders of common stock of
$15,600,000........................ -- -- 9,717,000
Common stock, no par value:
Authorized shares-- 40,000,000
Issued and outstanding shares--
18,344,633 in 1997, 19,855,243 in
1998 and 19,879,243 at December
31, 1998......................... 12,810,000 10,373,000 12,826,000
Class A common stock, no par value:
Authorized shares--15,000,000,
Issued and outstanding--none...... -- -- --
Class B common stock, no par value:
Authorized shares--15,000,000,
Issued and outstanding, none...... -- -- --
Additional paid-in capital........ 2,517,000 1,947,000 875,000
Accumulated deficit............... (15,939,000) (9,995,000) (18,421,000)
------------ ----------- ------------
Total shareholders' equity (deficit).. (612,000) 2,325,000 4,997,000
------------ ----------- ------------
Total liabilities and shareholders'
equity (deficit)..................... $ 11,617,000 $11,180,000 $ 9,916,000
============ =========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
USTMAN Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine months
Year ended ended
June 30 June 30 Six months ended December 31,
1998 1997 1998 1997
----------- ----------- --------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales............... $ 5,988,000 $ 2,325,000 $ 3,174,000 $ 3,081,000
Cost of sales........... 2,464,000 836,000 1,157,000 1,203,000
----------- ----------- -------------- --------------
Gross profit............ 3,524,000 1,489,000 2,017,000 1,878,000
Selling, general and
administrative......... 6,247,000 2,912,000 1,874,000 2,232,000
Write-off investment in
Toxguard Systems,
Inc.................... -- 384,000 -- --
----------- ----------- -------------- --------------
(2,723,000) (1,807,000) 143,000 2,232,000
Other income (expense):
Interest expense...... (3,240,000) (172,000) (1,415,000) (701,000)
Write-off deferred
debt cost............ -- -- (1,211,000) --
Interest income....... 19,000 4,000 1,000 9,000
----------- ----------- -------------- --------------
(3,221,000) (168,000) (2,625,000) (692,000)
----------- ----------- -------------- --------------
Net loss before
provision for income
taxes.................. (5,944,000) (1,975,000) (2,482,000) (1,046,000)
Provision for income
taxes.................. -- (4,000) -- --
----------- ----------- -------------- --------------
Net loss................ $(5,944,000) $(1,979,000) $ (2,482,000) $ (1,046,000)
=========== =========== ============== ==============
Basic and diluted net
loss per share......... $ (.31) $ (.17) $ (.12) $ (.05)
=========== =========== ============== ==============
</TABLE>
See accompanying notes.
F-4
<PAGE>
USTMAN Technologies, Inc.
Consolidated Statement of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------- ---------------------- Paid-in Accumulated
Share Amount Shares Amount Capital Deficit Total
----- ---------- ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Shareholders' Equity
Balance at September 30,
1996.................... -- $ -- 10,487,401 $ 9,100,000 $ 653,000 $ (8,016,000) $ 1,737,000
Common stock issued in
exchange for shares of
EnvirAlert, Inc........ -- -- 4,379 12,000 -- -- 12,000
Common stock and options
issued in connection
with the private
placement to the
Investors.............. -- -- 7,337,853 713,000 1,294,000 -- 2,007,000
Common stock issued in
connection with private
placements............. -- -- 465,000 455,000 -- -- 455,000
Common stock issued for
settlement of lawsuit.. -- -- 50,000 93,000 -- -- 93,000
Net loss................ -- -- -- -- -- (1,979,000) (1,979,000)
----- ---------- ---------- ----------- ------------ ------------ -----------
Balance at June 30,
1997.................... -- -- 18,344,633 10,373,000 1,947,000 (9,995,000) 2,325,000
Common stock issued for
settlement of
employment agreement... -- -- 16,667 27,000 -- -- 27,000
Common stock and options
issued in connection
with Advanced Tank
Certification, Inc.
acquisition............ -- -- 775,194 1,116,000 -- -- 1,116,000
Options exercised for
common stock........... -- -- 718,749 1,294,000 (1,294,000) -- --
Options modified to
extend exercise date
and increase exercise
price.................. -- -- -- -- 222,000 -- 222,000
Warrants to be issued
under the terms of the
Senior Subordinated
Note agreement......... -- -- -- -- 1,642,000 -- 1,642,000
Net loss................ -- -- -- -- -- (5,944,000) (5,944,000)
----- ---------- ---------- ----------- ------------ ------------ -----------
Balance at June 30,
1998.................... -- -- 19,855,243 12,810,000 2,517,000 (15,939,000) (612,000)
Common stock issued for
settlement of lawsuit
(unaudited)............ -- -- 24,000 16,000 -- -- 16,000
Warrants to be issued
under the terms of the
Senior Subordinated
Note agreement
(unaudited)............ -- -- -- -- 598,000 -- 598,000
Convert Senior
Subordinated Notes to
preferred stock
(unaudited)............ 9,717 9,717,000 -- -- (2,240,000) -- 7,477,000
Net loss (unaudited).... -- -- -- -- (2,482,000) (2,482,000)
----- ---------- ---------- ----------- ------------ ------------ -----------
Balance at December 31,
1998 (unaudited)........ 9,717 $9,717,000 19,879,243 $12,826,000 $ 875,000 $(18,421,000) $ 4,997,000
===== ========== ========== =========== ============ ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
USTMAN Technologies, Inc.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Nine months
Year ended ended
June 30 June 30 Six months ended December 31,
1998 1997 1998 1997
----------- ----------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating Activities
Net loss................ $(5,944,000) $(1,979,000) $ (2,482,000) $ (1,046,000)
Adjustments to reconcile
net loss to net cash
(used in) provided by
operating activities:
Depreciation.......... 285,000 166,000 123,000 122,000
Amortization of
intangible assets.... 864,000 193,000 510,000 364,000
Amortization included
in interest expense.. 555,000 29,000 245,000 173,000
Warrants to be issued
under Senior
Subordinated Note
agreement............ 1,642,000 -- 598,000 --
Gain on sale of
property held for
sale................. -- (363,000) -- --
Write-off of
investment in
Toxguard Systems,
Inc.................. -- 293,000 -- --
Write off of
intangible assets,
net.................. 656,000 -- 1,211,000 --
Issuance of common
stock and stock
options.............. 249,000 -- -- 27,000
Interest converted to
long-term debt....... 741,000 76,000 360,000 358,000
Issuance of common
stock to settle
lawsuit.............. -- 93,000 16,000 --
Gain on sale of
Toxguard Fluid
Technologies, Inc.... (28,000) -- -- --
Loss on sale of
equipment............ 260,000 6,000 -- --
Net changes in
operating assets and
liabilities.......... 526,000 238,000 (439,000) (377,000)
----------- ----------- -------------- --------------
Net cash (used in)
provided by operating
activities............. (194,000) (1,248,000) 142,000 (379,000)
Investing Activities
Purchase of furniture
and equipment.......... (286,000) (27,000) (85,000) (79,000)
Proceeds from the sale
of equipment........... 101,000 -- -- --
Proceeds from sale of
property held for
sale................... -- 315,000 -- --
Acquisition of USTMAN
Industries, Inc., net
of cash acquired....... -- (5,247,000) -- --
Acquisition of Advanced
Tank Certification,
Inc., net of cash
acquired............... (2,311,000) -- -- (2,190,000)
Sale of Toxguard Fluid
Technologies, Inc., net
of cash sold........... 123,000 -- -- --
----------- ----------- -------------- --------------
Net cash used in
investing activities... (2,373,000) (4,959,000) (85,000) (2,269,000)
Financing Activities
Increase in deferred
debt issuance cost..... -- -- (24,000) (58,000)
Proceeds from the
issuance of common
stock.................. -- 455,000 -- --
Proceeds from the
issuance of long-term
debt, net.............. 3,683,000 6,724,000 -- 4,143,000
Principal payments on
long term debt......... (1,549,000) (413,000) (375,000) (1,424,000)
----------- ----------- -------------- --------------
Net cash provided by
financing activities... 2,134,000 6,766,000 (399,000) (2,661,000)
----------- ----------- -------------- --------------
(Decrease) Increase in
cash and cash
equivalents............ (433,000) 559,000 (342,000) 13,000
Cash and cash
equivalents and
beginning of period.... 799,000 240,000 366,000 799,000
----------- ----------- -------------- --------------
Cash and cash
equivalents and end of
period................. $ 366,000 $ 799,000 $ 24,000 $ 812,000
=========== =========== ============== ==============
</TABLE>
F-6
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statement
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
1. Organization
USTMAN Technologies, Inc. and subsidiaries (the "Company"), formerly Watson
General Corporation ("Watson General"), provides environmental services to
owners and operators of underground storage tanks in the United States and
abroad. These products and services include statistical inventory
reconciliation and other monitoring methods accepted by various regulatory
authorities.
The Company's consolidated operations for the year ended June 30, 1998, the
nine months ended June 30, 1997, and the six month periods ended December 31,
1998 and 1997 were concentrated in a single business segment--the environmental
services industry. There were no customers greater than 10% of sales for the
year ended June 30, 1998, the nine months ended June 30, 1997, or the six month
periods ended December 31, 1998 or December 31, 1997. Sales to customers
outside the United States were immaterial during 1998 and 1997 but are
anticipated by management to increase in the upcoming year.
In fiscal 1997, the Company was a holding company which provided a variety
of environmental services to owners of underground storage tanks through its
subsidiaries, USTMAN Industries, Inc. ("USTMAN Industries"), Watson Systems,
Inc. ("Watson Systems"), Toxguard Fluid Technologies, Inc. ("TFT"), EnvirAlert,
Inc. ("EnvirAlert") and Toxguard Systems, Inc. ("Toxguard Systems"). The
Company's services included leak detection, removal and installation of
underground storage tanks and antifreeze recycling. The Company owned 87% of
the outstanding preferred stock and 96% of the outstanding common stock of
Toxguard Systems. The remaining subsidiaries were wholly owned by the Company.
On August 27, 1997, Toxguard Systems voluntarily filed under Chapter 7 of
the Bankruptcy Code. As of June 30, 1997, the Company wrote off its net
investment and net goodwill in Toxguard Systems of $293,000 and $91,000,
respectively, as a result of the bankruptcy filing (see Note 6).
During 1998, the Company consolidated the operations of USTMAN Industries,
Envir-Alert, and Watson Systems and sold TFT. The Company no longer provides
underground storage tank removal and installation and antifreeze recycling and
has focused its efforts primarily on providing statistical inventory
reconciliation procedures and underground storage tank monitoring services to
its customers. During December 1997, the Company acquired 100% of the common
stock of Advanced Tank Certification, Inc. ("ATC"), which operated in a similar
line of business (see Note 3).
2. Summary of Significant Accounting Policies
Basis of Presentation
Effective July 1, 1997, the Company changed its fiscal year to a period
beginning July 1 and ending June 30. Accordingly, the accompanying consolidated
financial statements present the transition period from the prior fiscal year
end of September 30, 1996 to June 30, 1997.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred net losses of
$5,944,000, $1,979,000, $2,482,000, and $1,046,000 for the year ended June 30,
1998, the nine months ended June 30, 1997, the six months ended December 31,
1998, and the six months ended December 31, 1997, respectively. Additionally,
the Company's operations have resulted in negative cash flows of $194,000 and
$1,248,000 for the year ended June 30, 1998 and the nine months ended June 30,
1997, respectively, and positive cash flows of $142,000 for the six months
ended December 31, 1998, and negative cash flow of $379,000 for the six months
ended December 31, 1997. Management believes the Company will generate
sufficient cash flows to enable it to fund operations and satisfy all capital
requirements over the next twelve months.
F-7
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
2. Summary of Significant Accounting Policies (continued)
Interim Financial Information
The consolidated financial information as of December 31, 1998 and for the
six months ended December 31, 1997 and 1998 is unaudited, but includes all
adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the financial position
at December 31, 1998 and the results of operations and cash flows for the
periods ended December 31, 1997 and 1998. Interim results are not necessarily
indicative of the results which may be expected for any other interim period
or for a full year.
Revenue Recognition
The Company primarily generates income through the testing of underground
storage tanks and related software services. Sales are recognized when
services are performed. Prepaid contracts are recorded as deferred revenue and
recognized as the contract is completed.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Reclassifications
Certain amounts for the prior period have been reclassified to conform to
the current year presentation.
Furniture and Equipment
Furniture and equipment are carried at cost and are depreciated on the
straight-line method over their estimated useful lives of five years.
Inventory
Inventory consists of tank gauge equipment and is accounted for using the
weighted-average method.
Asset Impairment
The Company recognizes impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. In such circumstances, those assets are written down to
estimated fair value. Long-lived assets include furniture and equipment,
identifiable intangible assets and goodwill. Long-lived assets held for sale
are valued at amortized cost.
F-8
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
2. Summary of Significant Accounting Policies (continued)
Goodwill and Intangible Assets
Goodwill and intangible assets consist of the following:
<TABLE>
<CAPTION>
June 30 December 31
1998 1997 1998
----------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Goodwill............................... $ 5,946,000 $2,999,000 $ 5,946,000
Technology............................. 3,300,000 4,200,000 3,300,000
Deferred debt issuance costs........... 1,803,000 1,722,000 99,000
Copyrights and organization costs...... 1,000 2,000 1,000
----------- ---------- -----------
11,050,000 8,923,000 9,346,000
Less accumulated amortization.......... (1,351,000) (377,000) (1,444,000)
----------- ---------- -----------
$ 9,699,000 $8,546,000 $ 7,902,000
=========== ========== ===========
</TABLE>
Goodwill related to the USTMAN Industries and Watson Systems, Inc.
acquisitions is amortized over 15 years and goodwill relating to the ATC
acquisition is amortized over 10 years. Other goodwill (net carrying value of
$87,000 at June 30, 1998) is amortized over 20 years. Acquired technology is
amortized over eight years, and capitalized copyrights and organization costs
are amortized on a straight-line basis over five years. During 1998, the
Company discontinued the use of certain proprietary software due to the
development of a more advantageous product and wrote off the remaining
unamortized balance of $656,000.
In connection with the private placement of its Senior Subordinated Notes of
$7,000,000 and 7,304,520 shares of its common stock (see Notes 5 and 7), the
Company incurred costs of $2,010,000. The Company allocated the costs of
$1,722,000 and $288,000 to intangible assets and common stock, respectively.
The deferred debt issuance costs included in intangible assets were being
amortized over the term of the Senior Subordinated Notes using the straight-
line method which approximated the interest method. Effective December 1, 1998
all of the Senior Subordinated Notes were converted to Preferred stock (see
Note 7). As a result, the unamortized balance of deferred debt issuance costs
was written off resulting in expense of $1,211,000.
Amortization expense including the write off of the deferred debt cost
amounted to $1,419,000, $222,000, $1,755,000 and $537,000 for the year ended
June 30, 1998, the nine months ended June 30, 1997, and the six months ended
December 31, 1998 and December 31, 1997, respectively.
Fair Value of Financial Instruments
The fair values of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximated their carrying amounts due to the
relatively short maturity of these items. The fair values of the Company's
long-term debt approximated its carrying amount at December 31, 1998 and June
30, 1998, based on rates currently available to the Company for debt with
similar terms and remaining maturities.
Research and Development
Research and development costs are expensed as incurred.
F-9
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
2. Summary of Significant Accounting Policies (continued)
Advertising Costs
Advertising costs are expensed as incurred and include trade shows, direct
mailings, and trade publications. Advertising expense was $300,000, $83,000,
$91,000 and $128,000 for the year ended June 30, 1998, the nine months ended
June 30, 1997, and the six months ended December 31, 1998 and 1997,
respectively.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, is effective for the Company's 1998 fiscal year. As
permitted by the standard, the Company has chosen to continue to account for
stock-based compensation to employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the options'
exercise price. Compensation cost for performance shares issued to nonemployees
is recorded over the vesting period from the date the underlying stock options
are exercised based on the fair market value of the Company's stock on the
option exercise date.
Per Share Information
Effective June 30, 1998, the Company adopted FASB Statement No. 128,
Earnings Per Share, which replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Basic earnings
per share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the shares
issuable upon the exercise of stock options under the treasury stock method.
Net loss per share amounts for both periods have been presented, and where
appropriate, restated to conform to the SFAS No. 128 requirements. Per share
information is based on the weighted average number of common shares
outstanding. Weighted average shares for computing loss per share were
19,117,186, 11,727,000, 19,858,363 and 18,593,691 for the year ended June 30,
1998, the nine months ended June 30, 1997, and the six months ended December
31, 1998 and 1997, respectively. 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.
Income Taxes
Deferred income taxes are provided based on the estimated future tax effects
of differences between financial statement carrying amounts and the tax bases
of existing assets and liabilities using statutory tax rates expected to be in
effect in the period in which the deferred tax item is expected to be settled.
Deferred tax assets are reduced by a valuation allowance if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the deferred tax asset may not be realized.
F-10
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
2. Summary of Significant Accounting Policies (continued)
Statement of Cash Flows
The Company considers highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
Changes in operating assets and liabilities as shown in the consolidated
statements of cash flows, net of acquired assets and liabilities, are as
follows:
<TABLE>
<CAPTION>
Year ended Nine months
June 30 ended Six months ended December 31,
1998 June 30 1997 1998 1997
---------- ------------ --------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Accounts receivable,
net.................... $(93,000) $ 315,000 $ (367,000) $ (231,000)
Inventory............... 76,000 (188,000) (54,000) 127,000
Prepaid expenses and
other current assets... 169,000 112,000 (55,000) (173,000)
Accounts payable........ 93,000 (26,000) 175,000 16,000
Accrued expenses........ 298,000 123,000 (163,000) (83,000)
Deferred revenue........ (17,000) 15,000 25,000 (33,000)
Note payable............ -- (105,000) -- --
Other long-term
liabilities............ -- (8,000) -- --
-------- --------- -------------- --------------
$526,000 $ 238,000 $ (439,000) $ (377,000)
======== ========= ============== ==============
</TABLE>
The Company paid no federal or state income taxes for the year ended June
30, 1998 and paid $5,000 for the nine months ended June 30, 1997. The Company
paid interest of $247,713 and $90,000 for the year ended June 30, 1998 and the
nine months ended June 30, 1997, respectively.
In connection with the acquisition of ATC and USTMAN Industries in December
1997 and May 1997, respectively (see Note 3), the Company funded the
acquisition as follows:
<TABLE>
<CAPTION>
ATC USTMAN
----------- ----------
<S> <C> <C>
Fair value of assets acquired..................... $ 3,539,000 $6,126,000
Less:
Cash acquired................................... (112,000) (3,000)
Purchase price adjustment liability (see Note
3)............................................. -- (376,000)
Notes payable issued............................ -- (500,000)
Common stock issued............................. (1,116,000) --
----------- ----------
Cash paid....................................... $ 2,311,000 $5,247,000
=========== ==========
</TABLE>
Noncash investing and financing activities during fiscal 1998 consist of the
reduction of the purchase price adjustment liability and related goodwill of
$76,000 in connection with the USTMAN acquisition (see Note 3).
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Issues
requiring significant assumptions include estimates of future cash flows used
in the evaluation of the recoverability of goodwill, and estimates made in
establishing the allowance for doubtful accounts and obsolete inventory.
F-11
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
3. Acquisitions
Pursuant to the Primary Stock Purchase Agreement and Contingent Stock
Purchase Agreement, on December 17, 1997, the Company acquired all of the
outstanding capital stock of ATC, a Tennessee corporation, for an aggregate of
approximately $3.4 million in cash and stock. In connection with the
acquisition, the Company secured a term loan of $3.75 million from BankBoston,
N.A. (see Note 7).
ATC provided services to owners and operators of underground storage tanks
including statistical inventory reconciliation, tightness testing and cathodic
protection. ATC operations have been consolidated at the Company's Lakewood,
Colorado headquarters in order to eliminate duplication and increase
efficiencies.
The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on their estimated fair value at
the date of acquisition. ATC's purchase price in excess of the net assets of
the purchased company was assigned to goodwill. The Company allocated
$3,058,000 to goodwill. The Company is amortizing the goodwill on a straight-
line basis over ten years.
On May 22, 1997, the Company acquired all of the outstanding capital stock
of USTMAN Industries, a subsidiary of NDE Environmental Corporation ("NDE"),
pursuant to a Stock Purchase Agreement between the Company and NDE (the "USTMAN
Acquisition"). The purchase price was $5.25 million in cash and a $500,000
promissory note. As of June 30, 1998, the promissory note had been paid in
full.
Immediately prior to the closing, all cash and cash equivalents of USTMAN
Industries at the close of business on May 21, 1997 were transferred to NDE. In
addition, the Stock Purchase Agreement provided for an adjustment to the
purchase price within 60 days after the closing to reflect the difference, if
any, between the working capital balance of USTMAN Industries at the closing
(after taking into account the transfer of cash and cash equivalents to NDE on
May 21) and $424,271 (representing the working capital balance of USTMAN
Industries as of December 31, 1996.) In fiscal year 1997, the Company accrued
an estimated purchase price adjustment of $376,000. During the 1998 fiscal
year, the Company and NDE agreed to reduce the adjustment to $300,000 and as a
result the Company reduced the goodwill recorded on the USTMAN Acquisition by
$76,000.
The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on the estimated fair value at the date
of acquisition. The Company's purchase price in excess of the net assets of
USTMAN Industries was assigned to goodwill and software based upon the
estimated future cash flows of its operations. The Company allocated $1,622,000
to goodwill and $3,300,000 to software. The Company is amortizing the goodwill
and software assets on a straight-line basis over 15 and 8 years, respectively.
The Company obtained $7,000,000 of financing for the USTMAN Acquisition and
for working capital from Sagaponack Partners, L.P. ("Sagaponack"), a private
investment firm based in San Francisco and New York, and its foreign affiliate,
Sagaponack International Partners, L.P. (collectively, the "Investors"),
pursuant to a Securities Purchase Agreement dated May 22, 1997. As of June 30,
1998, two partners of the Investors serve as directors of the Company.
During fiscal year 1998, USTMAN Industries, Watson Systems and Watson
General were merged resulting in the remaining entity, USTMAN Technologies,
Inc. In connection with the merger and the ATC acquisition, the Company
recorded a charge to general and administrative expenses of $736,000 for direct
and other transition costs consisting primarily of fees for relocating offices,
severance of terminated employees, exit costs, attorneys' fees, and accounting
fees.
F-12
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
3. Acquisitions (continued)
USTMAN Industries and ATC's results of operations have been included in the
consolidated results of operations since May 23, 1997 and December 18, 1997,
respectively. Pro forma unaudited consolidated operating results of the
Company, USTMAN Industries and ATC for the year ended June 30, 1998 and the
nine months ended June 30, 1997 assuming the acquisitions had been as of the
beginning of each period are as follows:
<TABLE>
<CAPTION>
Year ended Nine months ended
June 30, 1998 June 30, 1997
------------- -----------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales.................................... $ 6,802,000 $ 6,592,000
Net loss..................................... (5,991,000) (3,293,657)
Net loss per share........................... (.30) (.17)
</TABLE>
4. Sale of Property Held for Sale
In December 1994, the Company purchased a secured adjustable rate loan dated
March 29, 1989 with a face value of $1,400,000 from a major bank. The loan was
secured with a Commercial Deed of Trust, Assignment of Rents, and Security
Agreement for a 12,215 square foot strip shopping mall located in El Cajon,
California. The bank sold the loan to the Company for $300,000. Professional
environmental assessments of the property securing the loan, made on behalf of
the bank, revealed there was hydrocarbon contamination present.
In March 1995, the Company completed foreclosure proceedings and took
possession of the property and a Receiver's account totaling $147,000.
The Company completed its own environmental assessment of the property which
indicated that the level of hydrocarbon contamination was significantly less
than previously detected. On January 4, 1996, the Company's management received
a "no further action letter" from the San Diego Department of Environmental
Health which cleared the title to the property from any restrictions on
transferability.
On October 1, 1996, the Company formed a wholly owned limited liability
company (LLC), Watson Value Assets LLC ("WVA") into which the property and
building for sale, with a net book value of $337,000, was transferred for
liability purposes.
In December 1996, WVA sold the property for $700,000. The Company recorded a
gain on the sale of the property of $363,000 for the nine months ended June 30,
1997.
5. Sale of Toxguard Fluid Technologies, Inc.
On January 20, 1998, the Company sold all of the outstanding capital stock
of TFT for $92,000 in cash. At the date of sale, the Company's investment in
TFT was valued at a negative $336,000. Additionally, the Company wrote off
approximately $400,000 in advances to TFT. The sale resulted for a net gain of
approximately $28,000.
6. Toxguard Systems Bankruptcy
As a result of Toxguard Systems filing under Chapter 7 of the Bankruptcy
Code (see Note 1) in August 1997, the Company has written off its net
investment in Toxguard Systems at June 30, 1997. Toxguard Systems owed $356,000
to its creditors at the time of filing for bankruptcy. The bankruptcy
proceedings for Toxguard Systems have not yet been approved and settled by the
U.S. Bankruptcy Court and accordingly, there
F-13
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
6. Toxguard Systems Bankruptcy (continued)
is uncertainty as to the ultimate resolution of creditors' claims. In
management's opinion, the amounts owed to Toxguard's creditors will be
discharged in bankruptcy and the ultimate resolution of the bankruptcy
proceedings will not have a material effect on the consolidated financial
statements of the Company and its subsidiaries.
7. Notes Payable and Long-Term Debt
Long-term debt consists of the following (December 31, 1998 balance
reflects agreement as amended):
<TABLE>
<CAPTION>
June 30 December 31,
1998 1997 1998
----------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
Senior Subordinated Notes Payable to the
Investors, net of original issue discount
of $783,000 and $907,000, respectively... $ 7,034,000 $6,093,000 $ --
BankBoston Term Loan, principal due in
quarterly installments through December
31, 2000, interest payable quarterly at
the BankBoston Base Rate plus 2.5%. (11%
and 10.75% at June 30, 1998 and December
31, 1998, respectively).................. 3,625,000 -- 3,250,000
Note payable to NDE, all principal due on
June 1, 1998, interest payable quarterly
at 8.5%, guaranteed by USTMAN, Watson
Systems, Inc. and EnvirAlert, Inc.,
maturing June 1998....................... -- 500,000 --
Purchase price adjustment payable to NDE,
due upon settlement of disputed purchase
price.................................... -- 376,000 --
Note payable to a lending institution in
monthly installments of $3,143 including
interest at 9.12%, maturing January
1999..................................... -- 55,000 --
Service fleet vehicle loans and other
amounts owed, due in monthly installments
through 1999 at rates ranging from 8.75%
to 15.9%, collateralized by the related
asset.................................... -- 32,000 --
Note payable to bank in monthly
installments of $10,750 including
interest at 1.5% over the corporate base
rate adjusted quarterly, with any
remaining unpaid principal due November
2000, collateralized by a security
interest in accounts receivable and
certain property and equipment of the
Company.................................. -- 381,000 --
Guarantor of note payable to bank in
monthly installments of $3,259 including
interest at 10.5%, with any remaining
principal due November 1997.............. -- 28,000 --
Unsecured notes payable to former
employees and officers of an acquired
subsidiary. The notes are non-interest
bearing with various maturities through
January 30, 1998......................... -- 35,000 --
Unsecured note payable to a former officer
and shareholder in monthly installments
of $226, including interest at 6.5%,
maturing December 2000................... -- 6,000 --
----------- ---------- ----------
10,659,000 7,506,000 3,250,000
Less current portion...................... 875,000 1,083,000 1,125,000
----------- ---------- ----------
Long-term portion......................... $ 9,784,000 $6,423,000 $2,125,000
=========== ========== ==========
</TABLE>
F-14
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
7. Notes Payable and Long-Term Debt (continued)
On December 17, 1997, the Company secured term and acquisition financing
from BankBoston, N.A. Pursuant to the agreement, the Company obtained $3.75
million in the form of a term loan bearing interest at the BankBoston Base Rate
plus 2% (11% at June 30, 1998 and 10.75% at December 31, 1998). Under the
original terms of the agreement, repayment of the loan began March 31, 1998 and
continues in quarterly installments, including accrued interest, until December
31, 2000 when the remaining principal is due. In March 1999, the Company and
BankBoston agreed to amend the terms of the agreement. As part of the
amendment, the Company will pay $750,000 in principal before June 30, 1999. The
Company will then be required to make quarterly payments of $125,000 in June,
September and December 1999 and March 2000. The quarterly payments then
increase to $250,000, and the balance of the loan will be due on December 31,
2001. The agreement also requires the Company to pay additional interest
totaling the greater of $150,000 or 5% of the average consolidated earnings
before interest, taxes, depreciation and amortization ("EBITDA") during fiscal
1998, 1999 and 2000. This amount is payable in September 2000 and is being
accrued over the life of the note using the effective interest method. The debt
is secured by the assets of the Company. The Company used this financing to
facilitate the ATC acquisition, to pay existing debt, and for working capital
purposes. The agreement with BankBoston provides that additional financing of
up to $2.25 million can be made available to the Company for approved future
acquisitions. As of June 30, 1998 and December 31, 1998, the Company had not
used any of this additional acquisition financing.
The BankBoston agreement contains financial and restrictive covenants. These
covenants include minimum levels of EBITDA and consolidated net worth, maximum
levels of capital expenditures and ratios of funded debt to EBITDA, EBITDA to
interest charges, and operating cash flows to debt service. If the Company
fails to meet the covenants, the unpaid principal and accrued interest will
become immediately due. Due to the lower than expected performance in fiscal
1998, the Company failed to meet the requirements of all the covenants with the
exception of the capital expenditure limitations. The Company received a waiver
from the bank for these covenant violations at June 30, 1998. On October 9,
1998, the Company and BankBoston agreed to amend the terms of the agreement and
reduced the covenant requirements for the upcoming three quarters beginning on
September 30, 1998. As of December 31, 1998, due to the conversion of Senior
Subordinated Notes to preferred stock and the write-off of related deferred
debt cost, the Company failed to meet the net worth covenant. The Company
received a waiver from the bank for these covenant violations at December 31,
1998. In March 1999, the Company agreed to amend the terms of the agreement and
reduce the covenant requirements for the upcoming quarters beginning on March
31, 1999. Management believes the Company's operations for fiscal year 1999
will be sufficient to enable the Company to be in compliance with the amended
covenants for all periods of fiscal year 1999. Accordingly, amounts payable
under the term loan agreement are classified as long term in the accompanying
balance sheets with the exception of scheduled principal payments.
On May 22, 1997, the Company completed the private placement of its Senior
Subordinated Notes with an aggregate principal amount of $7,000,000 and
7,304,520 shares of its common stock (see Note 9) to the Investors, and used
most of the proceeds therefrom to acquire all of the outstanding capital stock
of USTMAN Industries. The notes were due and payable in five years, subject to
mandatory prepayment in certain circumstances. The notes were secured by the
assets of the Company, including the stock of certain of its subsidiaries, and
by the assets of the principal subsidiaries of the Company, including USTMAN
Industries and Watson Systems. The notes were subject to mandatory prepayment
in the event that the Company completed a public offering of newly-issued
shares of common stock (a "Stock Offering"), or in the event that one or more
persons (other than the Investors or their transferees) acquired at least 50%
of the outstanding common stock or of the operating assets of the Company (a
"Company Sale"). In addition, the Company was required to apply toward the
reduction of principal at least 50% of any excess cash.
F-15
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
7. Notes Payable and Long-Term Debt (continued)
Interest on the Senior Subordinated Notes was 10% per annum for the first
year, payable quarterly, and increased by one percent each year during the term
of the Notes. At the option of the Company, interest payments due could be
converted to debt under the same terms as the original principal. During the
year ended June 30, 1998 and six months ended December 31, 1998, the Company
converted interest due of $741,000 and $360,000, respectively, 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 Companys cumulative adjusted earnings
before taxes, depreciation and amortization ("EBTDA") fail to meet specific
projections provided by the Company to the Investors, additional interest was
payable in the form of warrants to the Investors. The additional interest was
determined by comparing a ratio of fully diluted EBTDA per share to the
projected fully diluted EBTDA. If the resulting actual percentage of EBTDA per
share was less than 70% of the projected amount, an adjustment to interest
expense was calculated and warrants were issued in an amount equal to the
additional interest expense divided by the fair market value of the common
stock on the Adjustment Date. The adjusted interest rate could not exceed
29.76%. Due to the lower than expected performance in fiscal 1998, the Company
did not meet the projected EBTDA per share and believed it would be 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% and
reflected the additional 18.76% expense as warrants to be issued. This amount
totaled $1,642,000 for the year ended June 30, 1998.
During the time that the Senior Subordinated Notes remained outstanding, the
Company was subject to a number of negative covenants, as set forth in the
Securities Purchase Agreement. Upon the occurrence of an Event of Default, as
defined in the Securities Purchase Agreement, the Senior Subordinated Notes
could have become immediately due and payable. As of June 30, 1998, the Company
was in violation of one of its covenants due to the violation on the BankBoston
agreement noted above. The Company obtained a waiver for this violation as of
June 30, 1998 and for the upcoming fiscal year and accordingly, all amounts due
under the Senior Subordinated Notes were reflected as long-term.
The Senior Subordinated Notes also specify that the Company pay Sagaponack
an annual management fee totaling $100,000 through the fifth anniversary of the
agreement.
In December 1998, the Investors agreed to convert all of the Senior
Subordinated Notes and accrued interest totaling $9,717,000 to Series A
Preferred Stock ("Preferred Stock") effective July 1, 1998. Warrants previously
issued to the investors for additional interest expense were also cancelled
upon exchange of the notes. 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. As a result of the
conversion, the Company recorded an additional loss of $1,211,000 related to
the write off of the deferred debt cost related to the Private Placement and
converted the following balances to preferred stock:
<TABLE>
<S> <C>
Long-term debt................................................. $7,000,000
Original issue discount........................................ (700,000)
Accrued interest............................................... 1,177,000
Accrued interest payable in warrants........................... 2,240,000
----------
Total.......................................................... $9,717,000
==========
</TABLE>
F-16
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
7. Notes Payable and Long-Term Debt (continued)
Principal payments on long-term debt are as follows (December 31 payments
reflect agreement as amended):
<TABLE>
<CAPTION>
As of
June 30 December 31
----------- -----------
<S> <C> <C>
1999............................................... $ 875,000 $1,125,000
2000............................................... 1,250,000 875,000
2001............................................... 1,500,000 1,250,000
2002............................................... 7,034,000 --
----------- ----------
$10,659,000 $3,250,000
=========== ==========
</TABLE>
8. Income Taxes
A reconciliation of taxes computed at the statutory federal income tax rate
to income tax expense is as follows:
<TABLE>
<CAPTION>
Nine months
Year ended ended
June 30 June 30
1998 1997
----------- -----------
<S> <C> <C>
Benefit from loss before provision for income
taxes computed at statutory rate................ $ 1,919,000 $ 673,000
Nondeductible expense............................ (136,000) (137,000)
Losses without tax benefit....................... (1,783,000) (536,000)
California franchise tax......................... -- (4,000)
----------- ---------
$ -- $ (4,000)
=========== =========
</TABLE>
At June 30, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $11.4 million which begin to
expire in fiscal year 2007.
Pursuant to the Tax Reform Act of 1986, use of the Company's net operating
loss carryforwards may be substantially limited if a cumulative change in
ownership of more than 50% occurs within a three-year period.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of June 30, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards..................... $ 4,401,000 $ 3,015,000
Accrued expenses................................. 30,000 54,000
Book depreciation over tax....................... 50,000 56,000
Other............................................ 161,000 28,000
----------- -----------
Total deferred tax assets.......................... 4,642,000 3,153,000
Valuation allowance................................ (3,518,000) (1,415,000)
----------- -----------
1,124,000 1,738,000
Deferred tax liabilities:
Amortization of purchased technology............. (1,103,000) (1,738,000)
Other............................................ (21,000) --
----------- -----------
Net deferred tax assets............................ $ -- $ --
=========== ===========
</TABLE>
F-17
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
8. Income Taxes (continued)
A valuation reserve of $3,518,000 and $1,415,000 has been established as of
June 30, 1998 and 1997, respectively, due to uncertainty as to the
realizability of the Company's net deferred tax assets and liabilities. The
change in the valuation allowance for the year ended June 30, 1998 and the nine
months ended June 30, 1997 is approximately $2,103,000 and $1,117,000,
respectively.
9. Shareholders' Equity
Senior Subordinated Notes
In December 1998, the Investors agreed to convert all of the Private
Placement and accrued interest totaling $9,717,000 to Series A Preferred Stock
("Preferred Stock") effective July 1, 1998. Warrants previously to be issued to
the investors for additional interest expense were also cancelled upon exchange
of the notes. 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.
During fiscal 1997, the Company completed four private placement offerings
in which a total of 465,000 shares of common stock were issued to investors in
exchange for $455,000. The shares issued have not been registered under the
Securities Act of 1933, as amended (the "Act"), as they are exempt under
Regulation D of the Act.
Warrants
Pursuant to the Securities Purchase Agreement, the Investors were issued
7,304,520 shares of the Company's common stock, representing 40% of the total
number of shares of common stock outstanding immediately after such issuance,
and warrants (the "Sagaponack Warrants") to purchase shares of common stock in
an amount sufficient, upon the exercise of any outstanding options and
warrants, for the Investors to maintain their 40% ownership of the outstanding
common stock of the Company. Such warrants will be at the same price and term
as the options or warrants exercised by third parties.
In June 1997, the Investors exercised warrants for a noncash purchase of
33,333 shares of the Company's common stock in order to maintain their 40%
ownership of the outstanding common stock of the Company.
In connection with a fiscal 1995 private placement, the Company issued
warrants to the selling agent for the purchase of 50,000 units, at $3.50 per
unit. As of June 30, 1998, all 50,000 warrants have expired. On August 6, 1996,
35,000 additional warrants were issued at the same price per unit which were
exercisable immediately and expire on February 6, 2001. All 35,000 warrants
issued remain outstanding at June 30, 1998.
The Company issued warrants for 100,000 shares exercisable at $1.62 per
share through August 1999 in connection with the fiscal 1996 private placements
of the Company's common stock. All of these warrants remain outstanding at June
30, 1998.
During 1997, the Company issued warrants for 200,000 shares exercisable at
$1.50 per share through March 1998. In March 1998, these options were modified
to extend the exercise period through March 16, 1999 and increase the exercise
price to $1.75. As a result, the Company recognized expense of $222,000,
representing the fair market value of these options at the time of the
modification.
F-18
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
9. Shareholders' Equity (continued)
In connection with the 1997 private placement, the Company issued warrants
for 718,749 shares at $.01 per unit. The warrants were exercisable immediately
and expire on May 22, 2000. In January 1998, all warrants were exercised.
Stock Options
On September 1, 1992, the Company granted to a key employee nonstatutory
options to purchase 400,000 shares of common stock at an exercise price of
$1.50 per share. These options were exercisable immediately and expire on
September 30, 1998. On April 3, 1997, these options were replaced with an equal
amount of options at an exercise price of $1.53. The new options were
exercisable immediately and expire on April 3, 2002.
On January 4, 1994, certain key employees were issued options to purchase
1,000,000 shares at an exercise price of $2.63 in exchange for certain rights
to an antifreeze recycling process. These options vested over two years and
expire five years after the vesting date. On April 3, 1997, 650,000 of these
options were replaced with 650,000 options at an exercise price of $1.53. The
new options are exercisable immediately and expire on April 3, 2002. As of June
30, 1998, 50,000 of the remaining 350,000 options had expired.
In connection with the USTMAN Industries acquisition on May 22, 1997, the
Company issued options to purchase 600,000 shares to a key employee. The
options become exercisable, subject to continued employment, over four years at
a rate of 25% per year beginning one year from the grant date. The options
expire three years from the vesting date. The exercise price is $1.00. As of
June 30, 1998, none of these options had been exercised.
Also during the 1997 fiscal year, the Company issued a total of 251,518
nonqualified options to several employees at an exercise price of $1.63. Of
this total, 201,518 are immediately exercisable and the remaining 50,000 vest
over two years. The options expire on various dates through April 10, 2002. As
of June 30, 1998, 50,000 of these options have expired. The remaining options
have not been exercised.
In connection with the ATC acquisition in December 1997, the Company issued
options to purchase 90,000 shares to key employees. The options become
exercisable subject to continued employment, at a rate of 33% per year
beginning on the grant date and expire at a rate of 33% each year beginning
five years after the grant date. The exercise price is $1.47. As of June 30,
1998, none of these options had been exercised.
During the 1998 fiscal year, the Company adopted a stock option plan
authorizing the issuance of options for 2,000,000 shares of common stock to
selected employees. Under the terms of the plan, the options may be either
incentive or nonqualified. The exercise price per share, determined by a
committee of the Board of Directors, may not be less than the fair market value
on the grant date.
On January 30, 1998, the Company granted 195,000 options with an exercise
price of $1.50. The options become exercisable, subject to continued
employment, at the rate of 33% per year beginning on the grant date. The
options have a term of ten years.
F-19
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
9. Shareholders' Equity (continued)
The following table summarizes stock option activity for the year ended June
30, 1998 and the nine months ended June 30, 1997:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
---------- --------------
<S> <C> <C>
Outstanding on September 30, 1996.............. 1,996,233 $2.25
Granted....................................... 1,954,518 $1.57
Exercised..................................... -- --
Expired or forfeited.......................... (1,513,233) $2.16
---------- -----
Outstanding on June 30, 1997................... 2,437,518 $1.64
Granted....................................... 310,000 $1.50
Exercised..................................... -- --
Expired or forfeited.......................... (147,666) $2.54
Outstanding on June 30, 1998................... 2,599,852 $1.58
Granted (unaudited)........................... -- --
Exercised (unaudited)......................... -- --
Expired or forfeited (unaudited).............. -- --
---------- -----
Outstanding on December 31, 1998 (unaudited)... 2,599,852 $1.58
========== =====
Exercisable.................................... 1,944,852 $1.71
========== =====
</TABLE>
Exercise prices for the majority of the options outstanding as of June 30,
1998 range from $.50 to $2.50. Approximately 2,000 options outstanding at June
30, 1998 have an exercise price of $4.50.
In calculating pro forma information regarding net income and earnings per
share, as required by Statement No. 123, the fair value was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the options on the Company's common stock:
risk-free interest rate of 5.25%; a dividend yield of 0%; volatility of the
expected market price of the Company's common stock of .75 and .78 for the year
ended June 30, 1998 and the period ended June 30, 1997, respectively; and a
weighted-average expected life of the option of 4.9 and 4.6 years for the year
ended June 30, 1998 and the period ended June 30, 1997, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the year ended June 30, 1998 and the nine months
ended June 30, 1997 is summarized below:
<TABLE>
<CAPTION>
Nine months
Year ended ended
June 30 1998 June 30 1997
------------ ------------
<S> <C> <C>
Pro forma net loss................................ $6,092,000 $3,322,000
Pro forma net loss per share...................... $ (.32) $ (.28)
</TABLE>
The Company issued 24,000 shares of common stock in 1998 in order to settle
a lawsuit.
F-20
<PAGE>
USTMAN Technologies, Inc.
Notes to Condensed Consolidated Financial Statements--(Continued)
(Information for the six months ended December 31, 1998 and 1997 is unaudited)
10. Commitments and Contingencies
Deferred Employee Benefit Agreement
In July 1991, the Company entered into a deferred compensation agreement
with the Company's former president. The benefits as defined under the
agreement require the Company to pay $2,700 per month with such payments
continuing throughout the president's lifetime with a minimum ten-year
guaranteed payment. Upon his death, benefits may continue to his beneficiaries
as defined under the agreement. Monthly payments will be adjusted on an annual
basis based on the Department of Labor Consumer Price Index. As of the
effective date of the agreement, the benefits are fully vested, but not funded.
Leases
The Company leases its facilities and certain equipment under noncancelable
operating leases with future minimum payments as follows:
<TABLE>
<CAPTION>
Fiscal year ending June 30
--------------------------
<S> <C>
1999............................................................... $105,000
2000............................................................... 111,000
2001............................................................... 116,000
2002............................................................... 60,000
--------
$392,000
========
</TABLE>
Rent expense totaled $101,000, $80,000, $61,000 and $41,000 for the year
ended June 30, 1998, the nine months ended June 30, 1997, and the six months
ended December 31, 1997 and 1998, respectively.
Litigation
The Company is involved in various claims and lawsuits arising in the
ordinary course of business. Included in accrued expenses as of June 30, 1998
is approximately $100,000 of reserve for potential losses resulting from this
litigation. Management believes this reserve is adequate to cover all pending
litigation as of June 30, 1998 and December 31, 1998.
11. Employee Benefit Plan
The Company sponsors employee savings plans under Section 401(k) of the
Internal Revenue Code. Under the plan, all employees are eligible to
participate after six months of service. Employees may defer up to 15% of their
salary subject to limits set annually by the Internal Revenue Service and, at
the Company's discretion, it can match annually. No expense for matching
contributions was recorded in 1997 or 1998.
F-21
<PAGE>
ITEM 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
3.1 Articles of Incorporation of the Company (1).
3.2 Certificate of Amendment of Articles of Incorporation dated February 14,
1991 (2).
3.3 Certificate of Amendment of Articles of Incorporation dated February 3,
1998 (3).
3.4 Bylaws, as amended, of the Company (1).
4.1 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Articles of
Incorporation and Bylaws defining the rights of holders of Common Stock.
4.2 Form of Subscription Certificate (to be filed by amendment).
5.1 Opinion of Case, Knowlson, Burnett & Wright LLP.
10.1 Watson General Corporation Retirement Plan (4).
10.2 Modified stock option agreement dated January 4, 1994 between the
Company, on the one hand, and Ronald G. Crane, Joseph L. Christoffel,
and William R. Kughn on the other hand (5).
10.3 Stock Option agreement dated April 3, 1997 between the Company and
Ronald G. Crane (6).
10.4 Stock Option agreement dated May 22, 1997 between the Company and Dan R.
Cook (6).
10.5 Employment agreement dated May 22, 1997 between the Company and Dan R.
Cook (6).
10.6 Stock purchase agreement dated May 22, 1997 between the Company and NDE
Environmental Corporation for the purchase of the common stock of USTMAN
Industries (7).
10.7 Securities purchase agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. and Sagaponack International Partners, L.P.
(7).
10.8 Warrant agreement dated May 22, 1997 between the Company and Sagaponack
Partners, L.P. (7).
10.9 Stock pledge agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. and Sagaponack International Partners, L.P.
(7).
10.10 Security agreement dated May 22, 1997 between the Company and Sagaponack
Partners, L.P. and Sagaponack International Partners, L.P. (7)
10.11 Financial advisory agreement dated May 22, 1997 between the Company and
Sagaponack Management Company (7).
10.12 Company agreement dated May 22, 1997 between the Company and Sagaponack
Partners, L.P. and Sagaponack International Partners, L.P. (7).
10.13 Shareholder agreement dated May 22, 1997 between Sagaponack Partners,
L.P. ,Sagaponack International Partners, L.P. and certain shareholders
of the Company (7).
10.14 Primary Stock Purchase Agreement dated December 17, 1997 between the
Company and Erica Bengtson Grant and James B. Grant (8).
10.15 Contingent Stock Purchase Agreement dated December 17, 1997 between the
Company and Environmental Systems Corporation (8).
10.16 Term Loan and Acquisition Line Agreement dated December 16, 1997 between
the Company and BankBoston, N.A. (8).
10.17 First Amendment to Term Loan and Acquisition Line Agreement between the
Company and BankBoston, N.A.
10.18 Second Amendment to Term Loan and Acquisition Line Agreement between the
Company and BankBoston, N.A.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.19 Stock Pledge Agreement dated December 16, 1997 between the Company and
BankBoston, N.A. (8).
10.20 Security Agreement dated December 16, 1997 between the Company and
BankBoston, N.A. (8).
10.21 Intercreditor and Subordination Agreement dated December 16, 1997
between the Company and BankBoston, N.A. (8).
10.22 Employment Agreement dated December 18, 1997 between the Company and
Erica Bengtson, including the Stock Option Agreement (9).
10.23 Employment Agreement dated December 18, 1997 between the Company and
James B. Grant, including the Stock Option Agreement (9).
10.24 Employment Agreement dated December 18, 1997 between the Company and
David Booth, including the Stock Option Agreement (9).
10.25 Stock Option Agreement dated January 16, 1998 (10).
10.26 Amendment to Securities Purchase Agreement Among the Company, Sagaponack
Investors L.P. and Sagaponack International Partners L.P.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Case, Knowlson, Burnett & Wright LLP (included in opinion
filed as Exhibit 5.1).
24.1 Power of attorney (included on page II-6 of the Registration Statement).
27. Financial Data Schedule
</TABLE>
(b) Financial Statement Schedules. All schedules for which provision is made
in the applicable accounting regulations of the Securities and Exchange
Commission are not required under the applicable instructions or are
inapplicable and therefore have been omitted.
- --------
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter ended March 31, 1989.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter ended March 31, 1998 (Form ).
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.
(5) Incorported by reference to the Company's Annual Report on Form 10-KSB/A2
for the fiscal year ended December 31, 1993.
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1997 (File no. 000-16011).
(7) Incorporated by reference to the Company's Current Report on Form 8-K
filed on June 6, 1997 (File no. 000-16011).
(8) Incorporated by reference to the Company's Current Report on Form 8-K
filed on December 30, 1997 (File no. 000-16011).
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the Quarter ended December 31, 1997 (File no. 000-16011).
(10) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1998 (File no. 000-16011).
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with this offering are as follows:
<TABLE>
<CAPTION>
Expenses Amount
-------- -------
<S> <C>
SEC Registration Fee................................................ $ 885
Printing Expenses................................................... 5,000
Legal Fees and Expenses............................................. 20,000
Accounting Fees and Expenses........................................ 20,000
Subscription Agent's Fees and Costs................................. 10,000
Soliciting Agent's Expenses......................................... 10,000
Blue Sky Fees and Expenses.......................................... 3,000
Miscellaneous Expenses.............................................. 1,115
-------
Total............................................................. $70,000
=======
</TABLE>
ITEM 14. Indemnification of Directors and Officers.
Section 317 of the California Corporations Code permits a corporation to
grant indemnification to directors, officers and other agents in terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities, including expenses, arising in connection with federal securities
laws, including but not limited to the Securities Act of 1933, as amended.
Pursuant to the Articles of Incorporation, as amended, and the Bylaws of the
Company, the Company is authorized to indemnify its directors, officers and
other agents to the full extent permitted by law and has indemnified its
directors for monetary damages to the full extent permitted by law.
ITEM 15. Recent Sales of Unregistered Securities.
On May 20, 1996, the Company granted options to purchase 15,000 shares of
its Common Stock at the then market price to Randy Nelson, an employee of the
Company, in consideration for services rendered to the Company by him. The
Company believes that the issuance of such shares was exempt from registration
under Section 4(2) of the Securities Act.
On July 16, 1996, the Company granted options to purchase 5,000 shares of
Common Stock at $1.625 per share to Debbie Almeida, an employee of the Company,
in consideration for services rendered to the Company by her. The Company
believes that the issuance of such shares was exempt from registration under
Section 4(2) of the Securities Act.
On August 1, 1996, the Company granted options to purchase an aggregate of
30,000 shares of Common Stock at the then market price for the Common Stock to
James Criswell and Deanna Butler, employees of the Company, in consideration
for services rendered by them to the Company. The Company believes that the
issuance of such shares was exempt from registration under Section 4(2) of the
Securities Act.
On August 20, 1996, the Company granted warrants to purchase an aggregate of
100,000 shares of Common Stock at an exercise price of $1.62 per share to Ron
E. Ainsworth, Andrew Boyd-Jones and Leon M. Bronfin in consideration for
services rendered to the Company by such persons. The Company believes that the
issuance of such shares was exempt from registration under Section 4(2) of the
Securities Act.
On February 13, 1997, the Company sold 100,000 shares of its Common Stock to
the James R. Moiola and Virginia M. Moiola Trust UA DTD June 10, 1973 for
$100,000. On February 22, 1997, the Company sold an additional 100,000 shares
of its Common Stock to the trust. The Company believes that the issuance of
such shares was exempt from registration under Section 4(2) of the Securities
Act.
II-1
<PAGE>
On February 17, 1997 the Company granted an option to purchase 50,000 shares
of Common Stock at $1.825 per share to Dennis Mulligan in consideration for his
services as a director of the Company. The Company believes that the issuance
of such shares was exempt from registration under Section 4(2) of the
Securities Act.
On March 25, 1997, the Company sold an aggregate of 235,000 shares of its
Common Stock to the Lipeles Living Trust, the Brayshay Family Trust, Joseph
Chakkalo, Comox Co. Ltd., Stourbridge Investments Ltd., Ernest Gottdiener,
Martin and Miriam Knecht, and Herman Brock for aggregate consideration of
$235,000. The Company believes that the issuance of such shares was exempt from
registration under Section 4(2) of the Securities Act.
On April 3, 1997, the Company granted options to purchase an aggregate of
1,050,000 shares of Common Stock at an exercise price of $1.53 per share to
Ronald G. Crane and Joseph L. Christoffel in consideration for services
rendered by such persons as officers and employees of the Company. The Company
believes that the issuance of such shares was exempt from registration under
Section 4(2) of the Securities Act.
On April 15, 1997, the Company sold an aggregate of 10,000 shares of its
Common Stock to Nicholas Ponzio and Anthony Broy for an aggregate consideration
of $10,000. The Company believes that the issuance of such shares was exempt
from registration under Section 4(2) of the Securities Act.
On April 22, 1997, the Company sold an aggregate of 20,000 Shares of its
Common Stock to PJS Trust and the Ferreiera Family Trust for an aggregate
consideration of $20,000. The Company believes that the issuance of such shares
was exempt from registration under Section 4(2) of the Securities Act.
On May 22, 1997, the Company issued to Sagaponack Partners L.P and
Sagaponack International Partners L.P. an aggregate of 7,304,520 shares of
Common Stock and warrants to purchase up to 2,625,432 shares of Common Stock in
partial consideration for a $7,000,000 financing to the Company by them. The
Company believes that the issuance of such shares was exempt from registration
under Section 4(2) of the Securities Act.
On May 22, 1997, the Company granted options to purchase 600,000 shares of
Common Stock, vesting one-fourth every year, at an exercise price of $1.00 per
share to Dan R. Cook as part of his compensation as an officer of the Company.
The Company believes that the issuance of such shares was exempt from
registration under Section 4(2) of the Securities Act.
On May 22, 1997, the Company granted options to purchase 718,745 shares of
Common Stock at an exercise price of $.01 per share in consideration for
services rendered in locating Sagaponack on behalf of the Company. The Company
believes that the issuance of such shares was exempt from registration under
Section 4(2) of the Securities Act.
On June 12, 1997, the Company issued 50,000 shares to Ronald G. Crane in
consideration for his assistance in settling an action against a subsidiary of
the Company and issued 33,333 shares of Common Stock to Sagaponack in order to
permit Sagaponack to maintain its ownership percentage in the Company as
required by a securities purchase agreement between the Company and Sagaponack.
The Company believes that the issuance of such shares was exempt from
registration under Section 4(2) of the Securities Act.
II-2
<PAGE>
ITEM 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
3.1 Articles of Incorporation of the Company (1).
3.2 Certificate of Amendment of Articles of Incorporation dated February 14,
1991 (2).
3.3 Certificate of Amendment of Articles of Incorporation dated February 3,
1998 (3).
3.4 Bylaws, as amended, of the Company (1).
4.1 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Articles of
Incorporation and Bylaws defining the rights of holders of Common Stock.
4.2 Form of Subscription Certificate (to be filed by amendment).
5.1 Opinion of Case, Knowlson, Burnett & Wright LLP.
10.1 Watson General Corporation Retirement Plan (4).
10.2 Modified stock option agreement dated January 4, 1994 between the
Company, on the one hand, and Ronald G. Crane, Joseph L. Christoffel,
and William R. Kughn on the other hand (5).
10.3 Stock Option agreement dated April 3, 1997 between the Company and
Ronald G. Crane (6).
10.4 Stock Option agreement dated May 22, 1997 between the Company and Dan R.
Cook (6).
10.5 Employment agreement dated May 22, 1997 between the Company and Dan R.
Cook (6).
10.6 Stock purchase agreement dated May 22, 1997 between the Company and NDE
Environmental Corporation for the purchase of the common stock of USTMAN
Industries (7).
10.7 Securities purchase agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. and Sagaponack International Partners, L.P.
(7).
10.8 Warrant agreement dated May 22, 1997 between the Company and Sagaponack
Partners, L.P. (7).
10.9 Stock pledge agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. and Sagaponack International Partners, L.P.
(7).
10.10 Security agreement dated May 22, 1997 between the Company and Sagaponack
Partners, L.P. and Sagaponack International Partners, L.P. (7)
10.11 Financial advisory agreement dated May 22, 1997 between the Company and
Sagaponack Management Company (7).
10.12 Company agreement dated May 22, 1997 between the Company and Sagaponack
Partners, L.P. and Sagaponack International Partners, L.P. (7).
10.13 Shareholder agreement dated May 22, 1997 between Sagaponack Partners,
L.P. ,Sagaponack International Partners, L.P. and certain shareholders
of the Company (7).
10.14 Primary Stock Purchase Agreement dated December 17, 1997 between the
Company and Erica Bengtson Grant and James B. Grant (8).
10.15 Contingent Stock Purchase Agreement dated December 17, 1997 between the
Company and Environmental Systems Corporation (8).
10.16 Term Loan and Acquisition Line Agreement dated December 16, 1997 between
the Company and BankBoston, N.A. (8).
10.17 First Amendment to Term Loan and Acquisition Line Agreement between the
Company and BankBoston, N.A.
10.18 Second Amendment to Term Loan and Acquisition Line Agreement between the
Company and BankBoston, N.A.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.19 Stock Pledge Agreement dated December 16, 1997 between the Company and
BankBoston, N.A. (8).
10.20 Security Agreement dated December 16, 1997 between the Company and
BankBoston, N.A. (8).
10.21 Intercreditor and Subordination Agreement dated December 16, 1997
between the Company and BankBoston, N.A. (8).
10.22 Employment Agreement dated December 18, 1997 between the Company and
Erica Bengtson, including the Stock Option Agreement (9).
10.23 Employment Agreement dated December 18, 1997 between the Company and
James B. Grant, including the Stock Option Agreement (9).
10.24 Employment Agreement dated December 18, 1997 between the Company and
David Booth, including the Stock Option Agreement (9).
10.25 Stock Option Agreement dated January 16, 1998 (10).
10.26 Amendment to Securities Purchase Agreement Among the Company, Sagaponack
Investors L.P. and Sagaponack International Partners L.P.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Case, Knowlson, Burnett & Wright LLP (included in opinion
filed as Exhibit 5.1).
24.1 Power of attorney (included on page II-6 of the Registration Statement).
27. Financial Data Schedule
</TABLE>
(b) Financial Statement Schedules. All schedules for which provision is made
in the applicable accounting regulations of the Securities and Exchange
Commission are not required under the applicable instructions or are
inapplicable and therefore have been omitted.
- --------
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter ended March 31, 1989.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter ended March 31, 1998 (Form ).
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.
(5) Incorported by reference to the Company's Annual Report on Form 10-KSB/A2
for the fiscal year ended December 31, 1993.
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1997 (File no. 000-16011).
(7) Incorporated by reference to the Company's Current Report on Form 8-K
filed on June 6, 1997 (File no. 000-16011).
(8) Incorporated by reference to the Company's Current Report on Form 8-K
filed on December 30, 1997 (File no. 000-16011).
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the Quarter ended December 31, 1997 (File no. 000-16011).
(10) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1998 (File no. 000-16011).
II-4
<PAGE>
ITEM 17. Undertakings.
The Registrant hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling persons of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling persons in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(b) That for determining any liability under the Act, the Registrant
will treat the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule
424(b)(1) or (4) or 497(h) under the Act as part of this registration
statement as of the time the Securities ad Exchange Commission declared it
effective.
(c) That for determining any liability under the Act, each post-
effective amendment that contains a form of prospectus will be treated as a
new registration statement for the securities offered in the registration
statement, and that offering of the securities at that time will be treated
as the initial bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Lakewood, state of
Colorado, on this 19th day of April, 1999.
USTMAN TECHNOLOGIES, INC.
By /s/ Dan R. Cook
___________________________________
Dan R. Cook
Chief Executive Officer and
President
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dan R. Cook and Barry S. Rosenstein and each of
them singly, as true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign the Registration Statement filed herewith and
any or all amendments to said Registration Statement (including post-effective
amendments and registration statements filed pursuant to Rule 462 and
otherwise), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
granting unto said attorneys-in-fact and agents the full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the foregoing, as to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents or any of them, or his substitute, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Dan R. Cook President, Chief Executive April 19, 1999
____________________________________ Officer (Principal
Dan R. Cook Executive Officer),
Principal Financial Officer
and Director
/s/ Barry S. Rosenstein Co-Chairman and Director April 19, 1999
____________________________________
Barry S. Rosenstein
/s/ Marc A. Weisman Co-Chairman and Director April 19, 1999
____________________________________
Marc A. Weisman
/s/ Heather Murphy Controller April 19, 1999
____________________________________
Heather Murphy
</TABLE>
II-6
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF CASE, KNOWLSON, BURNETT & WRIGHT LLP]
April 16, 1999
USTMAN Technologies, Inc.
12265 West Bayaud Avenue, Suite 110
Lakewood, Colorado 80228
Attn: Mr. Dan R. Cook, President
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 to be filed by
you with the Securities and Exchange Commission on or about April 19, 1999 (the
"Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of 9,941,624 shares (the "Shares") of the
Common Stock of USTMAN Technologies, Inc.
The Shares are to be sold as described in the Registration Statement.
As your counsel in connection with this transaction, we have examined the
proceedings taken and proposed to be taken in connection with said sale and
issuance of the Shares.
It is our said opinion that the Shares to be issued and sold by you,
when issued and sold in accordance in the manner referred to in the relevant
Prospectus associated with the Registration Statement, will be validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
/s/ Case, Knowlson, Burnett & Wright LLP
CASE, KNOWLSON, BURNETT & WRIGHT LLP
<PAGE>
EXHIBIT 10.17
FIRST AMENDMENT TO TERM LOAN AND ACQUISITION LINE AGREEMENT
-----------------------------------------------------------
This First Amendment to Term Loan and Acquisition Line Agreement is made as
of the __ day of October, 1998 by and among
Ustman Industries, Inc. (f/k/a Watson General Corporation), a California
corporation, with its principal place of business at 12265 West Bayaud
Avenue, Suite 110, Lakewood, Colorado 80228 (the "Company"), and
BankBoston, N.A., a national banking association having its principal
offices at 100 Federal Street, Boston, Massachusetts (the "Bank")
in consideration of the mutual covenants herein contained and benefits to be
derived herefrom.
WITNESSETH
----------
WHEREAS, the Company and the Bank have entered into a Term Loan and
Acquisition Line Agreement dated as of December 16, 1997 (as amended and in
effect, the "Loan Agreement"); and
WHEREAS, certain Events of Default have arisen under the Loan Agreement and
the Company has requested the Bank to amend the Loan Agreement and to waive such
Events of Default; and
WHEREAS, the Bank has, by letter dated October 9, 1998, waived such Events
of Default and is willing to amend the Loan Agreement on the terms set forth
herein.
NOW THEREFORE, it is hereby agreed as follows:
1. Definitions: All capitalized terms used herein and not otherwise
-----------
defined shall have the same meaning as in the Loan Agreement.
2. Amendments to Section 1. The provisions of Section 1.1 of the Loan
-----------------------
Agreement are hereby amended
a. by deleting the date "December 11, 1998" appearing in the definition
of "Acquisition Loan Period" and substituting the date "September 30,
1998" in its stead.
b. by adding the following after clause (f) of the definition of
"Consolidated EBITDA" and before the words, "all as determined in
accordance with Generally Accepted Accounting Principles":
plus (g) with respect to any measurement period which includes the
----
Company's fiscal quarter ending June 30, 1998, any non-recurring
expenses which were charged against the Company's earnings
pursuant to the audit conducted by the Company's certified public
accountants (which expenses aggregated approximately $812,000.00
for such fiscal quarter).
3. Amendments to Section 2. The provisions of Section 2 of the Loan
-----------------------
Agreement are hereby amended
a. by deleting the first sentence of Section 2.3 in its entirety and
substituting the following in its stead:
<PAGE>
The Term Loan shall bear interest on the outstanding principal
balance thereof at a rate equal to (a) the aggregate of the Base
Rate plus three percent (3%) per annum if the Company does not
achieve Consolidated EBITDA of at least $2,000,000.00 as of the
end of the immediately preceding quarter (calculated on a rolling
four quarters basis), or (b) the aggregate of the Base Rate plus
two and one-half percent (2 1/2%) per annum if the Company
achieves Consolidated EBITDA of at least $2,000,000.00 for the
immediately preceding quarter. For purposes of determining the
rate of interest hereunder, Consolidated EBITDA shall be
determined based upon the financial statements delivered to the
Bank pursuant to (S)6.1(a) and (b) hereof, provided that, if the
-------------
Company fails to deliver such financial statements as and when
due, interest shall accrue at the rate set forth in clause (a)
hereof (without waiving the provisions of (S)3.7 hereof).
b. by deleting the first sentence of Section 2.4(a) and substituting the
following in its stead:
An amount equal to the greater of (i) $150,000.00, or (ii) ten
percent (10%) of the result of (A) the Consolidated EBITDA of
the Company and its Subsidiaries for fiscal years 1999 and 2000,
divided by (B) two (2).
c. by deleting the words "five percent (5%) appearing in Section
2.4(b)(ii) and substituting the words "ten percent (10%)" in their
stead.
4. Amendments to Section 3. The provisions of Section 3.7(a) of the
-----------------------
Loan Agreement are hereby amended by adding the following at the end thereof:
, or if the interest is then accruing at the rate set forth in
(S)2.3(a) hereof, at a rate per annum equal to the aggregate of
the Base Rate plus six percent (6%) per annum.
5. Amendments to Section 8. The provisions of Section 8 of the Loan
-----------------------
Agreement are hereby amended
a. by deleting the provisions of (S)8.1 in their entirety and
substituting the following in their stead:
8.1 Consolidated Net Worth. The Company shall at all times
----------------------
maintain a Consolidated Net Worth equal to or greater than:
(a) as of each of the quarters end September 30, 1998, December
31, 1998, March 31, 1999, and June 30, 1999 - $6,000,000.00;
(b) as of each quarter end thereafter, the sum of (i)
$6,000,000.00 plus (ii) one hundred percent (100%) of the
----
proceeds realized from the issuance of any stock or other equity
interests in the Company, plus (c) seventy five percent (75%) of
----
the Consolidated Net Income (but not any net loss) of the
Company and its Subsidiaries in each of their fiscal years
commencing with the fiscal year ending June 30, 1999.
2
<PAGE>
b. by amending the provisions of (S)8.2
(i) by adding the words ", calculated on a rolling four quarters
basis," after the words "Adjusted Consolidated EBITDA" in the
fourth line thereof.
(ii) by deleting the ratios for the periods ending September 30,
1998 and thereafter and substituting the following in their
stead:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Quarter ending
September 30, 1998 3.1:1.0
Quarter ending
December 31, 1998 2.7:1.0
Quarter ending
March 31, 1999 2.3:1.0
Quarter ending
June 30, 1999 2.0:1.0
and each quarter end thereafter
</TABLE>
c. by deleting the provisions of (S)8.3 in their entirety and
substituting the following in their stead:
8.3 Adjusted Consolidated EBITDA to Interest Charges. The Company
------------------------------------------------
shall not permit the ratio of Adjusted Consolidated EBITDA to
Interest Charges paid in cash, calculated on a rolling four quarters
basis, to be less than 3.0:1.0 at the end of each of the Company's
fiscal quarters.
d. by amending the provisions of (S)8.5(a) as follows:
(i) by adding the words ", calculated on a rolling four quarters
basis (except as otherwise provided below, " after the words
"Adjusted Consolidated EBITDA" in the second line thereof.
(ii) by deleting the ratios for the periods ending September 30,
1998 and thereafter and substituting the following in their
stead:
<TABLE>
<CAPTION>
Period Minimum EBITDA
------ --------------
<S> <C>
Quarter ending
September 30, 1998 $1,100,000.00
Quarter ending
December 31, 1998 $1,200,000.00
Quarter ending
March 31, 1999 $1,300,000.00
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Quarter ending
June 30, 1999 $1,800,000.00
Quarter ending
September 30, 1999 $1,936,000.00
and each quarter end thereafter
</TABLE>
(iii) by deleting the provisions of (S)8.5(b) in their entirety.
c. by deleting the provisions of (S)8.6 in their entirety and
substituting the following in their stead:
8.6 Consolidated Operating Cash Flow to Debt Service
Charges. The Company shall not permit the ratio of
Consolidated Operating Cash Flow to Debt Service Charges,
calculated on a rolling four quarters basis to be less than
1.1:1.0 as of the end of any fiscal quarter of the Company,
commencing with the quarter ending September 30, 1998.
6. Conditions to Effectiveness. This First Amendment to Term Loan and
---------------------------
Acquisition Line Agreement shall not be effective until each of the following
conditions precedent have been fulfilled to the satisfaction of the Bank:
a. This First Amendment to Term Loan and Acquisition Line Agreement shall
have been duly executed and delivered by the COmpany and the Bank, and
shall be in full force and effect. The Bank shall have received a
fully executed copy hereof and of each other document required
hereunder.
b. All action on the part of the Company necessary for the valid
execution, delivery and performance by the Company of this First
Amendment to Term Loan and Acquisition Line Agreement shall have been
duly and effectively taken. The Bank shall have received from the
Company true copies of its certificates of the resolutions adopted by
its board of directors authorizing the transactions described herein,
each certified by its secretary as of a recent date to be true and
complete.
c. The Bank shall have received an opinion of counsel to the Company
satisfactory to the Bank and the Bank's counsel.
d. The Bank shall have been paid an amendment fee in the sum of
$18,750.00. The amendment fee shall be fully earned upon execution of
this First Amendment and shall not be subject to refund or rebate
under any circumstances.
e. The Company shall have paid to the Bank all other fees and expenses
then due and owing pursuant to the Loan Agreement, as modified hereby,
including, without limitation, reasonable attorneys' fees incurred by
the Bank.
f. No Default or Event of Default shall have occurred and be continuing.
g. The Company shall have provided such additional instruments and
documents to the Bank as the Bank and its counsel may have reasonably
requested.
7. Miscellaneous.
-------------
4
<PAGE>
a. Except as provided herein, all terms and conditions of the Loan
Agreement and the other Loan Documents remain in full force and
effect. The Company and the Guarantors hereby ratify, confirm, and
reaffirm all of the representations, warranties and covenants therein
contained (except to the extent that such representations and
warranties expressly relate to an earlier date). The Company and the
Guarantors further acknowledge and agree that none of them have any
offsets, defenses, or counterclaims against the Bank under the Loan
Agreement or the other Loan Documents and, to the extent that the
Company or the Guarantors have, or ever had, any such offsets,
defenses, or counterclaims, the Company and the Guarantors each hereby
waive and release the same.
b. The Company shall pay all costs and expenses incurred by the Bank in
connection with this First Amendment, including, without limitation,
all reasonable attorneys' fees and expenses, commercial finance
examination fees, appraisal fees, and all reasonable travel expenses
incurred by the Bank.
c. This First Amendment may be executed in several counterparts and by
each party on a separate counterpart, each of which when so executed
and delivered, each shall be an original, and all of which together
shall constitute one instrument.
d. This First Amendment expresses the entire understanding of the parties
with respect to the matters set forth herein and supersedes all prior
discussions or negotiations hereon.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be executed and their seals to be hereto affixed as the date first above
written.
"Company"
USTMAN INDUSTRIES, INC.
By: /s/ Dan R. Cook
_________________________
Name: Dan R. Cook
Title: President
"Bank"
BANKBOSTON, N.A.
By: /s/ Kenneth S. Struglia
_________________________
Name: Kenneth S. Struglia
Title: Vice President
5
<PAGE>
EXHIBIT 10.18
SECOND AMENDMENT TO TERM LOAN AND ACQUISITION LINE AGREEMENT
------------------------------------------------------------
This Second Amendment to Term Loan and Acquisition Line Agreement is made
as of the ___day of March, 1999 by and among
Ustman Industries, Inc. (f/k/a Watson General Corporation), a California
corporation, with its principal place of business at 12265 West Bayaud
Avenue, Suite 110, Lakewood, Colorado 80228 (the "Company"); and
BankBoston, N.A., a national banking association having its principal
offices at 100 Federal Street, Boston, Massachusetts (the "Bank")
in consideration of the mutual covenants herein contained and benefits to be
derived herefrom.
WITNESSETH
----------
WHEREAS, the Company and the Bank have entered into a Term Loan and
Acquisition Line Agreement dated as of December 16, 1997 (as amended and in
effect, the "Loan Agreement"); and
WHEREAS, the Company has requested the Bank to amend the Loan Agreement
and the Bank is willing to do so on the terms set forth herein.
NOW THEREFORE, it is hereby agreed as follows:
1. Definitions: All capitalized terms used herein and not otherwise
-----------
defined shall have the same meaning herein as in the Loan Agreement.
2. Amendments to Section 1. The provisions of Section 1.1 of the Loan
-----------------------
Agreement are hereby amended
a. by deleting the definition of Subordinated Indebtedness in its
entirety and substituting the following in its stead:
Subordinated Indebtedness. Preferred Stock of the Company to
-------------------------
Sagaponack acquired as a result of the conversion of Indebtedness due
from the Company to Sagaponack in the aggregate principal sum of
$7,000,000.00 evidenced by certain Senior Subordinated Promissory
Notes dated May 22, 1997.
b. by deleting the date "December 31, 2000" appearing in the definition
of "Term Loan Maturity Date" and substituting the date "December 31,
2001" in its stead.
c. by adding the following new definition:
Rights Offering. The offering by the Company to its existing
---------------
shareholders of the right to purchase additional shares of the
Company's common stock on or before June 30, 1999.
3. Amendments to Section 2. The provisions of Section 2 of the Loan
-----------------------
Agreement are hereby amended
a. by deleting the date "December __,2000" appearing in (S)2.2 and
substituting the date "December 31, 2001" in its stead.
<PAGE>
b. by deleting the first sentence of (S)2.3 in its entirety and
substituting the following in its stead:
The Term Loan shall bear interest on the outstanding principal
balance thereof at a rate equal to (a) the aggregate of the Base
Rate plus three and one-half percent (3 1/2%) per annum if the
Company does not achieve Consolidated EBITDA of at least
$2,000,000.00 as of the end of the immediately preceding quarter
(calculated on a rolling four quarters basis), or (b) the
aggregate of the Base Rate plus three percent (3%) per annum if
the Company achieves Consolidated EBITDA of at least
$2,000,000.00 for the immediately preceding quarter. For purposes
of determining the rate of interest hereunder, Consolidated
EBITDA shall be determined based upon the financial statements
delivered to the Bank pursuant to (S)6.1 (a) and (b) hereof,
provided that, if the Company fails to deliver such financial
-------------
statements as and when due, interest shall accrue at the rate set
forth in clause (a) hereof (without waiving the provisions of
(S)3.7 hereof).
c. by deleting the first sentence of (S)2.4(a) and substituting the
following in its stead:
An amount equal to the greater of (i) $150,000.00 or (ii) ten
percent (10%) of the result of (A) the Consolidated EBITDA of the
Company and its Subsidiaries for fiscal years 1999, 2000, and
2001 divided by (B) three (3).
d. by deleting the words "fiscal year 2000" appearing in the second
sentence of (S)2.4(a) and substituting the words "fiscal year 2001" in
its stead.
e. by deleting the amortization schedule for the Term Loan for 1999 and
2000 appearing in (S)2.5 and substituting the following in its stead:
<TABLE>
<CAPTION>
Quarters Ending Quarterly Installment
---------------- ---------------------
<S> <C>
March, 1999 $0
June, September and
December, 1999 and March 2000 $125,000.00
June, 2000 and each quarter end
thereafter through September, 2001 $250,000.00
December, 2001 The entire outstanding
balance of the Term Loan
</TABLE>
In addition to the foregoing, on the earlier of (x) ten (10)
Business Days after the consummation of the Rights Offering, or
(y) June 30, 1999, the Company shall make a principal payment in
the sum of $750,000.00
f. by deleting the provisions of (S)(S)2.6 through 2.11 in their entirety,
it being agreed that no Acquisition Loans are outstanding and the Bank has no
further obligation to make Acquisition Loans.
2
<PAGE>
g. by adding the words "and other than Net Proceeds from the Rights
Offering" after the words "employee stock option plans" in (S)2.13(d)
thereof.
4. Amendments to Section 3. The provisions of Section 3.7(a) of the Loan
-----------------------
Agreement are hereby deleted in their entirety and the following substituted in
their stead:
(a) Following the occurrence of an Event of Default, principal
and (to the extent permitted by applicable law) interest on the
Loans and all other amounts payable hereunder or under any of the
other Loan Documents, at the option of the Bank, shall bear
interest (compounded daily) payable on demand at a rate equal to
the aggregate of the Base Rate plus six and one-half percent (6
1/2%) per annum, or if interest is then accruing at the rate set
forth in (S)2.3(b) hereof, at a rate equal to the aggregate of
the Base Rate plus six percent 6% per annum.
5. Amendments to Section 7. The provisions of Section 7 of the Loan
-----------------------
Agreement are hereby amended as follows:
a. by adding the words, "Except for the conversion of Subordinated
Indebtedness to preferred stock and for the Rights Offering," before the
beginning of (S)7.6.
b. by adding the words "except for the conversion of Subordinated
Indebtedness to preferred stock" at the end of (S)7.11.
c. by adding the following new section:
(S)7.13 Rights Offering. On or before June 30, 1999, the Company shall
---------------
have received at least $1,000,000.00 from the Net Proceeds of the Rights
Offering.
6. Amendments to Section 8. The provisions of Section 8 of the Loan
-----------------------
Agreement are hereby amended.
a. by deleting the provisions of (S)8.1 in their entirety and substituting
the following in their stead:
8.1 Consolidated Net Worth. The Company shall at all times
----------------------
maintain a Consolidated Net Worth equal to or greater than:
(a) $6,000,000.00 as of each of the quarters end September 30,
1998 and December 31, 1998;
(b) $5,500,000.00 as of each of the quarters end March 31, 1999
through and including June 30, 2000;
3
<PAGE>
(c) as of each quarter and thereafter, the sum of (i)
$5,500,000.00, plus (ii) one hundred percent (100%) of the
----
proceeds realized from the issuance of any stock or other equity
interests in the Company, plus (iii) seventy-five percent (75%) of
----
the Consolidated Net Income (but not any net loss) of the Company
and its Subsidiaries in each of their fiscal years commencing with
the fiscal year ending June 30, 2000.
b. by deleting the provisions of (S)8.3 in their entirety and
substituting the following in their stead:
8.3 Adjusted Consolidated EBITDA to Interest Charges. The
------------------------------------------------
Company shall not permit the ratio of Adjusted Consolidated EBITDA
to Interest Charges paid in cash, calculated on a rolling four
quarters basis, to be less than 3.0:1.0 at the end of each of the
Company's fiscal quarters, except for the fiscal quarter ending
March 31, 1999 for which quarter the ratio shall not be less than
2.8:1.0.
c. by amending the provisions of (S)8.5(a) by deleting the ratios for the
periods ending March 31, 1999 and thereafter and substituting the
following in their stead:
<TABLE>
<CAPTION>
Period Minimum EBITDA
------ --------------
<S> <C>
Quarter ending
March 31, 1999 $1,200,000.00
Quarter ending
June 30, 1999 $1,400,000.00
Quarter ending
September 30, 1999 $1,500,000.00
Quarter ending
December 31, 1999 $1,600,000.00
Quarter ending
March 31, 2000 $1,800,000.00
Quarter ending
June 30, 2000 and
each quarter ending thereafter $1,936,000.00
</TABLE>
d. by deleting the provisions of (S)8.6 in their entirety and
substituting the following in their stead:
8.6 Consolidated Operating Cash Flow to Debt Service
Charges. The Company shall not permit the ratio of
Consolidated Operating Cash Flow to Debt Service Charges,
calculated on a rolling four quarters basis to be less
than 1.1:1.0 as of the end of any fiscal quarter of the
Company, commencing with the quarter ending March 31,
1999 for which quarter the ratio shall not be less than
1.0:1.0.
4
<PAGE>
7. Conditions to Effectiveness. This Second Amendment to Term Loan and
---------------------------
Acquisition Line Agreement shall not be effective until each of the following
conditions precedent have been fulfilled to the satisfaction of the Bank:
a. This Second Amendment to Term Loan and Acquisition Line Agreement
shall have been duly executed and delivered by the Company and the
Bank, and shall be in full force and effect. The Bank shall have
received a fully executed copy hereof and of each other document
required hereunder.
b. All action on the part of the Company necessary for the valid
execution, delivery and performance by the Company of this Second
Amendment to Term Loan and Acquisition Line Agreement shall have been
duly and effectively taken. The Bank shall have received from the
Company true copies of its certificates of the resolutions adopted by
its board of directors authorizing the transactions described herein,
each certified by its secretary as of a recent date to be true and
complete.
c. The Bank shall have received an opinion of counsel to the Company
satisfactory to the Bank and the Bank's counsel.
d. The Bank shall have been paid an amendment fee in the sum of
$16,250.00. The amendment fee shall be fully earned upon execution of
this Second Amendment and shall not be subject to refund or rebate
under any circumstances.
e. The Company shall have paid to the Bank all other fees and expenses
then due and owing pursuant to the Loan Agreement, as modified hereby,
including, without limitation, reasonable attorney's fees incurred by
the Bank.
f. No Default or Event of Default shall have occurred and be continuing.
g. The Company shall have provided such additional instruments and
documents to the Bank as the Bank and its counsel may have reasonably
requested.
8. Miscellaneous.
-------------
a. Except as provided herein, all terms and conditions of the Loan
Agreement and the other Loan Documents remain in full force and
effect. The Company and the Guarantors hereby ratify, confirm, and
reaffirm all of the representations, warranties and covenants therein
contained (except to the extent that such representations and
warranties expressly relate to an earlier date) and that all
Obligations, as modified hereby are secured by the Collateral. The
Company and the Guarantors further acknowledge and agree that none of
them have any offsets, defenses, or counterclaims against the Bank
under the Loan Agreement or the other Loan Documents and, to the
extent that the Company or the Guarantors have, or ever had, any such
offsets, defenses, or counterclaims, the Company and the Guarantors
each hereby waive and release the same.
b. The Company shall pay all costs and expenses incurred by the Bank in
connection with this Second Amendment, including, without limitation,
all reasonable attorneys' fees and expenses, commercial finance
examination fees, appraisal fees, and all reasonable travel expenses
incurred by the Bank.
5
<PAGE>
c. This Second Amendment may be executed in several counterparts and by
each party on a separate counterpart, each of which when so executed
and delivered, each shall be an original, and all of which together
shall constitute one instrument.
d. This Second Amendment expresses the entire understanding of the
parties with respect to the matters set forth herein and supersedes
all prior discussions or negotiations hereon.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be executed and their seals to be hereto affixed as the date first above
written.
"Company"
USTMAN INDUSTRIES, INC.
/s/ Dan R. Cook
By:____________________
Name: Dan R. Cook
Title: President
"Bank"
BANKBOSTON, N.A.
/s/ Kenneth S. Struglia
By:____________________
Name: Kenneth S. Struglia
Title: Vice President
374522.3
6
<PAGE>
EXHIBIT 10.26
AMENDMENT TO SECURITIES PURCHASE AGREEMENT
------------------------------------------
This AMENDMENT TO SECURITIES PURCHASE AGREEMENT (the "Amendment") is
entered into as of this 11th day of February, 1999, by and among USTMAN
TECHNOLOGIES, INC., formerly known as WATSON GENERAL CORPORATION, a California
corporation (the "Company"), and SAGAPONACK PARTNERS, L.P., a Delaware limited
partnership and SAGAPONACK INTERNATIONAL PARTNERS, L.P., a Cayman Islands
limited partnership (each, an "Investor" and together, the "Investors").
BACKGROUND
----------
The Company and the Investors previously entered into a Securities Purchase
Agreement (the "Agreement") dated May 22, 1997. Unless otherwise indicated, all
capitalized terms used in the Amendment which are defined in the Agreement shall
have the meaning ascribed to them in the Agreement. The Company and the
Investors desire to amend the Agreement, as set forth hereinafter.
NOW, THEREFORE, the Company and the Investors hereby agree as follows:
1. Exchange of Loan and Interest For Preferred Stock. The Company and
-------------------------------------------------
the Investors hereby agree that, effective retroactive to July 1, 1998 (the
"Exchange Date"), the Senior Subordinated Notes and all interest accrued thereon
shall be exchanged by the Investors for $8,676,000 principal amount of the
Company's Series A Preferred Stock (the "Preferred Stock"). The rights,
preferences, privileges, and other terms of the Preferred Stock are set forth on
Exhibit A hereto. The Company and Investors agree that, as of the Exchange
Date, the aggregate principal amount of the Senior Subordinated Notes after
original issue discount was $6,216,667 (with a face amount of $7,000,000) and
the aggregate amount of accrued interest thereon was $2,459,034 (including
interest payable in warrants).
1.1 The Investors shall deliver to the Company for cancellation,
promptly after the execution of this Amendment, the Senior Subordinated Notes.
1.2 The Company shall deliver one or more certificates representing
the Preferred Stock to the Investors promptly after the execution of this
Amendment.
1.3 The Investors shall not be entitled to interest on the Senior
Subordinated Notes on or after the Exchange Date, but the Preferred Stock shall
be deemed to be outstanding on and after the Exchange Date for purposes of the
dividend thereon.
2. Deletion of Certain Provisions of the Agreement. The Company and the
-----------------------------------------------
Investors hereby amend the Agreement as follows:
Page 1 of 5
<PAGE>
2.1 Section 2.2.8 (Adjustment in Base Ownership Percentage) of the
Agreement is hereby deleted in its entirety.
2.2 Section 2.10 (Issuance of Adjustment Warrants) of the Agreement
is hereby deleted in its entirety.
2.3 The first sentence of Section 5 of the Agreement is amended to
read as follows:
"Company covenants that so long as any of the Obligations of
Company to any Investor hereunder remains outstanding, and so
long as any of the Series A Preferred Stock of Company remains
outstanding, Company shall, and shall cause each of Company's
Affiliated Companies to:"
2.4 The first sentence of Section 6 of the Agreement is amended to
read as follows:
"Company further covenants that so long as any of the Obligations
of Company to any Investor hereunder remains outstanding, and so
long as any of the Series A Preferred Stock of Company remains
outstanding, Company shall not, and shall not allow any of
Company's Affiliated Companies to, unless the prior written
consent of the Investors is obtained:"
3. All Other Provisions of Agreement Unaffected. Except as specifically
--------------------------------------------
provided in this Amendment, all other terms and provisions of the Agreement
shall remain in full force and effect.
4. Miscellaneous.
-------------
4.1 Expenses. The Company shall reimburse the Investors for their
--------
expenses, including the fees and disbursements of their respective counsel, in
connection with the negotiation, preparation and execution of this Amendment and
the consummation of the transactions contemplated herein.
4.2 Modification; Waiver. No modification of or amendment to this
--------------------
Amendment shall be valid unless in a writing signed by the parties hereto
referring specifically to this Amendment and stating the parties' intention to
modify or amend the same. Any waiver of any term or condition of this Amendment
must be in a writing signed by the party or parties sought to be charged with
such waiver referring specifically to the term or condition to be waived, and no
such waiver shall be deemed to constitute the waiver of any other breach of the
same or of any other term or condition of this Amendment.
4.3 Captions. The headings of the sections of this Amendment are
--------
intended solely for convenience of reference and are not intended and shall not
be deemed for any purpose whatever to modify or explain or place any
construction upon any of the provisions of this Amendment.
Page 2 of 5
<PAGE>
4.4 Legal Counsel. Each party to this Amendment has had access to
-------------
legal counsel in connection with the negotiation of the terms of this Amendment.
4.5 Governing Law; Consent to Jurisdiction and Service. THIS
--------------------------------------------------
AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES CREATED HEREBY SHALL BE
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
CONFLICT OF LAW AND CHOICE OF LAW PROVISIONS THEREOF. THE PARTIES CONSENT TO THE
NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT IN NEW YORK, NEW YORK.
4.6 Severability of Provisions. If a court or an arbitrator of
--------------------------
competent jurisdiction holds any provision of this Amendment to be illegal,
unenforceable or invalid in whole or in part for any reason, such provision
shall be adjusted rather than voided, if possible to achieve the intent of the
parties to the extent possible, and in any event the validity and enforceability
of the remaining sections shall not be affected unless an essential purpose of
this Amendment would be defeated by the loss of the illegal, unenforceable, or
invalid provision.
4.7 Word Usage. Unless the context clearly requires otherwise, (a)
----------
the plural and singular numbers shall each be deemed to include the other; (b)
the masculine, feminine and neuter genders shall each be deemed to include the
others; (c) "shall," "will," or "agrees" are mandatory, and "may" is permissive;
(d) "or" is not exclusive; and (e) "includes" and "including" are not limiting.
4.8 Equitable Relief. Each party acknowledges that, in the event of
----------------
any breach of this Amendment by a party, the other party would be irreparably
and immediately harmed and could not be made whole by monetary damages. It is
accordingly agreed that such other party, in addition to any other remedy to
which it may be entitled, shall be entitled to an injunction or injunctions to
prevent breaches of the provisions of this Amendment and to compel specific
performance of this Amendment.
4.9 Arbitration. Any controversy or claim arising out of or
-----------
relating to the terms of this Amendment, or otherwise related to the compliance
by either party with its obligations hereunder, shall be settled by binding
arbitration in New York, New York. The arbitration shall be conducted by
American Arbitration Association under its Commercial Arbitration Rules, and
judgment on the award rendered by the arbitrator(s) may be entered by any court
having jurisdiction thereof. Any party to this Amendment may submit to
arbitration any controversy or claim hereunder. The arbitrator shall have the
right to grant reasonable attorneys fees to the prevailing party.
4.10 Binding Effect. This Amendment shall be binding upon, and inure
---------------
to the benefit of, the parties hereto and their respective representatives,
successors, heirs and assigns. However, except as otherwise expressly provided
herein, this Amendment is not for the benefit of any person not a party hereto
or specifically identified as a beneficiary herein, and is not intended to
constitute a third party beneficiary contract.
Page 3 of 5
<PAGE>
4.11 Assignment. This Amendment and each party's rights hereunder
----------
may not be assigned without the prior written consent of the other parties.
4.14 Waivers and Consents. All waivers and consents given hereunder
--------------------
shall be in writing. No waiver by any party hereto of any breach or anticipated
breach of any provision hereof by any other party shall be deemed a waiver of
any other contemporaneous, preceding or succeeding breach or anticipated breach,
whether or not similar.
4.15 Indemnification.
---------------
(a) Representative shall indemnify, defend, protect and hold Company
and its employees, agents, officers, directors and shareholders harmless from
and against any and all actions, claims, suits, losses, damages, costs and
expenses, including without limitation reasonable attorneys' fees and costs of
litigation and investigation, arising out of or related to the performance of
any obligation of Representative under this Amendment, including without
limitation the making by Representative of any unauthorized representation or
misrepresentation concerning any of the Products, or arising out of or related
to the breach by Representative of any representation, warranty or covenant of
Representative pursuant to this Amendment.
(B) Company shall indemnify, defend, protect and hold Representative
harmless from and against any and all actions, claims, suits, losses, damages,
costs and expenses, including without limitation reasonable attorneys' fees and
costs of litigation and investigation, arising out of or related to the
performance of any obligation of Company under this Amendment, or arising out of
or related to the breach by Company of any representation, warranty or covenant
of Company pursuant to this Amendment.
4.16 Costs and Attorney's Fees. In any litigation, arbitration or
-------------------------
other proceeding by which one party either seeks to enforce its rights under
this Amendment (whether in contract, tort, or both) or seeks a declaration of
any rights or obligations under this Amendment, the prevailing party shall be
awarded reasonable costs and expenses, including reasonable attorneys' fees, to
resolve the dispute and to enforce the final judgment.
4.17 Counterparts. This Amendment may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
4.18 Entire Amendment. This Amendment constitutes the entire
----------------
agreement between the parties hereto pertaining to the subject matter hereof and
supersedes all prior and contemporaneous agreements and understandings of the
parties, and there are no representations, warranties or other agreements
between the parties in connection with the subject matter hereof except as
specifically set forth herein.
Page 4 of 5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
set forth above.
USTMAN TECHNOLOGIES, INC.
By: s/ DAN R. COOK
--------------
Title: President
SAGAPONACK PARTNERS, L.P.
By: RSP Capital L.L.C., its general partner
By: s/ BARRY S. ROSENSTEIN
----------------------
Title: Managing Partner
SAGAPONACK PARTNERS, L.P.
By: RSP Capital L.L.C., its general partner
By: s/ BARRY S. ROSENSTEIN
----------------------
Title: Managing Partner
Page 5 of 5
<PAGE>
EXHIBIT A
Certificate of Designation of Rights, Preferences,
--------------------------------------------------
Privileges and Restrictions of Series A Preferred Stock of
----------------------------------------------------------
USTMAN TECHNOLOGIES, INC.
-------------------------
The Board of Directors of USTMAN Technologies, Inc. (The "Company") does
hereby provide for the issuance of a series of Preferred Stock of the Company
and does hereby fix and determine the rights, preferences, privileges,
restrictions and other matters related to said series of Preferred Stock as
follows:
1. Designation. The designation of this Preferred Stock shall be "Series
-----------
A Preferred Stock" (hereinafter "Preferred Stock").
2. Authorized Number of Shares. The maximum number of shares of Preferred
---------------------------
Stock shall be limited to Fifty Thousand (50,000) shares (the "Shares").
3. Face Amount of Shares. Each Share shall have a face amount of One
---------------------
Thousand Dollars ($1,000).
4. Allocation Amount. Each Share shall have an allocation amount (the
-----------------
"Allocation Amount") for the purposes of liquidation priority and dividends
which shall be determined from time to time by (i) obtaining the sum of Fifteen
Million Dollars ($15,000,000) plus the amount of any dividends on Preferred
Stock not declared for payment by the Company, as provided in Section 5, and
(ii) dividing such sum by the number of Shares then outstanding.
5. Dividends. The Preferred Stock shall bear an annual Eight Percent (8%)
---------
cumulative dividend if and when declared for payment by the Board of Directors
of the Company; provided, however, that the cumulative dividend shall increase
to Fifteen Percent (15%) immediately after (i) a merger or consolidation of the
Company with or into any other entity, in which the Company is not the surviving
entity, or (ii) a sale of all or substantially all of the assets of the Company.
The Allocation Amount shall increase by the amount of any dividends not declared
for payment by the Company.
6. Liquidation Preference. In the event of a liquidation, dissolution or
----------------------
winding up of the Company, whether voluntary or involuntary, the holders of the
Preferred Stock shall be entitled to receive out of the assets of the Company,
whether such assets are stated capital or surplus of any nature, an amount equal
to the Allocation Amount for each Share of Preferred Stock then outstanding
before any payment shall be made or any assets distributed to the holders of
Common Stock, and thereafter such holders shall not be entitled to receive any
further amount. In the event that upon any such liquidation, dissolution or
winding up, whether voluntary or involuntary, the assets available for
distribution among the holders of the Preferred Stock and any other class or
series of preferred stock of the Company which may hereafter be created having
parity with the Preferred Stock in liquidation preference shall be insufficient
to permit payment of the full preferential amounts attributable to the
<PAGE>
Preferred Stock and such other class or series of preferred stock, then the
entire assets of the Company available for distribution remaining after
distribution to the holders of any other class or series of preferred stock of
the Company which may hereafter be created having priority over the Preferred
Stock in liquidation preference shall be distributed ratably among the holders
of the Preferred Stock and any other class or series of preferred stock of the
Company which may hereafter be created having parity with the Preferred Stock in
proportion to the respective preferential amounts to which each is entitled.
7. Voting Rights. The approval of the holders of a majority of the
-------------
outstanding shares of Preferred Stock (voting as a separate class) shall be
required with respect to any adverse change in the rights of the Preferred Stock
and with respect to the issuance of any shares of preferred stock of the Company
having priority over the Preferred Stock. The holders of the Preferred Stock
shall possess no other voting rights or powers.
8. No Mandatory Redemption. The Company shall have no mandatory right of
-----------------------
redemption with respect to outstanding Shares of Preferred Stock.
9. No Conversion Rights. The Preferred Stock is not convertible into
--------------------
shares of Common Stock of the Company.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Historical
Consolidated Financial Data" and "Experts" and to the use of our reports dated
October 9, 1998, in the Registration Statement (Form S-1) and related Prospectus
of USTMAN Technologies dated April 20, 1999.
/s/ Ernst & Young LLP
Denver Colorado
April 20, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> JUL-01-1997 JUL-01-1998
<PERIOD-END> JUN-30-1998 DEC-31-1998
<CASH> 366,000 24,000
<SECURITIES> 0 0
<RECEIVABLES> 826,000 1,193,000
<ALLOWANCES> 0 0
<INVENTORY> 112,000 166,000
<CURRENT-ASSETS> 1,374,000 1,508,000
<PP&E> 951,000 1,034,000
<DEPRECIATION> 407,000 528,000
<TOTAL-ASSETS> 11,617,000 9,916,000
<CURRENT-LIABILITIES> 2,010,000 2,235,000
<BONDS> 0 0
0 0
0 9,717,000
<COMMON> 12,810,000 12,826,000
<OTHER-SE> (13,422,000) (17,546,000)
<TOTAL-LIABILITY-AND-EQUITY> 11,617,000 9,916,000
<SALES> 5,988,000 3,174,000
<TOTAL-REVENUES> 5,988,000 3,174,000
<CGS> 2,464,000 1,157,000
<TOTAL-COSTS> 6,247,000 1,874,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,221,000 2,625,000
<INCOME-PRETAX> (5,944,000) (2,482,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,944,000) (2,482,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,944,000) (2,482,000)
<EPS-PRIMARY> (.31) (.12)
<EPS-DILUTED> (.31) (.12)
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