<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
Commission file number 0-16011
-------
USTMAN Technologies, Inc.
(Exact name of small business issuer as specified in its charter)
California
----------
(State or other jurisdiction of
incorporation or organization)
95-2873757
----------
(I.R.S. Employer Identification No.)
12265 W. Bayaud Ave #110
Lakewood, CO
------------------------
(Address of principal executive offices)
80228
-----
(Zip Code)
(303) 986-8011
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and, (2) has been
subject to such filing requirements for the past 90 days. X Yes No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date: 19,879,243 shares of Common Stock as of
May 4, 1999.
Transitional Small Business Disclosure Format (check one): X Yes No
--- ---
1
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
March
31,1999 June 30,
(unaudited) 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 195,000 $ 366,000
Accounts receivable 1,280,000 826,000
Inventory 121,000 112,000
Prepaid expenses and other current assets 190,000 70,000
------------ ------------
1,786,000 1,374,000
PROPERTY AND EQUIPMENT 497,000 544,000
INTANGIBLES AND GOODWILL 7,667,000 9,699,000
============ ============
$ 9,950,000 $ 11,617,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses
and other liabilities $ 1,277,000 $ 1,135,000
Current portion of long-term debt 1,250,000 875,000
------------ ------------
2,527,000 2,010,000
LONG-TERM DEBT AND OTHER LIABILITIES 2,000,000 9,784,000
DEFERRED EMPLOYEE BENEFITS 433,000 435,000
SHAREHOLDERS' EQUITY
Preferred stock, no par value: Authorized shares- 1,000,000, Issued and
outstanding- 9,717 shares at March 31, 1999 and none at June 30, 1998
Liquidation preference before payment to holders of common stock of
$15,900,000 at March 31, 1999 9,717,000 --
Common stock, no par value: Authorized shares-40,000,000, Issued and
outstanding-19,879,243 at March 31, 1999 and 19,855,243 at June 30, 1998 12,826,000 12,810,000
Additional paid-in capital 875,000 2,517,000
Accumulated deficit (18,428,000) (15,939,000)
------------ ------------
4,990,000 (612,000)
------------ ------------
$ 9,950,000 $ 11,617,000
============ ============
</TABLE>
2
<PAGE> 3
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Sales $ 1,637,000 $ 1,597,000
Cost of sales 565,000 517,000
----------- -----------
Gross profit 1,072,000 1,080,000
Selling, general and administrative expenses 658,000 930,000
Depreciation and amortization 318,000 321,000
Compensation expense to third parties -- 222,000
Gain on sale of Toxguard Fluid Technologies, Inc. -- 28,000
Interest expense, net of interest income 103,000 427,000
----------- -----------
Loss from operations before benefit for income taxes (7,000) (792,000)
Benefit for income taxes -- --
----------- -----------
Net loss $ (7,000) $ (792,000)
=========== ===========
Basic and diluted net loss per share $ (0.00) $ (0.04)
=========== ===========
</TABLE>
3
<PAGE> 4
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Nine Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Sales $ 4,811,000 $ 4,302,000
Cost of sales 1,722,000 1,478,000
----------- -----------
Gross profit 3,089,000 2,824,000
Selling, general and administrative expenses 1,899,000 2,549,000
Depreciation and amortization 951,000 786,000
Compensation expense to third parties -- 222,000
Gain on sale of Toxguard Fluid Technologies, Inc. -- 28,000
Write-off deferred debt cost 1,211,000 --
Interest expense, net of interest income 1,517,000 1,118,000
----------- -----------
Loss from operations before benefit for income taxes (2,489,000) (1,823,000)
Benefit for income taxes -- --
----------- -----------
Net loss $(2,489,000) $(1,823,000)
=========== ===========
Basic and diluted net loss per share $ (.13) $ (.09)
=========== ===========
</TABLE>
4
<PAGE> 5
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Operating Activities
Net loss $(2,489,000) $(1,823,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,194,000 1,301,000
Warrants to be issued under Senior Subordinated Note
Agreement 598,000 --
Write off deferred debt cost 1,211,000 --
Interest converted to long term debt 360,000 --
Issuance of common stock and stock options -- 249,000
Issuance of common stock to settle lawsuits 16,000 --
Net changes in operating assets and liabilities (526,000) (40,000)
----------- -----------
Cash flows provided by (used in) operating activities 364,000 (313,000)
Investing Activities
Purchase of Advanced Tank Certification, Inc. -- (2,190,000)
Sale of Toxguard Fluid Technologies, Inc. -- 28,000
Purchase of property and equipment (136,000) (164,000)
----------- -----------
Cash flows used in investing activities: (136,000) (2,326,000)
Financing Activities
Deferred debt issuance cost (24,000) (74,000)
Repayments, net of borrowings (375,000) 2,432,000
----------- -----------
Cash flows (used in) provided by financing activities: (399,000) 2,358,000
Decrease in cash (171,000) (281,000)
Cash, beginning of period 366,000 799,000
----------- -----------
Cash, end of period $ 195,000 $ 518,000
=========== ===========
</TABLE>
5
<PAGE> 6
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. The financial information furnished herein has not been audited by
independent accountants; however, in the opinion of management, all
adjustments (only consisting of normal recurring accruals) necessary for
a fair presentation of the results of operations for the three and nine
month periods ending March 31, 1999 have been included.
2. On May 22, 1997, the Company, then doing business as Watson General
Corporation (Watson) completed the private placement of $7 million 10%
Senior Subordinated Notes Due 2002 and 7,304,520 shares of its common
stock (the Private Placement) with Sagaponack Partners, L.P., and
Sagaponack International Partners, L.P. (the "Investors"). In connection
with the valuation of the common stock issued in the transaction, an
original issue discount of $1,000,000 was recorded. Approximately
$17,000 of the discount is amortized into interest expense monthly
through November 1998.
In December 1998, the Investors reached an agreement to convert all of
the Private Placement and accrued interest totaling $9,717,000 to Series
A Preferred Stock ("Preferred Stock"). Warrants previously to be issued
to the investors for additional interest expense were also canceled upon
exchange of notes. The Preferred Stock has an aggregate allocation
amount (the "Allocation Amount") of $15,000,000 for the purposes of
liquidation priority and dividends. The Preferred Stock will bear an
annual 8% 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. At March 31, 1999 the
allocation amount was $15,900,000 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>
<CAPTION>
<S> <C>
Long-term debt $ 7,000,000
Original issue discount (700,000)
Accrued interest (including interest as warrants) 3,417,000
-----------
Total $ 9,717,000
===========
</TABLE>
On December 17, 1997, the Company obtained $3.75 million in financing
from BankBoston and used the proceeds to, among other things, acquire
all of the outstanding common stock of Advanced Tank Certification, Inc.
(ATC), pursuant to stock purchase agreements between the Company and all
of the shareholders of ATC. The ATC acquisition was accounted for using
the purchase method. In March 1999, the Company and BankBoston agreed to
amend the terms of the agreement and reduce the covenant requirements
for the upcoming quarters beginning on March 31, 1999.
3. Inventory consists of tank gauge equipment and is accounted for using
the weighted average method.
4. Included in interest expense on the Statement of Operation is
amortization of deferred debt costs. These amounts are included in
depreciation and amortization on the Statement of Cash Flows.
6
<PAGE> 7
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. Due to the Company's loss position, diluted net loss per share is the
same as basic earnings per share as the result would be antidilutive.
6. Certain amounts for the prior period have been reclassified to conform
to the current quarter presentation.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Except for historical information contained herein, the statements in
this report are forward-looking statements that are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements involve known and unknown risks and
uncertainties which may cause the actual results in future periods to
differ materially from forecasted results. These risks and uncertainties
include, among other things, product demand, customers' strategies, and
market competition.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 COMPARED
TO THE THREE MONTHS ENDED MARCH 31, 1998
Sales for the quarter were $1,637,000 compared with $1,597,000 in the
prior year. Sales increased approximately 3% as a result of the December
22, 1998 EPA deadline which requires, among other things, monthly leak
detection and additional revenue related to British Petroleum ("BP").
Although sales increased, gross profit decreased slightly. This decrease
is a result of increases in tank gauge sales which are at a lower gross
profit than statistical inventory reconciliation ("SIR") sales.
Additionally, the Company has incurred costs in expanding foreign
operations into Australia and New Zealand. Management expects these
costs to decrease as the Company continues to streamline the process.
The Company's sales of its Extreme(TM) software decreased during the
third quarter of fiscal year 1999. The software has a high gross margin
as there are few costs directly attributable to the installation and
implementation. Sales of this product decreased in the three months
ended March 31, 1999 as a result of decreased priority on installations.
The Company decreased installations in order to ensure proper customer
satisfaction during the period of high volume of tank additions as a
result of the EPA deadline. Now that additions have stabilized,
management anticipates increases of software sales in the upcoming
quarter as sales efforts will again be focused on these products and
installations will be scheduled.
In the third quarter of fiscal 1999 the Company reported a net loss of
$7,000 as compared to a net loss of $792,000 for the corresponding
quarter of the preceding year. This decrease in loss is primarily
attributable to a decrease in selling, general and administrative
expenses, compensation expense to third parties, and interest expense.
Selling, general and administrative expenses decreased by 29% primarily
due to the reduction of expenses incurred in the prior year related to
the merger of USTMAN Industries, Inc. and Watson General Corporation and
the acquisition of Advanced Tank Certification, Inc. 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.
Additionally, the Company has decreased advertising costs, legal fees
not related to SEC filings and management payroll.
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 expense of $222,000 representing the fair market value of
these options at the time of the modification.
In December 1998, the Investors reached an agreement to convert the
Private Placement and accrued interest totaling $9,717,000 to Series A
Preferred Stock ("Preferred Stock") effective July 1, 1998. Interest
expense, including deferred debt cost and original issue discount
amortization, decreased 76% as a result of the conversion.
8
<PAGE> 9
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1999 COMPARED
TO THE SIX MONTHS ENDED MARCH 31, 1998
Sales increased approximately 12% compared to the prior year, as a
result of an increase in the customer base as the December 22 EPA
deadline approached, increases in software and tank gauge sales and the
addition of BP. Although sales have increased, gross profit has
decreased slightly. This decrease is a result of increases in tank gauge
sales which are at a lower gross profit than SIR. Gross profits on tank
gauges has also decreased as a result of rising equipment costs.
Additionally, the Company has incurred costs in expanding foreign
operations into Australia and New Zealand. Management expects these
costs to decrease as the Company continues to streamline the process.
General and administrative expenses decreased by 26%. This is primarily
a result of the elimination of expenses related to the merger of USTMAN
Industries, Inc. and Watson General Corporation, and the acquisition of
Advanced Tank Certification, Inc. 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. In addition, advertising and
legal expenses not related to SEC filings have decreased.
The Company reported a net loss of $2,489,000 or $0.13 per share as
compared to a net loss of $1,823,000 or $0.09 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 deferred debt cost related to the
Private Placement when the Investors agreed to convert the Private
Placement Notes to Preferred Stock.
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 1999 the Company's current liabilities exceeded current
assets by $741,000 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, the Investors reached an agreement to convert all of
the Private Placement and accrued interest totaling $9,717,000 to Series
A Preferred Stock ("Preferred Stock"). Warrants previously to be issued
to the investors for additional interest expense were also canceled upon
exchange of notes. The Preferred Stock 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. At March 31, 1999 the
allocation amount was $15,900,000. The Preferred Stock has no mandatory
redemption or voting rights and is not convertible into Common Stock.
9
<PAGE> 10
YEAR 2000 ASSESSMENT
The following disclosure is made pursuant to the Year 2000 Information
and Readiness Disclosure Act. The following disclosure originated from
the Company and concerns (1) assessments, projections, or estimates of
Year 2000 processing capabilities; (2) plans, objectives or timetables
for implementing or verifying Year 2000 processing capabilities; (3)
test plans dates or results; and/or (4) reviews and comments concerning
Year 2000 processing capabilities as defined by the Act.
The Company has assessed Year 2000 compliance matters and has determined
that it has potential for exposure regarding Year 2000 compliance in
three areas of its internal and external business activities. These
areas include (1) its own internal hardware and software systems which
are utilized to process and provide the Company's operations and
accounting information, (2) the hardware and software systems it has
provided to its clients for automation of the SIR process and (3)
clients' hardware and software systems which are utilized to provide
data to the Company. The following discusses management's assessment of
those risks and the steps it is taking to minimize them.
Internal hardware and software
Over the last three years, the Company has purchased computers, servers
and other equipment which are certified by the vendor as being Year 2000
compliant. Because of this, the telephone system, servers and the
majority of the Company's workstations are Year 2000 compliant. As of
September 30, 1998, the Company gathered an inventory of current
revisions needed on older workstations. Those computers which were not
compliant will be thoroughly tested in the upcoming months and have the
needed revisions by December 31, 1999.
The Company's software consists primarily of three distinct areas:
network operating system, commercial software and proprietary software.
The network operating system has been certified by the vendor to be Year
2000 compliant subsequent to the completion of certain patches which the
Company completed applying as of September 30, 1998. The commercial
software the Company runs is very diverse. The Company has identified
over thirty types of commercial software that are currently used both
internally and externally. Over the next five months, the Company will
contact the manufacturers to determine if the software is Year 2000
compliant. For those software packages which will not be Year 2000
compliant, the Company will make a determination to either replace the
software with a different vendor or continue to use the software in a
"quarantined" environment. Until responses from all vendors are
received, it is not possible to estimate costs associated with the new
software. However it is not anticipated that any new software other than
that discussed below will be a material capital expenditure. All
assessments required and the related determinations are expected to be
made prior to June 30, 1999.
The Company will contract for the replacement of its accounting and
information computer software. One criterion in the selection of the new
accounting software will be a warranty that the software is Year 2000
compliant. 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.
The Company runs internal software developed by the Company's software
engineers. The Company does not believe that the software code will have
to be rewritten or recompiled because most of the software is simply a
front end to well known commercial software which has Year 2000
compliance built into the core software.
10
<PAGE> 11
In order to ensure that all software and hardware will function properly
in the Year 2000, the Company has planned to construct a separate
testing facility. This facility will be dedicated entirely to Year 2000
testing on live customer data. This facility will have a server and
other hardware to mirror the Company's. The Company plans to set the
internal date at this facility to December 31, 1999 and run analysis for
two months to verify that no Year 2000 issues occur as the clock
approaches, reaches and passes the century mark. The equipment has been
purchased for this facility and the facility is expected to be in use
some time after March 1999. In addition, the Company is planning on
having software engineers on site immediately after the December 31,
1999 to avoid any unforeseen problems.
Hardware and software provided to customers
Over the past couple of years, the Company has provided to its customers
Extreme(TM), TankTrax(TM), and SIRSend(TM) software for use by its
customers in providing data to the Company. The Company has tested and
believes the Extreme(TM) software is Year 2000 compliant but the
TankTrax(TM) and SIRSend(TM) software packages are not. The Company
believes the TankTrax(TM) software can be corrected with few programming
changes. The Company has evaluated and identified the specific changes
needed. The Company has obtained, but not applied, the programming
revision needed for the SIRSend(TM) software. These revisions are
expected to be complete by June 30, 1999. Because the Company's software
engineers will do these revisions, the incremental cost to the Company
is expected to be minimal.
In addition to software the Company has furnished computer equipment to
run the above-mentioned software and tank gauges. The Company believes
all computer equipment sold to current customers is Year 2000 compliant.
The Company has made provisions with customers so that the Company will
not be responsible for any Year 2000 issues due to customers moving the
proprietary software from the machine provided by the Company to other
equipment without the signed consent of the Company. The Company has
obtained a written warranty from the manufacturer of its tank gauge that
the tank gauge is Year 2000 compliant.
Clients' hardware and software
In order to assess the preparedness of its customers, the Company
requested that its top two hundred customers complete a Year 2000 survey
to determine the status of Year 2000 compliance of the customers'
software and the data provided to the Company. The Company has received
responses and based on the representations of these customers, does not
believe there will be significant Year 2000 problems. The Company does
not believe that any data received either electronically or in hard copy
which is not Year 2000 compliant will have a negative effect on the
systems, but may affect services provided due to additional manual labor
required to correct problems with the data. The Company will be working
closely with its customers known to generate data from legacy equipment
which is not Year 2000 compliant to determine what the customers' own
Year 2000 compliance program encompasses. The Company believes by
working together with these customers potential problems will be
avoided.
11
<PAGE> 12
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
USTMAN TECHNOLOGIES, INC.
(Registrant)
Date: 5/14/99 By /s/ Dan R. Cook
----------------------
Dan R. Cook
President and CEO
Date: 5/14/99 By /s/ Heather Murphy
----------------------
Heather Murphy
Controller
12
<PAGE> 13
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 195,000
<SECURITIES> 0
<RECEIVABLES> 1,280,000
<ALLOWANCES> 0
<INVENTORY> 121,000
<CURRENT-ASSETS> 1,786,000
<PP&E> 497,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,950,000
<CURRENT-LIABILITIES> 2,527,000
<BONDS> 0
0
9,717,000
<COMMON> 12,826,000
<OTHER-SE> (17,553,000)
<TOTAL-LIABILITY-AND-EQUITY> 9,950,000
<SALES> 4,811,000
<TOTAL-REVENUES> 4,811,000
<CGS> 1,722,000
<TOTAL-COSTS> 2,850,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,517,000
<INCOME-PRETAX> (2,489,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,489,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,489,000)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
