<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
-----------------
Commission file number 0-16011
-------
USTMAN TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
California
----------
(State or other jurisdiction of
incorporation or organization)
95-2873757
----------
(I.R.S. Employer Identification No.)
12265 W. Bayaud Ave #110
Lakewood, CO
------------------------
(Address of principal executive offices)
80228
-----
(Zip Code)
(303) 986-8011
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and, (2) has been
subject to such filing requirements for the past 90 days. X Yes No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date: 19,879,243 shares of Common Stock as of
February 5, 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>
December
31,1998 June 30,
(unaudited) 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 24,000 $ 366,000
Accounts receivable, net 1,193,000 826,000
Inventory 166,000 112,000
Prepaid expenses and other current assets 125,000 70,000
------------ ------------
Total current assets 1,508,000 1,374,000
PROPERTY AND EQUIPMENT, NET 506,000 544,000
INTANGIBLES AND GOODWILL 7,902,000 9,699,000
------------ ------------
$ 9,916,000 $ 11,617,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses
and other liabilities $ 1,235,000 $ 1,135,000
Current portion of long-term debt 1,000,000 875,000
------------ ------------
Total current liabilities 2,235,000 2,010,000
LONG-TERM DEBT AND OTHER LIABILITIES 2,250,000 9,784,000
DEFERRED EMPLOYEE BENEFITS 434,000 435,000
SHAREHOLDERS' EQUITY
Preferred Stock 9,717,000 --
Common stock 12,826,000 12,810,000
Additional paid-in capital 875,000 2,517,000
Accumulated deficit (18,421,000) (15,939,000)
------------ ------------
4,997,000 (612,000)
------------ ------------
$ 9,916,000 $ 11,617,000
============ ============
</TABLE>
2
<PAGE> 3
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Sales $ 1,651,000 $ 1,521,000
Cost of sales 613,000 707,000
----------- -----------
Gross profit 1,038,000 772,000
Selling, general and administrative expenses 639,000 716,000
Depreciation and amortization 320,000 261,000
Interest expense, net of interest income 607,000 335,000
Write off deferred debt cost 1,211,000 --
----------- -----------
Loss from operations before benefit for income taxes (1,739,000) (498,000)
Benefit for income taxes -- --
----------- -----------
Net loss $(1,739,000) $ (498,000)
=========== ===========
Basic and diluted, net loss per share $ (0.09) $ (0.03)
=========== ===========
</TABLE>
3
<PAGE> 4
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Six Months Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Sales $ 3,174,000 $ 3,081,000
Cost of sales 1,157,000 1,203,000
----------- -----------
Gross profit 2,017,000 1,878,000
Selling, general and administrative expenses 1,241,000 1,745,000
Depreciation and amortization 633,000 487,000
Interest expense, net of interest income 1,414,000 692,000
Write off deferred debt cost 1,211,000 --
----------- -----------
Loss from operations before benefit for income taxes (2,482,000) (1,046,000)
Benefit for income taxes -- --
----------- -----------
Net loss $(2,482,000) $(1,046,000)
=========== ===========
Basic and diluted, net loss per share $ (0.12) $ (0.05)
=========== ===========
</TABLE>
4
<PAGE> 5
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Operating Activities
Net loss $(2,482,000) $(1,046,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 878,000 659,000
Write off of deferred debt cost 1,211,000 --
Warrant expense under Senior Subordinated Note
Agreement 598,000 --
Interest converted to long-term debt 360,000 358,000
Issuance of common stock to settle lawsuit 16,000 27,000
Net changes in operating assets and liabilities (439,000) (377,000)
----------- -----------
Cash flows provided by (used in) operating activities 142,000 (379,000)
Investing Activities
Net purchase of Advanced Tank Certification, Inc. -- (2,190,000)
Purchase of property and equipment (85,000) (79,000)
----------- -----------
Cash flows used in investing activities: (85,000) (2,269,000)
Financing Activities
Increase in deferred debt issuance cost (24,000) (58,000)
Repayments, net of borrowings (375,000) 2,719,000
----------- -----------
Cash flows (used in) provided by financing activities (399,000) 2,661,000
Change in cash (342,000) 13,000
Cash and equivalents, beginning of period 366,000 799,000
----------- -----------
Cash and equivalents, end of period $ 24,000 $ 812,000
=========== ===========
</TABLE>
5
<PAGE> 6
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. The interim financial information furnished herein has not been audited
by independent accountants; however, in the opinion of management, all
adjustments (only consisting of normal recurring accruals) necessary for
a fair presentation of the results of operations for the six month and
three month periods ending December 31, 1998 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
during the 1998 fiscal year.
Interest on the Senior Subordinated Notes is 10% per annum for the first
year, payable quarterly, and increases by one percent each year during
the term of the Notes. As of December 31, 1998 and December 31, 1997 the
interest rate was 11% and 10%, respectively. At the option of the
Company, interest payments due can be converted to debt under the same
terms as the original principal. During the six month period ended
December 31, 1998 and December 31, 1997, the Company converted interest
due of $360,000 and $358,000, 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 Company's cumulative
adjusted earnings before taxes, depreciation and amortization ("EBTDA")
fail to meet specific projections provided by the Company to the
Investors, additional interest is payable in the form of warrants to the
Investors. If the resulting actual percentage of EBTDA per share is less
than 70% of the projected amount, an adjustment to interest expense is
calculated and warrants are issued in an amount equal to the additional
interest expenses divided by the fair market value of the common stock
on the Adjustment Date. The adjusted interest rate cannot exceed 29.76%.
Due to the lower than expected performance in fiscal 1998, the Company
determined it was unlikely to meet these projections in the future.
Accordingly, the Company has recorded interest expense on the Senior
Subordinated Notes at a rate of 29.76% as of the beginning of the
agreement and reflected the adjustment as a change in accounting
estimate. Therefore, interest in the first quarter of 1998 is accrued at
10% while interest for the second quarter of fiscal year 1999 through
November 30 is recorded at 29.76%. The Company reflected additional
interest as warrants to be issued.
In December 1998, the Investors reached an agreement to convert all of
the Private Placement and accrued interest 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 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. 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 (including interest payable as warrants) 3,417,000
----------
Total $9,717,000
==========
</TABLE>
6
<PAGE> 7
USTMAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
2. (continued)
In February 1999, the Company filed a December 31, 1998 Form 10-Q which
gave effect to this transaction as of July 1, 1998. However, because the
agreement was not finalized until December 1998, this treatment was
incorrect. Accordingly, this amended filing restates the preferred
stock, interest expense and write-off of deferred debt costs to
correctly reflect the date of the transaction.
During the six months ended December 31, 1998, interest expense
attributable to the Senior Subordinated Notes which was converted to
equity (including warrants to be issued for additional interest expense)
was $958,000 $.05 per share.
On December 17, 1997, the Company obtained $3.75 million in financing
from BankBoston and used the proceeds to, among other things, acquire
all of the outstanding common stock of Advanced Tank Certification, Inc.
(ATC), pursuant to stock purchase agreements between the Company and all
of the shareholders of ATC. The ATC acquisition was accounted for using
the purchase method.
3. Inventory consists of tank gauge equipment and is accounted for using
the weighted average method.
4. Included in interest expense on the Statements of Operations is
amortization of deferred debt costs. These amounts are shown as
depreciation and amortization on the Statements of Cash Flows.
5. Certain amounts for the prior period have been reclassified to conform
to the current quarter presentation.
6. Due to the Company's loss position, diluted net loss per share is the
same as basic earnings per share as the result would be antidilutive.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED
TO THE THREE MONTHS ENDED DECEMBER 31, 1997
In the second quarter of fiscal 1999 the Company reported a net loss of
$1,739,000 as compared to a net loss of $498,000 for the corresponding
quarter of the preceding year. This increase in loss is primarily
attributable to the write off of deferred debt cost related to the Private
Placement Notes (see Notes to the Financial Statements). The write off
resulted in $1,211,000 of additional expense in the second fiscal quarter.
Interest expense increased 81% to $607,000 from $335,000. This increase is a
result of interest on the Private Placement Notes. Although the notes were
converted to preferred stock this was not effective until December when all
terms of the agreement were substantially agreed upon. Interest expense and
debt discount amortization on the notes was recorded through November. Sales
for the quarter were $1,651,000 compared with $1,521,000 in the prior year.
Sales increased approximately 9% as the December 22 EPA deadline approached.
These requirements require, among other things, some form of permanent
monthly monitoring of underground storage tanks. In addition, additional
customers were added while the Company maintained costs related to analyzing
data. The Company has also achieved higher sales of its Extreme (TM) and
SIRSend (TM) software and tank gauges. The software has a very high gross
margin as there are few costs directly attributable to the installation and
implementation. These factors resulted in a 63% gross margin, up from 51% in
the prior year.
Selling, general and administrative expenses decreased by 11% due to the
reduction of expenses incurred in the prior year related to the merger of
USTMAN Industries, Inc. and Watson General Corporation and the Advanced Tank
Certification, Inc. acquisition. These expenses consisted primarily of fees
for relocating offices, severance of terminated employees, exit costs,
attorneys' fees, and accounting fees. All operations were integrated as of
June 30, 1998 eliminating duplication of costs and resulting in more
efficient operations. Management believes the selling, general and
administrative expenses will continue throughout the fiscal year at the
lower level.
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 certain intangible assets 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.
The increase in customers and software and tank gauge sales in the second
quarter exceeded the prior quarters decrease.
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.
8
<PAGE> 9
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, 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") effective July 1, 1998. 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. The Preferred Stock has
no mandatory redemption or voting rights and is not convertible into Common
Stock.
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.
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 has gathered an inventory of current revisions needed on
older workstations. Those computers which were not compliant will be
thoroughly tested in the upcoming months and have the needed revisions by
December 31, 1999.
The Company's software consists primarily of three distinct areas: network
operating system, commercial software and proprietary software. The network
operating system has been certified by the vendor to be Year 2000 compliant
subsequent to the completion of certain patches which the Company completed
applying as of September 30, 1998. The commercial software the Company runs
is very diverse. The Company has identified over thirty types of commercial
software that are currently used both internally and externally. Over the
next 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.
9
<PAGE> 10
Internal hardware and software (continued)
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.
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.
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 is
currently evaluating 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 several responses and is
currently evaluating the survey responses. 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.
10
<PAGE> 11
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description of Document
-------------- -----------------------
27.0 Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
USTMAN TECHNOLOGIES, INC.
(Registrant)
Date: 4/9/99 By /s/ Dan R. Cook
-----------------------
Dan R. Cook
President and CEO
Date: 4/9/99 By /s/ Heather Murphy
-----------------------
Heather Murphy
Controller
11
<PAGE> 12
EXHIBIT INDEX
Exhibit Number Description of Document
- -------------- -----------------------
27.0 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,000
<SECURITIES> 0
<RECEIVABLES> 1,193,000
<ALLOWANCES> 0
<INVENTORY> 166,000
<CURRENT-ASSETS> 1,508,000
<PP&E> 506,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,916,000
<CURRENT-LIABILITIES> 2,235,000
<BONDS> 0
0
9,717,000
<COMMON> 12,826,000
<OTHER-SE> (17,546,000)
<TOTAL-LIABILITY-AND-EQUITY> 9,916,000
<SALES> 1,651,000
<TOTAL-REVENUES> 1,651,000
<CGS> 613,000
<TOTAL-COSTS> 959,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,818,000
<INCOME-PRETAX> (1,739,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,739,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,739,000)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
