USTMAN TECHNOLOGIES INC, 10KSB40, 1999-09-28

USTMAN TECHNOLOGIES INC
10KSB40, 1999-09-28
HAZARDOUS WASTE MANAGEMENT

Previous: CHILDRENS COMPREHENSIVE SERVICES INC, 10-K, 1999-09-28

Next: BURNS INTERNATIONAL SERVICES CORP, 8-K, 1999-09-28

<PAGE> 1
===============================================================================

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- -----------------
Commission File Number 0-16011

USTMAN TECHNOLOGIES, INC.
(Name of small business issuer in its charter)

CALIFORNIA 95-2873757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

12265 W. BAYAUD AVE #110 80228
LAKEWOOD, CO
(Address of principal (Zip Code)
executive offices)

Issuer's telephone number: (303) 986-8011

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
NO PAR VALUE

Indicate by check mark whether the registrant (1) has 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. YES [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form this 10-KSB or any amendment
thereto. [X]

State issuer's revenues for its most recent fiscal year: $6,420,000

The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold on September 24, 1999 was
2,005,572. For purposes of the foregoing calculation only, all directors and
executive officers of the registrant have been deemed affiliates.

The number of shares outstanding of the issuer's common stock, as of September
24, 1999, was 19,879,243.

<PAGE> 2

PART I

ITEM 1. BUSINESS

(a) Business Development

USTMAN Technologies, Inc. ("USTMAN" or the "Company") was incorporated
under California law in 1947. On January 28, 1998, the shareholders changed the
previous name of the Company from Watson General Corporation ("Watson") to
USTMAN Technologies, Inc. USTMAN is engaged in statistical inventory
reconciliation leak detection for underground storage tanks and product piping.
Statistical inventory reconciliation provides owners and operators of
underground storage tank systems with compliance for monthly monitoring leak
detection requirements as well as management of fuel inventory.

Prior to May 22, 1997, Watson operated through three wholly owned
subsidiaries in three different businesses. Watson provided statistical
inventory reconciliation leak detection through Watson Systems, Inc. Watson
provided anti-freeze recycling through Toxguard Fluid Technologies, Inc. Watson
provided removal and installation of underground storage tanks through Toxguard
Systems, Inc.

On May 22, 1997, Watson acquired all of the outstanding capital stock
of USTMAN Industries, Inc., paying NDE Environmental Corporation $5,750,000. In
connection with this acquisition, Watson obtained $7,000,000 from Sagaponack
Partners, L.P., and Sagaponack International Partners, L.P. ("Sagaponack") in
exchange for Senior Subordinated Notes issued to Sagaponack in the aggregate
principal amount of $7,000,000 which were due and payable in five years, subject
to mandatory prepayment in certain circumstances. Interest on the notes was 10%
per annum for the first year, payable quarterly, and increased by one percent
each year during the term of the notes, subject to further adjustment in
specified instances. The notes were secured by substantially all of the assets
of the Company. 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. The Preferred Stock has an aggregate allocation amount of
$15,000,000 for the purposes of liquidation priority and dividends. The
Preferred Stock will bear an annual 8% dividend based on the Allocation Amount,
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.

Beginning with Watson's May 22, 1997, acquisition of USTMAN Industries,
Inc., Watson's statistical inventory reconciliation business was merged into the
statistical inventory reconciliation business of USTMAN Industries, Inc.

In August 1997, Toxguard Systems, Inc., filed for bankruptcy. The
bankruptcy of Toxguard Systems, Inc., did not have a material effect on the
Company.

On December 17, 1997, the Company acquired all of the outstanding
capital stock of Advanced Tank Certification, Inc. ("ATC") for an aggregate of
approximately $3.4 million in cash and 775,194 shares of common stock. ATC
provided leak detection, including statistical inventory reconciliation. In
connection with the acquisition, the Company secured term and acquisition
financing from BankBoston, N.A., by which the Company obtained $3.75 million in
the form of a term loan. The ATC statistical inventory reconciliation business
has been merged into the statistical inventory reconciliation business of the
Company and the assets of ATC have been sold.

In January 1998, the Company sold Toxguard Fluid Technologies, Inc.,
which resulted in a net gain of approximately $28,000.

<PAGE> 3

(b) Business of the Issuer

Principal Services and Products and their Markets. USTMAN is primarily
engaged in providing leak detection services to owners and operators of
underground storage tanks by analyzing the inventory of a tank to determine
whether the tank is leaking. This is accomplished using proprietary, certified
software and highly trained individuals. This method of leak detection is known
as statistical inventory reconciliation, or "SIR". The proprietary software
utilized by the Company is also designed to assist with inventory management and
regulatory compliance. These services are provided on a recurring monthly fee
basis under annually renewable agreements. USTMAN also licenses the proprietary
software for larger customers. The customers can then perform the leak detection
analysis internally and submit the results to the Company for review.

In addition to providing statistical inventory reconciliation services,
the Company licenses fuel management software and sells related fuel management
products including in-tank automatic tank gauges, network data gathering
equipment and cathodic protection (a form of corrosion protection) for
underground storage tanks.

USTMAN markets an automatic tank gauge system that (i) minimizes the
human element in gathering tank volume data, and (ii) further automates the
analytical process to improve data processing efficiency. This automatic tank
gauge system is marketed as Extreme Fuel Management(TM) and has the Company's
statistical inventory reconciliation service and on-line capabilities.

The Company also markets its regulatory compliance software,
Extreme(TM). Extreme(TM) is installed at the customer's home office and
automatically gathers data and generates custom reports for each underground
storage tank in the Extreme(TM) system. The software acts as an extension of an
inventory control system, transparently interpreting and analyzing underground
storage tank inventory data with no human intervention, then transmitting the
data to USTMAN for review.

Distribution Methods. The Company employs full time regional sales
managers to sell its services and products. These employees are paid salary and
commission. Additionally, the Company has commission only arrangements with
trade associations and independent sales representatives by which groups of tank
owners or operators obtain the services and products of the Company. In some of
these arrangements the associations or representatives may provide some
statistical inventory reconciliation related service, such as, collecting data
from the owners or operators of underground storage tank systems, transmitting
data to USTMAN, or printing reports of the statistical inventory reconciliation
analysis. Sales are supported through trade publications, advertising, direct
mail and strategic trade show attendance.

Outside the United States, the Company uses distributors and affiliates
to assist in generating sales. The Company seeks organizations with established
industry presence and provides these organizations with the opportunity to
purchase a product license, share revenues and receive ongoing quality control
and sales support.

<PAGE> 4

Research and development. The Company incurred research and development
expenses of approximately $72,000 and $38,000 in 1999 and 1998, respectively.

Competition. The Company competes with other providers of statistical
inventory reconciliation services as well as other methods of leak detection.
Many of the Company's competitors have greater financial resources. With the
exception of the largest customers (which have other considerations, such as,
compliance redundancy, economies of scale, and existing legacy of automatic tank
gauges and public relations considerations), cost and the ability to satisfy
regulatory requirements are the key factors influencing sales.

Customers. The Company has more than 3,000 customers and, therefore, is
not dependent on sales to any principal customer.

Trademarks. The Company is 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 the Company has rights in numerous unregistered trademarks which it
uses in interstate commerce and which are subject only to common law protection.

Governmental Regulations and Environmental Laws. Compliance with
federal, state and local regulations has not had a material effect on the
capital expenditures, operations or competitive position of the Company.
However, the imposition or relaxation of environmental regulations relating to
leak detection for underground storage tank systems can affect the need for the
Company's services and products.

Employees. On September 27, 1999, the Company employed a total of 51
persons, 49 of whom were full time employees.

ITEM 2. DESCRIPTION OF PROPERTY

At June 30, 1999 the Company operated out of leased office space
located at 12265 W. Bayaud Avenue Lakewood, Colorado. The Company leases
approximately 7,080 square feet. Monthly payments under the lease are $9,072 and
will increase during the term of the lease until expiration on December 31,
2001.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended June 30, 1999.

<PAGE> 5

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded on the OTC Bulletin Board under
the symbol USTX. Until February 1999, the common stock was traded on the Nasdaq
SmallCap Market. The Company was delisted from the NASDAQ Stock Market for
failure to meet listing requirements. The Company was not in compliance with the
net tangible assets/market capitalization/net income requirement.

<PAGE> 6

The following table sets for the high and low bid and sales prices of
the shares of Common Stock of the company for each quarterly fiscal period
within the last two fiscal years. These prices do not include allowances for
retail markup or markdown, commissions, or other transaction costs and,
therefore, do not represent actual transactions.

<TABLE>
<CAPTION>
QUARTER ENDING-- 6/30/99 3/31/99 12/31/98 9/30/98
<S> <C> <C> <C> <C>

HIGH BID PRICE $ 11/32 $ 1-3/16 $ 1-1/2 $ 1-9/32

LOW BID PRICE $ 1/4 $ 5/16 $ 15/32 $ 7/8
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDING-- 6/30/98 3/31/98 12/31/97 9/30/97
<S> <C> <C> <C> <C>

HIGH SALE PRICE $ 2-9/16 $2-13/16 $ 1-5/16 $1-15/16

LOW SALE PRICE $ 1-1/2 $ 1-1/4 $ 1-1/8 $0-15/16
</TABLE>

As of September 24, 1999, there were approximately 366 record holders
of the Company's Common Stock. This number does not include shareholders that
maintain their security positions with their security broker in street name.

The Company has never declared a cash dividend on its Common Stock.
The Company is prevented from declaring a cash dividend under agreements with
BankBoston and Sagaponack.

ITEM 6. MANAGEMENT'S DISCUSSION OF ANALYSIS OR PLAN OF OPERATION

The Company reported a net loss of $2,557,000 for the year ended June
30, 1999 compared to $5,944,000 for the year ended June 30, 1998. This decrease
is due partially to the completion of moving and consolidating the operations of
Watson General Corporation, Watson Systems, Inc., and ATC, to Lakewood, Colorado
and the efficiencies related to the consolidated operations. Additionally, the
Company experienced increased sales, decreased general and administrative
expenses and decreased interest expense.

The Company experienced an increase in sales of $432,000 or 7% to
$6,420,000 in 1999 compared to $5,988,000 in the prior year even though
experiencing a slight decrease in the average price charged for its service. The
increase is primarily a result of increased customer base as the December 22,
1998 EPA deadline requiring certain forms of monitoring approached and increases
in software and tank gauge sales. Additionally, the Company no longer provides
underground storage tank removal and installation or antifreeze recycling and
has been able to increase the customer base by concentrating on providing
underground storage tank monitoring services to its customers. No new products
or services were added during the last year; the Company concentrated on
increasing customer satisfaction for those products and services already
marketed. 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. Cost of sales
decreased $210,000, or 9% from $2,464,000 to $2,254,000. This is a result of
efficiencies in operations as processes are streamlined. Management does not
expect continued decreases in cost of sales but does anticipate maintaining the
current level of gross profit percentages. Gross margins increased from 59% to
65% as a result of the increases in sales and efficiencies in operations.

Selling, general and administrative expenses decreased $2,363,000, or
38% to $3,884,000 for the year ended June 30, 1999 compared to $6,247,000 in
1998. This is primarily a result of the elimination of expenses related to the
merger of USTMAN Industries, Inc., Watson General Corporation, and Advanced Tank
Certification, Inc. During fiscal year 1998, operations of the above companies
were relocated to Lakewood, Colorado. The consolidation was completed as of June
30, 1998 and accordingly, no reserves

<PAGE> 7

were established for future expenditures. Subsequent to June 30, 1998, no
material expenses have been incurred which related to the consolidation. The
costs incurred to relocate totaled approximately $736,000 and were made up of
primarily moving expenses, severance for terminated employees, exit costs,
attorneys' fees, and accounting fees. All operations were integrated as of June
30, 1998, eliminating duplication of costs resulting in more efficient
operations. In addition, advertising and legal expense not related to SEC
filings have decreased. Management expects to be able to maintain the general
and administrative costs at the lower level in the upcoming year.

The Company's interest expense decreased $1,610,000, or 50% to
$1,630,000 compared to $3,240,000 in the prior year. This decrease is a result
of the conversion of Sagaponack debt to Preferred Stock. In December 1998,
Sagaponack agreed to convert all debt issued to it by USTMAN to Series A
preferred stock. As a result of the conversion, interest that had been accruing
at 29.76% was eliminated. Additionally, amortization of deferred debt costs and
original issue discount, which were included in interest, were eliminated.
Included in the current year net loss is an extraordinary loss from the
extinguishment of debt of $1,211,000 related to the write off of the deferred
debt costs in connection with the Sagaponack debt to equity conversion.

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
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. The Company has
attempted to contact the manufacturers to determine if the software is Year 2000
compliant. For those software packages which will not be Year 2000 compliant,
the Company will make a determination to either

<PAGE> 8

replace the software with a different vendor or continue to use the software in
a "quarantined" environment. Software, which is used by a significant number of
users, such as the e-mail software, has been replaced and or updated to Year
2000 compliant software. It is not anticipated that any new software other than
that discussed below will be a material capital expenditure.

The Company has contracted for the replacement of its accounting and information
computer software. One criterion in the selection of the new accounting software
was a warranty that the software is Year 2000 compliant. It is estimated that
the system will be installed and functional by November 1999. The cost of this
system is expected to be approximately $50,000 including software, hardware and
implementation expense.

The Company runs internal software developed by the Company's software
engineers. The Company does not believe that the software code will have to be
rewritten or recompiled because most of the software is simply a front end to
well known commercial software which has Year 2000 compliance built into the
core software.

In order to ensure that all software and hardware will function properly in the
Year 2000, the Company has constructed a separate testing facility. This
facility is dedicated entirely to Year 2000 testing on live customer data. This
facility has a server and other hardware to mirror the Company's. The Company
plans to set the internal date at this facility to December 31, 1999 and run
analysis for two months to verify that no Year 2000 issues occur as the clock
approaches, reaches and passes the century mark. The equipment has been
purchased for this facility and preliminary testing has begun. 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 the programming revision
needed for the SIRSend(TM) software. These revisions are currently in the
process of being made. Because the Company's software engineers are doing these
revisions, the incremental cost to the Company is expected to be minimal.

In addition to software the Company has furnished computer equipment to run the
above-mentioned software and tank gauges. The Company believes all computer
equipment sold to current customers is Year 2000 compliant. The Company has made
provisions with customers so that the Company will not be responsible for any
Year 2000 issues due to customers moving the proprietary software from the
machine provided by the Company to other equipment without the signed consent of
the Company. The Company has obtained a written warranty from the manufacturer
of its tank gauge that the tank gauge is Year 2000 compliant.

Clients' hardware and software

In order to assess the preparedness of its customers, the Company requested that
its top two hundred customers complete a Year 2000 survey to determine the
status of Year 2000 compliance of the customers' software and the data provided
to the Company. The Company has received responses and based on the
representations of these customers, does not believe there will be significant
Year 2000 problems. The Company does not believe that any data received either
electronically or in

<PAGE> 9

hard copy which is not Year 2000 compliant will have a negative effect on the
systems, but may affect services provided due to additional manual labor
required to correct problems with the data. The Company will be working closely
with its customers known to generate data from legacy equipment, which is not
Year 2000 compliant to determine what the customers' own Year 2000 compliance
program encompasses. The Company believes by working together with these
customers potential problems will be avoided. Because the Company does not
foresee any significant issues even in the instances of data which is not Year
2000 compliant, no contingency plan has been developed.

Liquidity and Capital Resources

At June 30, 1999 the Company's current liabilities exceeded current assets by
$606,000 compared to a deficit of current assets over current liabilities of
$636,000 at June 30, 1998. The Company has incurred net losses for the years
ended June 30, 1999 and 1998 and at June 30, 1999 has a working capital
deficiency of $606,000. During the year ended June 30, 1999, the Company
implemented several plans to address its financial condition and to increase
profitability. This included cost reduction efforts and the conversion of the
Senior Subordinate Notes to equity. The Company has formulated plans and
strategies to continue to address the Company's financial condition and increase
profitability. This includes further cost reduction efforts, and consideration
of raising additional capital through the sale of additional stock or through
the issuance of debt. Management believes the Company will generate sufficient
cash flows to enable it to fund operations and satisfy all capital requirements
during the year ending June 30, 2000.

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 actual results in future periods to differ materially from
forecasted results. These risks and uncertainties include among other things,
product demand, customers' strategies regarding compliance requirements, and
market competition.

<PAGE> 10

ITEM 7. FINANCIAL STATEMENTS

Consolidated Financial Statements

Years ended June 30, 1999 and 1998

Index

<TABLE>

<S> <C>
Report of Independent Auditors (Gelfond Hochstadt Pangburn, P.C.)...........F-1

Report of Prior Independent Auditors (Ernst & Young, LLP)...................F-2

Consolidated Financial Statements:

Consolidated Balance Sheets..........................................F-3
Consolidated Statements of Operations................................F-5
Consolidated Statements of Shareholders' Equity (Deficit)............F-6
Consolidated Statements of Cash Flows................................F-7
Notes to Consolidated Financial Statements...........................F-8
</TABLE>

<PAGE> 11

Report of Independent Auditors

Board of Directors and Shareholders
USTMAN Technologies, Inc.

We have audited the accompanying consolidated balance sheet of USTMAN
Technologies, Inc. and subsidiaries as of June 30, 1999, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the year then ended. 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of USTMAN Technologies,
Inc. and subsidiaries at June 30, 1999, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.

GELFOND HOCHSTADT PANGBURN, P.C.

Denver, Colorado
September 20, 1999, except for paragraph [c]
of Note 6, as to which the
date is September 27, 1999

F-1

<PAGE> 12

Report of Independent Auditors

Board of Directors and Shareholders
USTMAN Technologies, Inc.

We have audited the accompanying consolidated balance sheet of USTMAN
Technologies, Inc. as of June 30, 1998, and the related consolidated statements
of operations, shareholders' equity (deficit) and cash flows for the year then
ended. 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 audit.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of USTMAN
Technologies, Inc. at June 30, 1998, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.

ERNST & YOUNG, LLP

Denver, Colorado
October 9, 1998

F-2

<PAGE> 13

USTMAN Technologies, Inc.

Consolidated Balance Sheets

<TABLE>
<CAPTION>
June 30,
1999 1998
------------ ------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 411,000 $ 366,000
Accounts receivable, less allowance for doubtful
accounts (1999, $167,000; 1998, $195,000) 1,079,000 826,000
Inventory 68,000 112,000
Prepaid expenses and other current assets 117,000 70,000
------------ ------------

Total current assets 1,675,000 1,374,000
------------ ------------

Furniture and equipment:
Machinery and equipment 81,000 76,000
Computers and equipment 940,000 783,000
Furniture and fixtures 102,000 88,000
Leasehold improvements 4,000 4,000
------------ ------------
1,127,000 951,000
Accumulated depreciation 648,000 407,000
------------ ------------

479,000 544,000
------------ ------------

Intangible and other assets, less accumulated amortization
(1999, $1,922,000; 1998, $1,351,000) 7,490,000 9,699,000

------------ ------------

$ 9,644,000 $ 11,617,000
============ ============
</TABLE>

(Continued)

F-3

<PAGE> 14

USTMAN Technologies, Inc.

Consolidated Balance Sheets

(Continued)

<TABLE>
<CAPTION>
June 30,
1999 1998
------------ ------------
<S> <C> <C>
Liabilities and Shareholders' Equity (Deficit)):
Current liabilities:
Accounts payable $ 385,000 $ 327,000
Accrued expenses:
Salaries and wages 50,000 58,000
Other 253,000 620,000
Deferred revenue 218,000 130,000
Current portion of long-term debt 1,375,000 875,000
------------ ------------

Total current liabilities 2,281,000 2,010,000
Long-term debt, less current portion 1,750,000 9,784,000
Deferred employee benefits 432,000 435,000
------------ ------------

Total liabilities 4,463,000 12,229,000
------------ ------------
Commitments and contingencies

Shareholders' equity (deficit):
Series A preferred stock, no par value; 1,000,000 shares authorized; issued
and outstanding, 9,717 at June 30, 1999,
and none in 1998; liquidation preference $16,200,000 9,717,000 --
Common stock, no par value; 25,000,000 shares authorized;
issued and outstanding, 19,879,243 in 1999 and 19,855,243 in 1998 12,826,000 12,810,000
Class A common stock, no par value; 15,000,000 shares
authorized; none issued and outstanding -- --
Class B common stock, no par value; 15,000,000 shares
authorized; none issued and outstanding -- --
Additional paid-in capital 1,134,000 2,517,000
Accumulated deficit (18,496,000) (15,939,000)
------------ ------------
Total shareholders' equity (deficit) 5,181,000 (612,000)
------------ ------------
$ 9,644,000 $ 11,617,000
============ ============
</TABLE>

See accompanying notes

F-4

<PAGE> 15

USTMAN Technologies, Inc.

Consolidated Statements of Operations

<TABLE>
<CAPTION>
Year ended June 30,
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 6,420,000 $ 5,988,000
Cost of sales 2,254,000 2,464,000
------------ ------------
Gross profit 4,166,000 3,524,000
Selling, general and administrative expenses 3,884,000 6,247,000
------------ ------------

282,000 (2,723,000)
------------ ------------

Other income (expense):
Interest expense (1,630,000) (3,240,000)
Interest income 2,000 19,000
------------ ------------

(1,628,000) (3,221,000)
------------ ------------

Loss before extraordinary item (1,346,000) (5,944,000)

Extraordinary item, loss on extinguishment of debt (1,211,000) --
------------ ------------

Net loss $ (2,557,000) $ (5,944,000)
============ ============

Basic and diluted net loss per share:

Loss before extraordinary item $ (.07) $ (.31)
Extraordinary item (.06) --
------------ ------------
Net loss $ (.13) $ (.31)
============ ============
</TABLE>

See accompanying notes.

F-5
<PAGE> 16
USTMAN Technologies, Inc.

Consolidated Statements of Shareholders' Equity (Deficit)

<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------------- --------------------------- paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
-------- ------------ ------------ -------------- --------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at July
1, 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)
----- ---------- ---------- ----------- ----------- ------------- -----------

Balances 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 - - 24,000 16,000 - - 16,000
Amortization of
deferred
compensation
cost - - - - 259,000 - 259,000
Warrants to be
issued under
the terms of
the Senior
Subordinated
Note
agreement - - - - 598,000 - 598,000
Conversion of
Senior
Subordinated
Notes to
preferred
stock 9,717 $9,717,000 - - (2,240,000) - 7,477,000
Net loss - - - - (2,557,000) (2,557,000)
----- ---------- ---------- ----------- ----------- ------------- -----------

Balances at June
30, 1999 9,717 $9,717,000 19,879,243 $12,826,000 $ 1,134,000 $ (18,496,000) $ 5,181,000
===== ========== ========== =========== =========== ============= ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 17

USTMAN Technologies, Inc.

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Year ended June 30,
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(2,557,000) $(5,944,000)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation 241,000 285,000
Amortization of intangible assets 909,000 864,000
Amortization included in interest expense 263,000 555,000
Warrants to be issued under Senior Subordinated Note
agreement 598,000 1,642,000
Extraordinary item 1,211,000 -
Write-off of proprietary software, net - 656,000
Issuance of common stock and stock options 16,000 249,000
Interest converted to long-term debt 360,000 741,000
Gain on sale of Toxguard Fluid Technologies, Inc. - (28,000)
(Gain) loss on sale of equipment (3,000) 260,000
Net changes in operating assets and liabilities (279,000) 526,000
----------- -----------
Net cash provided by (used in) operating activities 759,000 (194,000)
----------- -----------

Investing activities:
Purchases of furniture and equipment (176,000) (286,000)
Proceeds from sale of equipment 3,000 101,000
Acquisition of Advanced Tank
Certification, Inc., net of cash acquired - (2,311,000)
Sale of Toxguard Fluid Technologies, Inc.,
net of cash sold - 123,000
----------- -----------
Net cash used in investing activities (173,000) (2,373,000)
----------- -----------

Financing activities:
Proceeds from issuance of long-term debt, net 709,000 3,683,000
Principal payments on long-term debt (1,250,000) (1,549,000)
----------- -----------
Net cash (used in) provided by financing activities (541,000) 2,134,000
----------- -----------

Increase (decrease) in cash and cash equivalents 45,000 (433,000)
Cash and cash equivalents, beginning of year 366,000 799,000
----------- -----------
Cash and cash equivalents, end of year $ 411,000 $ 366,000
=========== ===========
</TABLE>

See accompanying notes.

F-7
<PAGE> 18

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements

Years Ended June 30, 1999 and 1998

1. ORGANIZATION AND MANAGEMENT'S PLANS

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 services include statistical inventory reconciliation and other
monitoring methods accepted by various regulatory authorities.

The Company's consolidated operations for the years ended June 30, 1999 and 1998
were concentrated in a single business segment--the environmental services
industry. There were no customers that generated greater than 10% of net sales
for the years ended June 30, 1999 and 1998, and sales to customers outside the
United States were immaterial during 1999 and 1998.

Prior to July 1, 1997, the Company provided a variety of environmental services
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").
During 1998, the Company consolidated the operations of USTMAN Industries,
Envir-Alert, and Watson Systems, sold TFT (Note 4), and acquired 100% of the
common stock of Advanced Tank Certification, Inc. ("ATC") (Note 3). On August
27, 1997, Toxguard Systems voluntarily filed under Chapter 7 of the United
States Bankruptcy Code (Note 5).

The Company owns 87% of the outstanding preferred stock and 96% of the
outstanding common stock of Toxguard systems. The remaining subsidiaries are
wholly owned by the Company. All significant intercompany transactions have been
eliminated in consolidation.

MANAGEMENT'S PLANS

The Company has incurred net losses for the years ended June 30, 1999 and 1998,
and at June 30, 1999, has a working capital deficiency of $606,000. During the
year ended June 30, 1999, the Company implemented several plans to address its
financial condition and to increase profitability. This included cost reduction
efforts and the conversion of the Senior Subordinated Notes to equity (Note 6).
The Company's plans also include consideration of raising additional capital
through the sale of additional stock or through the issuance of debt. Management
believes the Company will generate sufficient cash flows to enable it to fund
operations and satisfy all capital requirements during the year ending June 30,
2000.

F-8
<PAGE> 19

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated 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 intangible and
long-lived assets, and estimates made in establishing the allowance for doubtful
accounts and obsolete inventory.

INVENTORY

Inventory consists of tank gauge equipment and is stated at the lower of cost or
market. Cost is determined using the weighted average method.

FURNITURE AND EQUIPMENT

Furniture and equipment are carried at cost and are depreciated under the
straight-line method over their estimated useful lives of five years.

LONG LIVED ASSETS AND 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. At each balance sheet date, the Company
evaluates goodwill and other intangible assets when the Company evaluates other
long-term assets for recoverability. The Company recognizes impairment losses on
intangible assets when undiscounted cash flows estimated to be generated from
the intangible assets are less than the amount of unamortized assets. In such
circumstances, the intangible asset is written down to the benefit the Company
expects to receive from the intangible asset.

F-9
<PAGE> 20

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INTANGIBLE AND OTHER ASSETS

Intangible and other assets consist of the following:

<TABLE>
<CAPTION>
June 30
1999 1998
------------ ------------
<S> <C> <C>
Goodwill $ 5,946,000 $ 5,946,000
Acquired technology 3,300,000 3,300,000
Debt issuance costs 115,000 1,803,000
Deferred stock offering costs 50,000 --
Copyrights and other costs 1,000 1,000
------------ ------------
9,412,000 11,050,000
Less accumulated amortization (1,922,000) (1,351,000)
------------ ------------
$ 7,490,000 $ 9,699,000
============ ============
</TABLE>

Goodwill of $2,782,000 related to the USTMAN Industries and Watson Systems
acquisitions is amortized over 15 years, and goodwill of $3,058,000 relating to
the ATC acquisition is amortized over 10 years. Other goodwill of $106,000 is
amortized over 20 years. Acquired technology is amortized over eight years, and
copyrights and other costs are amortized on a straight-line basis over five
years. During the year ended June 30, 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.

Through December 1, 1998, debt issuance costs included costs of $1,722,000,
recorded in connection with a May 22, 1997 private placement of Senior
Subordinated Notes and common stock (Note 6). These costs 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, the Senior
Subordinated Notes were converted to Preferred stock (Note 6) and the
unamortized balance of debt issuance costs of $1,211,000 was written off, and is
presented as an extraordinary loss on debt extinguishment. Amortization expense
amounted to $1,172,000 and $1,419,000 for the years ended June 30, 1999 and
1998, respectively.

Costs incurred in connection with the stock rights offering (Note 7) have been
deferred and will be offset against the proceeds of the offering, if the
offering is successful, or charged to expense if the offering is unsuccessful.

F-10
<PAGE> 21

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SOFTWARE DEVELOPMENT COSTS

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, the Company capitalizes certain costs to develop software to be
licensed or otherwise marketed to customers. Capitalization of software
development begins upon the establishment of technical feasibility of the
product and ceases when the product is available for general release to
customers. Technological feasibility is established at the completion of
detailed program design and testing. Because the Company's current products have
a short period of time between technological feasibility and when the product is
available for general release, amounts capitalized and amortized for computer
software are not material for the years ended June 30, 1999 and 1998.

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
with a third party approximated its carrying amount at June 30, 1999, based on
rates currently available to the Company for debt with similar terms and
remaining maturities. The fair value of the Company's debt to certain investors
(Note 6) is not practicable to estimate, due to the related party nature of the
underlying transaction.

REVENUE RECOGNITION

The Company primarily generates revenue through the testing of underground
storage tanks and related software (storage tank monitoring software) services.
Sales are recognized when services are performed. Prepaid contracts are recorded
as deferred revenue and recognized ratably over the related service period.
Revenues from up-front fees for software are recognized when the software is
provided to the customer. Revenues from license agreements are recognized
ratably over the term of the agreement as service is provided.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred. Research and
development expenses were approximately $72,000 and $38,000 for the years ended
June 30, 1999 and 1998, respectively.

ADVERTISING COSTS

Advertising costs are expensed as incurred and include trade shows, direct
mailings, and trade publications. Advertising expenses were $156,000 and
$300,000 for the years ended June 30, 1999 and 1998, respectively.

F-11
<PAGE> 22

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION

SFAS No. 123, Accounting for Stock-Based Compensation, allows companies to
choose whether to account for employee stock-based compensation on a fair value
method, or to continue accounting for such compensation under the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations ("APB
25"). The Company has chosen to continue to account for employee stock-based
compensation using APB 25. 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.

EARNINGS (LOSS) PER SHARE

SFAS No. 128, Earnings Per Share, requires dual presentation of basic and
diluted earnings per share ("EPS"), with a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS is computed using the weighted average number
of common shares outstanding during the year. Diluted EPS is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the year. 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 years 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. The weighted average number of common shares outstanding for
computing loss per share were 19,877,731 and 19,117,186 for the years ended June
30, 1999 and 1998, respectively. Stock options and warrants are not considered
in the calculation, as the impact of the potential common shares would be to
decrease loss per share.

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-12
<PAGE> 23

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STATEMENTS 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 June 30
1999 1998
--------- ---------
<S> <C> <C>
Accounts receivable, net $(253,000) $ (93,000)
Inventory 44,000 76,000
Prepaid expenses and other current assets (97,000) 169,000
Accounts payable 58,000 93,000
Accrued expenses (119,000) 298,000
Deferred revenue 88,000 (17,000)
--------- ---------
$(279,000) $ 526,000
========= =========
</TABLE>

The Company paid no federal or state income taxes for the years ended June 30,
1999 and 1998. The Company paid interest of $508,000 and $248,000 for the years
ended June 30, 1999 and 1998, respectively.

In connection with the acquisition of ATC in December 1997, (Note 3), the
Company funded the acquisition as follows:

<S> <C>
Fair value of assets acquired $ 3,539,000
Less:
Cash acquired (112,000)
Common stock issued (1,116,000)
-----------
Cash paid $ 2,311,000
===========
</TABLE>

F-13
<PAGE> 24

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STATEMENTS OF CASH FLOWS (CONTINUED)

Noncash investing and financing activities during the year ended June 30, 1999,
consist of the conversion of senior subordinated notes and accrued interest, and
the cancellation of warrants for shares of the Company's preferred stock, as
follows:

<TABLE>

<S> <C>
Long-term debt $7,000,000
Original issue discount (700,000)
Accrued interest 1,177,000
Accrued interest payable as warrants 2,240,000
----------
Total $9,717,000
==========
</TABLE>

During the year ended June 30, 1998, noncash investing and financing activities
consisted of a reduction of an accrued estimated purchase price adjustment
liability from $376,000 to $300,000, and a reduction in related goodwill of
$76,000 in connection with the USTMAN acquisition.

BUSINESS RISK AND CONCENTRATION OF CREDIT RISK

The Company is subject to risk and uncertainties common to environmental
services companies, including potential liability if the Company's leak
detection software and systems fail to detect a leak. The Company attempts to
limit potential liability and maintains insurance coverage. There can be no
assurance however that insurance coverage will continue to be available on
reasonable terms or will be available in sufficient amounts to cover one or more
significant claims. The successful assertion of one or more claims that are
uninsured or underinsured, could materially affect the Company adversely.

The Company extends credit based on an evaluation of each customer's financial
condition, generally without requiring collateral. Exposure to losses on
receivables is principally dependent on each customer's financial condition. The
Company monitors its exposure for credit losses and maintains allowances for
anticipated losses. As of June 30, 1999, three customers accounted for
approximately 20% of the net accounts receivable balance.

YEAR 2000 CONVERSION

The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the Year 2000 date are a
known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of the operational systems.
The Company has established processes for evaluating and managing the risks and
costs associated with this problem. Management believes the total cost of
compliance, and its effect on the Company's future results of operations will
not be significant.

F-14
<PAGE> 25

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On July 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. This standard establishes requirements for disclosure of comprehensive
income. During the years ended June 30, 1999 and 1998, the Company did not have
any components of comprehensive income to report.

In June 1998, the Financial Accounting Standard Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement, as amended by SFAS No. 137, is effective for fiscal years beginning
after June 15, 2000. Currently, the Company does not have any derivative
financial instruments and does not participate in hedging activities; therefore,
management believes that SFAS No. 133 will not impact the Company's financial
statements.

3. ACQUISITION

On December 17, 1997, the Company acquired all of the outstanding capital stock
of ATC, a Tennessee corporation, which provides services to owners and operators
of underground storage tanks, including statistical inventory reconciliation,
tightness testing and cathodic protection for an aggregate of approximately $3.4
million in cash and 775,194 shares of common stock. The total purchase price was
determined using the average stock price of $1.44 calculated using the period
ten days prior and subsequent to the acquisition. In connection with the
acquisition, the Company secured a term loan of $3.75 million from BankBoston,
N.A. (Note 6). 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
acquired, approximately $3,058,000, was allocated to goodwill. ATC's results of
operations have been included in the Company's consolidated results of
operations since December 18, 1997.

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, attorney fees, and accounting fees.

4. 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 in a net gain of
approximately $28,000.

F-15
<PAGE> 26

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

5. TOXGUARD SYSTEMS BANKRUPTCY

As a result of Toxguard Systems filing under Chapter 7 of the Bankruptcy Code in
August 1997, the Company wrote 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 is uncertainty as to the ultimate resolution of creditors' claims. In
management's opinion, the amounts owed to Toxguard Systems' 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.

6. NOTES PAYABLE AND LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
June 30
1999 1998
------------ ------------
<S> <C> <C>
BankBoston N.A. term loan [A] $ 2,375,000 $ 3,625,000

Senior Subordinated Notes, net of
original issue discount of $783,000 [B] -- 7,034,000

Advance by Investors [C] 750,000

------------ ------------
3,125,000 10,659,000
Less current portion 1,375,000 875,000
------------ ------------
Long-term portion $ 1,750,000 $ 9,784,000
============ ============
</TABLE>

[A] On December 17, 1997, the Company secured term and acquisition
financing from BankBoston, N.A. ("BankBoston"). The Company obtained
$3.75 million in the form of a term loan, originally bearing interest
at the BankBoston Base Rate ("Base Rate") plus 2 1/2% and maturing in
December 2000. In March 1999, the terms of the loan were amended,
requiring a $750,000 principal payment by June 30, 1999, which was
made, and increasing the interest rate from the Base Rate plus 3%, to
the Base Rate plus 3.5% (10.75% at June 30, 1999), depending upon the
level of earnings before interest, taxes, depreciation and amortization
("EBITDA") achieved by the Company. The Company is required to make
quarterly installments of $125,000, plus accrued interest, through
March 2000 increasing to $250,000 through September 30, 2001 with the
remaining principal due December 31, 2001. The agreement also requires
the Company to pay additional interest totaling the greater of $150,000
or 10% of the average consolidated EBITDA during fiscal 1999, 2000 and
2001. This amount is being accrued over the term of the loan using the
effective interest method. The debt is collateralized by the assets of
the Company.

F-16
<PAGE> 27

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)

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, 1999, 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. The Company
failed to meet the net worth, funded debt to adjusted EBITDA, and
operating cash flow to debt service covenants at June 30, 1999, and the
covenant prohibiting the Company from incurring certain indebtedness,
which included the $750,000 advanced to the Company by the Investors in
June 1999. The Company also advised BankBoston it would be in default
on these same covenants at September 30, 1999. The Company received a
waiver from the bank for these covenant violations at June 30, 1999 and
for the quarter ending September 30, 1999. Management believes the
Company's plans for fiscal year 2000 will enable the Company to be in
compliance with its loan covenants during fiscal year 2000.
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.

[B] 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 with 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. At June 30, 1999
and 1998, the investors own approximately 37% of the Company's common
stock, and two partners of the Investors serve as directors of the
Company.

F-17
<PAGE> 28

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)

The Company incurred costs of $2,010,000 in connection with private
placement. Costs of $1,722,000 and $288,000 were allocated to debt
issue costs and common stock, respectively. This allocation was based
on the ratio of original issue discount to debt. The Company and
Sagaponack employed a third party to determine the fair value of the
stock issued in connection with the private placement. The senior
subordinated notes were due originally in 2002, subject to mandatory
prepayment in certain circumstances. The notes were collateralized 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. and 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) acquire at least 50% of the outstanding
common stock or of the operating assets of the Company (a "Company
Sale"). In addition, the Company would have applied toward reduction of
principal at least 50% of any excess cash.

Interest on the Senior Subordinated Notes was 10% per annum for the
first year, payable quarterly, and was increased by one percent each
year during the term of the Notes. At the option of the Company,
accrued interest could be converted to debt under the same terms as the
original principal. During the years ended June 30, 1999 and 1998, the
Company converted accrued interest of $359,000 and $741,000 to
long-term debt, respectively. 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") failed 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 1999 and 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 $599,000 and $1,642,000 for
the years ended June 30, 1999 and 1998, respectively.

F-18
<PAGE> 29

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)

The Company is also required to pay Sagaponack an annual management fee
of $100,000.

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 (Note 7). Warrants previously issued to the Investors
for additional interest expense were also cancelled upon exchange of
the notes. As a result of the transaction, the Company recognized a
$1,211,000 extraordinary loss from extinguishment of debt, which
represented the write down of the deferred issue costs in connection
with the transaction.

[C] On June 29, 1999, the Investors agreed to advance the Company $750,000.
The advance is non-interest bearing, unsecured, and due on demand. The
proceeds were used to pay down the BankBoston term loan in June 1999.
The Investors have informed the Company that they intend to convert the
$750,000 advance to equity upon certain conditions, but in any case, no
later than November 26, 1999.

Principal payments on long-term debt are as follows:

Year ending June 30 Amount
----------
<S> <C>
2000 $1,375,000
2001 1,000,000
2002 750,000
----------
$3,125,000
==========
</TABLE>

7. INCOME TAXES

A reconciliation of taxes computed at the statutory federal income tax rate,
applied to the loss before the extraordinary item, to income tax expense is as
follows:

<TABLE>
<CAPTION>
Year ended June 30,
1999 1998
--------- -----------
<S> <C> <C>
Benefit from loss before provision for income taxes computed
at statutory rate $ 457,000 $ 1,919,000
Nondeductible expense (176,000) (136,000)
Losses without tax benefit (281,000) (1,783,000)
--------- -----------
$ -- $ --
========= ===========
</TABLE>

F-19
<PAGE> 30

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

7. INCOME TAXES (CONTINUED)

At June 30, 1999, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $13,000,000 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 are as follows:

1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $4,900,000 $4,401,000
Accrued expenses 24,000 30,000
Book depreciation over tax 45,000 50,000
Other 178,000 161,000
---------- ----------
Total deferred tax assets 5,147,000 4,642,000

Valuation allowance (4,249,000) (3,518,000)
---------- ----------
898,000 1,124,000

Deferred tax liabilities:
Amortization of purchased technology (843,000) (1,103,000)
Other (55,000) (21,000)
--------- ----------
Net deferred tax assets $ - $ -
========= ==========
</TABLE>

A valuation reserve of $3,865,000 and $3,518,000 has been established as of June
30, 1999 and 1998, 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 years ended June 30, 1999 and 1998 is approximately
$347,000 and $2,103,000, respectively.

F-20
<PAGE> 31

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

8. SHAREHOLDERS' EQUITY

SERIES A PREFERRED STOCK

The Series A Preferred Stock ("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 bears an annual 8% dividend (based
on the Allocation Amount), if and when, declared by the Board of Directors. The
effective dividend rate is 12.3% for the year ended June 30, 1999. The
Allocation Amount increases by the amount of any dividends not declared for
payment by the Company. As of June 30, 1999, the calculated allocation increase
was $1,200,000. Therefore, the Allocation Amount at June 30, 1999 is
$16,200,000. The Preferred Stock has no mandatory redemption or voting rights
and is not convertible into Common Stock.

RIGHTS OFFERING

The Company is in the process of a stock rights offering. On July 7, 1999, the
Company filed a Form SB-2 Registration Statement with the Securities and
Exchange Commission to register 9,941,624 shares of common stock. Under this
registration, the Company intends to offer 9,941,624 shares of common stock for
sale at $0.25 per share to its current shareholders. Shareholders will be
offered the right to purchase one new share of common stock for every two shares
of common stock held.

In addition, shareholders that exercise their right can also subscribe for
additional shares, which are not purchased by other shareholders. If
shareholders subscribe for more shares than those offered, subscriptions for
additional shares will be satisfied in proportion to the number of shares owned
by each shareholder that has subscribed for additional shares.

WARRANTS

During 1997, the Company issued warrants to purchase 200,000 shares of the
Company's common stock 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.

In connection with the 1997 private placement, the Company issued warrants to
purchase 718,749 shares of the Company's common stock at $.01 per share. The
warrants were exercisable immediately and expire on May 22, 2000.
In January 1998, all warrants were exercised.

F-21
<PAGE> 32

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

8. SHAREHOLDERS' EQUITY (CONTINUED)

STOCK OPTIONS

Prior to July 1, 1997, the Company granted to certain key employees, options to
purchase 1,651,518 shares of common stock at exercise prices ranging from $1.53
to $1.63 per share and expiring in April 2002. As of June 30, 1999 $1,625,518
options are outstanding.

In connection with the USTMAN Industries acquisition on May 22, 1997, the
Company issued options to purchase 600,000 shares to a key employee at an
exercise price of $1.00 per share, which was below the fair value of the stock
on the date of grant. As a result, the Company is recognizing compensation
expense over the vesting period of the options. 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. As of June 30, 1999, none of these options had been exercised. The
company recorded compensation expense of approximately $124,000 in both 1999 and
1998.

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 per share. As of June 30,
1999, none of these options had been exercised and 60,000 of these options had
been forfeited.

During 1998, 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. As of June 30, 1999 none of these options had been exercised and
30,000 had been forfeited.

F-22
<PAGE> 33

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

8. SHAREHOLDERS' EQUITY (CONTINUED)

STOCK OPTIONS (CONTINUED)

The following table summarizes stock option activity for the years ended June
30, 1999 and 1998:

Weighted Average
Number of Shares Exercise Price
---------------- -----------------
<S> <C> <C>
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 - -
Exercised - -
Expired or forfeited (179,334) 1.73
----------- -----------
Outstanding at June 30, 1999 2,420,518 1.57
=========== ===========
Exercisable 2,055,518 $1.66
=========== ===========
</TABLE>

Exercise prices for the majority of the options outstanding as of June 30, 1999
range from $.50 to $2.50. Approximately 2,000 options outstanding at June 30,
1999 have an exercise price of $4.50.

In calculating pro forma information regarding net income and earnings per
share, as required by SFAS 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: expected dividend yield, 0%; expected stock price
volatility, 75%; risk-free interest rate, 5.25%, expected life of options, 4.9
years.

F-23
<PAGE> 34

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

8. SHAREHOLDERS' EQUITY (CONTINUED)

STOCK OPTIONS (CONTINUED)

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, 1999 and 1998 is summarized below:

<TABLE>
<CAPTION>
Year ended June 30
1999 1998
--------------------------------
<S> <C> <C>
Net loss, as reported $ (2,557,000) $ (5,944,000)
Net loss, pro forma (2,755,000) (6,092,000)
Net loss per share, as reported (.19) (.31)
Net loss per share, pro forma $ (.20) $ (.32)
</TABLE>

9. 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 throughout the former 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 are to be adjusted annually 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:

Year ending June 30
-------------------
<S> <C>
2000 $111,000
2001 116,000
2002 59,000
--------
$286,000
========
</TABLE>

Rent expense totaled $128,000 and $101,000 for the years ended June 30, 1999 and
1998, respectively.

F-24
<PAGE> 35

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (Continued)

Years Ended June 30, 1999 and 1998

10. 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, the Company can match contributions annually. No expense for
matching contributions was recorded in 1999 or 1998.

F-25
<PAGE> 36

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Effective August 18, 1999, the Company dismissed its prior independent
auditors Ernst & Young LLP ("Ernst & Young") and retained as its new independent
auditors, Gelfond Hochstadt Pangburn, P.C. Ernst & Young's report on USTMAN's
financial statements during the two most recent fiscal years contained no
adverse opinion or disclaimer of opinion, and was not qualified as to audit
scope or accounting principles. The decision to change accountants was
unanimously approved by USTMAN's Board of Directors.

During the last two fiscal years and the subsequent interim period to
the date hereof, there were no disagreements between USTMAN and Ernst & Young on
any matter of accounting principle or practice, financial statement disclosure,
or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Ernst & Young, would have caused it to make reference to the
subject matter of disagreement in connection with its report on the financial
statements of USTMAN for such period.

No "reportable event", as that term is defined in Item 304 (a) (1) (iv)
of Regulation S-B, occurred during the two most recent fiscal years and through
August 18, 1999.

USTMAN engaged Gelfond Hochstadt Pangburn, P.C. as its new independent
accountants as of August 18, 1999. During the two most recent fiscal years and
through August 18, 1999 USTMAN had not consulted with Gelfond Hochstadt
Pangburn, P.C. regarding (i) the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on USTMAN's financial statements or (ii) any
matter that was either the subject mater of a disagreement or a reportable event
(as described in Item 304 (a) (1) of Regulation S-B).

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

EXECUTIVE OFFICERS AND DIRECTORS

BARRY S. ROSENSTEIN, 40, has served as Co-Chairman of the Board 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 four years 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, 46, has served as Co-Chairman of the Board 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.

F-26
<PAGE> 37
DAN R. COOK, 49, has served as a Director and the President of the Company since
May 1997. Mr. Cook was appointed President of USTMAN in May 1997. Mr. Cook
served as Chief Operating Officer of USTMAN Industries from 1992 until it was
merged into USTMAN in May 1997, and additionally served as its President from
January 1994 until its merger into USTMAN. Mr. Cook is also a certified public
accountant. Mr. Cook has an employment agreement with USTMAN that expires May
20, 2001. Mr. Cook's base salary is $130,000 per year.

James B. Grant, 49, Vice President, Corporate Development since December 1997.
Prior to employment at USTMAN, Mr. Grant served as President of Advanced Tank
Certification, Inc.

Donald Philips resigned as a director of USTMAN effective March 5, 1999 due to
other commitments, and Ronald G. Crane resigned as director of USTMAN effective
April 8, 1999 due to other commitments.

In January 1999, Erica Bengtson resigned from USTMAN, where she had served as
Chief Operating Officer. In April 1999, her husband, David Booth, also resigned
from USTMAN, where he has served as a Vice President.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth information concerning compensation
provided to the Company's executive officers. Fiscal year 1998 was Mr. Cook's
first full year of employment with the Company. Mr. Grant did not become
employed by the Company until December 1997.

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
NAME AND PRINCIPAL FISCAL SALARY AWARDS PAYOUT ALL OTHER
POSITION YEAR ANNUAL COMPENSATION RESTRICTED OPTIONS & LTP COMPENSATION
BONUS OTHER AWARDS SARS PAYOUT

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dan R. Cook 1998 $130,000 0 0 0 0 0 None
President and CEO 1999 $130,000 0 0 0 0 0 None

James B. Grant 1998 $ 90,000 0 0 0 0 0 10,601 (Production Bonus)
Vice President, Corporate
Development 1999 $ 90,000 0 0 0 0 0 57,156 (Production Bonus)
</TABLE>

OPTIONS/SAR GRANTED DURING YEAR ENDED JUNE 30, 1999

During the fiscal year ended June 30, 1999, USTMAN granted no stock options or
stock appreciation rights to its officers and directors, or to other employees.

AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTIONS/SAR VALUE TABLE.

No officer exercised stock options during the fiscal year ended June 30, 1999,
or subsequently. The following table sets forth information regarding the
year-end value of options being held be the Chief Executive Officer and the
other named officers such persons on June 30, 1999; No Stock Appreciation Rights
have been granted, or are held by, any such person:

(a) (b) (c) (d) (e)

Name States acquired on Value realized # of unexercised Value of in-the-money
exercise options at FY end options at FY end
(exercisable/ (exercisable/
unexercisable) unexercisable)
<S> <C> <C> <C> <C>

Dan R. Cook 0 0 300,000 300,000 0
James B. Grant 0 0 20,000 20,000 0

</TABLE>
LONG TERM INCENTIVE PLAN - AWARDS IN LAST FISCAL YEAR

USTMAN has no long term incentive compensation plans, defined benefit
plans or actuarial plans. There are no plans to pay bonuses or deferred
compensation to employees of the Company The Company has not adopted any
medical, life of other insurance plan for its employees.

DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE

Not applicable since the company has not defined benefit or actuarial plans.

COMPENSATION OF DIRECTORS

STANDARD ARRANGEMENTS.

Two of USTMAN's directors, Messrs. Rosenstein and Weisman (who are also
principals of the Company's principal shareholders, Sagaponack) are paid $25,000
cash compensation per quarter for their services as Directors each year. The
Company paid Don Philips, a director until April 1999, and Ron Crane (a
director until May 1999) was paid $1,667 plus reasonable expenses for his
physical attendance at board meetings, and also was paid $5,000 annual for his
service as a director.

In each case, Directors are reimbursed expenses they incurred on behalf of
USTMAN on a fully accountable basis.

OTHER ARRANGEMENTS

Except as described herein, no officer or director of the company has
been or in being paid any cash compensation, or is otherwise subject to any
deferred compensation plan, bonus plan or any other arrangement and
understanding whereby such person would obtain any cash compensation for his
services for and on behalf of the company.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.

USTMAN has no compensation plan or arrangement with respect to any
executive officer which plan or arrangement results or will result from the
resignation, retirement or any other termination of such individual's
employment with the company. USTMAN has no plan or arrangement with respect to
any such persons which will result from a change in control or a change in the
individual's responsibilities following a change in control.

USTMAN has an employment contract with Dan R. Cook for a term expiring
on May 20, 2001 at an annual base salary of $130,000. Mr. Cook serves as
President and Chief Executive Officer. Under the agreement Mr. Cook can receive
an annual cash bonus based on a percentage or earnings before income taxes,
depreciation and amortization.

USTMAN has an employment contract with James B. Grant expiring on December 17,
2000 at an annual base salary of $90,000. Mr. Grant is also entitled to
commissions based on monthly monitoring, tank gauge and software sales.

REPORT ON REPRICING OF OPTIONS/SARs.

Not applicable, as no options or SARs were repriced during the fiscal
year ended June 30, 1999.

F-27
<PAGE> 38

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of September 24, 1999 by (i) each person
who we know owns beneficially more than 5% of the common stock; (ii) each of our
directors and 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>
Amount and Nature
of Beneficial Percent of Outstanding
Name Ownership(A) Shares
- ---- ----------------- ----------------------
<S> <C> <C>
Sagaponack Partners, L.P.
170 Columbus Ave., 5th Floor
San Francisco, CA 94133 7,344,520 36.9%

Dan R. Cook
12265 W. Bayaud Ave., #110
Lakewood, CO 80228 300,000(1) 1.5%

Ronald G. Crane
12265 W. Bayaud Ave., #110
Lakewood, CO 80228 1,101,500(2) 5.6%

Barry S. Rosenstein
909 Montgomery Street, Suite 102
San Francisco, CA 94133 7,344,520(3) 36.9%

Marc A. Weisman
645 Fifth Ave., 8th Floor
New York, NY 10022 7,344,520(3) 36.9%

All current executive officers and directors as a group
(5 persons) 7,821,357(4) 39.4%
</TABLE>

(A) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or will become exercisable within 60 days are deemed
outstanding, while such shares are not deemed for purposes of computing the
percentage of ownership of any other person. Unless otherwise indicated, the
listed beneficial owner has sole voting and investment power with respect to
all shares beneficially owned, subject to community property law where
applicable.

(1) Includes options granted by USTMAN to purchase up to 150,000 shares of
common stock which are exercisable within 60 days.

(2) Includes options granted by USTMAN 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 a 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 USTMAN are exercised after May 22, 1997 in order
to maintain Sagaponack Partners. L.P.'s percentage ownership of the outstanding
common stock of USTMAN.

(4) Includes options granted by USTMAN to purchase an aggregate of 170,000
shares of common stock which are exercisable within 60 days. In addition, see
note (3) above.

F-28
<PAGE> 39

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In consideration of the purchase by Sagaponack of the Senior
Subordinated Notes, the Company issued to Sagaponack Partners, L.P., 7,304,520
shares of the Company's Common Stock, which represented in the aggregate 40% of
the issued and outstanding shares of the Company's Common Stock immediately
after issuance of the Common Stock. Warrants were issued to Sagaponack Partners,
L.P., to purchase shares of Common Stock in an amount sufficient, upon the
exercise of any outstanding options and warrants, for Sagaponack Partners, L.P.,
to maintain 40% ownership of the outstanding Common Stock of the Company. Such
warrants will be at the same price and on the same terms as the options or
warrants exercised by third parties.

In December 1998, Sagaponack 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 Sagaponack for additional interest expense were also canceled 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% dividend
based on the Allocation Amount, if and when, declared by the Board of Directors.
The effective dividend rate is 12.3% for the year ended June 30, 1999. 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.

On June 29, 1999, the Investors agreed to advance the Company $750,000.
The advance is non-interest bearing, unsecured, and due on demand. The proceeds
were used to pay down the BankBoston term loan in June 1999. The investors have
informed the Company that they intend to convert the $750,000 advance to equity
upon certain conditions, but in any case, no later than November 26, 1999.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

3.1 Certificate of Amendment of Articles of Incorporation dated
February 14, 1991 is incorporated herein by reference to
Form 10-K for fiscal year 1991.

3.2 Certificate of Amendment of he 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 and 3.4 for provisions of the Articles
of Incorporation and Bylaws defining the rights of holders of
common stock.

10.1 Watson General Corporation Retirement Plan(4).

F-29
<PAGE> 40

10.2 Stock Option agreement dated May 22, 1997 between the Company
and Dan R. Cook(5).

10.3 Employment agreement dated May 22, 1997 between the Company
and Dan R. Cook(5).

10.4 Securities purchase agreement dated May 22, 1997 between the
Company and Sagaponack Partners, L.P. and Sagaponack
International Partners; L.P.(6).

10.5 Warrant agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P.(6).

10.6 Stock pledge agreement dated May 22, 1997 between the Company
and Sagaponack Partners, L.P. and Sagaponack International
Partners, L.P.(6).

10.7 Security agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. and Sagaponack International
Partners, L.P.(6).

10.8 Financial advisory agreement dated May 22, 1997 between the
Company and Sagaponack Management Company(6).

10.9 Company agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. and Sagaponack International
Partners, L.P.(6).

10.10 Shareholder agreement dated May 22, 1997 between Sagaponack
Partners, L.P. ,Sagaponack International Partners, L.P. and
certain shareholders of the Company(6).

F-30
<PAGE> 41

10.11 Term Loan and Acquisition Line Agreement dated December 16,
1997 between the Company and BankBoston, N.A.(7)

10.12 First Amendment to Term Loan and Acquisition Line Agreement
between the Company and BankBoston, N.A.(9)

10.13 Second Amendment to Term Loan and Acquisition Line Agreement
between the Company and BankBoston, N.A.(9)

10.14 Stock Pledge Agreement dated December 16, 1997 between the
Company and BankBoston, N.A.(7).

10.15 Security Agreement dated December 16, 1997 between the Company
and BankBoston, N.A.(7).

10.16 Intercreditor and Subordination Agreement dated December 16,
1997 between the Company and BankBoston, N.A.(7).

10.17 Primary Stock Purchase Agreement dated December 17, 1997
between the Company and Erica Bengtson Grant and James B.
Grant(7).

10.18 Contingent Stock Purchase Agreement dated December 17, 1997
between the Company and Environmental System Corporation(7).

10.19 Stock Option Agreement dated January 16, 1998(8).

10.20 Amendment to Securities Purchase Agreement among the Company,
Sagaponack Investors, L.P. and Sagaponack International
Partners, L.P.(9).

21.0 Subsidiaries of Registrant

A-Accurate Moving, Inc. California Inactive
EnvirAlert, Inc. Delaware Inactive
Three Generations Moving, Inc. California Inactive
Watson Systems, Inc. Missouri Inactive
Watson Value Assets, LLC California Inactive
Advanced Tank Certification, Inc. Tennessee Inactive

23.0 Consent of Independent Auditors

27.0 Financial Data Schedule

F-31
<PAGE> 42

- --------------
(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.

(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.

(5) 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).

(6) Incorporated by reference to the Company's Current Report on Form 8-K
filed on June 6, 1997 (File No. 000-16011).

(7) Incorporated by reference to the Company's Current Report on Form 8-K
filed on December 30, 1997 (File No. 000-16011).

(8) 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).

(9) Incorporated by reference to the Company's Registration Statement No.
333-82425 on Form SB-2 filed under the Securities Act of 1933 on July 7,
1999 (File No. 000-16011).

F-32
<PAGE> 43

(B) DURING THE REGISTRANT'S QUARTER ENDED JUNE 30, 1999, THE REGISTRANT FILED
THE FOLLOWING CURRENT REPORTS ON FORM 8-K: none.

In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.

USTMAN TECHNOLOGIES, INC.

By: /s/ Dan R. Cook
-------------------------------------------------
Dan R. Cook, President, Chief Executive
Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Barry S. Rosenstein
- -------------------------------- Co-Chairman of Board of Directors, September 24, 1999
(Barry S. Rosenstein)

/s/ Marc A. Weisman
- -------------------------------- Co-Chairman of Board of Directors, September 27, 1999
(Marc A. Weisman)

/s/ Dan R. Cook
- -------------------------------- President, Chief Executive Officer, September 27, 1999
(Dan R. Cook) Chief Financial officer, and
Director
/s/ Heather Murphy
- -------------------------------- Controller September 27, 1999
(Heather Murphy)
</TABLE>

F-33

<PAGE> 44
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Certificate of Amendment of Articles of Incorporation dated
February 14, 1991 is incorporated herein by reference to
Form 10-K for fiscal year 1991.