<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
COMMISSION FILE NUMBER: 0-16011
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USTMAN Technologies, Inc.
-----------------------------------------------------------------
(Exact name of small business issuer as specified 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, Lakewood, CO 80228
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 986-8011
--------------
Former name, former address and former fiscal year, if changed since last
report: NA
Indicate by check mark whether the issuer (1) has filed all annual, quarterly
and other reports required to be filed by Section 13 or 15(d) of the Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of February 11, 2000, were 22,298,598 shares, $0.00 par value.
1
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USTMAN TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1999 June 30,
(unaudited) 1999
----------- -----------
<S> <C> <C>
Assets:
Current assets:
Cash and equivalents $ 479,000 $ 411,000
Accounts receivable, less allowance for doubtful accounts (December 31,
1999, $163,000; June 30, 1999, $167,000) 1,261,000 1,079,000
Inventory 58,000 68,000
Prepaid expenses and other current assets 105,000 117,000
----------- -----------
Total current assets 1,903,000 1,675,000
Furniture and equipment:
Machinery and equipment 91,000 81,000
Computers and equipment 1,077,000 940,000
Furniture and fixtures 114,000 102,000
Leasehold improvements 4,000 4,000
----------- -----------
1,286,000 1,127,000
Accumulated depreciation (763,000) (648,000)
----------- -----------
523,000 479,000
Intangibles and other assets, less accumulated amortization (December
31,1999, $2,160,000; June 30, 1999, $1,922,000) 6,964,000 7,490,000
----------- -----------
$ 9,390,000 $ 9,644,000
=========== ===========
</TABLE>
See accompanying notes.
2
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<TABLE>
<CAPTION>
December 31,
1999 June 30,
(unaudited) 1999
------------ ------------
<S> <C> <C>
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 157,000 $ 385,000
Accrued expenses:
Salaries and wages 69,000 50,000
Other 199,000 253,000
Deferred revenue 302,000 218,000
Current portion of long-term debt 875,000 1,375,000
------------ ------------
Total current liabilities 1,602,000 2,281,000
Long-term debt, less current portion 1,250,000 1,750,000
Deferred employee benefits 429,000 432,000
------------ ------------
Total liabilities 3,281,000 4,463,000
------------ ------------
Shareholders' equity:
Preferred stock, no par value: Authorized shares- 1,000,000, issued and
outstanding- 9,717 shares at December 31, 1999 and June 30, 1999
Liquidation preference before payment to holders of common stock of
$16,800,000 at December 31, 1999 9,717,000 9,717,000
Common stock, no par value: Authorized shares-40,000,000, issued and
outstanding-22,298,598 at December 31, 1999 and 19,879,243 at June 30, 1999 13,576,000 12,826,000
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 1,196,000 1,134,000
Accumulated deficit (18,380,000) (18,496,000)
------------ ------------
Total shareholders' equity 6,109,000 5,181,000
------------ ------------
$ 9,390,000 $ 9,644,000
============ ============
</TABLE>
See accompanying notes.
3
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USTMAN TECHNOLOGIES, INC.
Consolidated Statements of Operations
Three Months Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
(unaudited) (unaudited)
------------ ------------
<S> <C> <C>
Net sales $ 1,745,000 $ 1,651,000
Cost of sales 549,000 613,000
------------ ------------
Gross profit 1,196,000 1,038,000
Selling, general and administrative expenses 964,000 959,000
Write off of deferred rights offering costs 138,000 --
Other income (expense):
Interest expense (88,000) (607,000)
Interest income 2,000 --
------------ ------------
Income (loss) before extraordinary item 8,000 (528,000)
Extraordinary item, loss on extinguishment of debt -- (1,211,000)
------------ ------------
Net income (loss) $ 8,000 $ (1,739,000)
============ ============
Basic and diluted income (loss) per common share:
Income (loss) before extraordinary item $ 0.00 $ (.03)
Extraordinary item -- (.06)
------------ ------------
Net income (loss) $ 0.00 $ (.09)
============ ============
Weighted average shares outstanding 20,221,108 19,879,243
============ ============
</TABLE>
See accompanying notes.
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USTMAN TECHNOLOGIES, INC.
Consolidated Statements of Operations
Six Months Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
(unaudited) (unaudited)
------------ ------------
<S> <C> <C>
Net sales $ 3,455,000 $ 3,174,000
Cost of sales 1,108,000 1,157,000
------------ ------------
Gross profit 2,347,000 2,017,000
Selling, general and administrative expenses 1,922,000 1,874,000
Write off of deferred rights offering costs 138,000 --
Other income (expense):
Interest expense (175,000) (1,414,000)
Interest income 4,000 --
------------ ------------
Income (loss) before extraordinary item 116,000 (1,271,000)
Extraordinary item, loss on extinguishment of debt -- (1,211,000)
------------ ------------
Net income (loss) $ 116,000 $ (2,482,000)
============ ============
Basic and diluted income (loss) per common share:
Income (loss) before extraordinary item $ .01 $ (.06)
Extraordinary item -- (.06)
------------ ------------
Net income (loss) $ .01 $ (.12)
============ ============
Weighted average shares outstanding 20,050,176 19,879,243
============ ============
</TABLE>
See accompanying notes.
5
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USTMAN TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
Six Months Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Operating activities:
Net income (loss) $ 116,000 $(2,482,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 115,000 124,000
Amortization of intangible assets 455,000 510,000
Amortization included in interest expense 21,000 244,000
Warrants to be issued under Senior Subordinated Note
Agreement -- 598,000
Write off deferred costs 138,000 1,211,000
Interest converted to long-term debt -- 360,000
Issuance of common stock to settle lawsuit -- 16,000
Loss on sale of equipment 2,000 --
Net changes in operating assets and liabilities (368,000) (439,000)
----------- -----------
Net cash provided by operating activities 479,000 142,000
----------- -----------
Investing activities:
Purchase of property and equipment (161,000) (85,000)
----------- -----------
Net cash used in investing activities: (161,000) (85,000)
----------- -----------
Financing activities:
Increase in deferred debt issuance cost -- (24,000)
Principal payments on long-term debt (250,000) (375,000)
----------- -----------
Net cash used in financing activities: (250,000) (399,000)
----------- -----------
Increase (decrease) in cash 68,000 (342,000)
Cash and cash equivalents, beginning of period 411,000 366,000
----------- -----------
Cash and cash equivalents, end of period $ 479,000 $ 24,000
=========== ===========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
Effective in December 1999, $750,000 of debt was converted into 2,419,355 shares
of the Company's common stock.
See accompanying notes.
6
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USTMAN TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
BASIS OF PRESENTATION
The consolidated financial statements of USTMAN Technologies, Inc. (the
"Company") included in this Form 10-QSB have been prepared without audit
(except that the balance sheet information as of June 30, 1999 has been
derived from consolidated financial statements which were audited) in
accordance with the rules and regulations of the Securities and Exchange
Commission. Although certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, the Company
believes that the disclosures are adequate to make the information presented
not misleading. The accompanying consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1999.
In the opinion of management, all adjustments (only consisting of normal
recurring accruals) necessary for a fair presentation of the results of
operations for the three and six month periods ended December 31, 1999 and
1998 have been included. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for
the full year.
Certain amounts for the prior period have been reclassified to conform to
the current quarter presentation.
NOTES PAYABLE AND LONG-TERM DEBT
On May 22, 1997, the Company, then doing business as Watson General
Corporation (Watson) completed the private placement of $7 million 10%
Senior Subordinated Notes Due 2002 and 7,304,520 shares of its common stock
(the Private Placement) with Sagaponack Partners, L.P., and Sagaponack
International Partners, L.P. (the "Investors"). In connection with the
valuation of the common stock issued in the transaction, an original issue
discount of $1,000,000 was recorded.
In December 1998, the Investors reached an agreement to convert all of the
Private Placement and accrued interest totaling $9,717,000 to Series A
Preferred Stock ("Preferred Stock"). Warrants previously to be issued to the
investors for additional interest expense were also canceled upon exchange
of notes. The Preferred Stock has an aggregate allocation amount (the
"Allocation Amount") of $15,000,000 for the purposes of liquidation priority
and dividends. The Preferred Stock will bear an annual 8% dividend, if and
when, declared by the Board of Directors. The Allocation Amount will
increase by the amount of any dividends not declared for payment by the
Company. At December 31, 1999 the allocation amount was $16,800,000. The
Preferred Stock has no mandatory redemption or voting rights and is not
convertible into Common Stock.
7
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EARNINGS (LOSS) PER SHARE
Basic and diluted net earnings (loss) per share are the same because the
exercise price on options outstanding exceeded the Company's average price
during the three and six months ended December 31, 1999.
DEBT CONVERSION
Effective in December 1999, Sagaponack converted $750,000 of unsecured debt
to 2,419,355 shares of common stock at $0.31 per share.
EQUITY
During the three and six months ended December 31, 1999, the Company
incurred $31,000 and $62,000, respectively, of stock-based compensation
expense.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Except for historical information contained herein, the statements in this
report are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the actual results in future periods to differ materially
from forecasted results. These risks and uncertainties include, among other
things, product demand, customers' strategies, and market competition.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED
TO THE THREE MONTHS ENDED DECEMBER 31, 1998
Sales for the 1999 quarter were $1,745,000 compared with $1,651,000 in the
prior year. Sales increased approximately 6% as a result of an increase in
the number of customers and related tanks analyzed. Gross profit increased
as a result of increased sales and lower operating costs. Cost of sales
decreased 10% compared to the comparable period of the prior year.
Management believes the cost of sales will increase slightly in the upcoming
months as a result of adding personnel in order to maintain high levels of
customer service.
Selling, general and administrative expenses increased 3% in the second
quarter compared to the second quarter of the prior year from $959,000 to
$989,000. This increase is partially a result of more aggressive marketing
and advertising during the current year which we expect may lead to
increased sales and revenues in future quarters.
In December 1999, USTMAN determined to withdraw its registration statement
filed in April 1999 with the Securities and Exchange Commission. The
registration statement was intended to permit shareholders to acquire
additional shares of common stock at an anticipated subscription price of
$0.25 per share. As a result of the withdrawal, $138,000 of costs related to
the rights offering were written off. Had the rights offering been
completed, these costs would have been netted against the proceeds of the
offering.
In December 1999, Sagaponack exchanged $750,000 of its unsecured debt for
2,419,335 shares of common stock at $0.31 per share. This non-cash
transaction resulted in reduced current indebtedness and increased
shareholders' equity.
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% per year was eliminated. Additionally,
amortization of deferred debt costs and original issue discount, which were
included in interest, were eliminated. Interest expense, including deferred
debt cost and original issue discount amortization, decreased 86% as a
result of the conversion. This conversion also resulted in a $1,211,000
write off of deferred debt costs.
9
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO
THE SIX MONTHS ENDED DECEMBER 31, 1998
USTMAN reported net income of $116,000 for the six month period ended
December 31, 1999 compared to a net loss of $2,482,000 for the six month
period ended December 31, 1998. The improvement in income is due to
increases in sales, decreases in both operating and general and
administrative expenses and decreases in interest expense. Additionally,
during the prior year USTMAN experienced an extraordinary loss related to
the extinguishment of debt.
Sales for the period ending December 31, 1999 were $3,455,000 compared with
$3,174,000 in the prior year. Sales increased approximately 9% as a result
of an increase in the number of customers and related tanks analyzed. Gross
profit increased as a result of increased sales and lower operating costs.
Cost of sales decreased 4% compared to the comparable period of the prior
year.
Selling, general and administrative expenses increased 4% compared to the
prior year from $1,874,000 to $1,947,000. This increase is partially a
result of more aggressive marketing and advertising during the current year
which we expect may lead to increased sales and revenues in future quarters.
See the three month results for a discussion of the rights offering costs
write off and debt conversion.
Because of prior net operating loss carryforwards, the Company has no taxes
due.
YEAR 2000 ASSESSMENT
The Company assessed Year 2000 compliance matters and determined
that it had potential for exposure regarding Year 2000 compliance in three
areas of its internal and external business activities. These areas included
(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 had 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 were Year 2000 compliant. Those
computers which were not compliant were replaced before 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 had been certified by the vendor to be Year 2000
compliant subsequent to the completion of certain patches which the Company
applied. The commercial software the Company runs is very diverse. The
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Company identified over thirty types of commercial software that were used
both internally and externally. The Company did not experience any
significant problems as a result of any of this software. The Company
replaced its accounting and information computer software. The system was
installed and functional before December 31, 1999. The cost of this system
was approximately $80,000.
In order to ensure that all software and hardware functioned properly in the
Year 2000, the Company constructed a separate testing facility. This
facility was dedicated entirely to Year 2000 testing on live customer data.
The Company set the internal date at this facility to December 31, 1999 and
ran analysis for two months to verify that no Year 2000 issues occur as the
clock approaches, reached and passed the century mark. The testing resulted
in no significant modifications to the system. In addition, the Company had
software engineers on site immediately after December 31, 1999. No
significant unforeseen problems occurred.
FINANCIAL CONDITION AND LIQUIDITY
At December 31, 1999 the Company's current assets exceeded its current
liabilities by $276,000 compared to current liabilities exceeding current
assets by $606,000 at 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. The Company formulated plans and strategies to
continue to address the Company's financial condition and increase
profitability. This included further cost reduction efforts, raising
additional capital through the sale of additional stock to Sagaponack, and
attempting to increase average prices by applying higher rates to new
customers and increasing rates for existing customers.. Management believes
the Company will generate sufficient cash flows to enable it to fund
operations and satisfy all capital requirements.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-k:
On December 17, 1999 the Company filed a report on Form 8-k, reporting
that the Company determined to withdraw its registration statement filed
in April 1999 with the Securities and Exchange Commission.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
USTMAN TECHNOLOGIES, INC.
(Registrant)
Date: 2/14/00 By /s/ Dan R. Cook
----------- ----------------------------------
Dan R. Cook
President and CEO
Date: 2/14/00 By /s/ Heather Murphy
----------- ----------------------------------
Heather Murphy
Controller
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 479,000
<SECURITIES> 0
<RECEIVABLES> 1,261,000
<ALLOWANCES> 0
<INVENTORY> 58,000
<CURRENT-ASSETS> 1,903,000
<PP&E> 523,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,390,000
<CURRENT-LIABILITIES> 1,602,000
<BONDS> 0
0
9,717,000
<COMMON> 13,576,000
<OTHER-SE> (17,184,000)
<TOTAL-LIABILITY-AND-EQUITY> 9,390,000
<SALES> 3,455,000
<TOTAL-REVENUES> 3,455,000
<CGS> 1,108,000
<TOTAL-COSTS> 2,060,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175,000
<INCOME-PRETAX> 116,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 116,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116,000
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
