<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
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 #300, 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 May 11, 2000, were 22,298,598 shares, no par value.
1
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Independent Accountants' Report
The Board of Directors and Shareholders
USTMAN Technologies, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of USTMAN
Technologies, Inc. and subsidiaries as of March 31, 2000, and the related
condensed consolidated statements of operations for the three-month and
nine-month period then ended, and the condensed consolidated statement of cash
flows for the nine-month period then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of June 30, 1999, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the year then ended (not presented herein); and in our report dated
September 20, 1999, except for paragraph [c] of Note 6, as to which the date is
September 27, 1999, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of June 30, 1999 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
May 15, 2000
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USTMAN TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31,
2000 June 30,
(unaudited) 1999
----------- -----------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 524,000 $ 411,000
Accounts receivable, less allowance for doubtful accounts (March 31,
2000, $163,000; June 30, 1999, $167,000) 1,341,000 1,079,000
Inventory 46,000 68,000
Prepaid expenses and other current assets 106,000 117,000
----------- -----------
Total current assets 2,017,000 1,675,000
----------- -----------
Furniture and equipment:
Machinery and equipment 97,000 81,000
Computers and equipment 1,133,000 940,000
Furniture and fixtures 115,000 102,000
Leasehold improvements 4,000 4,000
----------- -----------
1,349,000 1,127,000
Accumulated depreciation (811,000) (648,000)
----------- -----------
538,000 479,000
Intangibles and other assets, less accumulated amortization (March
31, 2000, $2,645,000; June 30, 1999, $1,922,000) 6,777,000 7,490,000
----------- -----------
$ 9,332,000 $ 9,644,000
=========== ===========
</TABLE>
See accompanying notes.
3
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<TABLE>
<CAPTION>
March 31,
2000 June 30,
(unaudited) 1999
------------ ------------
<S> <C> <C>
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 134,000 $ 385,000
Accrued expenses:
Salaries and wages 29,000 50,000
Other 308,000 253,000
Deferred revenue 173,000 218,000
Current portion of long-term debt 1,000,000 1,375,000
------------ ------------
Total current liabilities 1,644,000 2,281,000
Long-term debt, less current portion 1,000,000 1,750,000
Deferred employee benefits 428,000 432,000
------------ ------------
Total liabilities 3,072,000 4,463,000
------------ ------------
Shareholders' equity:
Preferred stock, no par value: Authorized shares-1,000,000,
issued and outstanding-9,717 shares at March 31, 2000 and June
30, 1999. Liquidation preference before payment to holders of
common stock of $17,230,285 at March 31, 2000 9,717,000 9,717,000
Common stock, no par value: Authorized shares-40,000,000,
issued and outstanding-22,298,598 at March 31, 2000 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 1,227,000 1,134,000
Accumulated deficit (18,260,000) (18,496,000)
------------ ------------
Total shareholders' equity 6,260,000 5,181,000
------------ ------------
$ 9,332,000 $ 9,644,000
============ ============
</TABLE>
See accompanying notes.
4
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USTMAN TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
(unaudited) (unaudited)
-------------- --------------
<S> <C> <C>
Net sales $ 1,706,000 $ 1,637,000
Cost of sales 572,000 565,000
-------------- --------------
Gross profit 1,134,000 1,072,000
Selling, general and administrative expenses 922,000 976,000
Other income (expense):
Interest expense (93,000) (103,000)
Interest income 2,000 --
-------------- --------------
Net income (loss) $ 121,000 $ (7,000)
============== ==============
-------------- --------------
Basic and diluted income (loss) per common share $ 0.01 $ 0.00
============== ==============
Weighted average shares outstanding 22,298,598 19,879,243
============== ==============
</TABLE>
See accompanying notes.
5
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USTMAN TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
Nine Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
(unaudited) (unaudited)
------------ ------------
<S> <C> <C>
Net sales $ 5,161,000 $ 4,811,000
Cost of sales 1,681,000 1,722,000
------------ ------------
Gross profit 3,480,000 3,089,000
Selling, general and administrative expenses 2,843,000 2,850,000
Write off of deferred rights offering costs 138,000 --
Other income (expense):
Interest expense (268,000) (1,518,000)
Interest income 5,000 1,000
------------ ------------
Income (loss) before extraordinary item 236,000 (1,278,000)
Extraordinary item, loss on extinguishment of debt -- (1,211,000)
------------ ------------
Net income (loss) $ 236,000 $ (2,489,000)
============ ============
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 20,799,650 19,879,243
============ ============
</TABLE>
See accompanying notes.
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USTMAN TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 236,000 $ (2,489,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 163,000 183,000
Amortization of intangible assets 775,000 758,000
Amortization included in interest expense 41,000 253,000
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 (583,000) (526,000)
------------- -------------
Net cash provided by operating activities 772,000 364,000
------------- -------------
Investing activities:
Purchase of property and equipment (224,000) (136,000)
------------- -------------
Net cash used in investing activities: (224,000) (136,000)
------------- -------------
Financing activities:
Increase in deferred debt issuance cost (60,000) (24,000)
Principal payments on long-term debt (375,000) (375,000)
------------- -------------
Net cash used in financing activities: (435,000) (399,000)
------------- -------------
Increase (decrease) in cash 113,000 (171,000)
Cash and cash equivalents, beginning of period 411,000 366,000
------------- -------------
Cash and cash equivalents, end of period $ 524,000 $ 195,000
============= =============
</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.
7
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USTMAN TECHNOLOGIES, INC.
Notes to Condensed 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 the audited consolidated balance sheet as of that date 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 condensed 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 and
recurring adjustments) necessary for a fair presentation of the results of
operations for the three and nine month periods ended March 31, 2000 and
1999 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. The Investors appointed two members of
the Company's board of directors, who were re-elected by the shareholders in
February 2000 at the Company's annual meeting of shareholders.
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 increases by
the amount of any dividends not declared for payment by the Company. At
March 31, 2000 the allocation amount was $17,230,285. The Preferred Stock
has no mandatory redemption or voting rights and is not convertible into
Common Stock.
8
<PAGE> 9
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 nine months ended March 31, 2000.
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. The market price of
the Company's common stock as quoted on the OTC Bulletin Board at the date
of the transaction was $0.31 per share.
EQUITY
During the three and nine months ended March 31, 2000, the Company incurred
$31,000 and $93,000, respectively, of stock-based compensation expense.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This report contains certain statements which are "forward looking"
statements under federal securities laws that are based on the beliefs of
management as well as assumptions made by and information currently
available to management. Forward looking statements appear throughout Item 2
of Part I, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" concerning USTMAN's Financial Condition and
Liquidity. Certain factors could cause actual results to differ materially
from those in the forward-looking statements including without limitation,
(i) continuation of historical patterns of demand for USTMAN's products and
USTMAN's ability to meet demand, (ii) actions by competitors, including
without limitation new product introductions (iii) and general economic
conditions. USTMAN does not intend to update these forward looking
statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1999
Sales for the quarter ended March 31, 2000 were $1,706,000 compared with
$1,637,000 in the prior year. Sales increased approximately 4% as a result
of an increase in the number of customers and related tanks analyzed. Cost
of sales increased 1% compared to the comparable period of the prior year.
This is a result of travel to customer locations and adding personnel in
order to maintain high levels of customer service.
Selling, general and administrative expenses decreased 6% in the third
quarter compared to the third quarter of the prior year from $976,000 to
$922,000. While the Company has been more aggressive with marketing and
advertising during the current year decreases in sales commission have
offset the increased advertising expenses.
As a result of increased sales and reduced expenses and other factors
described in the Management's Discussion and Analysis, the Company's income
for the three month period was $121,000 as compared to a $7,000 loss for the
same period of the previous fiscal year.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO
THE NINE MONTHS ENDED MARCH 31, 1999
USTMAN reported net income of $236,000 for the nine month period ended March
31, 2000 compared to a net loss of $2,489,000 for the nine month period
ended March 31, 1999 (a net loss of $1,278,000 before the extraordinary loss
on extinguishments of debt). The improvement in income is due to increases
in sales, decreases in both operating and general and administrative
expenses and decreases in interest expense.
Sales for the nine month period ending March 31, 2000 were $5,161,000
compared with $4,811,000 in the prior year. Sales increased approximately 7%
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 2% compared to the comparable
period of the prior year.
10
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Selling, general and administrative expenses remained relatively consistent
compared to the prior year changing from $2,850,000 to $2,843,000. While the
Company has been more aggressive with marketing and advertising during the
current year decreases in sales commission have offset the increased
advertising expenses.
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 the Company's principal shareholder, Sagaponack exchanged
$750,000 of its unsecured debt for 2,419,335 shares of common stock at $0.31
per share at a time when the market price of the Company's common stock was
$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 82% as a
result of the conversion. This conversion also resulted in a $1,211,000
write off of deferred debt costs.
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
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which the Company applied. The commercial software the Company runs is very
diverse. The 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. All systems have been functioning
properly since December 31, 1999. Management believes all Year 2000 issues
have been resolved with no significant interruptions to business.
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 2000 the Company's current assets exceeded its current
liabilities by $373,000 compared to current liabilities exceeding current
assets (a working capital deficit) by $606,000 at fiscal year end June 30,
1999. Prior to the Company's last fiscal year end, the Company implemented
several plans to address its financial condition and to increase
profitability (including the conversion of the Senior Subordinated Notes to
equity), and has continued to implement cost reduction efforts and the
conversion of additional debt to equity.
In addition, it should be noted that the Company's operations generated
positive cash flow of $772,000 during the nine months ended March 31, 2000,
more than twice the positive cash flow achieved during the same nine-month
period of the previous fiscal year. Even after accounting for a negative
cash flow of $224,000 for investing activities (for the purchase of property
and equipment) and $435,000 for financing activities, the Company generated
a positive cash flow of $113,000 for the nine months ended March 31, 2000 as
compared to a negative cash flow of $171,000 realized during the first nine
months of fiscal 1999.
Management intends to continue to monitor its operations and will continue
to attempt to increase its profitability and cash flow from operations
during the remaining portion of this fiscal year and in the future. Based on
the Company's projections, management believes that the Company will
generate sufficient cash flows to enable it to fund operations and satisfy
all capital requirements.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
USTMAN TECHNOLOGIES, INC.
(Registrant)
Date: 5/15/00 By /s/ Dan R. Cook
----------- ---------------------------------
Dan R. Cook
President and CEO
Date: 5/15/00 By /s/ Heather Murphy
----------- ---------------------------------
Heather Murphy
Controller
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 524,000
<SECURITIES> 0
<RECEIVABLES> 1,341,000
<ALLOWANCES> 0
<INVENTORY> 46,000
<CURRENT-ASSETS> 2,017,000
<PP&E> 538,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,332,200
<CURRENT-LIABILITIES> 1,644,000
<BONDS> 0
0
9,717,000
<COMMON> 13,576,000
<OTHER-SE> (17,033,000)
<TOTAL-LIABILITY-AND-EQUITY> 9,332,000
<SALES> 5,161,000
<TOTAL-REVENUES> 5,161,000
<CGS> 1,681,000
<TOTAL-COSTS> 2,981,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268,000
<INCOME-PRETAX> 236,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 236,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 236,000
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
