<PAGE> 1
UNITED STATES
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 SEPTEMBER 30, 2000
COMMISSION FILE NO. 000-21325
SYSTEMONE TECHNOLOGIES INC.
----------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0226813
------------------------- -----------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
8305 N.W. 27TH STREET, SUITE 107
MIAMI, FLORIDA 33122
--------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(305) 593-8015
--------------------------------------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
MANSUR INDUSTRIES INC.
(FORMER NAME)
CHECK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
THE REGISTRANT HAD AN AGGREGATE OF 4,742,923 SHARES OF ITS COMMON STOCK, PAR
VALUE $.001 PER SHARE, OUTSTANDING AS OF THE CLOSE OF BUSINESS ON NOVEMBER 14,
2000.
1
<PAGE> 2
SYSTEMONE TECHNOLOGIES INC.
INDEX TO FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2000
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets-
As of September 30, 2000 (unaudited) and December 31, 1999
Condensed Statements of Operations-
For the three and nine months ended September 30, 2000 and 1999
(unaudited)
Condensed Statements of Cash Flows-
For the nine months ended September 30, 2000 and 1999 (unaudited)
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
<PAGE> 3
SYSTEMONE TECHNOLOGIES INC.
CONDENSED BALANCE SHEETS
As at September 30, 2000 and December 31, 1999
(In thousands)
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 175 $ 912
Accounts receivable, net 1,547 2,748
Inventories, net 4,031 4,962
Prepaid and other assets 464 585
-------- --------
Total current assets 6,217 9,207
Property and equipment, net 2,587 2,866
Other assets 722 907
-------- --------
Total assets $ 9,526 $ 12,980
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses 3,208 3,721
Deferred revenue 207 160
Line of credit 1,942 957
Current installments of obligations under capital leases 254 319
-------- --------
Total current liabilities 5,611 5,157
Long-term debt and capital lease obligations, excluding
current installments 21,243 18,263
-------- --------
Total liabilities 26,854 23,420
Stockholders' deficit:
Preferred stock, Series B 56 53
Preferred stock, Series C 75 71
Preferred stock, Series D 21 --
Common stock 5 5
Additional paid-in capital 28,029 24,687
Accumulated deficit (45,514) (35,256)
-------- --------
Total stockholders' deficit (17,328) (10,440)
-------- --------
Total liabilities and stockholders' deficit $ 9,526 $ 12,980
======== ========
</TABLE>
See accompanying notes to condensed financial statements which are an
integral part thereof.
3
<PAGE> 4
SYSTEMONE TECHNOLOGIES INC.
CONDENSED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2000 and 1999
(Unaudited)
(In thousands other than per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 4,536 $ 4,331 $ 13,832 $ 13,545
Cost of sales 1,807 1,750 5,597 5,823
----------- ----------- ----------- -----------
Gross margin 2,729 2,581 8,235 7,722
Operating expenses:
Research and product development 44 41 287 287
Selling, general and administrative 4,882 5,724 15,730 16,919
----------- ----------- ----------- -----------
4,926 5,765 16,017 17,206
----------- ----------- ----------- -----------
Loss from operations (2,197) (3,184) (7,782) (9,484)
Interest expense, net (608) (475) (1,651) (1,399)
----------- ----------- ----------- -----------
Net loss (2,805) (3,659) (9,433) (10,883)
=========== =========== =========== ===========
Dividends on convertible
preferred stock (291) (161) (825) (220)
----------- ----------- ----------- -----------
Loss to common shares $ (3,096) $ (3,820) $ (10,258) (11,103)
=========== =========== =========== ===========
Basic and diluted net loss
per common share $ (0.65) $ (0.83) $ (2.16) $ (2.41)
=========== =========== =========== ===========
Weighted-average of common shares
outstanding 4,742,923 4,601,309 4,742,923 4,601,309
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements which are an
integral part thereof.
4
<PAGE> 5
SYSTEMONE TECHNOLOGIES INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2000 and 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,433) $(10,883)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization 443 285
Provision for bad debts 85 105
Provision for obsolete inventory -- 60
Non cash interest payments on convertible debt 1,247 1,184
Changes in operating assets and liabilities:
Inventories 931 (1,444)
Accounts receivable 1,116 (353)
Prepaid and other assets 121 124
Deferred revenue 47 (110)
Accounts payable and accrued expenses (513) (212)
-------- --------
Net cash flows from operating activities (5,956) (11,244)
-------- --------
Cash flows from investing activities:
Purchase of equipment (3) (183)
-------- --------
Net cash flows from investing activities (3) (183)
Cash flows from financing activities:
Proceeds from issuance of convertible preferred stock 2,000 10,997
Proceeds from issuance of promissory note 2,500
Proceeds from line of credit 985 756
Repayments of capital lease obligations (263) (202)
-------- --------
Net cash flows from financing activities 5,222 11,551
-------- --------
Net (decrease) increase in cash and cash equivalents (737) 124
Cash and cash equivalents, beginning of period 912 3,199
-------- --------
Cash and cash equivalents, end of period $ 175 $ 3,323
======== ========
</TABLE>
See accompanying notes to condensed financial statements which are an
integral part thereof.
5
<PAGE> 6
SYSTEMONE TECHNOLOGIES INC.
(FORMERLY KNOWN AS MANSUR INDUSTRIES INC.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 (UNAUDITED)
AND DECEMBER 31, 1999
THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING
PRONOUNCEMENTS
SystemOne Technologies Inc. (formerly known as Mansur Industries Inc.) (the
"Company") is primarily engaged in the manufacture, marketing and sale of
industrial parts cleaning equipment for use in the automotive, marine, aviation
and general manufacturing industries. The Company's focus is on the design,
development and manufacture of industrial cleaning equipment which incorporate
continuous recycling and recovery technologies for solvents and solutions,
reducing the need to replace and dispose of contaminants.
(1) BASIS OF PRESENTATION
The accompanying unaudited interim condensed financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-QSB.
Accordingly, certain information and footnotes required by generally accepted
accounting principles for complete financial statements are not included herein.
The interim condensed statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB as filed with the Securities and Exchange Commission for the year
ended December 31, 1999.
Management acknowledges its responsibility for the preparation of the
accompanying interim condensed financial statements which reflect all
adjustments considered necessary, in the opinion of management, for a fair
statement of the results of interim periods presented. The results of operations
for the interim periods are not necessarily indicative of the results of
operations for the entire year. Where appropriate, certain amounts have been
reclassified to conform with the 2000 presentation.
(2) CONVERTIBLE PREFERRED STOCK AND WARRANTS
On May 2, 2000, the Company sold an aggregate of 20,000 shares (the "Shares") of
newly created Series D Convertible Preferred Stock (the "Series D Preferred
Stock") to three institutional investors for an aggregate purchase price of
$2,000,000. In addition, the purchasers received warrants (the "May Warrants"),
which expire in April 2005, to acquire an aggregate of 363,636 shares of the
Company's common stock at an exercise price of $5.50 per share. Each share of
Series D Preferred Stock has a liquidation value of $100. The dividend rate
payable on the outstanding shares of Series D Preferred Stock
6
<PAGE> 7
is 8.25% of the liquidation value of each share per annum. Through the second
anniversary of the issuance of the Series D Preferred Stock, all dividends are
payable by the issuance of additional shares of Series D Preferred Stock valued
at the liquidation value. Thereafter, all such dividends may, at the option of
the Company, be paid either through the issuance of additional shares of the
Series D Preferred Stock, cash or any combination of Series D Preferred Stock
and cash. Each holder of shares of Series D Preferred Stock has the right, at
any time or from time to time prior to May 17, 2004 (the "Redemption Date") to
convert its shares of Series D Preferred Stock into shares of the Company's
Common Stock at a conversion price of $5.50 per share, subject to adjustment in
certain circumstances. Subject to earlier conversion, commencing on May 17,
2002, the Company shall have the right to redeem outstanding shares of Series D
Preferred Stock at a redemption price of 104% (if redemption occurs during 2002)
or 102% (if redemption occurs during 2003) of the liquidation value of the
redeemed shares. The holders of Series D Preferred Stock will vote together with
the holders of the Company's Common Stock, Series B 8.25% Convertible Preferred
Stock ("Series B Preferred Stock"), and Series C 8.00% Convertible Preferred
Stock ("Series C Preferred Stock") as a single class on all matters to come
before a vote of the shareholders of the Company, with each share of Series D
Preferred Stock entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible. The Company is also required to
register the shares of common stock underlying the Series D Preferred Stock for
resale under the Securities Act of 1933, as amended (the "Securities Act").
(3) LOAN AGREEMENT
On August 7, 2000, the Company entered into a Loan Agreement (the "Loan
Agreement") with Environmental Opportunities Fund II, L.P., Environmental
Opportunities Fund II (Institutional), L.P. and Hanseatic Americas LDC under
which it borrowed an aggregate of $2,500,000, evidenced by promissory notes (the
"Subordinated Promissory Notes"), maturing February 7, 2002, subject to
mandatory prepayment to the extent of any proceeds received by the Company from
the sale of any new securities of the Company or the borrowing of any additional
money (other than purchase money debt). The Subordinated Promissory Notes
initially bear interest at the rate of 12% per annum until the six month
anniversary of the Issuance Date, 14% until the nine month anniversary of the
Issuance Date and 16% thereafter until repaid in full. The Company's obligations
under the Loan Agreement are secured by a lien on substantially all of its
assets other than its intellectual property although such obligations have been
subordinated to the Loan and Security Agreement with Guaranty Business Credit
Corporation, as assignee of Capital Business Credit, a division of Capital
Factors, Inc. (the "Revolver"). Each of the Environmental Funds and Hanseatic
are shareholders of the Company and Mr. Paul A. Biddelman, President of
Hanseatic, and Mr. Kenneth Ch'uan-K'ai Leung, Chief Investment Officer of the
Environmental Funds, are directors of the Company. Pursuant to the Loan
Agreement the Company issued warrants (the "August Warrants") to purchase an
aggregate of 714,286 shares of its common stock at $3.50 per share and the
Company is required to register such shares of common stock for resale under the
Securities Act. The Company assigned a fair value of $569,000 to the August
Warrants and has recorded this amount as a discount to the Subordinated
Promissory Notes with a corresponding increase in Additional Paid In Capital.
7
<PAGE> 8
This discount is being amortized into interest expense over the term of the
Subordinated Promissory Notes. The August Warrants may only be exercised for 50%
and 75% of the common stock underlying the August Warrants prior to May 7, 2001
and August 7, 2001 respectively. In addition, if the loan is repaid prior to May
7, 2001, then 50% of the August Warrants will terminate, and, thereafter, if the
loan is repaid prior to August 7, 2001, then 25% of the August Warrants will
terminate.
In accordance with its terms, the conversion price of the Series B Preferred
Stock was reduced to $4.81 and in accordance with their respective terms, the
conversion prices of the Series C and Series D Preferred Stock as well as the
exercise price of the May Warrants were reset to $3.50 as a result of the
issuance of the August Warrants. In addition, each share of the Series B, Series
C and Series D Preferred Stock is now convertible into 20.79, 28.57 and 28.57
shares of the Company's common stock respectively and the May Warrants are now
exercisable for 571,428 shares of the Company's common stock.
(4) SUBSEQUENT EVENTS
MARKETING AND DISTRIBUTION AGREEMENT
On November 13, 2000, the Company signed a multi-year marketing and distribution
agreement with Safety-Kleen Systems, Inc., a wholly owned subsidiary of
Safety-Kleen Corp. ("Safety-Kleen"). Under the agreement, Safety-Kleen will be
appointed the exclusive distributor of SystemOne parts washer equipment in the
United States, Puerto Rico, Canada and Mexico. The agreement provides for
minimum annual purchases escalating from 10,000 units during each of the first
two years to 18,000 units during the fifth year for specified prices plus 36
monthly royalty payments on each unit purchased. In addition, Safety-Kleen will
take over service, maintenance and repair responsibility for previously sold
SystemOne parts washers. The marketing and distribution agreement is expected to
become effective by the end of the fourth quarter, subject to approval of the
United States Bankruptcy Court administering Safety-Kleen's Chapter 11
Bankruptcy proceeding, of which approval there can be no assurance.
As a result of the Safety-Kleen agreement, the Company will eliminate its entire
national sales and service infrastructure. The Company also agreed to issue to
Safety-Kleen a five year warrant to purchase up to 1,134,615 shares of Common
Stock at a price of $3.50 per share. The fair value of the warrants is
approximately $1.9 million. The Company anticipates recording a charge in the
fourth quarter ranging from $4 million to $5 million relating to the agreement,
the issuance of warrants and closure of its national sales and service
infrastructure.
LOAN AGREEMENT
The Company borrowed an additional $800,000 in two separate transactions of
$400,000 each on October 17, and November 10, 2000, evidenced by promissory
notes under the Loan Agreement, as amended, with Environmental Opportunities
Fund II, L.P., Environmental Opportunities Fund, II (Institutional), L.P. and
Hanseatic Americas LDC (the "Loan Agreement"). Pursuant to the Loan Agreement
the Company amended the August Warrants to increase the shares issuable under
such warrants (the "October Warrants") by
8
<PAGE> 9
228,572 shares for an aggregate of 942,858 shares. The Company is required to
register such shares of common stock for resale under the Securities Act. See
Note 3 to the Condensed Financial Statements included herein.
In accordance with its terms, the conversion price of the Series B Preferred
Stock has been reduced to $4.79 upon issuance of the October Warrants and each
share of the Series B Preferred Stock is now convertible into 20.88 shares of
the Company's common stock.
SECOND AMENDATORY AGREEMENT TO LOAN AND SECURITY AGREEMENT
In November, the Company executed a second amendment to its Revolver. Pursuant
to this amendment, the Company is required to make additional weekly principal
payments beginning on October 20, 2000 in the minimum amount of $25,000, which
amount will be applied to reduce the amount of the Over-Advance outstanding
under the Revolver. The Company further is required to pay 50% of the remaining
balance of such Over-Advance on November 30, 2000 and the remaining 50% on
December 15, 2000.
(5) NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998 the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), as amended, which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company will adopt SFAS No. 133, as amended, during the three months ending
March 31, 2001 and anticipates that there will be no material impact to the
Company's financial statements and notes thereto.
In 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101 ("SAB No. 101"), which becomes effective in the fourth quarter of 2000.
The bulletin provides guidance on the recognition, disclosure and presentation
of revenue in financial statements. The Company does not expect SAB No. 101 to
have a material impact on the Company's results of operations or financial
position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the
condensed Financial Statements, including the notes thereto, contained elsewhere
in this 10-QSB and the Company's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1999.
9
<PAGE> 10
GENERAL AND RECENT DEVELOPMENTS
The Company was incorporated in November 1990 under the name Mansur Industries
Inc. and, as a development stage company, devoted substantially all of its
resources to research and development programs related to its full line of self
contained, recycling industrial parts washers until June 1996. The Company
commenced its planned principal operations in July 1996.
Since July 1996, the Company has made its SystemOne(R) Washers and services
available to the public through a third party leasing program and through direct
sales. Under the third party leasing program, the Company recognizes revenue
from the sale of parts washers at the time the equipment is delivered by the
Company to the customer and the customer accepts such equipment. In general, the
revenue recognized approximates the discounted present value of the payment
stream related to the underlying lease.
Commencing in January 1997 and continuing until June 1998, the Company
maintained a distribution agreement with First Recovery, an affiliate of
Ashland, Inc., whereby First Recovery served as the Company's exclusive
distributor of the SystemOne(R) Washers. In an effort to accelerate market
penetration and provide new opportunities for recurring service revenues, the
Company completed the development of a direct marketing and distribution
organization for its SystemOne(R) product line in 1998 and launched a new
full-service program ("TotalCare") in the fourth quarter of 1999 to transition
the Company from a pure equipment and manufacturing company into a full-service
organization. This strategy was designed to allow the Company to offer
aggressive factory direct pricing on sales of its products and realize recurring
service revenues on its increasing customer base. In addition, commencing in the
first quarter of 2000, the Company consolidated its nationwide distribution and
service infrastructure, eliminating redundant or nonproductive resources in the
field and at its corporate office, and also restructured the direct sales and
service organization in order to significantly cut operating expenses while
enhancing efficiency and productivity.
On November 14, 2000, the Company announced that it had entered into a marketing
and distribution agreement dated November 13, 2000 with Safety-Kleen (the
"Marketing and Distribution Agreement") and will eliminate its entire national
direct sales and service infrastructure. Under the agreement, Safety-Kleen will
be appointed the exclusive distributor of SystemOne parts washer equipment in
the United States, Puerto Rico, Canada and Mexico and will take over service,
maintenance and repair responsibility for previously sold SystemOne parts
washers. The agreement provides for minimum annual purchases escalating from
10,000 units during each of the first two years to 18,000 units during the fifth
year for specified prices plus 36 monthly royalty payments on each unit
purchased. The Company believes that the appointment of Safety-Kleen will
substantially accelerate market penetration and reduce annual operating expenses
by approximately $20 million. The marketing agreement is expected to become
effective by the end of the fourth quarter, subject to approval of the United
States Bankruptcy Court administering Safety-Kleen's Chapter 11 Bankruptcy
proceeding (the "Bankruptcy Court") which approval can not be assured. The
Company also agreed to issue to Safety-Kleen a five year warrant to purchase up
to 1,134,615 shares of Common Stock at a price of $3.50 per share.
The Company anticipates recording a charge in the fourth quarter ranging from $4
million to $5 million relating to the agreement, the issuance of warrants and
closure of its national sales and service infrastructure.
10
<PAGE> 11
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Sales revenues increased by $205,000, or 4.7%, to $4,536,000 for the three
months ended September 30, 2000 from $4,331,000 for the comparable period of
1999. As a percentage of sales, gross margin represented 60.2% and 59.6% for the
three months ended September 30, 2000 and 1999, respectively.
Selling, general and administrative expenses for the three months ended
September 30, 2000 were $4,882,000, a decrease of $842,000, or 14.7%, compared
to selling, general and administrative expenses of $5,724,000 for the three
months ended September 30, 1999. The decrease for the three months ended
September 30, 2000 was primarily the result of the consolidation of the
Company's nationwide distribution and service infrastructure, commencing in the
first quarter of 2000, which eliminated redundant or nonproductive resources in
the field and at its corporate office.
The Company recognized net interest expense of $608,000 for the three months
ended September 30, 2000, an increase of $133,000 or 28% compared to net
interest expense of $475,000 for the three months ended September 30, 1999. This
increase was primarily the result of the higher outstanding balance under the
Company's Loan and Security Agreement with Guaranty Business Credit Corporation,
as assignee of Capital Business Credit, a division of Capital Factors, Inc. (the
"Revolver") in the current period compared to the comparable period of the prior
year and the issuance, under the Bridge Loan (as defined below), of a $2,500,000
promissory note in August 2000.
As a result of the foregoing, the Company incurred a net loss of $2,805,000 for
the three months ended September 30, 2000 compared to a net loss of $3,659,000
for the three months ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Sales revenues increased by $287,000 to $13,832,000 for the nine months ended
September 30, 2000 from $13,545,000 for the comparable period of 1999. During
the current period, gross margin increased by $513,000, or 6.6% to $8,235,000
for the nine months ended September 30, 2000 from $7,722,000 for the nine months
ended September 30, 1999. As a percentage of sales, gross margin represented
59.5% and 57.0% for the nine months ended September 30, 2000 and 1999,
respectively. The increase in gross margin as a percentage of sales for the nine
months ended September 30, 2000 compared to the comparable period of 1999 is
primarily the result of reduced per unit manufacturing costs achieved through
increased efficiencies in production.
Selling, general and administrative expenses for the nine months ended September
30, 2000 were $15,730,000, a decrease of $1,189,000, or 7.0%, compared to
selling, general
11
<PAGE> 12
and administrative expenses of $16,919,000 for the nine months ended September
30, 1999. The decrease for the nine months ended September 30, 2000 was
primarily the result of the consolidation of the Company's nationwide
distribution and service infrastructure, commencing in the first quarter of
2000, which eliminated redundant or nonproductive resources in the field and at
its corporate office.
The Company recognized net interest expense of $1,651,000 for the nine months
ended September 30, 2000, an increase of $252,000 compared to net interest
expense of $1,399,000 for the nine months ended September 30, 1999. This
increase was primarily the result of the higher outstanding balance under the
Revolver in the current period compared to the comparable period of the prior
year, and the issuance, under the Bridge Loan, of a $2,500,000 promissory note
in August 2000.
As a result of the foregoing, the Company incurred a net loss of $9,433,000 for
the nine months ended September 30, 2000 compared to a net loss of $10,883,000
for the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended September 30,
2000 decreased by $5,288,000 to $5,956,000, compared to net cash used in
operating activities of $11,244,000 for the comparable nine month period of the
prior year. The decrease for the current period is attributable to a decrease of
approximately $1,450,000 in the net loss, from $10,883,000 to $9,433,000. Also
contributing to the decrease was increased collection efforts resulting in a
decrease of $1,116,000 in accounts receivable, and implementation of a plan to
sell existing units in the field which decreased inventory by $931,000.
Net cash used in investing activities for the nine months ended September 30,
2000 was $3,000, a decrease of $180,000, compared to $183,000 during the
comparable period of the prior year. This decrease was a result of decreased
purchases of equipment during the nine months ended September 30, 2000.
Net cash provided from financing activities for the nine months ended September
30, 2000 decreased by $6,329,000 to $5,222,000, from net cash provided from
financing activities of $11,551,000 for the nine months ended September 30,
1999. The decrease is primarily attributable to the proceeds of $2,000,000 from
the issuance of convertible preferred stock compared to proceeds of $10,997,000
in the 1999 comparable period. Also, in the current period, advances under the
Revolver increased by $229,000 and promissory notes were issued, under the
Bridge Loan, for $2,500,000.
12
<PAGE> 13
At September 30, 2000, the Company had working capital of $606,000 and cash and
cash equivalents of $175,000.
The Company's primary sources of cash have been the net proceeds from sales of
preferred stock, the Company's lease financing arrangement with
SierraCities.com, the Revolver, the Bridge Loan, and direct sales to customers.
The Revolver provides for a maximum credit line of $5,000,000 and amounts
advanced under the Revolver accrue interest at a rate of prime plus 2.5%. At
September 30, 2000, amounts totaling $1,942,000 had been advanced to the Company
under the Revolver. Pursuant to certain borrowing criteria contained in the
Revolver, the Company may not draw any advances beyond the $1,942,000 already
advanced under the Revolver. In November, the Company executed a second
amendment to the Revolver. Pursuant to this amendment, the Company agreed to
make additional weekly principal payments beginning on October 20, 2000 in the
minimum amount of $25,000, which amount will be applied to reduce the amount of
the Over-Advance outstanding under the Revolver. The Company has further agreed
to pay 50% of the remaining balance of such Over-Advance on November 30, 2000
and the remaining 50% on December 15, 2000.
On August 7, 2000, the Company entered into a Loan Agreement (the "Bridge Loan")
with Environmental Opportunities Fund II, L.P., Environmental Opportunities Fund
II (Institutional), L.P. and Hanseatic Americas LDC (collectively, the
"Lenders") under which it borrowed $2,500,000 which was increased to $3,300,000
in two installments in October and November. As part of this increase, the
Company also issued to the Lenders additional warrants to purchase 228,572
shares of Common Stock at $3.50 per share and further adjusted the conversion
price of its outstanding Series B Preferred Stock to $4.79 per share resulting
in an increase in the number of shares of Common Stock issuable upon conversion
of each share of Series B Preferred Stock to 20.88 shares. The proceeds were
used to cover working capital needs. For additional information regarding the
Bridge Loan see Notes 2 and 3 to the Condensed Financial Statements included in
this Form 10-QSB and incorporated herein reference.
The Company's material financial commitments relate primarily to its obligations
to make lease payments with respect to the Company's principal executive and
manufacturing facility in Miami, Florida and its nationwide direct distribution
centers and equipment leases (approximately $184,000 per month), installment
payments for financed manufacturing equipment (approximately $28,000 per month),
noncash interest payments on the Company's 8.25% Subordinated Convertible Notes
(the "Notes") (approximately $132,000 per month), and noncash dividends on the
Company's Series B, Series C, and Series D Convertible Preferred Stock
(approximately $97,000 per month).
On May 2, 2000, the Company sold an aggregate of 20,000 shares of new Series D
Preferred Stock for an aggregate purchase price of $2,000,000.
On August 2, 2000, the Company entered into an Addendum to that certain Vendor
Lease Plan Agreement dated November 15, 1998 by and between SierraCities.com,
Inc. (f/k/a First Sierra Financial, Inc., "SierraCities.com") (the "Lease Plan
Agreement"). Pursuant to the Lease Plan Agreement, SierraCities.com will
purchase for cash the revenue streams of lease payments for the initial term of
leases of the Company's SystemOne(R) Washers. After the initial term of the
leases, the revenue streams from the leases will revert back to the Company. As
of November 14, 2000, there has been no activity with respect to the addendum.
Capital requirements relating to the implementation of the Company's business
plan have been significant. The Company believes that its ability to generate
cash from operations is dependent upon, among other things, the demand for its
products and services. In order to reduce certain of the Company's up-front
capital requirements associated with manufacturing operations, the Company
leases, and plans, to the extent possible, to continue to lease rather than
purchase its machinery and equipment. The Company
13
<PAGE> 14
currently anticipates that it will require additional equity or debt financing
in order for it to meet its cash needs, including working capital requirements,
for the payment of preferred stock dividends and the repayment of the Bridge
Loan and the Revolver. There can be no assurance that such financing will be
available on terms acceptable to the Company or at all. Any such financing would
cause the further dilution of existing shareholders. In addition, the Company's
ability to draw advances under its Revolver is currently limited by its
available borrowing base. A failure to significantly improve the Company's
financial performance or obtain necessary financing could require the Company to
materially curtail or cease its operations.
Provided that the Marketing and Distribution Agreement is approved by the
Bankruptcy Court and becomes effective, the Company anticipates having a stable
revenue stream, significantly reduced administrative costs and positive cash
flow by the second quarter of the year 2001. The foregoing forward looking
statement is subject to a number of uncertainties, including the availability of
bank financing to bolster the Company's working capital until revenue under the
Marketing and Distribution Agreement is received, the Company's ability to
produce parts washers in a timely fashion to meet Safety-Kleen's orders, the
possible need for additional capital if Safety-Kleen's orders substantially
exceed required minimum purchases, Safety-Kleen's ability to market and
distribute SystemOne part washers through its marketing and sales
infrastructure, as well as the continuing ability of Safety-Kleen to perform its
obligations despite its bankruptcy.
As indicated in the accompanying financial statements, as of September 30, 2000
the Company's accumulated deficit totaled $45,514,000.
14
<PAGE> 15
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS.
The foregoing Management's Discussion and Analysis contains various "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs concerning future
events, including, but not limited to, statements regarding growth in sales of
the Company's products and the sufficiency of the Company's cash flow for its
future liquidity and capital resource needs. These forward looking statements
are further qualified by important factors that could cause actual events to
differ materially from those in such forward looking statements. These factors
include, without limitation, increased competition, the sufficiency of the
Company's patents, the ability of the Company to manufacture its systems on a
cost effective basis, market acceptance of the Company's products, the effects
of governmental regulation and the ability of the Company to obtain adequate
financing to support its operational and marketing plans, the expansion of its
services network and future product development. Results actually achieved may
differ materially from expected results included in these statements as a result
of these or other factors.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Note 2 to the Company's Condensed Financial Statements included herein for
information regarding the issuance and sale by the Company of shares of its
Series D Preferred Stock, the May Warrants and the August Warrants, and certain
changes to the Company's Series B and Series C Preferred Stock, which is
incorporated herein by reference.
On August 7, 2000 (the "Issuance Date"), the Company entered into a Loan
Agreement with Environmental Opportunities Fund II, L.P., Environmental
Opportunities Fund II (Institutional), L.P. and Hanseatic Americas LDC under
which it borrowed an aggregate of $2,500,000, evidenced by promissory notes (the
"Subordinated Promissory Notes"), maturing February 7, 2002, subject to
mandatory prepayment to the extent of any proceeds received by the Company from
the sale of any new securities of the Company or the borrowing of any additional
money (other than purchase money debt). The Subordinated Promissory Notes
initially bear interest at the rate of 12% per annum until the six month
anniversary of the Issuance Date, 14% until the nine month anniversary of the
Issuance Date and 16% thereafter until repaid in full. The Company's obligations
under the Loan Agreement are secured by a lien on substantially all of its
assets other than its intellectual property although such obligations have been
subordinated to the Revolver. Each of the Environmental Funds and Hanseatic are
shareholders of the Company and Mr. Paul A. Biddelman, President of Hanseatic,
and Mr. Kenneth Ch'uan-K'ai Leung,
15
<PAGE> 16
Chief Investment Officer of the Environmental Funds, are directors of the
Company. Also pursuant to the Loan Agreement the Company issued the August
Warrants. If the Company is unable to repay the Subordinated Promissory Notes at
maturity, it will have to issue, subject to shareholder approval, additional
warrants to the lenders that will be exercisable for 714,286 shares of the
Company's common stock at $3.50 per share. Messrs. Paul and Pierre Mansur and
Hanseatic and the Environmental Funds have agreed to vote any shares of Company
voting stock owned by them in favor of such issuance.
The Company also amended its 1998 Common Stock Purchase Rights Agreement to
allow Hanseatic and the Environmental Funds to acquire the August Warrants and
the shares of common stock issuable upon exercise thereof without triggering the
issuance of rights certificates.
The August Warrants and the Subordinated Promissory Notes were issued and the
October Warrants to be issued were done so in offerings exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 4(2) based upon the nature and number of offerees.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27 Financial Data Schedule
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYSTEMONE TECHNOLOGIES INC.
Date: November 14, 2000 /s/ PAUL I. MANSUR
------------------------------------
PAUL I. MANSUR
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2000 /s/ STEVEN M. HEALY
------------------------------------
STEVEN M. HEALY
Director of Finance and Controller
(Principal Financial Accounting Officer)
17
