SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-QSB
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
--------------------------
For the Quarter Ended: Commission File Number
June 30, 1997 0 - 9574
--------------------------
UNITED SYSTEMS TECHNOLOGY, INC.
Iowa 42-1102759
(State of Incorporation) (I.R.S. Employer
Identification Number)
3021 Gateway Drive, Suite 240
Irving, Texas 75603
(972) 518-0728
(Address of principal executive offices and telephone number)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities 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.
Yes __X__ No ______
As of June 30, 1997 there were 43,278,045 shares of the registrant's
Common Stock, par value $0.10 per share, outstanding.
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
INDEX TO FORM 10-QSB
PART I - FINANCIAL INFORMATION (UNAUDITED) PAGE
- ------------------------------------------
Item 1. Consolidated Financial Statements
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 8
PART II - OTHER INFORMATION 10
- ---------------------------
---------------------------------------------------------
The consolidated financial information reflects all adjustments which
are, in the opinion of management, necessary to a fair presentation of financial
position and of the statements of operations and cash flows for the periods
presented.
These consolidated financial statements should be read in conjunction
with the notes to the consolidated financial statements which are included in
the annual report on Form 10-KSB for the fiscal year ended December 31, 1996.
2
<PAGE>
United Systems Technology, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
June 30,
1997 December 31,
(Unaudited) 1996
Current Assets
Cash and cash equivalents $ 18,582 $ 67,252
Trade accounts receivable, less allowance
for doubtful accounts of $40,000 at
June 30, 1997 and December 31, 1996 210,986 253,692
Prepaid expenses and other 1,220 279
--------- ---------
Total current assets 230,788 321,223
--------- ---------
Property and equipment, net 94,344 115,738
Goodwill, net 707,774 741,744
Purchased software, net 62,468 71,833
Deposits and other 28,417 27,942
--------- ---------
893,003 957,257
--------- ---------
Total assets $1,123,791 $1,278,480
========= =========
Liabilities and Stockholders' Equity
Current Liabilities
Current portion of capital lease obligations $ 7,601 $ 8,271
Trade accounts payable 237,982 230,039
Accrued payroll 15,729 20,432
Accrued interest - related party 74,031 72,020
Other accrued expenses 99,483 115,368
Deferred revenue 611,978 664,797
--------- ---------
Total current liabilities 1,046,804 1,110,927
Notes payable - related party 50,000 50,000
Capital lease obligations,
net of current portion 2,867 6,730
--------- ---------
Total liabilities 1,099,671 1,167,657
Commitments and contingencies - -
Stockholders' Equity
Preferred stock, convertible, cumulative,
par value $.10 per share; authorized
5,000,000 shares; issued and outstanding,
500,000 shares of Series B, 750,000 shares
of Series C, 500,000 shares of Series D
and 300,000 shares of Series E (liquidating
preference of $1.00, $.20, $1.00 and
$1.00 per share, respectively,) aggregating
$1,300,000 at June 30, 1997 and $1,450,000
at December 31, 1996 130,000 205,000
Common stock, par value $.10 per share;
authorized 100,000,000 shares; issued and
outstanding 43,278,045 at June 30, 1996
and 38,643,163 December 31, 1996 4,327,857 3,796,975
Additional paid-in capital 3,758,508 4,214,390
Accumulated deficit (8,192,245) (8,105,542)
--------- ---------
Total stockholders' equity 24,120 110,823
--------- ---------
Total liabilities and stockholders' equity $1,123,791 $1,278,480
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
United Systems Technology, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
==== ==== ==== ====
Revenue
Software packages $ 44,551 $ 87,485 $123,054 $166,164
Installation, training and
customer support 19,446 62,190 54,477 135,640
Maintenance 257,948 310,091 537,467 636,928
Equipment and supplies sales 39,506 95,128 103,628 142,320
Other 1,709 2,969 3,013 2,969
-------- -------- -------- --------
363,160 557,863 821,639 1,084,021
Costs and expenses
Salaries 242,082 298,454 495,262 608,912
Other general, administrative
and selling expense 136,845 153,494 265,699 302,071
Depreciation and amortization 40,469 74,296 80,251 151,514
Commissions 5,618 8,948 14,727 12,212
Cost of equipment and
supplies sold 17,434 57,373 50,506 73,712
-------- -------- -------- --------
442,448 592,565 906,445 1,148,421
-------- -------- -------- --------
Loss from operations (79,288) (34,702) (84,806) (64,400)
-------- -------- -------- --------
Nonoperating income (expense)
Interest expense (1,529) (2,082) (2,922) (4,624)
Interest income 532 1,299 1,025 2,568
-------- -------- -------- --------
(997) (783) (1,897) (2,056)
-------- -------- -------- --------
Net loss $(80,285) $(35,485) $(86,703) $(66,456)
======== ======== ======== ========
Preferred stock dividend
requirements (22,690) (26,240) (45,130) (52,104)
-------- -------- -------- --------
Loss available for common
stockholders $102,975) $(61,725) $131,833) $(118,560)
======== ======== ======== ========
Loss per common share $ NIL $ NIL $ NIL $ NIL
======== ======== ======== ========
Weighted average number of
common shares outstanding 43,278,045 37,969,763 43,278,045 37,969,763
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
United Systems Technology, Inc. and Subsidiary
Consolidated Statemsnts of Cash Flows
For the Six Month Period Ended Jene 30, 1997 and 1996
(Unaudited)
<TABLE>
<S> <C> <C>
1997 1996
==== ====
Cash flows in operating activities:
Net Loss $(86,703) $(66,456)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 80,251 151,514
Change in operating assets and liabilities:
Accounts receivable 42,707 22,511
Prepaid expenses (942) (17,364)
Deposits and other (475) 2,900
Accounts payable 9,955 11,804
Accrued expenses (20,587) 21,791
Deferred revenue (52,819) (116,278)
-------- --------
$ 58,090 $ 76,878
-------- --------
Net cash provided (used) in operating activities (28,613) 10,422
-------- --------
Cash flows from investing activities:
Property and equipment additions $(14,897) $ (9,598)
Additions to purchased software (1,086) (1,195)
-------- --------
Net cash used in investing activities $(15,983) $(10,793)
-------- --------
Cash flows from financing activities:
Payments on capital lease obligations (4,074) (30,132)
-------- --------
Net cash used in financing activities $ (4,074) $(30,132)
-------- --------
Decrease in cash and cash equivalents $(48,670) $(30,503)
Cash and cash equivalents, beginning of period 67,252 139,234
-------- --------
Cash and cash equivalents, end of period $ 18,582 $108,731
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 916 $ 3,222
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation:
In the opinion of management, the accompanying unaudited consolidated
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the consolidated financial position of
United Systems Technology, Inc. ("USTI") as of June 30, 1997 and December 31,
1996 and the results of operations and cash flows of USTI for the six months
ended June 30, 1997 and 1996. The consolidated results of operations for the six
months ended June 30, 1997 are not necessarily indicative of the results to be
expected for the full year.
Note 2. Property and Equipment:
Property and equipment at June 30, 1997 and December 31, 1996 consisted
of the following:
<TABLE>
<S> <C> <C>
June 30, December 31,
1997 1996
---- ----
Leasehold improvements $ 58,702 $ 58,702
Furniture and fixtures 38,330 38,330
Equipment 884,190 869,292
-------- --------
981,222 966,324
Less Accumulated depreciation
and amortization (886,878) (850,586)
-------- --------
$ 94,344 $115,738
-------- --------
</TABLE>
Note 3. Other Assets:
Other assets at June 30, 1997 and December 31, 1996 consisted of the
following:
<TABLE>
<S> <C> <C> <C>
Accumulated
June 30, 1997 Cost Amortization Net
- ------------- ---- ------------ ---
Goodwill $ 1,692,128 $ (984,354) $ 707,774
Purchased Software 591,740 (529,272) 62,468
December 31, 1996
- -----------------
Goodwill $ 1,692,128 $ (950,384) $ 741,744
Purchased Software 590,654 (518,821) 71,833
</TABLE>
6
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
Notes To Consolidated Financial Statements
(Unaudited)
Note 4. Preferred Stock:
The company is in arrears in the payment of dividends to holders of its
Series B, D and E Preferred Stock. Holders of Series B Preferred Stock are
entitled to annual dividends of $.07 per share, payable quarterly and, as of
June 30, 1997, are entitled to the payment of approximately $306,155 in
dividends which are currently in arrears. Holders of Series D Preferred Stock
are entitled to annual dividends of $.07 per share, payable quarterly and, as of
June 30, 1997, are entitled to the payment of approximately $258,045 in
dividends which are currently in arrears. Holders of Series E Preferred Stock
are entitled to annual dividends of $.07 per share, payable quarterly and, as of
June 30, 1997, are entitled to the payment of approximately $127,150 in
dividends which are currently in arrears.
Note 5. New Accounting Pronouncement:
The FASB has issued Statement of Financial Accounting Standards No,
128, Earnings Per Share, which is effective for financial statements issued
after December 15, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts are computed. The adoption of this new
standard is not expected to have a material impact on the disclosure of earnings
per share in the financial statements. The effect of adopting this new standard
has not been determined.
7
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
Item 2. Management's Discussion and Analysis of Financial Condition
or Plan of Operation
Results of Operations
The Company derives its revenue from the licensing of its software
packages, installation, training and customer modifications, maintenance
agreements and equipment sales and commissions. Results of operations for the
three month period ended June 30, 1997 include revenues of $363,160 and a net
loss of $80,285 as compared to revenues of $557,863 and a net loss of $35,485
for the same period in 1996. Results for the six month period ended June 30,
1997 include revenues of $821,639 and a net loss of $86,703 as compared to
revenues of 1,084,021 and a net loss of $66,456 in 1996.
The Company continues to adjust its expenses based on anticipated
levels of revenue resulting in decreased expenses. The Company is continuing its
development of additional modules for its asystTM product line, which was
initially introduced in 1996. The asystTM product line operates in a single user
or network Windows environment and is seamlessly interfaced with the other
Microsoft Office products. The Company believes that its asystTM product line
offers its current and prospective customers with an attractive software
solution, both from a financial and functionality standpoint and follows the
trend of clients moving to windows based PC networks. This trend has resulted in
a decrease in the volume of licensing activity of the Company's older DOS
(QuestTM) and mid-range (LegacyTM ) products during 1997. The Company expects
this trend to continue in the future.
Three Month Period Ended June 30, 1997 and 1996
The Company's total revenue decreased 35% from $557,863 during the
first quarter in 1996 to $363,160 in 1997. Software license fees decreased 49%
during the first quarter of 1997 as compared to 1996. Licensing of the Company's
older product lines decreased during 1997 while the volume of licensing of the
Company's newer asystTM products did not increase at a level sufficient to
offset this decrease. The Company continues to market its QuestTM, asystTM and
LegacyTM product lines toward prospective customers which it believes are best
suited for its products. Installation and training decreased 69% from 1996 due
to the decrease in licensing of the Company's minicomputer products which
require a higher amount of these types of services. Maintenance revenue
decreased 17% in 1997, due in part, to a decrease in the number of customers of
the Company's LegacyTM products that elected to select maintenance coverage.
Equipment and supplies sales decreased 58% in the second quarter of 1997 due, in
part, to a decrease in the level of computers sold in conjunction with its
products.
Total costs and expenses decreased 25% from $592,565 in 1996 to
$442,448 in 1997. Salary expense decreased 19% in 1997 as a result of the
Company's continued adjustments in staffing to align with its anticipated levels
of revenue. Other general, administrative and selling expense costs decreased
11% in 1997 as a result of continued efforts to control or reduce expenses.
Depreciation and amortization expense decreased 46% in 1997 from 1996 due in
part, to a reduction in software and goodwill amortization expense. Commission
expense increased 37% in 1997 resulting from a decrease in the level of
licensing the Company's software products during the quarter. Cost of equipment
and supplies decreased 70% as a result of decreased sales of computer equipment
during the period.
8
<PAGE>
Six Month Period Ended June 30, 1997 and 1996
The Company's total revenue decreased 24% from $1,084,021 during the
first six months in 1996 to $821,639 in 1997. Software license fees decreased
26% during the first six months of 1997 as compared to 1996. Licensing of the
Company's older product lines decreased during 1997 while the volume of
licensing of the Company's newer asystTM products did not increase at a level
sufficient to offset this decrease. The Company continues to market its QuestTM,
asystTM and LegacyTM product lines toward prospective customers which it
believes are best suited for its products. Installation and training decreased
60% from 1996 due to the decrease in licensing of the Company's minicomputer
products which require a higher amount of these types of services. Maintenance
revenue decreased 16% in 1997, due in part, to a decrease in the number of
customers of the Company's LegacyTM products that elected to select maintenance
coverage. Equipment and supplies sales decreased 27% in the first six months of
1997 due, in part, to a decrease in the level of computers sold in conjunction
with its products.
Total costs and expenses decreased 21% from $1,148,421 in 1996 to
$906,445 in 1997. Salary expense decreased 19% in 1997 as a result of the
Company's continued adjustments in staffing to align with its anticipated levels
of revenue. Other general, administrative and selling expense costs decreased
12% in 1997 as a result of continued efforts to control or reduce expenses.
Depreciation and amortization expense decreased 47% in 1997 from 1996 due in
part, to a reduction in software and goodwill amortization expense. Commission
expense increased 21% in 1997 resulting from the use of an agent to license the
Company's software during 1997. Cost of equipment and supplies decreased 27% as
a result of decreased sales of computer equipment during the period.
Liquidity and Capital Resources
The Company had net cash used in operating activities of $28,613 during the
six months ended June 30, 1997, as compared to net cash provided by operations
of $10,422 for the same period in 1996. Net cash of $15,983 was utilized during
1997 for investing in capital expenditures versus $10,793 for 1996. Net cash of
$4,074was utilized in 1997 as compared to $30,132 in 1996 for financing
activities during the six month period.
Management believes that the effect of its continued focus on adjusting
the Company's expenses to the level of revenue, which management anticipates
achieving, and the Company's current cash balance will be adequate to meet its
working capital requirements in the near future. However, if the Company is not
able to continue to generate cash flows in the future by achieving a level of
sales adequate to support the Company's cost structure, additional financing may
be required, of which there can be no assurance.
The Company had a $50,000 note payable to Ventana Growth Fund
("Ventana"), a related party. The maturity date of the note was extended from
September 30, 1996 to September 30, 1998. The original maturity date of this
note was October 17, 1987. In 1997, Ventana distributed this note to its limited
partners in its fund requiring the Company to reissue notes, under the same
terms and conditions, to the limited partners. As of June 30, 1997 there was
$74,031 of interest outstanding on these notes.
9
<PAGE>
The Company is currently in arrears in the payment of dividends to holders
of its preferred stock. As of June 30, 1997, dividends were in arrears on Series
B preferred stock in the amount of $306,155, on Series D preferred stock in the
amount of $258,045 and on Series E preferred stock in the amount of $127,150.
Part II - Other Information
Item 1. Legal Proceedings
The Company is involved in the following legal proceedings:
On December 10, 1993, Plaintiff County of Essex filed suit against
USTI, USTEI, New Jersey Municipal Data Management ("MDM") and MDM's surety in
Superior Court of New Jersey. The suit is based on allegations that MDM failed
to perform its obligations related to software and related services sold by MDM
to the County of Essex, that USTI and USTEI succeeded to the obligations of MDM
by the acquisition of the assets of MDM, and that there was a failure to comply
with the New Jersey bulk sales act in USTEI's acquisition of the assets of MDM.
USTI and USTEI did not assume any obligations or liabilities of MDM with respect
to the County of Essex in the acquisition transaction. USTEI did agree to pay up
to $50,000 in defense costs of MDM with respect to such claim. USTI and USTEI
answered each of such lawsuits, denying all material allegations therein, and
intend to vigorously defend such allegations. On March 20, 1996, the County of
Essex's claim that USTI and USTEI succeeded to the obligations of MDM was
dismissed with prejudice. Subsequently, the Court found that the New Jersey bulk
sales act was not complied with but has made no finding on the amount of
damages, if any, with respect thereto. The Company has filed third party
complaints against counsel representing the parties to the transaction for their
failure to have caused the bulk sales act to be complied with. Additionally, on
April 10, 1997, the County of Essex obtained a judgement against MDM for
approximately $600,000 on its claim for failure of performance by MDM and
recovered $248,277 from the surety and the surety succeeded to the County of
Essex's claim against MDM, USTI and USTEI in such amount. The litigation is
still in the discovery phase. As stated above, USTI and USTEI have denied all
material allegations of the County of Essex and intend to vigorously defend such
litigation and pursue their third party claims.
On August 11, 1993, Plaintiff City of Sinton, Texas filed suit against
USTI alleging defects in software and services sold to the city in 1990. The
suit failed to specify a measure of damages which the City of Sinton was
seeking; USTI answered the lawsuit by denying all material allegations therein.
In April 1997, a jury ruled in favor of USTI in this suit, finding that there
was no breach of warranty by USTI with respect to the software or services
provided. The jury further found that the City of Sinton had breached the
software contracts by asserting rights and duties which were not specified in
the contracts. USTI is currently negotiating with the City of Sinton, seeking
payment of a portion of its attorney's fees awarded as part of the judgement.
On August 12, 1996, Plaintiff City of Siloam Springs, Arkansas filed suit
against USTI alleging defects in software and services sold to the city in 1994.
The suit alleges three different theories of recovery, as to each of which,
plaintiff claims damages in excess of $10,000. USTI has been granted an
extension of time to answer in the matter and intends to answer the lawsuit by
denying all material allegations therein, and intends to vigorously defend such
allegations.
10
<PAGE>
Item 2. Change In Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
The company is in arrears in the payment of dividends to holders of its
Series B, D and E Preferred Stock. Holders of Series B Preferred Stock are
entitled to annual dividends of $.07 per share, payable quarterly and, as of
June 30, 1997, are entitled to the payment of approximately $306,155 in
dividends which are currently in arrears. Holders of Series D Preferred Stock
are entitled to annual dividends of $.07 per share, payable quarterly and, as of
June 30, 1997, are entitled to the payment of approximately $258,045 in
dividends which are currently in arrears. Holders of Series E Preferred Stock
are entitled to annual dividends of $.07 per share, payable quarterly and, as of
June 30, 1997, are entitled to the payment of approximately $127,150 in
dividends which are currently in arrears.
Item 4. Submission of Matters to a Vote of Security Holders
On June 25, 1997, the Company held its Annual Meeting of Shareholders. At
the meeting, the shareholders of the Company voted to approve the following
items:
The following persons were elected as Directors of the Company:
Thomas E. Gibbs
Jordan Issackedes
Davis G. Sengpiel
Scott A. Burri
Earl H. Cohen
The accounting firm of Grant Thornton LLP was selected as independent
accountants for the Company.
Item 5. Other Information
During the first quarter 1997, Ventana Growth Fund elected its option to
convert its 750,000 shares of the Company's Series C preferred stock into shares
of the Company's common stock. There were dividends in arrears on the Series C
preferred stock in the amount of $115,415 which were also converted into common
stock. A total of 5,308,280 shares of the Company's common stock were issued as
a result of this conversion.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - No exhibits are required to be filed with this report.
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
11
<PAGE>
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.
United Systems Technology, Inc.
Date: August 13 1997 By: /s/ Thomas E. Gibbs
--------------------
Thomas E. Gibbs, President
and Chairman of the Board
(Principal Executive Officer)
Date: August 13, 1997 By: /s/ Randall L. McGee
----------------------
Randall L. McGee, Secretary
and Treasurer
(Principal Financial and
Accounting Officer)
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000350194
<NAME> UNITED SYSTEMS TECHNOLOGY, INC
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996 DEC-31-1996
<CASH> 18582 0 67252
<SECURITIES> 0 0 0
<RECEIVABLES> 210986 0 253692
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 230788 0 321223
<PP&E> 94344 0 115738
<DEPRECIATION> 80251 151514 0
<TOTAL-ASSETS> 1123791 0 1278480
<CURRENT-LIABILITIES> 1046804 0 1110927
<BONDS> 50000 0 50000
0 0 0
130000 0 205000
<COMMON> 4327857 0 3796975
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 1123791 0 1278480
<SALES> 44551 87485 0
<TOTAL-REVENUES> 363160 557863 0
<CGS> 17434 57373 0
<TOTAL-COSTS> 442448 592565 0
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<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1529 2082 0
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<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (80285) (35485) 0
<EPS-PRIMARY> 0 0 0
<EPS-DILUTED> 0 0 0
</TABLE>
