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
September 30, 1997 0 - 9574
--------------------------
UNITED SYSTEMS TECHNOLOGY, INC.
Iowa 42-1102759
(State of Incorporation) (I.R.S. Employer
Identification Number)
1850 Crown Drive - Suite 1109
Dallas, Texas 75234
(972) 402-8600
(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 September 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.
<PAGE>
United Systems Technology, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
September 30,
1997 December 31,
(Unaudited) 1996
============== =============
Current Assets
Cash and cash equivalents $ 34,540 $ 67,252
Trade accounts receivable, less allowance
for doubtful accounts of $40,000 at
September 30, 1997 and December 31, 1996 256,839 253,692
Prepaid expenses and other 5,735 279
--------- ---------
Total current assets 297,114 321,223
--------- ---------
Property and equipment, net 93,115 115,738
Goodwill, net 690,790 741,744
Purchased software, net 58,230 71,833
Deposits and other 16,028 27,942
--------- ---------
858,163 957,257
--------- ---------
Total assets $1,155,277 $1,278,480
========= =========
Liabilities and Stockholders' Equity
Current Liabilities
Current portion of capital lease obligations $ 6,065 $ 8,271
Trade accounts payable 182,047 230,039
Accrued payroll 16,551 20,432
Accrued interest - related party 75,071 72,020
Other accrued expenses 110,497 115,368
Deferred revenue 698,644 664,797
--------- ---------
Total current liabilities 1,088,875 1,110,927
Notes payable - related party 50,000 50,000
Capital lease obligations, net of current portion 2,137 6,730
--------- ---------
Total liabilities 1,141,012 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, 500,000 shares
of Series D, and 300,000 shares of Series E
(liquidating preference of $1.00 per share)
aggregating $1,300,000 at September 30, 1997
and 1,450,000 at December 31, 1996 30,000 205,000
Common stock, par value $.10 per share;
authorized 100,000,000 shares; issued and
outstanding 43,278,045 at September 30, 1997
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 (8,202,100) (8,105,542)
--------- ---------
Total stockholders' equity 14,265 110,823
--------- ---------
Total liabilities and stockholders' equity $1,155,277 $1,278,480
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
United Systems Technology, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
==== ==== ==== ====
Revenue
Software packages $ 53,016 $ 88,436 $ 176,070 $ 254,600
Installation, training and
customer support 23,098 55,299 77,575 190,939
Maintenance 264,827 288,033 802,294 924,961
Equipment and supplies sales 52,120 44,536 155,748 186,933
Other 423 8,278 3,436 11,170
--------- --------- --------- ---------
393,484 484,582 1,215,123 1,568,603
--------- --------- --------- ---------
Costs and expenses
Salaries 235,902 275,921 731,164 884,832
Other general, administrative and
selling expense 94,494 114,599 360,193 416,669
Depreciation and amortization 40,428 71,787 120,679 223,301
Commissions 6,904 13,917 21,631 26,129
Cost of equipment and supplies sold 24,428 25,690 74,934 99,403
--------- --------- --------- ---------
402,156 501,914 1,308,601 1,650,334
--------- --------- --------- ---------
Loss from operations (8,672) (17,332) (93,478) (81,731)
--------- --------- --------- ---------
Nonoperating income (expense)
Interest expense (1,381) (2,296) (4,303) (6,919)
Interest income 198 410 1,223 2,978
--------- --------- --------- ---------
(1,183) (1,886) (3,080) (3,941)
--------- --------- --------- ---------
Net loss $(9,855) $(19,218) $(96,558) $(85,672)
========= ========= ========= =========
Preferred stock dividend requirements (22,932) (26,345) (68,060) (78,449)
--------- --------- --------- ---------
Loss available for common stockholders $(32,787) $(45,563) $(164,618) $(164,121)
========= ========= ========= =========
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.
<PAGE>
United Systems Technology, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Nine Month Period Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<S> <C> <C>
1997 1996
==== ====
Cash flows in operating activities:
Net Loss $ (96,558) $ (85,672)
------- -------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 120,679 223,301
Change in operating assets and liabilities:
Accounts receivable (3,147) 29,892
Prepaid expenses (5,456) (9,561)
Deposits and other 11,914 (2,041)
Accounts payable (47,992) (43,772)
Accrued expenses (5,701) 35,593
Deferred revenue 33,847 (186,213)
------- -------
$ 104,144 $ 47,199
------- -------
Net cash provided (used) in operating activities 7,586 (38,473)
------- -------
Cash flows from investing activities:
Property and equipment additions $ (31,914) $ (23,659)
Additions to purchased software (2,046) (2,065)
------- -------
Net cash used in investing activities $ (33,960) $ (25,724)
------- -------
Cash flows from financing activities:
Payments on capital lease obligations (6,338) (31,002)
------- -------
Net cash used in financing activities $ (6,338) $ (31,002)
------- -------
Decrease in cash and cash equivalents $ (32,712) $ (95,199)
Cash and cash equivalents, beginning of year 67,252 139,234
------- -------
Cash and cash equivalents, end of period $ 34,540 $ 44,035
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,255 $ 2,576
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<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 September 30, 1997 and December
31, 1996 and the results of operations and cash flows of USTI for the nine
months ended September 30, 1997 and 1996. The consolidated results of operations
for the nine months ended September 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 September 30, 1997 and December 31, 1996
consisted of the following:
<TABLE>
<S> <C> <C>
September 30, December 31,
1997 1996
---- ----
Leasehold improvements $ 58,702 $ 58,702
Furniture and fixtures 38,330 38,330
Equipment 901,206 869,292
-------- --------
998,238 966,324
Less Accumulated depreciation
and amortization (905,123) (850,586)
-------- --------
$ 93,115 $ 115,738
-------- --------
</TABLE>
Note 3. Other Assets:
Other assets at September 30, 1997 and December 31, 1996 consisted of the
following:
<TABLE>
<S> <C> <C> <C>
Accumulated
September 30, 1997 Cost Amortization Net
- ------------------ ---- ------------ ---
Goodwill $1,692,128 $(1,001,338) $690,790
Purchased Software 592,700 (534,470) 58,230
December 31, 1996
- ------------------
Goodwill $1,692,128 $(950,384) $741,744
Purchased Software 590,654 (518,821) 71,833
</TABLE>
<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
September 30, 1997, are entitled to the payment of approximately $314,975 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
September 30, 1997, are entitled to the payment of approximately $266,860 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
September 30, 1997, are entitled to the payment of approximately $132,445 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.
<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 September 30, 1997 include revenues of $393,484 and a
net loss of $9,855 as compared to revenues of $484,582 and a net loss of $19,218
for the same period in 1996. Results for the nine month period ended September
30, 1997 include revenues of $1,215,123and a net loss of $96,558 as compared to
revenues of 1,568,603 and a net loss of $85,672 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 is
offering its Legacy customers a Year 2000 version of certain modules and has
sent agreements for the new version to the customers that have requested them.
The Company expects to begin shipping the Year 2000 version of the Legacy
products in the 4th quarter of 1998.
Three Month Period Ended September 30, 1997 and 1996
- ----------------------------------------------------
The Company's total revenue decreased 19% from $484,582 during the third
quarter in 1996 to $393,484 in 1997. Software license fees decreased 40% during
the third quarter of 1997 as compared to 1996. Licensing of the Company's older
product lines decreased in 1997 as compared to 1996, 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
58% 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 8% 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 increased 17% in the second quarter of
1997 due, in part, to a increase in the volume forms sold in conjunction with
its products.
Total costs and expenses decreased 20% from $501,914 in 1996 to $402,156 in
1997. Salary expense decreased 15% 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 18%
in 1997 as a result of continued efforts to control or reduce expenses.
Depreciation and amortization expense decreased 44% in 1997 from 1996 due in
part, to a reduction in software and goodwill amortization expense. Commission
expense decreased 50% in 1997 resulting from a decrease in the level of
licensing the Company's software products by agents in 1997.
Nine Month Period Ended September 30, 1997 and 1996
- ---------------------------------------------------
The Company's total revenue decreased 23% from $1,568,603 during the first
nine months in 1996 to $1,215,123 in 1997. Software license fees decreased 31%
during the first nine 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
59% 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 13% 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 17% in the first nine 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 $1,650,334 in 1996 to
$1,308,601 in 1997. Salary expense decreased 17% 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
14% 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 decreased 17% in 1997 resulting from the use of an agent to license the
Company's software during 1996. Cost of equipment and supplies decreased 25% as
a result of decreased sales of computer equipment during the period.
Liquidity and Capital Resources
- -------------------------------
The Company had net cash provided from operating activities of $7,586
during the nine months ended September 30, 1997, as compared to net cash used by
operations of $38,473 for the same period in 1996. Net cash of $33,960 was
utilized during 1997 for investing in capital expenditures versus $25,724 for
1996. Net cash of $6,338 was utilized in 1997 as compared to $31,002 in 1996 for
financing activities during the nine 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 September 30, 1997 there was $75,071
of interest outstanding on these notes.
<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 $314,975, on Series D preferred stock in the
amount of $266,860 and on Series E preferred stock in the amount of $132,445.
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. The City of Sinton paid USTI $10,000 for 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.
<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
September 30, 1997, are entitled to the payment of approximately $314,975 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
September 30, 1997, are entitled to the payment of approximately $266,860 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
September 30, 1997, are entitled to the payment of approximately $132,445 in
dividends which are currently in arrears.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
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.
<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: November 13 1997 By: /s/ Thomas E. Gibbs
--------------------
Thomas E. Gibbs, President
and Chairman of the Board
(Principal Executive Officer)
Date: November 13, 1997 By: /s/ Randall L. McGee
----------------------
Randall L. McGee, Secretary
and Treasurer
(Principal Financial and
Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 350194
<NAME> UNITED SYSTEM 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> SEP-30-1997 SEP-30-1996 DEC-31-1996
<CASH> 34540 0 67252
<SECURITIES> 0 0 0
<RECEIVABLES> 256839 0 253692
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
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<PP&E> 93115 0 115738
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<CURRENT-LIABILITIES> 1088875 0 1110927
<BONDS> 50000 0 50000
0 0 0
130000 0 205000
<COMMON> 4327857 0 3796975
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<TOTAL-LIABILITY-AND-EQUITY> 1155277 0 1278480
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<EPS-PRIMARY> 0 0 0
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</TABLE>
