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, 1998 0 - 9574
--------------------------
UNITED SYSTEMS TECHNOLOGY, INC.
Iowa 42-1102759
(State of Incorporation) (I.R.S. Employer
Identification Number)
1850 Crown Road, 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, 1998 there were 48,178,043 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 11
- ---------------------------
---------------------------------------------------------
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, 1997.
<PAGE>
United Systems Technology, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
September 30,
1998 December 31,
(Unaudited) 1997
============ ===========
Current Assets
Cash and cash equivalents $ 298,903 $ 204,807
Trade accounts receivable, less allowance for
doubtful accounts of $30,000 at September 30,
1998 and $40,000 at December 31, 1997 201,253 216,693
Prepaid expenses and other 72,052 6,165
---------- ----------
Total current assets 572,208 427,665
---------- ----------
Property and equipment, net 67,179 85,940
Goodwill, net 430,638 481,605
Purchased software, net 38,499 53,056
Deposits and other 5,149 4,999
---------- ----------
541,465 625,600
---------- ----------
Total assets $ 1,113,673 $ 1,053,265
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable - related party $ 50,000 $ 50,000
Current portion of capital lease obligations 2,403 4,484
Trade accounts payable 171,575 177,316
Accrued payroll 32,290 24,485
Accrued interest - related party 79,196 76,111
Other accrued expenses 117,554 98,868
Deferred revenue 655,939 779,485
---------- ----------
Total current liabilities 1,108,957 1,210,749
Capital lease obligations,
net of current portion 622 2,247
---------- ----------
Total liabilities 1,109,579 1,212,996
---------- ----------
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, aggregating
liquidating preference of $1,300,000
($1.00 per share) 130,000 130,000
Common stock, par value $.10 per share;
authorized 100,000,000 shares; issued and
outstanding 48,178,043 at September 30, 1998
and 43,178,043 at December 31, 1997 4,827,857 4,317,803
Additional paid-in capital 3,368,508 3,768,562
Accumulated deficit (8,322,271) (8,376,096)
---------- ----------
Total stockholders' equity 4,094 (159,731)
---------- ----------
Total liabilities and stockholders' equity $ 1,113,673 $ 1,053,265
========== ==========
</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,
1998 1997 1998 1997
---- ---- ---- ----
Revenue
Software packages $ 97,943 $ 53,016 $ 222,510 $ 176,070
Installation, training and
customer support 16,943 23,098 61,978 77,575
Maintenance 246,377 264,827 752,215 802,294
Equipment and supplies sales 62,242 52,120 168,958 155,748
Other 2,326 423 6,001 3,436
--------- --------- --------- ---------
425,831 393,484 1,211,662 1,215,123
--------- --------- --------- ---------
Costs and expenses
Salaries 194,427 235,902 594,348 731,164
Other general, administrative
and selling expense 107,338 94,494 355,922 360,193
Depreciation and amortization 31,075 40,428 99,411 120,679
Commissions 11,289 6,904 21,300 21,631
Cost of equipment and supplies
sold 31,975 24,428 89,912 74,934
--------- --------- --------- ---------
376,104 402,156 1,160,893 1,308,601
--------- --------- --------- ---------
Income (loss) from operations 49,727 (8,672) 50,769 (93,478)
--------- --------- --------- ---------
Nonoperating income (expense)
Interest expense (1,126) (1,381) (3,429) (4,303)
Interest income 2,559 198 6,485 1,223
--------- --------- --------- ---------
1,433 (1,183) 3,056 (3,080)
--------- --------- --------- ---------
Net income (loss) $ 51,160 $ (9,855) $ 53,825 $ (96,558)
========= ========= ========= =========
Preferred stock dividend
requirements (22,930) (22,930) (68,060) (68,060)
--------- --------- --------- ---------
Income (loss) available for
common stockholders $ 28,230 $ (32,785) $ (14,235) $(164,618)
========= ========= ========= =========
Income (loss) per common share $ NIL $ NIL $ NIL $ NIL
========= ========= ========= =========
Weighted average number of
common shares outstanding 43,938,913 43,278,045 43,434,453 43,278,045
========== ========== ========== ==========
</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, 1998 and 1997
(Unaudited)
<TABLE>
<S> <C> <C>
1998 1997
============ ===========
Cash flows in operating activities:
Net income (loss) $ 53,825 $ (96,558)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 99,411 120,679
Change in operating assets and liabilities:
Accounts receivable 15,440 (3,147)
Prepaid expenses (5,887) (5,456)
Deposits and other (150) 11,914
Accounts payable (5,741) (47,992)
Accrued expenses 29,576 (5,701)
Deferred revenue (123,546) 33,847
---------- ----------
9,103 104,144
---------- ----------
Net cash provided from operating activities $ 62,928 $ 7,586
---------- ----------
Cash flows from investing activities:
Property and equipment additions $ (14,436) $ (31,914)
Additions to purchased software (690) (2,046)
---------- ----------
Net cash used in investing activities $ (15,126) $ (33,960)
---------- ----------
Cash flows from financing activities:
Sale of common stock $ 50,000 $ -
Payments on capital lease obligations (3,706) (6,338)
---------- ----------
Net cash provided (used) in financing
activities $ 46,294 $ (6,338)
---------- ----------
Increase (decrease) in cash and cash
equivalents $ 94,096 $ (32,712)
Cash and cash equivalents, beginning of period 204,807 67,252
---------- ----------
Cash and cash equivalents, end of period $ 298,903 $ 34,540
========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 320 $ 1,255
========== ==========
</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, 1998 and December
31, 1997 and the results of operations and cash flows of USTI for the three and
nine months ended September 30, 1998 and 1997. The consolidated results of
operations for the nine months ended September 30, 1998 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, 1998 and December 31, 1997
consisted of the following:
<TABLE>
<S> <C> <C>
September 30, December 31,
1998 1997
---- ----
Leasehold improvements $ 64,772 $ 63,772
Furniture and fixtures 39,248 39,248
Equipment 917,759 904,323
---------- ---------
1,021,779 1,007,343
Less Accumulated depreciation
and amortization (954,610) (921,403)
---------- ---------
$ 67,179 $ 85,940
---------- ---------
</TABLE>
Note 3. Other Assets:
Other assets at September 30, 1998 and December 31, 1997 consisted of the
following:
<TABLE>
<S> <C> <C> <C>
Accumulated
September 30, 1998 Cost Amortization Net
- ------------------ ---- ------------ ---
Goodwill $ 1,692,128 $(1,261,490) $ 430,638
Purchased Software 593,390 (554,891) 38,499
December 31, 1997
- -----------------
Goodwill $ 1,692,128 (1,210,523) $ 481,605
Purchased Software 592,700 (539,644) 53,056
</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, 1998, are entitled to the payment of approximately $349,975 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, 1998, are entitled to the payment of approximately $301,860 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, 1998, are entitled to the payment of approximately $153,445 in
dividends which are currently in arrears.
<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, 1998 include revenues of $425,831 and net
income of $51,160 as compared to revenues of $393,484 and a net loss of $9,855
for the same period in 1997. Results for the nine month period ended September
30, 1998 include revenues of $1,211,662 and net income of $53,825 as compared to
revenues of $1,215,123 and a net loss of $96,558 in 1997.
The Company's expenses continued to be adjusted downward during 1998. The
Company is continuing its development of its asystTM product line, a Windows
product line that operates in a single user or network environment and is
seamlessly interfaced with the other Microsoft Office products. The asystTM
product line has been installed at over 200 locations and includes General
Ledger, Accounts Payable, Accounts Receivable, Cash Receipts, Purchase Orders,
Budgeting, Reporting, and Utility Billing modules. The Company believes that its
asystTM product line will continue to offer 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 PC networks.
This trend resulted in a continued decrease in the licensing of the Company's
DOS (QuestTM ) and mid-range (LegacyTM ) products in 1998. The Company is
offering a Year 2000 version of certain QuestTM and LegacyTM modules and expects
to begin shipping these products in the 4th quarter of 1998.
Three Month Period Ended September 30, 1998 and 1997
The Company's total revenue increased 8% from $393,484 during the third
quarter in 1997 to $425,831 in 1998. Software license fees increased 85% in 1998
due, in part, to an increase in the licensing of the Company's asystTM and
LegacyTM products. The Company continues to market its products to prospective
customers, which it believes are best suited for its products. Installation and
training decreased 27% in 1998 due to a decrease in amount of custom programming
requested by customers. Maintenance revenue decreased 7% during 1998, due in
part, to a decrease in the number of the Company's QuestTM and LegacyTM
customers that elected to select maintenance coverage. Equipment and supplies
sales increased 19% in the third quarter of 1998 due, in part, to an increase in
the volume of computer equipment sold in conjunction with its products.
Total costs and expenses decreased 6% from $402,156 in 1997 to $376,104 in
1998. Salary expense decreased 18% in 1998 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 increased 12%
in 1998 due, in part, to an increase in the level of direct mailing to
prospective customers. Depreciation and amortization expense decreased 23% in
1998. Commission expense increased 64% in 1998 due, in part, to an increase in
the volume of licensing Company's software in 1998. Cost of equipment and
supplies sold increased 31% as a result of increased sales of computer equipment
during the period.
<PAGE>
Nine Month Period Ended September 30, 1998 and 1997
The Company's total revenue remained constant at a contract level of
$1,211,662 during the first six months of 1998 as compared to $1,215,123 in
1997. Software license fees increased 26% in 1998 due, in part, to an increase
in the licensing of the Company's asystTM and LegacyTM products. Installation
and training decreased 20% in due to a decrease in amount of custom programming
requested by customers. Maintenance revenue decreased 8% during 1998, due in
part, to a decrease in the number of the Company's QuestTM and LegacyTM
customers that elected to select maintenance coverage. Equipment and supplies
sales increased 8% in 1998 due, in part, to an increase in the volume of
computer equipment sold in conjunction with its products
Total costs and expenses decreased 11% from $1,308,601 in 1997 to
$1,160,893 in 1998. Salary expense decreased 19% in 1998 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 remained
constant with 1997 levels in 1998. Depreciation and amortization expense
decreased 18% in 1998. Cost of equipment and supplies sold increased 20% as a
result of increased sales of computer equipment during the period.
Liquidity and Capital Resources
The Company had net cash provided from operating activities of $62,928
during the nine months ended September 30, 1998, as compared to net cash
provided by operations of $7,586 for the same period in 1997. Net cash of
$15,126 was utilized during 1998 for investing in capital expenditures as
compared to $33,960 in 1997.
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 increased 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 positive 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. Ventana distributed this note to its limited partners in its
fund in 1997 and instructed the Company to reissue notes, under the same terms
and conditions, to the limited partners. 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. As of June 30, 1998 there was $79,195 of
interest outstanding on the note. The Company is currently negotiating an
extension to these notes with the limited partners.
The Company is currently in arrears in the payment of dividends to holders
of its preferred stock. As of September 30, 1998, dividends were in arrears on
Series B preferred stock in the amount of $349,975, on Series D preferred stock
in the amount of $301,860 and on Series E preferred stock in the amount of
$153,445.
<PAGE>
Year 2000
Until just a few years ago, most computer programs were written to define
an applicable year by using two digits for the year instead of four. The effect
on a computer program that was written in such a way is to define a year that is
entered with the two digits "00" as 1900 rather than 2000. When the Year 2000
arrives, any computer programs that are written in this manner will either have
to be modified to accept a date in the 21st century or the programs will have to
be replaced. This issue not only effects the Company's internal automated
information systems but also has an effect on the software products the Company
develops, supports and markets to its customers. The Company has evaluated the
computer programs that it utilizes internally for its information systems and
has determined that substantially all of its systems are currently Year 2000
compliant. The Company's asystTM product line is Year 2000 compliant. The
Company's customers that are utilizing its LegacyTM, and QuestTM product lines
are being offered a Year 2000 compliant version of certain packages within these
product lines or are being encouraged to migrate to the Company's products that
are Year 2000 compliant. Based on currently available information, the Company
does not anticipate that the costs to address the issues related to the Year
2000 will have a material adverse impact on the Company's financial condition,
results of operations or liquidity.
Forward-Looking Statements
This report contains forward-looking statements, other than historical
facts, which reflect the view of Company's management with respect to future
events. Such forward-looking statements are based on assumptions made by and
information currently available to the Company's management. Although management
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from such expectations include, without limitation, the ability of
the Company i) to generate levels of revenue and adequate cash flows from its
operations to support and maintain its current cost structure and ii) to develop
and deliver products that are competitive, accepted by its markets and are not
rendered obsolete by changing technology. The forward-looking statements
contained herein reflect the current views of the Company's management with
respect to future events and are subject to these factors and other risks,
uncertainties and assumptions relating to the operations, results of operations
and financial position of the Company. The Company assumes no obligation to
update the forward-looking statements or to update the reasons actual results
could differ from those contemplated by such forward-looking statements.
<PAGE>
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 its third party claims.
The Company is also a defendant in various legal actions, which arose out
of the normal course of business. In the opinion of management, none of these
actions are expected to have a material effect on the consolidated results of
operations or financial position of the Company.
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, 1998, are entitled to the payment of approximately $349,975 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, 1998, are entitled to the payment of approximately $301,860 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, 1998, are entitled to the payment of approximately $153,445 in
dividends which are currently in arrears.
<PAGE>
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
(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 12, 1998 By: /s/ Thomas E. Gibbs
--------------------
Thomas E. Gibbs, President
and Chairman of the Board
(Principal Executive Officer)
Date: November 12, 1998 By: /s/ Randall L. McGee
----------------------
Randall L. McGee, Secretary
and Treasurer
(Principal Financial and
Accounting Officer)
<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-31-1998 DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997 DEC-31-1997
<CASH> 298903 0 204807
<SECURITIES> 0 0 0
<RECEIVABLES> 201253 0 216693
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 572208 0 427665
<PP&E> 67179 0 85940
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<BONDS> 50000 0 50000
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130000 0 130000
<COMMON> 4827857 0 4317803
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</TABLE>
