SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
--------------------
For the Fiscal Year Ended: Commission File Number
December 31, 1997 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)
---------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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 March 23, 1998 the aggregate market value of voting stock held by
non-affiliates of the Registrant was $405,277.
As of March 23, 1998, there were 43,178,043 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's
definitive proxy statement relating to its 1998 annual meeting of shareholders
is incorporated by reference into Part III of this Form 10-KSB.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in the proxy statement incorporated by
reference into Part III of the Form 10-KSB or any amendment hereto. X
<PAGE>
PART I
ITEM 1. BUSINESS
General Development of Business
United Systems Technology, Inc. ("USTI"), was incorporated under the
laws of the State of Iowa on June 5, 1978, and its wholly-owned subsidiary,
United Systems Technology East, Inc. ("USTEI"), was incorporated under the laws
of the State of Delaware on June 10, 1991 (USTI and USTEI, collectively, are
referred to herein as the "Company"). The Company is engaged in the business of
developing, supporting and marketing computer software products to county and
local governments. The software applications of the Company operate on IBM
mid-range computers, and on various network computer systems both in DOS and
Windows environments. The products are offered to customers in five product
application groups. These product application groups, consisting of over 30
separate software titles, are Financial, Public Works, General Administration,
Public Safety and Civil Processing.
On November 15, 1995, United Systems Technology, Inc. ("USTI")
purchased substantially all of the assets and assumed certain liabilities of QDS
Acquisitions, Inc. (QDS") from Dralvar Capital Corp. ("Dralvar"). These assets
were previously acquired by certain Dralvar shareholders through foreclosure on
their security interests in such assets granted by QDS. The purchase price
consisted of the issuance of 4,326,600 shares of USTI Common Stock. In addition,
USTI assumed certain obligations of Dralvar. The assets purchased by USTI
consisted of (a) all operating assets of QDS including its Utility Billing
System ("UBS") and its Law Enforcement Automated Data Retrieval System
("LEADRS") software,(b) the non-exclusive right to sell and provide software
maintenance and services for the Quest Fund Accounting ("QFA") software product
line from the closing date through February 28, 1997, (c) substantially all
hardware, equipment, supplies, furniture, furnishings and other fixed assets,
(d) all software used for product development, (e) trade secrets and proprietary
information including the name QuestTM and any other trademarks, (f) business
records of Dralvar, including customer lists and related contracts and contract
rights and (g) certain accounts receivable of Dralvar totaling approximately
$61,131. USTI assumed certain obligations of Dralvar which consisted of
obligations to customers in the amount of $187,645 and accrued expenses in the
amount of $36,774.
On October 17, 1994, USTI acquired substantially all of the assets of
Noll Computer Systems, Inc. ("NCS"), a Texas Corporation. On February 21, 1997
NCS exercised its option to reacquire certain assets, including the InterFundTM
products and customer relationships existing in 1994. In addition, NCS purchased
the InterFundTM products developed at USTI and customer relationships added
since October 1994, including, but not limited to, the following contractual
obligations: License Agreements, Customer Support Agreements, and certain
contractual obligations related to ongoing Service Requests. USTI's initial
decision to infuse the company with the new technology, specifically the
Progress and UNIX based InterFundTM product family, was based on the belief that
USTI needed a new technology direction to provide an alternative to the AS/400
based Legacy product family that had come under increasing competition from more
"Open" systems. Sales of this product family did not reach the required levels
in the 1994 agreement with NCS. The Company made the decision not to prepay the
stipulated minimum royalty amounts as provided for in the agreement to retain
the InterFundTM product line. According to the 1994 agreement, in the event that
royalty payments, based on sales or prepayment, did not equal certain stipulated
minimum annual amounts, NCS had the right to reacquire the InterFundTM product
line.
2
<PAGE>
Narrative Description of Business
Products
The software applications offered by the Company consist of a
comprehensive line of management information systems which were developed to
specifically meet the unique requirements of local governmental entities. The
software applications of the Company are offered through its LegacyTM, QuestTM
and asystTM product lines. The LegacyTM product line operates on the IBM
mid-range computer systems, including the AS/400 and the Advanced/36. The
QuestTM product line operates in a single user or small network PC DOS
environment. The asystTM product line operates in a single user or network
Windows environment. An initial software sale typically averages between $1,500
and $40,000. The cost of the related hardware varies depending on the type of
machine purchased as well as the amount of memory capacity, peripheral equipment
and optional features obtained on the machine.
The Company markets its software packages in the following five product
application groups.
Financial Systems
This group includes software modules in the areas of general ledger and
budgetary accounting, budget preparation, accounts payable, payroll,
accounts receivable, centralized cash receipts, tax billing and
collection, purchase orders and comprehensive financial report writer.
Public Works
This group includes software modules in the areas of building permits
and inspections, utility billing and collections, hand held meter
reading, assessment billing and project accounting.
General Administration
This group includes software modules in the areas of information
indexing, perpetual inventory, vehicle and equipment maintenance, fixed
asset records, and business licenses.
Public Safety
This group includes software modules in the areas of computer aided
dispatch, law enforcement records management, jail management, emergency
medical services billing, court administration and alarm billing.
Civil Processing
This group includes software modules in the areas of summonses and
complaint docketing, process server activity, writ and foreclosure
docketing and garnishments and is designed exclusively for the County
Sheriff Civil Process function..
The Company has completed the development of several new software
products which significantly enhance the competitiveness of its comprehensive
software offering. These products are marketed under the asystTM brand name,
were developed as Windows applications to "look and work like Microsoft Office",
and include a new Fund Accounting system including General Ledger, Budget
XLence, Report XLence, Accounts Payable, Accounts Receivable, Purchase Orders,
Cash Receipts, Payroll and Utility Billing. The Company is currently developing
its asystTM Public Safety product line to add to its existing Fund Accounting
offering in the Windows environment. The Company anticipates that the initial
packages will be released in the 2nd quarter of 1998. The Company derives its
revenue principally from (i) licensing of its software packages, (ii)
installation, training and customer support, (iii) maintenance agreements, and
(iv) equipment and supplies sales.
3
<PAGE>
Software Packages
The Company licenses its software packages under a perpetual nonexclusive
and nontransferable license agreement.
Installation, Training and Customer Support
The Company provides services related to the training and implementation of
the software packages to its customers. These services are delivered at the
customer site, conducted in a classroom setting at the company's
headquarters or as "remote" training through interactive
computer-to-computer hookup. In the event that the customer requests
additional functions from the product which are not standard in the software
packages, the Company provides custom programming services for these
modifications.
Maintenance Agreements
The Company offers maintenance agreements in conjunction with the licensing
of its software packages. These agreements provide telephone support,
software product enhancements, error corrections, upgrades and remote
diagnostics support.
Equipment and Supplies Sales
The Company sells PC's and hand-held computers as well as certain computer
forms that are used in conjunction with the Company's products.
For the year ended December 31, 1997, the Company generated
approximately 15% of its revenue from the sale of software, 6% from
installation, training and customer support, 66% from software maintenance, and
13% from equipment and supplies sales.
Marketing
The Company markets its products on a nationwide basis. Marketing is
conducted through its full-time sales staff in Dallas, Texas as well as the
Company's full-time sales representatives located in Minneapolis, Minnesota and
Lexington, Kentucky.
The Company's customers are primarily municipal governments with
populations between 1,000 and 100,000, county governments, police departments,
emergency medical services providers and municipal court systems. The Company
currently has approximately 1,500 customer installations nationwide. USTI
proposes computer equipment when selling its software, but the customer may
obtain their computer equipment from a hardware manufacturer or dealer and then
purchases one or more software modules from the Company.
The typical purchaser's representative is a City Manager,
Administrative Manager, Controller or Director of Finance. Customer leads are
established from customer referrals, direct mail campaigns and attendance at
national and regional trade shows. In addition, the names and addresses of
target city governments are readily available from directory sources. The
Company also holds an annual users' meeting in Dallas, Texas. The two-day
meeting is typically attended by approximately 100 current and prospective
users. In the past, new business has been generated from current customers who
have upgraded systems by purchasing new modules.
4
<PAGE>
Approximately 32% of the Company's customers are located in Texas and
Minnesota, and the remaining customers are located in various states nationwide.
Competition
The Company is aware of sizable, nationally prominent competitors, which
market products that are similar to those of the Company. Numerous other
competitors are small, local vendors who often do not market standard
application packages. Management believes that the comprehensive nature of its
product offering, including the uniqueness of the new asystTM product line, has
a positive impact on its competitive status.
Employees
The Company presently has 19 full-time employees, including its executive
officers. In addition, from time to time, the Company engages the services of
consultants and part-time employees.
Research and Development
During 1997, the Company incurred approximately $75,000 in research and
development costs related to the development of its asystTM product line.
Patents, Copyrights, Trademarks and Royalties
The Company does not believe that its products are patentable, and, to
date, has not registered any copyright with respect to its products. The Company
believes that all of its products are of a proprietary nature and the Company's
licensing arrangements prohibit disclosure of the program by the customer.
However, there can be no assurance that the Company's software is incapable of
being duplicated or that the Company will be successful in discovering or
preventing any such duplication.
The Company entered into royalty agreements as part of the sale of assets
to NCS on February 21, 1997. In addition, the Company is a party to certain
royalty agreements, which, individually, and in the aggregate, have not required
the payment of material amounts. Under these agreements, the Company is the
licensee of certain software systems, which it markets as part of its product
line.
5
<PAGE>
ITEM 2. PROPERTIES
The Company maintains its offices at 1850 Crown Road, Suite 1109,
Dallas, Texas, 75234. The lease for this facility was entered into on September
30, 1997 to include approximately 5,033 square feet with a sixty-two month lease
term commencing on November 1, 1997 and expiring on December 31, 2002. The
Company leases this space from a nonaffiliate for a monthly rental of $4,089
with the first two monthly payments on the lease abated.
ITEM 3. 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, 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. 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.
The Company is also a defendant in various legal actions which arose out of
the normal course of its 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1997.
6
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's common stock is traded over-the-counter on the National
Association of Securities Dealers, Inc. Over-The-Counter Bulletin Board System.
The quotations shown below represent prices among the dealers and do not include
retail mark-ups, mark-downs, or commissions, and do not necessarily represent
actual transactions.
<TABLE>
<S> <C> <C> <C>
High Low
Quarter Ended Bid Price Bid Price
March 31, 1996 $0.03 $0.01
June 30, 1996 $0.01 $0.01
September 30, 1996 $0.05 $0.04
December 31, 1996 $0.03 $0.03
March 31, 1997 $0.03 $0.03
June 30, 1997 $0.03 $0.03
September 30, 1997 $0.03 $0.02
December 31, 1997 $0.02 $0.01
</TABLE>
As of March 23, 1998, the Company had 493 shareholders of record and
its common stock had a closing bid price of $0.01 per share and a closing asked
price of $0.02 per share
Holders of the Company's common stock are entitled to receive such
dividends as may be declared by the Company's Board of Directors. However, no
dividends on common stock have ever been paid by the Company, nor does the
Company anticipate that dividends will be paid in the foreseeable future. In
addition, payment of dividends to holders of the Company's common stock are
restricted pursuant to the terms of outstanding shares of preferred stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company derives its revenue from the licensing of its software
packages, installation, training and customer modifications, maintenance
agreements and sale of equipment and supplies. Results of operations for 1997
include revenues of $1,641,370 resulting in a net loss of $270,554 as compared
to revenues of $2,004,747 and a net loss of $634,625 in 1996.
During 1997, the Company continued to adjust its expenses based on
anticipated levels of revenue resulting in decreased expenses and improved
results of operations as compared to 1996. The Company is continuing the
development of additional modules for its asystTM product line. The asyst TM
product line currently includes General Ledger, Accounts Payable, Accounts
Receivable, Cash Receipts, Purchase Orders, Budgeting, Reporting and Utility
Billing modules and has been installed at over 100 locations since its initial
release in 1996. The Company is currently developing its initial Public Safety
modules for its asystTM product line, which it anticipates, will be released in
the 2nd quarter of 1998. The Company believes that its asystTM product line
offers its current and prospective customers 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 resulted in a decrease
in the volume of licensing activity of the Company's DOS (QuestTM) and mid-range
(LegacyTM) products during 1997. The Company is offering a Year 2000 compliant
version of certain modules and has obtained commitments for this version of the
system. The Company expects to begin shipping the Year 2000 version of the
LegacyTM products in the 4th quarter of 1998.
7
<PAGE>
On October 17, 1994, USTI acquired substantially all of the assets of
Noll Computer Systems, Inc. ("NCS"), a Texas Corporation. On February 21, 1997
NCS exercised its option to reacquire certain assets, including the InterFundTM
products and customer relationships existing in 1994. In addition, NCS purchased
the InterFundTM products developed at USTI and customer relationships added
since October 1994, including, but not limited to, the following contractual
obligations: License Agreements, Customer Support Agreements, and certain
contractual obligations related to ongoing Service Requests. USTI's initial
decision to infuse the company with the new technology, specifically the
Progress and UNIX based InterFundTM product family, was based on the belief that
USTI needed a new technology direction to provide an alternative to the AS/400
based Legacy product family that had come under increasing competition from more
"Open" systems. Sales of this product family did not reach the required levels
in the 1994 agreement with NCS. The Company made the decision not to prepay the
stipulated minimum royalty amounts as provided for in the agreement to retain
the InterFundTM product line. According to the 1994 agreement, in the event that
royalty payments, based on sales or prepayment, did not equal certain stipulated
minimum annual amounts, NCS had the right to reacquire the InterFundTM product
line.
The following table sets forth, for the period indicated, the relative
percentage which certain items in the Consolidated Statements of Operations of
the Company bear as a percent of total revenues and the percentage change in
those items from period to period.
<TABLE>
<S> <C> <C> <C>
Percentage of Revenues
Year Ended December 31, Percentage Change
1997 1996 1997 vs 1996
Revenue
Software Packages 15% 15% (17%)
Installation, training and
customer support 6% 12% (60%)
Maintenance 66% 60% (10%)
Equipment and other 13% 13% (16%)
--- ---
100% 100% (18%)
Costs and expenses
Salaries 58% 58% (17%)
Other general administrative
and selling expense 29% 28% (17%)
Depreciation and amortization 21% 37% (53%)
Commissions 2% 2% (12%)
Cost of equipment sold 6% 6% (22%)
--- ---
Total costs and expenses 116% 131% (27%)
Operating loss (16%) (31%) 57%
Non-operating (expense) income - ( 1%) 76%
Loss before income taxes and
extraordinary items (16%) (32%) 57%
</TABLE>
8
<PAGE>
1997 vs 1996
The Company's total revenue decreased 18% for the year ended December
31, 1997 from $2,004,747 in 1996 to $1,641,370 in 1997. Software license fees
decreased 17% in 1997 due, in part, to a decrease in the licensing of the
Company's older product lines, 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 products toward prospective
customers which it believes are best suited for its products. Installation,
training and customer support revenue decreased 60% in 1997 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 10% in 1997,
due, in part, to a decrease in the number of customers using the Company's
LegacyTM products that elected to select maintenance coverage. Equipment sales
and supplies decreased 16% as a result of decreased sales of computer equipment
sold with its software products.
Total costs and expenses decreased 27% for the year ended December 31,
1997 from $2,625,646 in 1996 to $1,908,681 in 1997. Salaries and other general,
administrative and selling expense costs decreased 17% in 1997 as a result of
continued efforts to align staffing with anticipated levels of revenue. Other
general, administrative and selling expense decreased 17% in 1997 as a result of
continued efforts to control and reduce expenses. Depreciation and amortization
expense decreased 53% in 1997 from 1996 due to a reduction in software and
goodwill amortization expense. Commission expenses decreased 12% in 1997
resulting from a decrease in the level of licensing of the Company's software
products by sales agents in 1997. Cost of equipment sold decreased 22% in 1997
as a result of decreased computer equipment sold with its software products.
Liquidity and Capital Resources
The Company had net cash provided by operating activities of $188,890
during 1997 as compared to $4,088 provided in 1996. This increase in cash
provided was primarily the result of the improvement in the results of
operations in 1997 as compared to 1996 and an increase in deferred revenue. Net
cash of $43,065 was utilized in 1997 for the purchase of equipment necessary for
the sales, development and support of the new asystTM product line. Net cash of
$8,270 was utilized during 1997 for the reduction of capital lease obligations.
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 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. 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. Ventana distributed this note to the limited partners
in its fund in 1998. Ventana asked the Company to reissue notes, under the same
terms and conditions, to the limited partners. As of December 31, 1997, there
was $76,111 of interest outstanding on these notes.
The Company is currently in arrears in the payment of dividends to holders
of its preferred stock. As of December 31, 1997, dividends were in arrears on
the Series B preferred stock in the amount of $323,800, on the Series D
preferred stock in the amount of $275,685 and on Series E preferred stock in the
amount of $137,735.
9
<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 affects 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.
10
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
United Systems Technology, Inc. and Subsidiary
Index to Consolidated Financial Statements
And Supplementary Schedules
Pages
Reports of Independent Accountants F-1
Consolidated Financial Statements
Balance sheets as of December 31, 1997 and 1996 F-2
Statements of operations for the years
ended December 31, 1997 and 1996 F-3
Statements of stockholders' equity for the years
ended December 31, 1997 and 1996 F-4
Statements of cash flows for the years
ended December 31, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6 to F-17
11
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
United Systems Technology, Inc.
We have audited the accompanying consolidated balance sheets of United Systems
Technology, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Systems
Technology, Inc. and subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
/s/ GRANT THORNTON LLP
Dallas, Texas
March 13, 1998
F-1
<PAGE>
United Systems Technology, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<S> <C> <C>
1997 1996
==== ====
Assets
Current Assets
Cash and cash equivalents $ 204,807 $ 67,252
Trade accounts receivable, less allowance for
doubtful accounts of $40,000 in 1997 and 1996 216,693 253,692
Prepaid expenses and other 6,165 279
-------- --------
Total current assets 427,665 321,223
-------- --------
Property and equipment at cost, net 85,940 115,738
Goodwill, net 481,605 741,744
Purchased software, net 53,056 71,833
Deposits and other 4,999 27,942
--------- ---------
625,600 957,257
--------- ---------
Total Assets $1,053,265 $1,278,480
========= =========
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable - related party $ 50,000 $ -
Current portion of capital lease obligations 4,484 8,271
Trade accounts payable 177,316 230,039
Accrued payroll 24,485 20,432
Accrued interest - related party 76,111 72,020
Other accrued expenses 98,868 115,368
Deferred revenue 779,485 664,797
--------- ---------
Total current liabilities 1,210,749 1,110,927
Notes payable - related party - 50,000
Capital lease obligations, net of current portion 2,247 6,730
--------- ---------
Total liabilities $1,212,996 $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, aggregate liquidating
preference of $1,300,000 ($1.00 per share) 130,000 205,000
Common stock, par value $.10 per share; authorized
100,000,000 shares; issued and outstanding
43,178,043 and 37,969,765 shares in 1997
and 1996, respectively 4,317,803 3,796,975
Additional paid-in capital 3,768,562 4,214,390
Accumulated deficit (8,376,096) (8,105,542)
--------- ---------
Total stockholders' equity (159,731) 110,823
--------- ---------
Total liabilities and stockholders's equity $1,053,265 $1,278,480
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
United Systems Technology, Inc. and Subsidiary
Consolidated Statements of Operations
For The Years Ended December 31,
<TABLE>
<S> <C> <C>
1997 1996
==== ====
Revenue
Software packages $ 250,524 $ 302,305
Installation, training and customer support 97,633 246,014
Maintenance 1,080,084 1,203,724
Equipment sales and supplies 208,677 241,871
Other 4,452 10,833
--------- ---------
1,641,370 2,004,747
--------- ---------
Costs and expenses
Salaries 959,416 1,156,355
Other general, administrative and selling
expense 415,085 488,819
Depreciation and amortization 159,579 336,621
Rent 54,523 74,466
Commissions 30,323 34,271
Cost of equipment sold 97,555 124,574
Impairment of software development costs - 74,915
Impairment of goodwill 192,200 335,625
--------- ---------
1,908,681 2,625,646
--------- ---------
Operating loss (267,311) (620,899)
--------- ---------
Nonoperating (expense) income
Interest expense (5,342) (8,608)
Loss on sale of assets - (8,205)
Interest income 2,099 3,087
--------- ---------
(3,243) (13,726)
--------- ---------
Net loss $ (270,554) $ (634,625)
========= =========
Preferred stock dividend requirement (91,000) (104,500)
--------- ---------
Loss allocable to common shareholders $ (361,554) $ (739,125)
========= =========
Net loss per common share $ (0.01) $ (0.02)
========= =========
Weighted average number of common
shares outstanding 43,213,935 38,325,837
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
United Systems Technology, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31,
<TABLE>
<S> <C> <C> <C> <C> <C>
Additional
Capital Stock Issued Paid-In Accumulated
Preferred Common Capital Deficit Total
--------- ------ ------- ------- -----
Balance January 1,1996 205,000 3,864,315 4,157,151 (7,470,917) 755,549
Repurchase and retirement
of previously issued
shares for a business
acquisition (67,340) 57,239 (10,101)
Net loss (634,625)(634,625)
--------- --------- --------- --------- --------
Balance, December 31,1996 205,000 3,796,975 4,214,390 (8,105,542) 110,823
Conversion of Series C
preferred stock to
common stock (75,000) 530,828 (455,828) -
Acquisition and retirement
of of 100,000 shares of
common stock held as
collateral for note
receivable (10,000) 10,000 -
Net loss (270,554)(270,554)
--------- --------- --------- --------- --------
Balance, December 31,1997 130,000 4,317,803 3,768,562 (8,376,096)(159,731)
========= ========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
United Systems Technology, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31,
<TABLE>
<S> <C> <C>
1997 1996
==== ====
Cash flows in operating activities:
Net loss $ (270,554) $ (634,625)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 159,579 336,621
Impairment of software development costs - 74,915
Impairment of goodwill 192,200 335,625
Loss on sale of assets - 8,205
Change in operating assets and liabilities:
Trade accounts receivable 36,999 99,700
Prepaid expenses (5,886) 8,035
Deposits and other 22,943 599
Accounts payable (44,579) (67,459)
Accrued expenses (16,500) (2,418)
Deferred revenue 114,688 (155,110)
--------- ---------
$ 459,444 $ 638,713
--------- ---------
Net cash provided by operating activities $ 188,890 $ 4,088
--------- ---------
Cash flows from investing activities:
Property and equipment additions $ (43,065) $ (33,321)
--------- ---------
Cash flows from financing activities:
Payments on capital lease obligations $ (8,270) $ (42,749)
--------- ---------
Increase(decrease) in cash and cash equivalents $ 137,555 $ (71,982)
Cash and cash equivalents, beginning of year 67,252 139,234
--------- ---------
Cash and cash equivalents, end of year $ 204,807 $ 67,252
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest during the period $ 1,535 $ 6,356
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
1. Summary of Significant Accounting Policies:
Nature of Operations
The Company is engaged in the business of developing, supporting and
marketing computer software products to county and local governments
located throughout the United States.
Basis of Presentation
The financial statements for the years ended December 31, 1997 and 1996
are consolidated and include the accounts of United Systems
Technology, Inc. ("USTI") and its wholly-owned subsidiary, United
Systems Technology East, Inc. ("USTEI"). All material intercompany
transactions and balances have been eliminated.
Cash Equivalents
The Company considers short-term investments purchased with an initial
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of property
and equipment is computed using the straight-line method over the
estimated useful lives of such property and equipment, which range
from three to five years. Gains and losses on the disposal of such
assets are recognized as incurred.
Software Development Costs
The Company has implemented and accounted for certain costs related to
the development of its computer software products in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for
Costs of Computer Software to be Sold, Leased or Otherwise Marketed"
("SFAS 86"). Under SFAS 86, all costs incurred to establish the
technological feasibility of a computer software product are charged to
operations as incurred. After technological feasibility is established,
costs of producing the computer software product are capitalized until
the product is available for general release to customers. The
capitalized cost of internally developed software is amortized over its
estimated useful life, generally five years, using the straight-line
method or the ratio of current revenues to current and anticipated
revenues from such software, whichever provides the greater
amortization. Amortization and impairment of developed software costs
was $136,713 for the year ended December 31, 1996.
F-6
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
1. Summary of Significant Accounting Policies (Cont'd.):
Other Assets
Goodwill represents the excess of the total acquisition cost over the
fair value of the net assets acquired of Municipal Software
Consultants, Inc. ("MSC"), acquired in 1986, New Jersey Municipal Data
Management, Inc. ("MDM") acquired in 1991, and QDS Acquisitions, Inc.
("QDS") acquired in 1995. The goodwill resulting from the MSC and MDM
acquisitions is and is being amortized using the straight-line method
over 20 years from date of acquisition. The goodwill resulting from the
QDS acquisition is being amortized using the straight-line method over
10 years from date of acquisition. Purchased software represent assets
acquired in the MDM and QDS acquisitions, and are being amortized using
the straight-line method over a five-year period.
Revenue Recognition
The Company recognizes revenue from the initial license for computer
software product sales upon delivery of a software package. Revenue
from installation, training and customer support is recognized in the
period in which the services are provided. Revenue from contracts
to maintain its computer software products is recognized over the term
of the contracts.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable.
In reviewing recoverability, the Company estimates the future cash
flows expected to result from using the assets and eventually disposing
of them. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the
asset, an impairment loss is recognized.
Earnings (Loss) Per Common Share
In the fourth quarter of 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS 128). In accordance with SFAS No. 128, the Company
computes basic earnings (loss) per common share based on the
weighted-average number of common shares outstanding. Diluted earnings
per share are computed based on the weighted-average number of common
shares outstanding plus the number of additional common shares that
would have been outstanding if dilutive potential common shares had
been issued. In 1996 and 1997 all potential common shares were
anti-dilutive. Accordingly, the adoption of SFAS 128 had no effect on
1997 and 1998 earnings per share amounts.
Financial Instruments
The fair value of the Company's financial instruments, consisting of
cash and cash equivalents and debt, approximate their carrying values.
F-7
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" (SFAS 123) encourages, but does not require,
companies to record costs for stock-based employee compensation plans
at fair value. The Company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinions No. 25 "Accounting for Stock Issued to
Employees" and related interpretations, and to provide the pro forma
disclosures as if the requirements of SFAS 123 had been adopted.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent asset and liabilities at the date of
the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. Property and Equipment:
Property and equipment at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<S> <C> <C>
1997 1996
---- ----
Leasehold improvements $ 63,772 $ 58,702
Furniture and fixtures 39,248 38,330
Equipment 904,323 869,292
--------- ---------
1,007,343 966,324
Less accumulated depreciation
and amortization (921,403) (850,586)
--------- ---------
$ 85,940 $ 115,738
========= =========
</TABLE>
3. Other Assets:
Other assets at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<S> <C> <C> <C>
Accumulated
Cost Amortization Net
---- ------------ ---
1997
----
Goodwill $ 1,692,128 $(1,210,523) $ 481,605
Purchased software 592,700 (539,644) 53,056
1996
----
Goodwill $1,692,128 $ (950,384) $ 741,744
Purchased software 590,654 (518,821) 71,833
</TABLE>
F-8
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
4. Capital Lease Obligations:
The Company leases certain assets under capital leases. The leases
include interest at rates ranging from 10.75% to 11.9% and expire
at various dates through 1999. The leases are collateralized by the
related asset and most of the leases include options to purchase the
equipment at the end of the lease term.
Included in property and equipment as of December 31, 1997 are the
following assets held under capital leases:
<TABLE>
<S> <C>
Office furniture and equipment $443,683
Accumulated amortization (437,733)
-------
Assets under capital lease, net $ 5,950
=======
</TABLE>
Future minimum lease payments under capital leases as of December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998 $ 4,914
1999 2,376
-------
Total minimum lease payments 7,290
Less amount representing interest ( 559)
-------
Present value of capital lease obligations 6,731
Less current portion (4,484)
-------
$ 2,247
=======
</TABLE>
Amortization expense associated with these assets amounted to $31,981,
and $40,058 for the years ended December 31, 1997, and 1996,
respectively.
5. Notes Payable:
The Company had a note payable to a related party in the amount of
$50,000 at December 31, 1996. This note payable, which is not
collateralized, bears interest at prime and is due September 30, 1998.
The prime rate of interest was 8.50% at December 31, 1997 and 8.25% in
1996. The related party distributed this note to the limited partners
in its fund, under the same terms and conditions, in 1997. There was
$76,111 and $72,020 accrued interest outstanding on these notes at
December 31, 1997 and 1996, respectively. Interest expense incurred on
these notes was $4,091 and $4,147 for the years ended December 31, 1997
and 1996, respectively.
F-9
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
6. Capital Stock:
Preferred Stock
The Company's amended articles of incorporation authorize the issuance
of 5,000,000 shares of preferred stock with a par value of $.10 per
share. The preferred stock may be issued in series from time to
time with such designation, rights, preferences and limitations as the
Board of Directors may determine by resolution. The Company has
established four series of preferred stock: Series B, Series C,
Series D and Series E.
In June 1988, the Company established and issued 500,000 shares of
Series B preferred stock. The terms of the Series B preferred stock
provide for, among other things: (i) a cumulative dividend of $.07 per
share per annum, payable quarterly, which accrues day to day and which
must be paid prior to the payment of a dividend to holders of the
Company's common stock; (ii) a liquidation preference of $1.00 per
share plus accrued but unpaid dividends paid prior to any distribution
to holders of common stock and Series C preferred stock; (iii) the
right to convert each share plus accrued but unpaid dividends into
common stock; (iv) the right to vote on all matters submitted to a vote
of stockholders of the Company; and (v) redemption at the Company's
option at a redemption price of $1.00 per share plus all accrued and
unpaid dividends. As of December 31, 1997 the 500,000 outstanding
shares of Series B preferred stock were entitled to be converted into
4,118,995 shares of common stock and were entitled to 4,118,995 votes
on all matters submitted to a vote of stockholders of the Company. At
December 31, 1997 cumulative dividends of approximately $323,800 were
in arrears.
In June 1988, the Company established and issued 750,000 shares of
Series C preferred stock. The terms of the Series C preferred stock
provide for, among other things: (i) a cumulative dividend of $0.018
per share per annum which accrues from day to day and which must be
paid prior to the payment of a dividend to holders of the Company's
common stock; (ii) a dividend equal to that paid any other holders of
common stock; (iii) a liquidation preference of $.20 per share plus
accrued but unpaid dividends paid prior to any distribution to holders
of common stock; (iv) the right to convert each share plus accrued but
unpaid dividends into common stock; (v) the right to vote on all
matters submitted to a vote of stockholders of the Company; and (vi)
the right to approve any issuance of Series A preferred stock prior to
its issuance. 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 elected to be 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.
F-10
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
Capital Stock (Cont'd.):
In February 1990, the Company established and issued 500,000 shares of
Series D preferred stock. The terms of the Series D preferred stock
provide for, among other things: (i) a cumulative dividend of $.07 per
share per annum, payable quarterly, which accrues day to day and which
must be paid prior to the payment of a dividend to holders of the
Company's common stock; (ii) a liquidation preference of $1.00 per
share plus accrued but unpaid dividends paid prior to any distribution
to holders of common stock and Series C preferred stock; (iii) the
right to convert each share plus accrued but unpaid dividends into
common stock; (iv) the right to vote on all matters submitted to a vote
of stockholders of the Company; and (v) redemption at the Company's
option at a redemption price of $1.00 per share plus all accrued and
unpaid dividends. As of December 31, 1997 the 500,000 outstanding
shares of Series D preferred stock were entitled to be converted into
2,216,245 shares of common stock and were entitled to 2,216,245 votes
on all matters submitted to a vote of stockholders of the Company. At
December 31, 1997 cumulative dividends of approximately $275,685 were
in arrears.
In June 1991, the Company established and issued 300,000 shares of
Series E preferred stock. The terms of the Series E preferred stock
provide for, among other things: (i) a cumulative dividend of $.07 per
share per annum, payable quarterly, which accrues day to day and which
must be paid prior to the payment of the dividend to holders of the
Company's common stock; (ii) a liquidation preference of $1.00 per
share plus accrued but unpaid dividends paid prior to any distribution
to holders of common stock and Series C preferred stock; (iii) the
right to convert each share plus accrued but unpaid dividends into
common stock; (iv) the right to vote on all matters submitted to a vote
of stockholders of the Company; and (v) redemption at the Company's
option at a redemption price of $1.00 per share plus all accrued and
unpaid dividends. As of December 31, 1997 the 300,000 outstanding
shares of Series E preferred stock were entitled to be converted into
2,188,685 shares of common stock and were entitled to 2,188,685 votes
on all matters submitted to a vote of stockholders of the Company. At
December 31, 1997, cumulative dividends of approximately $137,735 were
in arrears.
F-11
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
7. Commitments and Contingencies:
Operating Leases
The Company leases certain office facilities under a non-cancelable
lease agreement which expires December 31, 2002. The future minimum
annual lease payments under this lease is $49,070 from 1998 through
2002. Rent expense was $54,445 and $71,226 in 1997 and 1996,
respectively.
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. 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. 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.
The Company is also a defendant in various legal actions, which arose
out of the normal course of its 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.
F-12
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
8. Common Stock Options and Warrants:
Stock Options
In September 1986, the Board of Directors approved the adoption of a
stock option plan (the "Plan"), whereby 12,000,000 shares of the
Company's common stock are reserved for options to be granted to
employees and directors at the discretion of the Board of Directors.
The exercise price shall be at a minimum of 100% of the fair market
value of the stock at the time the option is granted. Unless otherwise
specified, the options expire ten years from the date of grant and may
not be exercised during the initial one-year period from date of grant.
Compensation costs for stock options granted to employees is measured
as the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to
acquire the stock. If the Company recognized compensation expense based
upon the fair value at the grant date for options under the Plan, the
Company's 1997 and 1996 net loss and net loss per common share would
have increased to the pro forma amounts indicated as follows:
<TABLE>
<S> <C> <C>
1997 1996
---- ----
Net loss allocable to common shareholders
As reported $ (361,554) $ (739,125)
Pro forma $ (411,929) $ (813,306)
Net loss per common share
As reported $ (0.01) $ (0.02)
Pro forma $ (0.01) $ (0.02)
</TABLE>
The fair value of these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions, expected volatility of 415% in 1997 and
560% in 1996; risk free interest rates of 6.32% in 1997 and 7.05% in
1996; no dividend yield; and expected lives of 5 years.
The pro forma amounts presented are not representative of the amounts
that will be disclosed in the future because they do not take into
effect pro forma expenses related to grants before 1996.
F-13
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
8. Common Stock Options and Warrants (Cont'd.):
Additional information with respect to options outstanding at December
31, 1997, and the changes for each of the two years in the period
then ended was as follows:
<TABLE>
<S> <C> <C>
________1997_________
Weighted
Average
Exercise
Shares Price
------ -----
Outstanding at beginning of year 5,822,500 $.04
Granted 2,250,000 .03
Forfeited (182,500) .16
--------- ---
Outstanding at end of year 7,890,000 $.04
--------- ---
Options exercisable at December 31, 1997 4,063,125 $.04
--------- ---
Weighted average fair value per share
of options granted during 1997 $.03
---
________1996_________
Weighted
Average
Exercise
Shares Price
------ -----
Outstanding at beginning of year 4,810,000 $.04
Granted 1,077,500 .06
Forfeited (65,000) .04
--------- ---
Outstanding at end of year 5,822,500 $.04
--------- ---
Options exercisable at December 31, 1996 2,952,500 $.04
--------- ---
Weighted average fair value per share
of options granted during 1996 $.06
---
</TABLE>
Information about stock options outstanding at December 31, 1997 is
summarized as follows:
<TABLE>
<S> <C> <C> <C> <C>
Options Outstanding
------------------------------------------------
Weighted Average
Number Remaining Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price
------------------------ ----------- ---------------- ----------------
$.01 to $.05 6,862,500 3.5 years $.03
$.06 to $.10 1,027,500 3.5 years $.06
---------
7,890,000
---------
</TABLE>
F-14
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
8. Common Stock Options and Warrants (Cont'd.):
<TABLE>
<S> <C> <C> <C>
Options Exercisable
-----------------------------------
Number Weighted Average
Range of Exercise Prices Exercisable Exercise Price
------------------------ ----------- --------------
$.01 to $.05 3,431,250 $.04
$.06 to $.10 631,875 $.06
----------
4,063,125
----------
</TABLE>
Stock Purchase Warrants
As of December 31, 1997 common stock purchase warrants had
been issued primarily to officers, directors and employees including
warrants to purchase 1,000,000 shares at $.035 per share issued to a
director of the Company for the issuance of a letter of credit to
collateralize debt of the Company. As of December 31, 1997, none of
these warrants have been exercised and are fully vested:
<TABLE>
<S> <C> <C> <C>
Expiration Exercise
Date Price Shares
---------- ----- ------
Sep 30, 1998 $.050 950,000
Feb 16, 1999 $.080 1,000,000
Aug 9, 1999 $.050 1,000,000
Aug 9, 2000 $.035 1,000,000
---------
3,950,000
---------
</TABLE>
9. Income Taxes:
At December 31, 1997, the Company has net operating loss
carry-forwards of approximately $3,078,000. These carry-forwards
expire from period 1998 through 2011. Additionally, the Company has
approximately $71,000 in unused general business tax credits available
to directly offset future income tax liabilities and $624,000 in
capital loss carry-forwards available to offset future capital gains.
For the years ended December 31, 1997 and 1996 the difference between
the effective federal income tax rate and the amounts determined
by applying the statutory federal income tax rate to income before
provision for federal income tax was as follows:
F-15
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
9. Income Taxes (Cont'd.)::
<TABLE>
<S> <C> <C>
1997 1996
Amount Amount
------ ------
Federal income tax benefit at
statutory rate $ (91,990) $(215,770)
Amortization of goodwill 88,450 145,100
Expiration of net operating loss
carryforward 323,670 186,160
Other (13,030) 7,410
Change in valuation allowance (307,100) (122,900)
------- -------
$ - $ -
======= =======
</TABLE>
Because of losses from operations for the past two years, the Company
has recorded a valuation allowance equal to the net deferred tax asset.
The components of the deferred tax accounts as of December 31, 1997 and
1996 are as follows:
<TABLE>
<S> <C> <C>
1997 1996
------ ------
Deferred tax assets:
Net operating losses carried
forward $1,046,600 $1,408,400
Capital losses carried forward 212,300 212,300
Deferred revenue 265,000 226,000
Accounts payable and accrued
expenses 126,000 148,800
General business tax credits 71,000 71,000
--------- ---------
Total deferred tax asset $1,720,900 $2,066,500
--------- ---------
Deferred tax liabilities:
Accounts receivable 73,700 86,300
Purchased software, property
and equipment 33,600 59,500
--------- ---------
Total deferred tax liability 107,300 145,800
--------- ---------
Net deferred tax asset before
valuation allowance 1,613,600 1,920,700
Less valuation allowance 1,613,600 1,920,700
--------- ---------
Net deferred tax asset $ - $ -
--------- ---------
</TABLE>
F-16
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
10. Employee Benefit Plans:
Effective January 16, 1992, the Company established the USTI Employee's
401(k) Profit Sharing Plan and Trust (the "Plan"), which is a defined
contribution plan that covers substantially all full-time employees of
the Company eligible to participate. The Plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and Section 401(k) of the Internal Revenue Code. The
Company made contributions for the benefit of the participants in the
Plan in the amount of $3,665 and $2,623 for the years ended December
31, 1997 and 1996, respectively.
11. Fourth Quarter Adjustments:
During the fourth quarter of 1996, the Company charged earnings for
adjustment to software development costs of approximately $74,915
and impairment to goodwill of approximately $335,625.
During the fourth quarter of 1997, the Company charged earnings for
impairment to goodwill of approximately $192,200.
F-17
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has had no disagreements with its Independent Accountants
on accounting and financial disclosure matters.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth in the Company's
definitive proxy statement relating to the Company's 1998 Annual
Meeting of Shareholders under the captions "Election of Directors"
and "Executive Officers." Such information is incorporated herein by
reference therefrom.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is set forth in the Company's
definitive proxy statement relating to the Company's 1998 Annual
Meeting of Shareholders under the caption "Management Compensation."
Such information is incorporated herein by reference therefrom.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in the Company's
definitive proxy statement relating to the Company's 1998 Annual
Meeting of Shareholders under the caption "Security Ownership of
Certain Beneficial Owners and Management." Such information is
incorporated herein by reference therefrom.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in the Company's
definitive proxy statement relating to the Company's 1998 Annual
Meeting of Shareholders under the caption "Certain Relationships
and Related Transactions." Such information is incorporated
herein by reference therefrom.
12
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Consolidated Financial Statements
See "Index to Consolidated Financial Statements and Supplementary
Schedules" under Item 8 of this Report.
2. Consolidated Financial Statements Schedules
See "Index to Consolidated Financial Statements and Supplementary
Schedules" under Item 8 of this Report. All other schedules
have been omitted, as the required information is inapplicable or
the information is presented in the financial statements or the
notes thereto.
3. Exhibits
The following documents are filed as exhibits herewith,
unless otherwise specified, and are incorporated herein by this
reference:
Exhibit
Number
3.1 Amended and Restated Articles of Incorporation of the Company as
filed on November 21, 1986 with the Secretary of State of the State
of Iowa. (Incorporated by reference, Registration Statement on
Form S-1, File No. 33-9574, Exhibit 3.11)
3.2 Articles of Merger of Municipal Software Consultants, Inc. into
United Systems Technology, Inc., as filed on December 31, 1986
with the Secretaries of State of the States of Iowa and Texas.
(Incorporated by reference, Annual Report on Form 10-K for the
fiscal year ended December 31, 1986, Exhibit 3.2)
3.3 Statement Establishing and Designating Series B Preferred Stock
of the Company, as filed on June 13, 1988 with the Secretary of
State of the State of Iowa. (Incorporated by reference, Quarterly
Report on For 10-Q for the quarter ended June 30, 1988, Exhibit 4.1)
3.4 Statement Establishing and Designating Series C Preferred Stock of
the Company, as filed on June 13, 1988 with the Secretary of State
of the State of Iowa. (Incorporated by reference, Quarterly Report
on For 10-Q for the quarter ended June 30, 1988, Exhibit 4.2)
13
<PAGE>
Exhibit
Number
3.5 Articles of Amendment to the Articles of Incorporation of the
Company, as filed on July 15, 1988 with the Secretary of State of
the State of Iowa. (Incorporated by reference, Quarterly Report on
Form 10-Q for the quarter ended June 30, 1988, Exhibit 3.1)
3.6 By-Laws of the Company, as amended and currently in effect.
(Incorporated by reference, Registration Statement on Form S-1,
File No. 33-9574, Exhibit 3.6)
3.7 Articles of Amendment to the Articles of Incorporation designating
the Series D Preferred Stock of the Company, as filed on February
23, 1990 with the Iowa Secretary of State. (Incorporated by
reference, Form 8-K Current Report dated February 15, 1990,
Exhibit 3.1)
3.8 Statement establishing and designating Series E Preferred Stock of
the Company, as filed on June 26, 1991, with the Secretary of the
State of Iowa. (Incorporated by referenced, Annual Report on Form
10-K for the year ended December 31, 1991, Exhibit 3.8)
10.1 1986 Stock Option Plan. (Incorporated by reference, Registration
Statement on Form S-1, File No. 33-9574, Exhibit 10.9)
10.2 Agreement Regarding Preferred Stock Purchase, Warrant Purchase and
Loan, dated October 16, 1986, by and between the Company and Ventana
Growth Fund. (Incorporated by reference, Registration Statement on
Form S-1, File No. 33-9574, Exhibit 10.10)
10.3 Preferred Stock Purchase Agreement, dated October 28, 1986, by and
between the Company and Ventana Growth Fund. (Incorporated by
reference, Registration Statement on Form S-1, File No. 33-9574,
Exhibit 10.17)
10.4 Promissory Note, dated October 16, 1986, in the amount of
$150,000.00, from the Company to Ventana Growth Fund. (Incorporated
by reference, Registration Statement on Form S-1, File No. 33-9574,
Exhibit 10.19)
10.5 Stock Purchase Agreement, dated June 8, 1988, by and between the
Company and Farm Bureau Mutual Insurance Company. (Incorporated by
reference, Quarterly Report on Form 10-Q for the quarter ended June
30, 1988, Exhibit 19.1)
10.6 Preferred Stock Exchange Agreement, dated June 8, 1988, by and
between the Company and Ventana Growth Fund. (Incorporated by
reference, Quarterly Report on Form 10-Q for the quarter ended
June 30, 1988, Exhibit 19.2)
10.7 Purchase Agreement, dated February 15, 1990, by and between the
Company and International Technology Group, Inc. (Incorporated by
reference, Form 8-K Current Report dated February 15, 1990, Exhibit
10.1)
14
<PAGE>
Exhibit
Number
10.8 Assignment and Assumption Agreement, dated February 15, 1990, by
and between the Company and International Technology Group, Inc.
assigning all relevant rights and interest in a maintenance
agreement with Grumman Systems Support Corp. to the Company.
(Incorporated by reference, Form 8-K Current Report dated February
15, 1990, Exhibit 10.2)
10.9 Assignment and Assumption Agreement, dated February 15, 1990, by
and between the Company and International Technology Group, Inc.
assigning all rights and interest in a Technology Transfer
Agreement with AM Computer Corporation and Microvote Partners, Ltd.
to the Company. (Incorporated by reference, Form 8-K Current
Report dated February 15, 1990, Exhibit 10.3)
10.10 Assignment and Assumption Agreement, dated February 15, 1990, by
and between the Company and International Technology Group, Inc.
assigning all rights and interest in trademark INTEGRITY to the
Company. (Incorporated by reference, Form 8-K Current Report dated
February 15, 1990, Exhibit 10.4)
10.11 Stock Purchase Agreement, dated February 14, 1990, by and between
Farm Bureau Mutual Insurance Company and the Company. (Incorporated
by reference, Form 8-K Current Report dated February 15, 1990,
Exhibit 10.5)
10.12 Asset Purchase Agreement, dated June 10, 1991, by and between the
Company and New Jersey Municipal Data Management, Inc.
(Incorporated by reference Form 8-K Current Report, dated June 10,
1991)
10.13 Asset Purchase Agreement, dated December 22, 1994, by and between
the Company and Sequoia Pacific Systems, a division of Smurfit
Packaging Corporation. (Incorporated by reference Form 8-K Current
Report, dated December 22, 1994, Exhibit 10.1)
10.14 Assignment and Assumption Agreement, dated December 22, 1994, by
and between the Company and Sequoia Pacific Systems, a division of
Smurfit Packaging Corporation. (Incorporated by reference Form 8-K
Current Report, dated December 22, 1994, Exhibit 10.2)
10.15 Asset Purchase Agreement, dated October 17, 1994, by and between
the Company and Noll Computer Systems, Inc.("NCS"). (Incorporated
by reference, Annual Report on Form 10-KSB for the year ended
December 31, 1994, Exhibit 10.15)
10.16 Asset Purchase Agreement, dated November 15, 1995, by and between
the Company, Dralvar Capital Corp. ("Dralvar") and Ken Neff.
(Incorporated by reference, Form 8-K Current Report, dated November
15, 1995, Exhibit 10.1)
10.17 Asset purchase Agreement dated February 21, 1997, by and between
the Company and Noll Computer Services, Inc. ("NCS"). (Incorporated
by reference, Annual Report on Form 10-KSB for year ended December
31, 1996, Exhibit 10.17)
15
<PAGE>
Exhibit
Number
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the year for which
this report is filed.
(c) Exhibits
The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
separate section of this report.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 27, 1998 By: /s/ Thomas E. Gibbs
--------------------
Thomas E. Gibbs,
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 27, 1998 By: /s/ Thomas E. Gibbs
--------------------
Thomas E. Gibbs,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: March 27, 1998 By: /s/ Randall L. McGee
---------------------
Randall L. McGee,
Secretary and Treasurer
(Principal Financial &
Accounting Officer)
Date: March 27, 1998 By: /s/ David Sengpiel
-------------------
David Sengpiel, Director
Date: March 27, 1998 By: /s/ Scott Burri
----------------
Scott Burri, Director
Date: March 27, 1998 By: /s/ Jordan Issackedes
----------------------
Jordan Issackedes, Director
Date: March 27, 1998 By: /s/ Earl Cohen
---------------
Earl Cohen, Director
17
<PAGE>
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