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:
December 31, 1998
Commission File Number
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 22, 1999 the aggregate market value of voting stock held by
non-affiliates of the Registrant was $2,201,350.
As of March 22, 1999, there were 48,178,043 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's
definitive proxy statement relating to its 1999 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
and Public Safety.
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 four 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, purchase orders and comprehensive
financial report writer.
Public Works
This group includes software modules in the areas of utility billing and
collections, hand held meter reading and bank drafting.
General Administration
This group includes software modules in the areas of building licenses,
animal licenses, business licenses and code enforcement.
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.
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 Fund Accounting system, a Utility Billing system and a Public Safety
system. The Fund accounting system includes General Ledger, Budget XLence,
Report XLence, Accounts Payable, Accounts Receivable, Purchase Orders, Cash
Receipts and Payroll module. The Utility Billing system includes Utility
Billing, Meter Reader Interface, Bank Drafts and Budget Billing modules. The
initial Public Safety system modules, released during 1998, includes Mater Name
index, Calls for Service, Offense Reports and UCR Reports modules. The Company
is currently developing additional modules for the asystTM General Government
product line, including Business and Animal Licenses, Code Enforcement and
Building Permits modules, to add to its existing Fund Accounting, Utility
Billing and Public Safety offerings in the Windows environment. The Company
anticipates that the initial packages will be released in the 2nd quarter of
1999. 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, 1998, the Company generated approximately
26% of its revenue from the sale of software, 6% from installation, training and
customer support, 53% from software maintenance, and 15% 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 representative located in Minneapolis, Minnesota.
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 1,600 customer installations nationwide. USTI
proposes to sell computer equipment when selling its software, but the customer
may obtain their computer equipment from a hardware manufacturer or dealer and
then purchase 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 16 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 1998, the Company incurred approximately $100,000 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 leases its 5,033 square foot facility at 1850 Crown Road, Suite
1109, Dallas, Texas, 75234. The lease for this facility was entered into on
September 30, 1997 for a sixty-two month lease term commencing on November 1,
1997 and expiring on December 31, 2002.
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, 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.
Occasionally the Company is also a defendant in various legal actions which
arise 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 1998.
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, 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
March 31, 1998 $0.01 $0.01
June 30, 1998 $0.11 $0.01
September 30, 1998 $0.06 $0.02
December 31, 1998 $0.03 $0.02
</TABLE>
As of March 22, 1999, the Company had 487 shareholders of record and its
common stock had a closing bid price of $0.075 per share and a closing asked
price of $0.10 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 1998
include revenues of $1,856,973 resulting in net income of $309,288 as compared
to revenues of $1,641,370 and a net loss of $270,554 in 1997.
During 1998, 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 1997. The Company is continuing the
development of additional modules for its asystTM product line. The asyst TM
product line currently includes a Fund Accounting system, a Utility Billing
system and a Public Safety system. The Fund Accounting system includes General
Ledger, Budget XLence, Report XLence, Accounts Payable, Accounts Receivable,
Purchase Orders, Cash Receipts and Payroll modules. The Utility Billing system
includes Utility Billing, Meter Reader Interface, Bank Drafts and Budget Billing
modules. The initial Public Safety system modules, released during 1998,
includes Mater Name Index, Calls for Service, Offense Reports and UCR Reports
modules. The Company is currently developing additional modules for the asystTM
General Government product line, including Business and Animal Licenses, Code
Enforcement and Building Permits modules, to add to its existing Fund
Accounting, Utility Billing and Public Safety offerings in the Windows
environment.
7
<PAGE>
The Company anticipates that the initial packages will be released in the
2nd quarter of 1999. 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) products during 1998. The
Company is offering a Year 2000 compliant version of certain modules and has
obtained commitments for this version of the system. The Company shipped certain
modules of the Year 2000 version of the LegacyTM products in the 4th quarter of
1998 and will ship the balance of the Year 2000 version of the LegacyTM products
in the first half of 1999.
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>
Percentage of Revenues
Year Ended December 31,
1998 1997
---- ----
Revenue
Software Packages 26% 15%
Installation, training and
customer support 6% 6%
Maintenance 53% 66%
Equipment and other 15% 13%
---- ----
100% 100%
Costs and expenses
Salaries 47% 58%
Other general administrative
and selling expense 23% 29%
Depreciation and amortization 7% 21%
Commissions 3% 2%
Cost of equipment sold 8% 6%
---- ----
Total costs and expenses 87% 116%
Operating income (loss) 13% (16%)
Non-operating income (expense) 1% -
Income(loss) before
extraordinary items 14% (16%)
Extraordinary item 3% -
Net income (loss) 17% (16%)
</TABLE>
8
<PAGE>
1998 vs 1997
The Company's total revenue increased 13% for the year ended December 31,
1998 from $1,641,370 in 1997 to $1,856,973 in 1998. Software license fees
increased 93% in 1998 due, in part, to an increase in the licensing of the
Company's asystTM products and the Year 2000 compliant version of its LegacyTM
products. 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 increased 12% in 1998 due to an increased
demand from customers for these types of services. Maintenance revenue decreased
8% in 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
sales and supplies increased 25% as a result of an increase in the volume of
computer equipment sold in conjunction with its software products.
Total costs and expenses decreased 16% for the year ended December 31, 1998
from $1,908,681 in 1997 to $1,608,003 in 1998. Salary expense decreased 9% in
1998 as a result of continued efforts to align staffing with anticipated levels
of revenue. Other general, administrative and selling expense decreased 12% in
1998 as a result of continued efforts to control and reduce expenses.
Depreciation and amortization expense decreased 18% in 1998 from 1997 as a
result of many previously purchased assets becoming fully depreciated.
Commission expenses increased 61% in 1998 as a result of the increased licensing
of the Company's software products in 1998. Cost of equipment sold increased 43%
in 1998 as a result of increased sales of computer equipment in 1998
Liquidity and Capital Resources
The Company had net cash provided by operating activities of $ 294,909
during 1998 as compared to $188,890 provided in 1997. This increase in cash
provided was primarily the result of the improvement in the results of
operations in 1998 as compared to 1997. Net cash of $21, 925 was utilized in
1998 for the purchase of equipment necessary for the sales, development and
support of the new asystTM product line
Management believes that the effect of its continued focus on adjusting the
Company's expenses to the level of revenue, has resulted in a significant
increase in the Company's current cash balances and these cash balances 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. When these notes became due in 1998, the Company
offered the note holders the option of extending each note for an additional two
year period or receiving a partial payment of the balance due in full and final
settlement of the principal and interest due to each note holder. Certain note
holders opted to receive a partial payment totaling $5,500 in lieu of the
balance due of $22,917 on the note and $36,296 of accrued interest resulting in
a gain on debt forgiveness of $53,713 in 1998. As of December 31, 1998, there
was $27,083 due to the remaining note holders and $43,457 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, 1998, dividends were in arrears on
the Series B preferred stock in the amount of $358,800, on the Series D
preferred stock in the amount of $310,685 and on Series E preferred stock in the
amount of $158,735.
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 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 is 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
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
United Systems Technology, Inc. and Subsidiary
Index to Consolidated Financial Statements
And Supplementary Schedules
Pages
Report of Independent Certified Public Accountants F-1
Consolidated Financial Statements
Balance sheets as of December 31, 1998 and 1997 F-2
Statements of operations for the years
ended December 31, 1998 and 1997 F-3
Statements of stockholders' equity for the years
ended December 31, 1998 and 1997 F-4
Statements of cash flows for the years
ended December 31, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6 to F-17
11
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
United Systems Technology, Inc.
We have audited the accompanying consolidated balance sheets of United
Systems Technology, Inc. and subsidiary as of December 31, 1998 and 1997, 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, 1998 and 1997, 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 16, 1999
F-1
<PAGE>
United Systems Technology, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<S> <C> <C>
Assets 1998 1997
==== ====
Current Assets
Cash and cash equivalents $ 478,008 $ 204,807
Trade accounts receivable, less allowance
for doubtful accounts of $25,000 in 1998
and $40,000 in 1997 329,708 216,693
Prepaid expenses and other - 6,165
--------- ---------
Total current assets 807,716 427,665
--------- ---------
Property and equipment at cost, net 65,329 85,940
Goodwill, net 413,653 481,605
Purchased software, net 33,301 53,056
Deposits and other 5,139 4,999
--------- ---------
517,422 625,600
--------- ---------
Total Assets $1,325,138 $1,053,265
========= =========
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable - related party $ - $ 50,000
Current portion of capital lease obligations 2,448 4,484
Trade accounts payable, including $113,200
payable to a related party in 1998 and 1997 182,366 177,316
Accrued payroll 110,806 24,485
Accrued interest - related party 43,457 76,111
Other accrued expenses 83,241 98,868
Deferred revenue 701,180 779,485
--------- ---------
Total current liabilities 1,123,498 1,210,749
Notes payable - related party 27,083 -
Capital lease obligations, net of current portion - 2,247
--------- ---------
Total liabilities $1,150,581 $1,212,996
--------- ---------
Commitments and contingencies - -
Stockholders' Equity
Preferred stock, convertible, voting, 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) 130,000 130,000
Common stock, par value $.10 per share;
authorized 100,000,000 shares; issued and
outstanding 48,178,043 and 43,178,043 shares
in 1998 and 1997, respectively 4,817,804 4,317,804
Additional paid-in capital 3,333,561 3,768,561
Accumulated deficit (8,066,808) (8,376,096)
--------- ---------
214,557 (159,731)
Less stock purchase note receivable 40,000 -
--------- ---------
Total stockholders' equity (deficit) 174,557 (159,731)
--------- ---------
Total liabilities and stockholders' equity $1,325,138 $1,053,265
========= =========
</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>
1998 1997
==== ====
Revenue
Software packages $ 482,922 $ 250,524
Installation, training and customer support 109,527 97,633
Maintenance 992,005 1,080,084
Equipment sales and supplies 260,139 208,677
Other 12,380 4,452
--------- ---------
1,856,973 1,641,370
--------- ---------
Costs and expenses
Salaries 870,539 959,416
Other general, administrative and selling expense 363,777 415,085
Depreciation and amortization 130,243 159,579
Rent 54,878 54,523
Commissions 48,971 30,323
Cost of equipment sold 139,595 97,555
Impairment of goodwill - 192,200
--------- ---------
1,608,003 1,908,681
--------- ---------
Operating income (loss) 248,970 (267,311)
--------- ---------
Nonoperating (expense) income
Interest expense (4,057) (5,342)
Interest income 10,662 2,099
--------- ---------
6,605 (3,243)
--------- ---------
Net income (loss) before extraordinary item 255,575 (270,554)
Extraordinary gain on settlement of debt 53,713 -
--------- ---------
Net income (loss) 309,288 (270,554)
Preferred stock dividend requirement (91,000) (91,000)
--------- ---------
Income (loss) allocable to common shareholders $ 218,288 $ (361,554)
========= =========
Net income (loss) per common share before
extraordinary item $ NIL $ (0.01)
Extraordinary gain on settlement of debt NIL -
--------- ---------
Net income (loss) per common share after
extraordinary item $ NIL $ (0.01)
========= =========
Weighted average number of common
shares outstanding 44,630,098 43,213,935
========== ==========
</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> <C>
Stock
Additional Purchase
Capital Stock Issued Paid-In Accumulated Note
Preferred Common Capital Deficit Receivable Total
========= ======== ========= ========= ========== =====
Balance Jan 1,
1997 $ 205,000 $3,796,976 $4,214,389 $(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 $4,317,804 $3,768,561 $(8,376,096) $ - $(159,731)
Sale of
5,000,000
shares of
common stock 500,000 (450,000) (40,000) 10,000
Recognition of
deferred
compensation on
sale of stock 15,000 15,000
Net income 309,288 309,288
-------- --------- --------- ---------- -------- --------
Balance,
December 31,
1998 $ 130,000 $4,817,804 $3,333,561 $(8,066,808) $(40,000) $ 174,557
======== ========= ========= ========== ======== ========
</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>
1998 1997
==== ====
Cash flows in operating activities:
Net income (loss) $ 309,288 $(270,554)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 130,243 159,579
Recognition of deferred compensation costs on
employee stock purchase 15,000 -
Impairment of goodwill - 192,200
Extraordinary gain on settlement of debt (53,713) -
Change in operating assets and liabilities:
Trade accounts receivable (113,015) 36,999
Prepaid expenses 6,165 (5,886)
Deposits and other (140) 22,943
Trade accounts payable 5,050 (44,579)
Accrued expenses 74,336 (16,500)
Deferred revenue (78,305) 114,688
--------- ---------
Net cash provided by operating activities $ 294,909 $ 188,890
--------- ---------
Cash flows from investing activities:
Property and equipment additions (21,925) (43,065)
-------- --------
Cash flows from financing activities:
Sale of common stock 10,000 -
Payment of notes payable (5,500) -
Payments on capital lease obligations (4,283) (8,270)
-------- --------
Net cash provided by (used in) financing activities 217 (8,270)
-------- --------
Increase in cash and cash equivalents 273,201 137,555
Cash and cash equivalents, beginning of year 204,807 67,252
-------- --------
Cash and cash equivalents, end of year $ 478,008 $ 204,807
======== ========
</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, 1998 and 1997 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.
F-6
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
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 and QDS Acquisitions, Inc. ("QDS") acquired in 1995.
The goodwill resulting from the MSC acquisition 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
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 1997 and 1998 all potential
common shares were not dilutive..
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, 1998 and 1997
1. Summary of Significant Accounting Policies (Cont'd.):
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, 1998 and 1997 consisted of the
following:
<TABLE>
<S> <C> <C>
1998 1997
---- ----
Leasehold improvements $ 64,772 $ 63,772
Furniture and fixtures 40,655 39,248
Equipment 923,841 904,323
--------- ---------
1,029,268 1,007,343
Less accumulated depreciation
and amortization (963,939) (921,403)
--------- ---------
$ 65,329 $ 85,940
========= =========
</TABLE>
3. Other Assets:
Other assets at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<S> <C> <C> <C>
Accumulated
Cost Amortization Net
---- ------------ ---
1998
----
Goodwill $ 1,692,128 $(1,278,475) $ 413,653
Purchased software 592,700 (559,399) 33,301
1997
----
Goodwill $1,692,128 $(1,210,523) $ 481,605
Purchased software 592,700 (539,644) 53,056
</TABLE>
F-8
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
4. 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 was due September 30, 1998. The prime rate of interest was
7.75% at December 31, 1998 and 8.50% in 1997. The related party distributed this
note to the limited partners in its fund, under the same terms and conditions,
in 1997. When these notes became due in 1998, the Company offered the note
holders the option of extending each note for an additional two year period or
receive a partial payment of the balance due in full and final settlement of the
principal and interest due to each note holder. Certain note holders opted to
receive a partial payment totaling $5,500 in lieu of the balance due of $22,917
on the note and $36,296 of accrued interest resulting in a gain on debt
forgiveness of $53,713 in 1998. There was $27,083 and $50,000 balance
outstanding on these notes at December 31, 1998 and 1997, respectively. There
was $43,457 and $76,111 of accrued interest outstanding on these notes at
December 31, 1998 and 1997, respectively. Interest expense incurred on these
notes was $3,642 and $4,091 for the years ended December 31, 1998 and 1997,
respectively.
5. Capital Stock:
Common Stock
In September 1998, the Company sold 5,000,000 shares of common stock to
four members of management at a price of $.01 per share. The fair market value
of the common stock on the date of the transaction was $.022 per share.
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,
1998 the 500,000 outstanding shares of Series B preferred stock were entitled to
be converted into 4,293,995 shares of common stock and were entitled to
4,293,995 votes on all matters submitted to a vote of stockholders of the
Company. At December 31, 1998 cumulative dividends of approximately $358,800
were in arrears.
F-9
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
Capital Stock (Cont'd.):
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.
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, 1998 the 500,000 outstanding shares of Series D preferred stock
were entitled to be converted into 2,316,245 shares of common stock and were
entitled to 2,316,245 votes on all matters submitted to a vote of stockholders
of the Company. At December 31, 1998 cumulative dividends of approximately
$310,685 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,
1998 the 300,000 outstanding shares of Series E preferred stock were entitled to
be converted into 2,293,685 shares of common stock and were entitled to
2,293,685 votes on all matters submitted to a vote of stockholders of the
Company. At December 31, 1998, cumulative dividends of approximately $158,735
were in arrears.
F-10
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
6. 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 are $49,070 from 1999 through 2002. Rent expense was
$54,878 and $54,445 in 1998 and 1997, 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, 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 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-11
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
7. 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 Plan allows for the options to 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 1998 and 1997 net income and loss
and net income and loss per common share would have increased to the pro forma
amounts indicated as follows:
<TABLE>
<S> <C> <C>
1998 1997
---- ----
Net income (loss) allocable to common shareholders
As reported $ 218,288 $(361,554)
Pro forma $ 159,476 $(411,929)
Net income (loss) per common share
As reported $ NIL $ (0.01)
Pro forma $ NIL $ (0.01)
</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; risk free interest rate of
6.32% in 1997; 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-12
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
7. Common Stock Options and Warrants (Cont'd.):
Additional information with respect to options outstanding at December 31,
1998, and the changes for each of the two years in the period then ended was as
follows:
<TABLE>
<S> <C> <C>
1998
----
Weighted
Average
Exercise
Shares Price
------ --------
Outstanding at beginning of year 7,890,000 $.04
Granted - -
Forfeited (37,500) .05
--------- ---
Outstanding at end of year 7,852,500 $.04
--------- ---
Options exercisable at December 31, 1998 5,330,625 $.04
--------- ---
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 2,952,500 $.04
--------- ---
Weighted average fair value per share of
options granted during 1997 $.03
---
</TABLE>
Information about stock options outstanding at December 31, 1998 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 6,847,500 2.5 years $.03
$.06 to $.10 1,005,000 2.5 years $.06
---------
7,852,500
---------
</TABLE>
F-13
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
7. 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 4,573,125 $.03
$.06 to $.10 757,500 $.06
---------
5,330,625
---------
</TABLE>
Stock Purchase Warrants
As of December 31, 1998 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, 1998, none of these warrants have been exercised and are fully
vested:
<TABLE>
<S> <C> <C> <C>
Expiration Exercise
Date Price Shares
------------ ----- ------
Feb 16, 1999 $.080 1,000,000
Aug 9, 1999 $.050 1,000,000
Aug 9, 2000 $.035 1,000,000
Sep 30, 2000 $.050 514,585
---------
3,514,585
=========
</TABLE>
8. Income Taxes:
At December 31, 1998, the Company has net operating loss carry-forwards of
approximately $2,920,000. These carry-forwards expire from period 1999 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, 1998 and 1997 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-14
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
8. Income Taxes (Cont'd.):
<TABLE>
<S> <C> <C>
1998 1997
Amount Amount
------ ------
Federal income tax benefit at statutory rate $ 105,160 $(91,990)
Amortization of goodwill 23,100 88,450
Expiration of net operating loss carryforward - 323,670
Other 6,440 (13,030)
Change in valuation allowance (134,700) (307,100)
------- -------
$ - $ -
======= =======
</TABLE>
Because of losses from operations in recent 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, 1998 and
1997 are as follows:
<TABLE>
<S> <C> <C>
1998 1997
---- ----
Deferred tax assets:
Net operating losses carried forward $ 992,600 $1,046,600
Capital losses carried forward 212,300 212,300
Deferred revenue 238,400 265,000
Accounts payable and accrued expenses 117,500 126,000
General business tax credits 71,000 71,000
--------- ---------
Total deferred tax asset $1,631,800 $1,720,900
--------- ---------
Deferred tax liabilities:
Accounts receivable 126,000 73,700
Purchased software, property and equipment 26,900 33,600
--------- ---------
Total deferred tax liability 152,900 107,300
--------- ---------
Net deferred tax asset before
valuation allowance 1,478,900 1,613,600
Less valuation allowance 1,478,900 1,613,600
--------- ---------
Net deferred tax asset $ - $ -
--------- ---------
</TABLE>
F-15
<PAGE>
UNITED SYSTEMS TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
9. 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 $4,095 and $3,665
for the years ended December 31, 1998 and 1997, respectively.
10. Fourth Quarter Adjustments:
During the fourth quarter of 1997, the Company charged earnings for
impairment to goodwill of approximately $192,200.
F-16
<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 1999 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 1999 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 1999 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 1999 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 Form 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 the 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 29, 1999 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 29, 1999 By: /s/ Thomas E. Gibbs
--------------------
Thomas E. Gibbs,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: March 29, 1999 By: /s/ Randall L. McGee
---------------------
Randall L. McGee,
Secretary and Treasurer
(Principal Financial &
Accounting Officer)
Date: March 29, 1999 By: /s/ Scott Burri
----------------
Scott Burri, Director
Date: March 29, 1999 By: /s/ Jordan Issackedes
----------------------
Jordan Issackedes, Director
Date: March 29, 1999 By: /s/ Earl Cohen
---------------
Earl Cohen, Director
17
<PAGE>
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