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.
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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.
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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.
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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.
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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.
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