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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended January 31, 1996
Commission File Number: 33-17856-C
INNOVATIVE TECH SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
ILLINOIS 65-0071222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
444 JACKSONVILLE ROAD, SUITE 200
WARMINSTER, PENNSYLVANIA 18974
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 441-5600
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class: Name of each exchange on which registered:
-------------------- ------------------------------------------
<S> <C>
Common Stock, $.0185 par value Nasdaq Small Cap, Boston and Pacific Stock Exchanges
Redeemable Warrants Nasdaq Small Cap, Boston and Pacific Stock Exchanges
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
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
--- ---
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 Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes X No
--- ---
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant, computed by reference to the average of the
closing bid and asked prices of such stock on April 24, 1996, was $17,540,184.
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practicable date.
Class: Common
Outstanding at April 24, 1996: 10,227,837
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PART I
ITEM 1. BUSINESS
The Company was incorporated under the laws of the state of Illinois on May 2,
1986 as Windy City Capital Corporation. Prior to January, 1990, the Company was
a publicly-held corporation engaged in the business of acquiring existing
businesses in exchange for the issuance of Company securities and the payment of
small amounts of cash.
In January, 1990, Windy City Capital Corporation issued 22,750,000 shares of
restricted common stock to Innovative Tech Systems, Inc., a Pennsylvania
corporation, pursuant to an asset purchase agreement, whereby the Company
purchased substantially all of the assets of Innovative Tech Systems, Inc.,
including a space analysis software product and a note receivable. The Company's
name was changed to Innovative Tech Systems, Inc. ("Innovative Tech") in
connection with such transaction.
On February 7, 1990, the Company acquired from Micro-Vector, Inc., a New York
corporation, all copyrights, contracts, and source code to the following
software products: space projections, vertical stacking, block studies,
inventory, lease master, construction budgeting, and stacksheet. The products
were acquired for a combination of cash, notes and common stock with
registration rights (which rights have since expired.)
Since the consummation of such transactions, the Company has been engaged in the
business of designing, developing, and marketing proprietary computer-integrated
facilities management ("CIFM") software products. CIFM is a term developed by
the Company to describe the integrated products and services which the Company
provides to the facilities management industry. Computer-aided facilities
management or "CAFM" software products were previously available to service this
need within the facilities management industry, and such CAFM products continue
to be marketed in competition with the Company's CIFM products.
On July 26, 1994, the Company completed a public offering of 3,900,000 shares of
its Common Stock and 5,400,000 Redeemable Warrants. On August 2, 1994, the
Company received net proceeds of $6,043,433 from the offering. On September 14,
1994, the underwriter exercised the over-allotment option to purchase up to
585,000 additional shares of Common Stock and/or 810,000 Redeemable Warrants. An
additional 472,920 shares of Common Stock and 810,000 Redeemable Warrants were
purchased. The net proceeds received by the Company were $743,534.
The Board of Directors of the Company approved a three-for-one stock split of
all outstanding shares of Common Stock and all outstanding Redeemable Warrants
on August 23, 1995. The three-for-one split was effective on September 18, 1995.
The shareholders of the Company approved a one-for-18.54 reverse stock split of
all outstanding shares of Common Stock on July 22, 1994.
The shares of Common Stock and Redeemable Warrants are separately tradeable.
Each Redeemable Warrant entitles the holder to purchase one share of Common
Stock at an exercise price of $2.33 for a period of 60 months commencing on July
26, 1995. Each Redeemable Warrant is redeemable by the Company at a redemption
price of $.083 per Redeemable Warrant commencing on October 26, 1995 upon not
less than 30 days' prior written notice by the Company, provided that the
average closing bid price of the Common Stock equals or exceeds $2.92 for any 20
trading days within a period of 30 consecutive trading days ending on the fifth
trading day immediately prior to the notice of redemption.
THE AUTOMATED CIFM INDUSTRY
The CIFM industry refers to the tracking and cost control of the design,
construction, and management phases of a particular project or facility.
Automated CAFM applications first appeared in the late 1970's with the advent of
extremely expensive mainframe solutions. By 1983, a four-user turnkey system
typically sold for between $400,000 and $600,000, thus eliminating a very large
portion of the available market. During the 1985 to 1987 period, expensive
PC-
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based solutions were introduced and by 1988, the market had matured to the
point that DOS-based solutions were significantly influencing automated
facilities management product sales.
The Company believes that the automated facilities management industry is
developing due to the fact that CIFM software applications aid in the control of
expenses for corporations and other business entities. With the availability of
local area network or "LAN" solutions to provide CIFM software databases as a
shared resource within an organization, management believes that the industry
should continue to grow.
COMPANY PRODUCTS/SERVICES - THE INNOVATIVE TECH SOLUTION
The Company has developed, field-tested and actively markets an exclusive line
of facilities management software products called SPAN-FM(TM). The Company's
products are sold as a suite, which includes seven modules. In addition, two
modules are sold individually. The Company believes that its integrated product
line meets the needs of a wide range of users in the facilities and asset
management marketplace. The Company's product line operates on DOS-based and
Microsoft Windows(R) based personal computers or local area networks, but has
the ability to operate under various PC-based networks.
The SPAN-FM(TM) series of products automates the tracking of existing facilities
and assets in those facilities, as well as providing the capability of
developing extremely accurate cost analyses for new facilities. The SPAN-FM(TM)
series of products is one of the few existing facilities management PC-based
products that will run without an associated computer-aided design (CAD)
package.
The SPAN-FM(TM) family of products is primarily engineered for use by facility
managers, space planners, architects, interior designers, asset managers,
telecommunications and cable professionals, maintenance managers, and strategic
planners. All of the SPAN-FM(TM) products are integrated for use with one
another, which enables users to easily add new modules to their existing
SPAN-FM(TM) system. In addition, the Company's products all include a similar
user interface, which makes it easier for end-users to learn to use additional
Innovative Tech products.
The Company's customers include companies in the fields of insurance, banking,
manufacturing, retail and healthcare. They also include public utilities,
government agencies and academic institutions. In addition, professional
entities, such as architectural/engineering, interior design, accounting and
management consulting firms, use the SPAN-FM(TM) series of products in providing
facilities management services to their clients.
COMPETITION
The Company competes with numerous companies. The Company is not aware of any
published information as to the size of the computerized facilities management
market in which the Company competes. Accordingly, the Company is unable to
estimate its proportionate share of sales made in such market or the potential
for growth in such market. Although the Company believes that there are no
dominant competitors, the Company faces competition from many companies on a
specific module basis. The Company's ability to compete favorably is, in
significant part, dependent upon its ability to control costs, react timely and
appropriately to short and long-term trends and competitively price its products
and services. Firms compete in the facilities management industry based on
product functionality, product reliability, price, performance characteristics,
ease of product use, end-user support, distribution networks, and corporate
reputation.
INTELLECTUAL PROPERTY RIGHTS
The Company relies primarily on a combination of copyright law and trade secret
law to protect its proprietary technology. In most cases, the Company
distributes its products under "shrink-wrap" software license agreements which
grant end-users licenses to the Company's products and which contain various
provisions to protect the Company's ownership of, and the confidentiality of,
the underlying technology. The Company also requires its employees and other
parties with access to its confidential information to execute agreements
prohibiting the unauthorized use or disclosure of the Company's technology.
Despite these precautions, it may be possible for a third party to
misappropriate the
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Company's technology or to independently develop similar
technology. In addition, "shrink-wrap" licenses, which are not signed by the
end-user, may be unenforceable in certain jurisdictions.
The Company presently intends to make all appropriate filings and registrations,
and take all other actions necessary, to obtain and protect all trademarks,
copyrights, tradenames and all other intellectual property rights relating to
the Company's products. The Company is in the process of trademarking the
SPAN-FM(TM) logo. Management believes that no single copyright, patent or
technology license is material to the Company's business.
The Company believes that, due to the rapid pace of technological innovation
within the CIFM industry, the Company's ability to establish and maintain a
position of technological leadership in the CIFM industry is more dependent upon
the skills of its development personnel than upon the legal protection afforded
its existing technology.
PRODUCT DEVELOPMENT
The Company believes that its future success will depend upon its ability to
enhance its existing products and develop and introduce new products which keep
pace with technological developments in the marketplace and address the
increasingly sophisticated needs of its end-users. The Company intends to expand
its existing product offerings and to introduce new application products for the
computer integrated facilities management industry.
While the Company expects that certain of its new products will be developed
internally, the Company may, based on timing and cost considerations, expand its
product offerings through acquisitions. The Company is always open to
investigating possible acquisitions of businesses related or complementary to
its activities. As part of this process, the Company is currently in various
stages of discussions with one or more companies concerning potential
acquisitions. However, the Company has no binding arrangements or commitments
with respect to any transaction, and there can be no assurance that the
Company will make any particular acquisition.
The Company currently offers nine product modules. The Company has, in the past,
released enhanced versions of its software modules at least once each year. All
of the Company's software modules share the same technological foundation, which
makes the enhancement of the entire product line more efficient. Software
enhancements to a product are usually driven by requests received from existing
end-users or by interviews with certain key end-users and by competitive
analysis. As part of its ongoing product enhancements, the Company has completed
development of a Microsoft Windows(R) version of its SPAN-FM(TM) products. In
connection with these development efforts, the Company has capitalized $457,392
through January 31, 1996.
MARKETING AND DISTRIBUTION - THE INNOVATIVE TECH STRATEGY
The Company has identified several specific markets for the Company's
SPAN-FM(TM) series of facilities management software products including any
corporation with over 50,000 square feet of space or over 200 employees;
approximately 10,000 design and architectural firms; and software resellers.
The Company pursues the following strategies with respect to marketing and
distribution of its products:
Direct Marketing. The Company currently attributes the majority of its revenues
to direct sales generated by the Company's sales staff. The Company has expanded
its direct sales staff by hiring regional sales representatives that operate
from their homes with product shipment, support and customization being done
from the Company's home office in Warminster, Pennsylvania. The Company
currently has regional sales representatives located in Boston, Massachusetts;
Tampa, Florida; Los Angeles, California; New York, New York; Philadelphia,
Pennsylvania; and Winnipeg, Canada. During fiscal 1997, the Company plans to
hire additional sales representatives in the Philadelphia area, as well as in
the Midwest and Western part of the country. The Company is also instituting
direct mail, trade journal, and telephone solicitation campaigns in order to
develop new customers.
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Indirect Marketing. Under the terms of an exclusive five-year OEM distribution
agreement, Intergraph Corporation is private labeling certain Innovative Tech
software packages. Innovative Tech, under the terms of the agreement has agreed
not to act as an OEM supplier for any other third party. The financial terms of
the agreement provide for Innovative Tech to receive 30% royalties on all sales
of the SPAN-FM(TM) software by Intergraph Corporation. Minimum royalties during
each year of the agreement must be $1.5 million in order for Intergraph
Corporation to maintain exclusive distribution rights.
The Company has also identified other indirect distribution vehicles, such as
interior design and architectural firms, and software resellers. Management
intends to carefully analyze the benefits and costs associated with developing a
widespread software reseller channel for the Company's products to determine if
this is a feasible means of distribution.
Penetration of International Markets. On April 11, 1996, the Company signed a
seven (7) year strategic marketing agreement with Landis & Gyr (Europe) Corp., a
Swiss based $2.5 billion provider of building performance and energy efficiency
solutions. Under the terms of the agreement, Landis & Gyr (Europe) Corp. will
distribute and market Innovative Tech's SPAN-FM(TM) product line in Europe,
South Africa, Near and Middle East. The terms of the agreement call for Landis &
Gyr (Europe) Corp. to commit financial resources for revisions and
enhancements to the SPAN-FM(TM) product line. The remaining six years of the
contract are based on revenue generated from product distribution and sales of
the SPAN-FM(TM) software by Landis & Gyr (Europe) Corp. in Europe. As the new
European partner of Innovative Tech, Landis & Gyr (Europe) Corp. will also
translate the SPAN-FM(TM) software into the various languages used in the
market area.
SERVICE AND SUPPORT
As part of its strategy to provide complete facilities management solutions to
end-users, the Company provides comprehensive end-user service and support. The
Company believes that providing its end-users with training, consulting,
customization, and support services helps ensure that end-users obtain maximum
benefits offered by its products. The Company believes that the availability of
a good support program to its end-users will help to differentiate the Company
from its competitors. While the Company provides support and services to its
end-users at the present time, it is anticipated that the Company will strive to
make available an increased level of support for its customers in the future.
The Company believes that the demand by end-users for various support services
does and will continue to provide revenue opportunities for the Company. The
following is a list of end-users support programs currently offered by the
Company:
Software Upgrades and Telephone Support. This program allows end-users to
obtain, for a fixed annual fee, all product upgrades released by the Company
during the year as well as unlimited telephone support. The Company believes
that charging end-users a fixed annual fee, rather than a separate fee for each
product enhancement, facilitates the Company's, as well as the end-user's,
budgeting process.
Direct Support. The Company offers on-site training and technical support to
end-users for a negotiated fee between the Company and the end-user.
Consulting Services. The Company offers facilities management consulting
services for a negotiated fee with the end-user based on scope and length of
required services.
Custom Programming and Data Conversion. The Company offers custom programming
services either for a fixed fee or on an hourly basis. Included in these custom
programming services are data conversion services that entail electronically
converting data from one system into the SPAN-FM(TM) database modules purchased
by the end-user.
For the fiscal year ended January 31, 1996, revenues from software sales,
consulting services, and software upgrades and telephone support were 52%, 39%
and 6%, respectively, of total revenues. For the fiscal year ended January 31,
1995, revenues from software sales, consulting services, and software upgrades
and telephone support were 40%, 43% and 10%, respectively, of total revenues.
This information is not readily available for years prior to 1995.
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SIGNIFICANT CUSTOMERS
In fiscal 1996, revenues from the United States Department of Defense, CIBC
Development Corp. and Intergraph Corporation were approximately 25%, 16% and
11%, respectively, of total revenues. In fiscal 1995, revenues from the United
States Department of Defense, Washington Hospital Center and Principal Financial
Group were approximately 43%, 11% and 9%, respectively, of total revenues. In
fiscal 1994, revenues from the United States Department of Defense, Wawa Inc.
and MBNA Corporation were approximately 40%, 16% and 11%, respectively, of total
revenues.
EMPLOYEES
As of April 24, 1996, the Company had 52 full-time employees and one part-time
employee. None of the Company's employees are represented by a labor union and
the Company believes that its employee relations are satisfactory.
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ITEM 2. PROPERTY
On September 1, 1995, the Company moved its headquarters to 444 Jacksonville
Road, Suite 200, Warminster, Pennsylvania, 18974. The Company has a five year
lease for 10,000 square feet of office space. The annual rent is $130,000. The
building is owned and operated by Thompson Enterprises, L.P., a limited
partnership. William M. Thompson, John M. Thompson and Karen A. Thompson are the
limited partners of Thompson Enterprises, L.P. William M. Thompson and John M.
Thompson are executive officers and majority shareholders of the Company. Karen
A. Thompson is an executive officer of the Company.
ITEM 3. LEGAL PROCEEDINGS
There is no litigation pending to which the Company is a party or of which any
of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year of the Company ended on January 31, 1996.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock and Redeemable Warrants are principally
traded on the Nasdaq Small Cap Market under the symbols "ITSY", and "ITSYW",
respectively. The securities are also traded on the Boston and Pacific Stock
Exchanges.
The following table sets forth, for each of the quarterly periods indicated, the
high and low sales prices for the Company's Common Stock and Redeemable
Warrants.
<TABLE>
<CAPTION>
Common Stock Redeemable Warrants
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High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
FISCAL 1996
January 31, 1996 4 1/4 2 3/4 1 15/16 7/8
October 31, 1995 4 1/8 2 5/11 2 7/8 3/4
July 31, 1995 2 7/8 1 11/12 23/34 5/12
April 30, 1995 2 2/3 1 1/6 23/24 1/3
FISCAL 1995
January 31, 1995 2 17/24 1 7/12 1 3/8
October 31, 1994 2 1 1/6 11/19 1/4
July 31, 1994 2 1 23/24 5/8 13/24
April 30, 1994 * * * *
</TABLE>
* No bid price was supplied to the National Quotation Bureau, Inc., as the
securities were not admitted to trading on the Nasdaq Small Cap Market, the
Boston Stock Exchange and the Pacific Stock Exchange until July 26, 1994.
At January 31, 1996, the number of record holders of the Common Stock and
Redeemable Warrants were 122 and 19, respectively. Such numbers of record owners
was determined from the Company's shareholder records and does not include
beneficial owners whose shares are held in nominee accounts with brokers,
dealers, banks and clearing agencies.
Effective September 18, 1995, the Company completed a three-for-one forward
split of its Common Stock and Redeemable Warrants. All information in the above
table has been adjusted giving retroactive effect to the stock split.
The Company has not paid any cash dividends upon its Common Stock since its
inception and, by reason of its contemplated future financial requirements and
business plans, does not contemplate or anticipate paying any dividends upon its
Common Stock in the foreseeable future. The Company presently plans to retain
earnings, to the extent that there are any, to finance the development and
expansion of its business.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data as of and for each of the five years in the period
ended January 31, 1996 are derived from the audited financial statements, which
appear elsewhere in this Form 10-K. The selected financial data should be read
in conjunction with the financial statements of the Company and the related
notes thereto included elsewhere in this Form 10K.
<TABLE>
<CAPTION>
Year Ended January 31,
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1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 2,784,965 $ 1,325,991 $ 1,686,203 $ 1,082,277 $ 639,398
Income (loss) from operations (1,226,194) (902,591) 170,170 58,657 24,555
Net income (loss) (2) (858,174) (1,088,851) 138,653 56,827 23,171
Income (loss) per common share (1):
Income (loss) per common share (2) (0.08) (0.13) 0.02 0.01 --
BALANCE SHEET DATA:
Cash and cash equivalents $ 2,815,742 $ 5,336,009 $ 226,022 $ 83,526 $ 59,322
Working capital 3,708,980 5,367,985 301,561 161,470 115,574
Total assets 5,854,423 6,506,306 724,060 469,892 376,155
Long-term obligations -- -- -- -- --
Total liabilities 464,202 417,311 259,102 143,587 86,677
Cash dividends paid -- -- -- -- --
Shareholders' equity 5,390,221 6,088,995 464,958 326,305 289,478
</TABLE>
(1) See Note 8 to the financial statements
(2) Includes an extraordinary loss on extinguishment of debt in 1995 of $262,392
or $.03 per common share
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW AND SIGNIFICANT EVENTS
The Company made significant progress during fiscal 1996 in completion of the
Windows(R) version of its SPAN-FM(TM) product line, expansion of its direct
sales force, and establishing internal systems to handle rapid growth. As a
result, the Company reported record revenues, with the highest rate of revenue
growth since 1992. The record revenue the Company reported in 1996 is an
indication that its fundamental strategies are working.
The most significant product development efforts relate to the development of a
Microsoft Windows(R) version of the Company's SPAN-FM(TM) software products. In
connection with these efforts, the Company has capitalized total cumulative
costs of $457,392 through January 31, 1996. In accordance with the provisions
of SFAS No. 86, the Company expensed all costs incurred in order to reach
technological feasibility. Technological feasibility was reached in April 1994,
as evidenced by the Company's working models of the products. Capitalization
commenced on May 1, 1994 and continued through April 30, 1995. The capitalized
costs are being amortized over a 5 year period.
The Company has expanded its direct sales staff by hiring regional sales
representatives that operate from their homes with product shipment, support
and customization being done from the Company's home office in Warminster,
Pennsylvania. The Company currently has regional sales representatives located
in Boston; Tampa; Winnipeg, Canada; New York; Philadelphia and Los Angeles.
The Company has signed an exclusive five-year OEM agreement with Intergraph
Corporation to private label certain Innovative Tech software packages. The
financial terms of the agreement provide for Innovative Tech to receive 30
percent royalties on all sales of the SPAN-FM(TM) software by Intergraph
Corporation. Minimum royalties during each year of the agreement must be $1.5
million in order for Intergraph Corporation to maintain exclusive
distribution rights. The Company received $214,558 in royalties pursuant to the
agreement for the year ended January 31, 1996.
On April 11, 1996, the Company signed a seven (7) year strategic marketing
agreement with Landis & Gyr (Europe) Corp., a Swiss based provider of building
performance and energy efficiency solutions with $2.5 billion in annual
revenues. Under the terms of the agreement, Landis & Gyr (Europe) Corp. will
distribute and market Innovative Tech's SPAN-FM(TM) product line in Europe,
South Africa, and the Near and Middle East. The terms of the agreement in the
initial year call for Landis & Gyr (Europe) Corp. to commit financial resources
for revisions and enhancements to the SPAN-FM(TM) product line. During the
remaining six years of the contract, the Company is to receive royalties based
on revenue generated from product distribution and sales of SPAN-FM(TM) by
Landis & Gyr (Europe) Corp. in Europe. As the new European partner of
Innovative Tech, Landis & Gyr (Europe) Corp. will also translate the
SPAN-FM(TM) software into the various languages used in the market area.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs have related to and are expected to continue
relating to, capital investments and working capital requirements. The Company
has met its liquidity needs over the last two years primarily through funds
provided by the issuance of common stock in an underwritten public offering.
Prior to fiscal 1995, the Company was able to meet its liquidity needs through
cash provided by operating activities. The Company believes that cash provided
by operating activities, together with the remaining net proceeds generated
from the sale of shares of the Company's Common Stock, should be adequate for
its presently forseeable working capital and capital investment requirements.
The Company's cash position at January 31, 1996 decreased $2,520,267 or 47%
from the January 31, 1995 balance. The decrease was primarily attributable to
$1,521,134 used in operations to support the Company's product development
efforts, and increased advertising and marketing activities. Advertising and
marketing activities accounted for $469,552 of the decrease. In addition, the
Company purchased $391,541 of property and equipment, relating primarily to
equipment used by the Company in the development of its products as well as
leasehold improvements to the Company's new Corporate headquarters located in
Warminster, Pennsylvania, which was effective on September 1, 1995.
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Accounts receivable at January 31, 1996 increased $897,289 from the January 31,
1995 balance. This increase is due primarily to the increased sales volume
experienced in the third and fourth quarters of fiscal 1996.
Working capital at January 31, 1996 was $3,708,980. Included in accounts
payable at January 31, 1996 is $14,800 of computer equipment which was paid in
the first quarter of fiscal year 1997. The Company has no loans or notes payable
at January 31, 1996.
In the first quarter of fiscal 1995, the Company was in need of capital to
finance the purchase of computer development equipment and traditional bank
financing was not available on terms acceptable to the Company. To provide the
needed capital, the Company completed a private placement (the "Private
Placement") on April 29, 1994 in which 1,556,634 shares of restricted Common
Stock were sold to six outside investors for $48,100, or $.03 per share. All
voting rights pertaining to such shares of the Common Stock have been assigned
to two officers of the Company. The funds raised in the private placement were
used for the purchase of computer equipment and furniture.
On May 11, 1994, the Company issued $1,300,000 principal amount of seven
percent Promissory Notes (the "Bridge Debt") and 3,900,000 common stock
purchase warrants (the "Bridge Debt Warrants"). The Bridge Debt Warrants were
valued at the public offering price of $.083 per warrant, aggregating
$325,000, which constituted original issue discount on the debt. Each Bridge
Debt Warrant is exercisable to purchase one share of Common Stock at an
exercise price of $2.33 per share during the 60 month period commencing 12
months after the effective date of the Company's Public Offering, which was
July 26, 1994. The Company issued the Bridge Debt and the Bridge Debt Warrants
to a limited group of investors, who were previously unaffiliated with the
Company, for aggregate consideration of $1,300,000. The Bridge Debt was
repayable together with interest at the rate of seven percent per annum upon
the earlier of (1) the Company's consummation of a public or private financing
of its equity securities or (ii) 12 months after issuance. The effective rate
of interest on this Bridge Debt was 42.7%. The Bridge Debt Warrants were
automatically converted into Redeemable Warrants on July 26, 1994, when the
Company's Public Offering became effective. On August 2, 1994, the Company
repaid the $1,300,000 Bridge Debt, including interest of $20,693. The original
issue discount was charged to the statement of operations as interest expense
of $62,608 and an extraordinary loss on extinguishment of debt of $262,392.
The shareholders of the Company approved a one-for-18.54 reverse stock split of
all outstanding shares of Common Stock on July 22, 1994, As a result, all
historic share amounts and per share amounts in the accompanying financial
statements, except for the statements of changes in shareholders' equity, have
been adjusted to reflect the reverse stock split.
On July 22, 1994, the shareholders of the Company approved the conversion of
all Senior Preferred Stock into Common Stock on a one-for-one basis (prior to
the reverse stock split) and the authorization of a new class of preferred
stock with no par value and 200,000,000 authorized shares.
On July 26, 1994, the Company completed a public offering of 3,900,000 shares
of its Common Stock and 5,400,000 Redeemable Warrants. On August 2, 1994 the
Company received net proceeds of $6,043,433 from the offering, and charged
$347,179 relating to legal, accounting, printing and filing fees to equity as a
reduction of the proceeds.
On September 14, 1994, the Company's underwriter exercised the over-allotment
option to purchase up to 585,000 additional shares of Common Stock and/or
810,000 Redeemable Warrants. An additional 472,920 shares of Common Stock and
810,000 Redeemable Warrants were purchased. The net proceeds received by the
Company were $743,534.
11
<PAGE> 12
The shares of Common Stock and Redeemable Warrants are separately tradeable.
Each Redeemable Warrant entitles the holder to purchase one share of Common
Stock at an exercise price of $2.33 for a period of 60 months commencing 12
months after the effective date of the offering. Each Redeemable Warrant is
redeemable by the Company at a redemption price of $.083 per Redeemable Warrant
commencing 15 months after the effective date of the offering upon not less
than 30 days' prior written notice by the Company, provided that the average
closing bid price of the Common Stock equals or exceeds $2.92 for any 20
trading days within a period of 30 consecutive trading days ending on the
fifth trading day immediately prior to the notice of redemption.
The Company's cash position at January 31, 1995 was $5,336,009, a significant
increase over the prior year balance of $226,022. The increase was attributable
to the proceeds raised in the Company's public offering. The proceeds were used
to support the Company's product development effort; the hiring of a regional
direct sales force, a marketing manager, and a Vice President of sales and
marketing; and the expansion of the Company's technical services and project
management departments. In addition, the Company purchased $241,311 of
furniture and equipment, and paid $347,179 for professional fees associated
with the public offering.
Working capital at January 31, 1995 was $5,367,985, which was significantly
improved over the prior year due to the proceeds received from the public
offering. Included in accounts payable at January 31, 1995 was $6,995 of
computer equipment which was paid in the first quarter of fiscal 1996. The
Company had no loans or notes payable at January 31, 1995.
RESULTS OF OPERATIONS
Revenues for the fiscal years ended January 31, 1996, 1995 and 1994 were
$2,784,965, $1,325,991, and $1,686,203, respectively. Management attributes
the current year increase to the release of the Windows(TM) version of its
SPAN-FM(TM) product line, and increased sales and marketing activities, which
generated a higher volume of sales transactions.
The Company continues to provide services to the Department of Defense, and
sales made by the Company to the Department of Defense constituted
approximately 25% and 43% of the Company's total revenues for the fiscal years
ended January 31, 1996 and 1995. The Company anticipates that sales to the
United States Department of Defense will continue to be a significant part of
the Company's revenues during fiscal year 1997. Such continued sales to the
United States Department of Defense will arise as a result of the Company's
performance of its obligations under existing agreements with the United States
Department of Defense.
Cost of revenues were $174,366, $102,631, and $480,673 for fiscal years 1996,
1995 and 1994, respectively. Included within cost of revenues is computer
hardware purchased by the Company and subsequently sold to customers, and
amortization of capitalized software. Hardware purchases are made only as
required under customer contracts. Therefore, the volume of hardware purchases
may fluctuate significantly based upon specific contract requirements.
Selling, general and administrative expenses for fiscal year ended January 31,
1996 increased $1,710,842 over fiscal year 1995. The increase is due primarily
to increased wages incurred by the Company as a result of hiring additional
employees to support the Company's development, sales and marketing efforts.
The increased development and marketing efforts have resulted in increased
revenues.
The net loss reported for fiscal year ended January 31, 1996 of $858,174 was
due to the increased selling, general and administrative expenditures described
above.
The decrease in the Company's overall product sales for fiscal 1995 was due
primarily to the anticipated release of the Company's Windows(TM) version of
its SPAN-FM(TM) product line. While revenues were down from the prior year, the
Company's fourth quarter revenues were $421,191, an increase of 59% over third
quarter revenues.
12
<PAGE> 13
Selling, general and administrative expenses for fiscal year ended January 31,
1995 increased $1,090,591 over fiscal year 1994. The increase is due
primarily to increased wages incurred by the Company as a result of hiring
additional employees to support the Company's development, sales and marketing
efforts.
The net loss reported for fiscal year ended January 31, 1995 of $1,088,851 was
due to the increased selling, general and administrative expenditures described
above, and the non-cash interest charge of $325,000 relating to the original
issue discount on the $1,300,000 Bridge Debt. The original issue discount was
recorded as interest expense of $62,608, and extraordinary loss on early
extinguishment of debt of $262,392. In addition, the Company paid $20,693 of
interest relating to the repayment of the Bridge Debt.
Effective February 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No,
109). SFAS NO. 109 changes the method of computing deferred income taxes from
the deferred method to the liability method. Under the liability method,
deferred income taxes are determined based on temporary differences between the
financial statement and tax bases of assets and liabilities, using enacted tax
rates in effect during the years in which the differences are expected to
reverse, and on available tax credits and carryforwards. The Company did not
restate its prior financial statements in conjunction with adoption of the new
standard. The cumulative effect of this accounting change for fiscal years prior
to 1994, which is shown separately in the statement of operations, decreased net
income for the year ended January 31, 1994 by $2,300.
13
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Company's Financial Statements and Notes to Financial Statements are
attached hereto as pages F-1 to F-13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
(The remainder of this page is intentionally blank.)
14
<PAGE> 15
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
William M. Thompson 37 Chairman, Chief Executive Officer and Director
John M. Thompson 34 President, Chief Operating Officer, Treasurer and Director
Karen A. Thompson 30 Executive Vice President and Secretary
John R. Smart 31 Executive Vice President and Director
Louis J. Desiderio 31 Vice President, Chief Financial Officer and Assistant Secretary
Mark R. Hernick 34 Director
Julie Moore 36 Director
</TABLE>
WILLIAM M. THOMPSON
Mr. Thompson has served as the Company's Chairman, Chief Executive Officer and
Director since January, 1990. From January, 1990, to March, 1995, Mr. Thompson
served as President of the Company. From January, 1988, to January, 1990, Mr.
Thompson served as President and Director of Innovative Tech Systems, Inc., a
Pennsylvania corporation. From December, 1986 to January, 1988, Mr. Thompson was
an independent consultant. From October, 1985 to December, 1986, Mr. Thompson
was Director of Operations for CAD, Inc. Prior to joining CAD, Inc., Mr.
Thompson served as Vice President of Marketing for Computer Graphics Division,
Inc., a start-up venture.
JOHN M. THOMPSON
Mr. Thompson has served as the Company's Treasurer and Director since January,
1990, as the Company's Secretary from January, 1990 to March, 1995, as the
Company's Chief Operating Officer since June, 1994, and as the Company's
President since March, 1995. Mr. Thompson also served as the Company's Chief
Financial Officer from January, 1990 to June 1994. From April, 1989 to January,
1990, Mr. Thompson served as Treasurer and Director of Innovative Tech Systems,
Inc., a Pennsylvania corporation. Mr. Thompson served as Vice President of
Finance for Philadelphia Ship Maintenance Co., Inc. from July, 1988 through
April, 1989 and as that company's Controller from June, 1984 to May, 1987. Mr.
Thompson has also served as Controller for Display Corporation of America and as
a staff accountant for Manufacturers Hanover Financial Services, Inc. Mr.
Thompson attended Philadelphia College of Textiles and Sciences, where he
received a Bachelor of Science Degree in accounting in 1983, and a Master's
Degree in Business Administration in 1988.
15
<PAGE> 16
KAREN A. THOMPSON
Ms. Thompson has served as the Company's Vice President from January, 1990 to
March, 1995, and as the Company's Executive Vice President of Information
Services and Secretary since March, 1995. From April, 1989 to January, 1990, Ms.
Thompson served as Vice President of Innovative Tech Systems, Inc., a
Pennsylvania corporation. Prior to 1990, Ms. Thompson was employed as
administrator of dealer finance for Manufacturers Hanover Financial Services,
Inc., and Customer Service and Technical Support Manager for Applied Computer
Products. Ms. Thompson attended Philadelphia College of Textiles and Sciences.
JOHN R. SMART
Mr. Smart has served as the Company's Vice President of Marketing from January,
1990 to March, 1995, as a Director of the Company since May, 1994, and as an
Executive Vice President since March, 1995. Prior to joining Innovative Tech
Systems, Inc. in October, 1989, Mr. Smart served as an independent distributor
of drinking water systems for Multi Pure Corporation where he recruited, trained
and monitored the company's sales staff, and as a financial consultant for A.F.
Investments, Inc., a subsidiary of Atlantic Financial Corporation, where his
primary function was in sales and product marketing. Mr. Smart attended Denison
University, where he received a Bachelor of Science Degree in computer science
and economics in 1987.
LOUIS J. DESIDERIO
Mr. Desiderio joined the Company in May, 1994 and currently serves as a Vice
President, Chief Financial Officer and Assistant Secretary of the Company. In
December, 1992, Mr. Desiderio joined the Custom Underwriting Division of
Reliance Insurance as Controller and held this position through April, 1994.
From July, 1986 through December, 1992, Mr. Desiderio was employed by Coopers &
Lybrand as a staff accountant and manager, servicing primarily emerging growth
companies. Mr. Desiderio attended Rider University where he received a Bachelor
of Science Degree in accounting in 1986. Mr. Desiderio is a certified public
accountant.
MARK R. HERNICK
Mr. Hernick has served as a Director of the Company since May, 1994. Mr. Hernick
is currently Vice President of Sales and Marketing for the display division of
Art Guild, Inc. Mr. Hernick has been with Art Guild, Inc. since November, 1987,
directing all sales and marketing activities for the firm, which designs and
produces custom point-of-purchase displays, store fixtures, mall kiosks, trade
show and museum exhibits and showrooms. Mr. Hernick is also a Vice President,
and a director, of Spinnaker Solutions, Inc., which is engaged in the design,
development, supply and use of industrial coatings. Mr. Hernick attended Drexel
University where he received a Bachelor of Science Degree in commerce and
engineering in 1986.
JULIE MOORE
Ms. Moore has served as a Director of the Company since May, 1994. Ms. Moore was
formerly employed by Temple University Hospital in Philadelphia, Pennsylvania as
a physician liaison for the heart transplant program. From June, 1992 to March
1993, Ms. Moore served as a sales specialist for Home Health Corp. of America of
King of Prussia, Pennsylvania, with her primary responsibilities being the
marketing of medical respiratory products to physicians. From June, 1990 to
June, 1992, Ms. Moore was a hospital sales representative with Fujisawa
Pharmaceutical Company of Deerfield, Illinois where she sold and promoted a
diverse line of pharmaceuticals. Ms. Moore was employed as Vice President of
Marketing for Frank's School Uniforms, Inc. of Roslyn, Pennsylvania from 1987 to
1990. Ms. Moore attended Holy Family College where she received her Bachelor of
Science Degree in nursing in 1982.
William Thompson and John Thompson are brothers, and Karen Thompson is their
sister.
16
<PAGE> 17
COMPENSATION OF DIRECTORS
Directors of the Company who are not employees receive $500 per Board of
Directors' meeting attended and are reimbursed for their out-of-pocket expenses
incurred in connection with their duties as members of the Board of Directors.
Compliance with Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's officers and directors, and persons who own more than ten percent
(10%) of a registered class of the Company's equity securities, to file reports
of ownership and changes in ownership of the Company's securities with the
Securities and Exchange Commission and each securities exchange on which the
Company's equity securities are admitted for trading. Officers, directors and
greater than 10% shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, during the fiscal year
ended January 31, 1996, all filing requirements applicable to its officers,
directors, and greater than 10% beneficial owners were complied with.
(The remainder of this page is intentionally blank.)
17
<PAGE> 18
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the Compensation paid by
the Company during the three years ended on January 31, 1996 paid to its Chief
Executive Officer and its Chief Operating Officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Securities
Underlying
Name and Principal Position Year Salary Bonus Options
- - --------------------------- ---- ------ ----- ----------
<S> <C> <C> <C> <C>
William M. Thompson 1996 $110,000 - 50,000
Chairman and Chief Executive Officer 1995 $100,140 - 225,000
1994 $78,000 - -
John M. Thompson 1996 $110,000 - 50,000
President, Chief Operating Officer and Treasurer(1) 1995 $100,140 - 225,000
1994 $78,000 - -
</TABLE>
(1) Effective as of June 1, 1994, John M. Thompson was appointed as the
Company's Chief Operating Officer and Louis J. Desiderio was appointed as the
Company's Chief Financial Officer.
The above compensation does not include certain insurance and other personal
benefits, the total value of which does not exceed as to any named officer or
director or group of executive officers the lesser of $50,000 or 10% of such
person's or persons' cash compensation.
All of the Company's group life, health, hospitalization or medical
reimbursement plans, if any, do not discriminate in scope, terms or operation,
in favor of the executive officers or directors of the Company and are generally
available to all salaried employees.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Securities Percent of Total
Underlying Options Options Granted to Exercise Expiration
Name and Principal Position Granted Employees in Fiscal Year Price Date
- - --------------------------- ------- ------------------------ ----- ----
<S> <C> <C> <C> <C>
William M. Thompson 50,000 (2) 10 % $ 2.75 January 10, 2001
Chairman and Chief Executive Officer
John M. Thompson 50,000 (2) 10 % $ 2.75 January 10, 2001
President, Chief Operating Officer
and Treasurer(1)
</TABLE>
(2) Option grant subject to shareholder approval.
18
<PAGE> 19
1994 STOCK OPTION PLAN
The Company has adopted the 1994 Stock Option Plan which provides for the
granting of options to purchase not more than an aggregate of 975,000 shares of
Common Stock, subject to adjustment under certain circumstances. Such options
may be incentive stock options ("ISOs") within the meaning of the Internal
Revenue Code of 1986, as amended, or options that do not qualify as ISOs
("Non-Qualified Options"). Shareholders of the Company would have no preemptive
rights with regard to shares allotted pursuant to the 1994 Stock Option Plan.
The 1994 Stock Option Plan is administered by a Committee of the Board of
Directors (the "Stock Option Committee"), consisting of Mark R. Hernick and
Julie Moore, who are not eligible to participate in the 1994 Stock Option Plan
while on the Stock Option Committee. The Stock Option Committee has full power
and authority to interpret the provisions, and supervise the administration, of
the 1994 Stock Option Plan. It determines, subject to the provisions of the 1994
Stock Option Plan, to whom options are granted, the number of shares of Common
Stock subject to each option, whether an option shall be an ISO or a
Non-Qualified Option and the period during which each option may be exercised.
In addition, the Stock Option Committee determines the exercise price of each
option, subject to the limitations provided in the 1994 Stock Option Plan,
including that (i) for a Non-Qualified Option the exercise price per share may
not be less than 100% of the fair market value per share of Common Stock on the
date of grant and (ii) for an ISO the exercise price per share may not be less
than 100% of the fair market value per share of Common Stock on the date of
grant (110% of such fair market value if the grantee owns stock possessing more
than 10% of the combined voting power of all classes of the Company's stock).
The aggregate fair market value (determined as of the time such option is
granted) of the Common Stock for which any employee may have ISOs which become
exercisable for the first time in any calendar year may not exceed $100,000.
ISOs may have an exercise option period of up to 10 years (five years for
optionees who own more than 10% of the total combined voting power of all
classes of stock of the Company or its parent or subsidiary corporation or
corporations). Non-qualified options will have an exercise option period as
specified by the Committee at the time of grant.
The 1994 Stock Option Plan provides that upon termination of employment of the
optionee for a cause other than death or disability, the rights to exercise the
option will terminate within three months following cessation of employment. In
the event of termination of employment due to death or disability, the same
provisions apply except that the period of time for exercise is one year.
The options granted pursuant to the 1994 Stock Option Plan are not transferable
except in the event of death.
The Underwriting Agreement between the Company and A.S. Goldmen & Co., Inc. (the
"Underwriter") provides that for a period of two years from July 26, 1994, the
Company will not, without the prior consent of the underwriter, adopt, propose
to adopt or otherwise permit to exist any employee, officer, director,
consultant or compensation plan or arrangement permitting (a) the grant, issue
or sale of any share of Common Stock or other securities of the Company in an
amount greater than 975,000 shares, (b) the payment for such securities with any
form of consideration other than cash, or (c) the existence of stock
appreciation rights, phantom options or similar arrangements. The Underwriting
Agreement also provides that, for the two year period commencing on the
effective date of the Company's public offering (July 26, 1994), the exercise
price for any option granted pursuant to the 1994 Stock Option Plan during such
period cannot be less than the greater of (i) the fair market value per share of
the Common Stock on the date of grant, and (ii) $1.67.
In determining persons to whom options will be granted and the number of shares
of Common Stock to be covered by each option, the Stock Option Committee
considers various factors including each eligible person's position and
responsibilities, service and accomplishments, present and future value to the
Company, anticipated length of future service and other relevant factors.
Options may be granted under the 1994 Stock Option Plan to
19
<PAGE> 20
all directors and employees of the Company and to other parties who perform
services for the Company. No options may be granted under the 1994 Stock Option
Plan after 10 years from the date of its adoption.
The Board of Directors of the Company is able to amend the 1994 Stock Option
Plan without further approval by the shareholders of the Company, except insofar
as such approval is required by law, or by the Internal Revenue Code of 1986, as
amended, in the case of ISOs.
On January 10, 1996, the Board of Directors of the Company adopted an amendment,
subject to shareholder approval, to increase the number of shares covered by the
Plan by 500,000.
In connection with the Company's three-for-one forward stock split of its
outstanding Common Stock and Redeemable Warrants, which was effective September
18, 1995, all pricing and per share amounts noted above have been appropriately
adjusted.
EXECUTIVE INSURANCE
The Company maintains "key-man" life insurance on William M. Thompson and John
M. Thompson, in the amount of $500,000, each, and the Company is the sole
beneficiary of each such policy.
(The remainder of this page is intentionally blank.)
20
<PAGE> 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the date this Report
was filed with respect to the ownership of Common Stock by (i) each person known
by the Company to be the beneficial owner of more than five percent of its
outstanding Common Stock, (ii) each director of the Company, (iii) each
executive officer of the Company, and (iv) all directors and executive officers
as a group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature
of Beneficial Owner of Beneficial Ownership (1) Percentage Ownership (2)
- - ------------------- --------------------------- ------------------------
<S> <C> <C>
William M. Thompson (3)
444 Jacksonville Road, Suite 200
Warminster, PA 18974 3,373,363 32.20%
John M. Thompson (3)
444 Jacksonville Road, Suite 200
Warminster, PA 18974 2,661,391 25.40%
Karen A. Thompson (5)
444 Jacksonville Road, Suite 200
Warminster, PA 18974 82,361 .79%
John R. Smart (5)
444 Jacksonville Road, Suite 200
Warminster, PA 18974 66,989 .64%
Mark R. Hernick
444 Jacksonville Road, Suite 200
Warminster, PA 18974 1,617 .02%
Julie Moore (4)
444 Jacksonville Road, Suite 200
Warminster, PA 18974 2,022 .02%
Executive Officers and
Directors as a group (six
persons) (6) 4,631,109 44.20%
</TABLE>
(1) Except as otherwise noted, each holder named in the table has sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned.
(2) The percentages have been calculated on the basis of treating as outstanding
for a particular holder, all shares of the Common Stock outstanding on said date
and all shares of Common Stock issuable to such holder in the event of exercise
or conversion of outstanding options, warrants and convertible securities owned
by such holder at said date which are exercisable or convertible within 60 days
of such date.
(3) Includes 1,556,634 shares of Common Stock owned of record by six outside
investors who purchased such shares in the Private Placement. William M.
Thompson and John M. Thompson have sole voting power with respect to such shares
pursuant to voting agreements executed by the six outside investors. These
voting agreements expire on the earlier to occur of (a) January 1, 2008, (b) a
transfer of the underlying shares in a transaction registered under the
Securities Act of 1933 and (c) a transfer of the underlying shares in a
transaction pursuant to Rule 144 promulgated under the Securities Act of 1933.
Also includes 75,000 vested stock options.
(4) Includes 1,617 shares of Common Stock owned by Ms. Moore's husband as to
which Ms. Moore disclaims beneficial ownership.
(5) Includes 50,000 vested stock options.
(6) Includes 1,556,634 shares of Common Stock owned of record by six outside
investors who purchased such shares in the Private Placement. William M.
Thompson and John M. Thompson have sole voting power with respect to such shares
pursuant to voting agreements executed by the six outside investors. Also
includes 1,617 shares of Common Stock owned by Ms. Moore's husband as to which
Ms. Moore disclaims beneficial ownership.
21
<PAGE> 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 1, 1995, the Company moved its headquarters to 444 Jacksonville
Road, Suite 200, Warminster, Pennsylvania, 18974. The Company has a five year
lease for 10,000 square feet of office space. The annual rent is $130,000. The
building is owned and operated by Thompson Enterprises, L.P., a limited
partnership. William M. Thompson, John M. Thompson and Karen A. Thompson are the
limited partners of Thompson Enterprises, L.P. William M. Thompson and John M.
Thompson are executive officers and majority shareholders of the Company. Karen
A. Thompson is an executive officer of the Company.
On September 2, 1994 the Company loaned $50,000 to each of two officers, who are
also major shareholders of the Company. The notes were not collateralized,
non-interest bearing and were repayable in full on September 2, 1995. The notes
have been classified as a reduction of shareholders' equity in the accompanying
balance sheets. On April 28, 1995, the notes were repaid in full.
On March 29, 1995 the Company loaned an additional $50,000 to each of these two
officers. The notes were not collateralized, non-interest bearing and were
repayable in full on March 29, 1996. These notes were repaid in full on November
28, 1995.
On January 20, 1995, the Company loaned $50,000 to Thompson Enterprises, L.P., a
limited partnership, which is classified as a current asset in the Company's
balance sheet at January 31, 1995. The amount was repaid in full on April 20,
1995.
On March 17, 1995, the Company pledged a $700,000 certificate of deposit as
collateral for a mortgage loan obtained by Thompson Enterprises, L.P., which is
classified as restricted cash in the accompanying balance sheet.
(The remainder of this page is intentionally blank.)
22
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. Documents filed as a part of this Report:
(a) Financial Statements
Report of Independent Accountants; Balance Sheets;
Statements of Operations; Statements of Cash Flows;
Statements of Stockholders' Equity;
and Notes to Financial Statements
(b) Financial Statement Schedules - not applicable
2. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
last quarter of fiscal year ended January 31, 1996.
3. Exhibits
Number Description
------ -----------
3.1 Articles of Incorporation, as amended.+
3.2 By-Laws.+
4.1 Form of Redeemable Warrant Agreement entered into
between the Company and the Warrant Agent.+
4.2 Specimens of Common Stock and Redeemable Warrant
Certificates.+
4.3 Form of Selling Security Holders' Subscription
Agreement and Warrant Certificate.+
9.1 Voting Trust Agreements executed by investors in
Private Placement.+
10.1 OEM Agreement with Intergraph Corporation.**
10.4 1994 Stock Option Plan.+
10.5 Lease with 611 Horsham Valley Associates.+
10.6 Form of Consulting Agreement with Underwriter.+
10.7 Landis & Gyr (Europe) Corp. Agreement.*
21.1 List of Subsidiaries*
23.1 Consent of Coopers & Lybrand*
27.1 Financial Data Schedule*
+ Incorporated by reference to Company's Registration
Statement on Form SB-2 (File No. 33-78940).
** Incorporated by reference to Company's 1995 Form 10-K
(File No. 33-17856-C)
* Filed herewith.
23
<PAGE> 24
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.
INNOVATIVE TECH SYSTEMS, INC.
By: /s/ William M. Thompson April 29, 1996
--------------------------
William M. Thompson
Chairman and Chief Executive Officer
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.
<TABLE>
<CAPTION>
Signatures Titles Date
- - ---------- ------ ----
<S> <C> <C>
/s/ William M. Thompson Chairman, Chief Executive April 29, 1996
- - ----------------------- Officer and Director (Principal
William M. Thompson executive officer)
/s/ John M. Thompson President, Chief Operating April 29, 1996
- - ----------------------- Officer, Treasurer and Director
John M. Thompson
/s/ John R. Smart Executive Vice President and April 29, 1996
- - ----------------------- Director
John R. Smart
/s/ Mark R. Hernick Director April 29, 1996
- - -----------------------
Mark R. Hernick
/s/ Julie Moore Director April 29, 1996
- - -----------------------
Julie Moore
/s/ Louis J. Desiderio Vice President, Chief Financial April 29, 1996
- - ----------------------- Officer and Assistant Secretary
Louis J. Desiderio (Principal financial and accounting
officer)
</TABLE>
24
<PAGE> 25
INNOVATIVE TECH SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants F-2
Balance Sheets, as of January 31, 1996 and 1995 F-3
Statements of Operations for the years ended January 31, 1996, 1995 and 1994 F-4
Statements of Cash Flows for the years ended January 31, 1996, 1995 and 1994 F-5
Statements of Changes in Shareholders' Equity for the years ended January 31,
1996, 1995 and 1994 F-6
Notes to Financial Statements F-7 - F-13
</TABLE>
F-1
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Innovative Tech Systems, Inc.:
We have audited the accompanying balance sheets of Innovative Tech
Systems, Inc. as of January 31, 1996 and 1995 and the related statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended January 31, 1996. 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 that 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 financial position of Innovative Tech
Systems, Inc., as of January 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
January 31, 1996, in conformity with generally accepted accounting principles.
As more fully described in Notes 2 and 4, the Company changed its
method of accounting for income taxes in 1994.
COOPERS & LYBRAND, L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 2, 1996
F-2
<PAGE> 27
INNOVATIVE TECH SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,815,742 $ 5,336,009
Accounts receivable, net 1,281,707 384,418
Officer advance 49,921 14,869
Due from related party -- 50,000
Other current assets 25,812 --
----------- -----------
Total current assets 4,173,182 5,785,296
Property and equipment, net 611,548 314,266
Restricted cash 700,000 --
Computer software, net of accumulated amortization of
$335,599 and $231,373 at January 31, 1996 and 1995 369,693 402,754
Other assets -- 3,990
----------- -----------
Total assets $ 5,854,423 $ 6,506,306
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 215,888 $ 173,586
Accrued liabilities 35,273 70,193
Accrued payroll and related costs 138,160 91,482
Deferred revenue 74,881 82,050
----------- -----------
Total current liabilities 464,202 417,311
----------- -----------
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, no par value; authorized 200,000,000 -- --
shares
Senior Preferred stock, par value $.001; authorized
200,000,000 shares; issued and outstanding -0-
shares as of January 31, 1996 and 1995, respectively -- --
Common stock, par value $.0185; authorized
100,000,000 shares; issued and outstanding
10,227,837 as of January 31, 1996 and 1995 (see note 8) 189,215 63,071
Additional paid-in capital 6,475,501 6,601,645
Warrants 850,150 790,750
Notes receivable -- (100,000)
Accumulated deficit (2,124,645) (1,266,471)
----------- -----------
Total shareholders' equity 5,390,221 6,088,995
----------- -----------
Total liabilities and shareholders' equity $ 5,854,423 $ 6,506,306
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 28
INNOVATIVE TECH SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
----------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 2,784,965 $ 1,325,991 $ 1,686,203
Cost of revenues 174,366 102,631 480,673
Selling, general and administrative
expenses 3,836,793 2,125,951 1,035,360
------------ ------------ ------------
Income (loss) from operations (1,226,194) (902,591) 170,170
Interest expense -- (83,301) --
Interest income and other 368,020 150,633 4,383
------------ ------------ ------------
Income (loss) before income taxes, extra-
ordinary items and cumulative effect
of change in accounting principle (858,174) (835,259) 174,553
Provision for (benefit from) income taxes -- (8,800) 33,600
------------ ------------ ------------
Income (loss) before extraordinary items
and cumulative effect of change in
accounting principle (858,174) (826,459) 140,953
Extraordinary item - loss on extinguishment of
debt -- (262,392) --
Cumulative effect of change in accounting
principle -- -- (2,300)
------------ ------------ ------------
Net income (loss) $ (858,174) $ (1,088,851) $ 138,653
============ ============ ============
Income (loss) per common share (1):
Primary income (loss) before extraordinary items and
cumulative effect of change in accounting principle $ (0.07) $ (0.10) $ 0.02
Extraordinary item - loss on extinguishment of
debt -- (0.03) --
Cumulative effect of change in accounting principle -- -- (0.00)
------------ ------------ ------------
Primary income (loss) per common share $ (0.07) $ (0.13) $ 0.02
============ ============ ============
Weighted average number of shares outstanding 12,311,583 7,989,519 5,821,494
============ ============ ============
Fully diluted income (loss) before extraordinary items
and cumulative effect of change in accounting principle $ (0.06) $ (0.10) $ 0.02
Extraordinary item - loss on extinguishment of debt -- (0.03) --
Cumulative effect of charge in accounting principle -- -- (0.00)
------------ ------------ ------------
Fully diluted income (loss) per common share $ (0.06) $ (0.13) $ 0.02
============ ============ ============
Weighted average number of shares outstanding 14,814,527 7,989,519 5,821,494
============ ============ ============
</TABLE>
(1) See Note 8 to the financial statements
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 29
INNOVATIVE TECH SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (858,174) $(1,088,851) $ 138,653
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Cumulative effect of change in account-
ing principle -- -- 2,300
Depreciation and amortization 208,348 125,552 67,393
Loss on disposal of equipment 764 -- --
Extraordinary loss on extinguishment of debt -- 262,392 --
Amortization of original issue discount -- 62,608 --
Bad debt expense 5,000 9,200 --
Changes in operating assets and
liabilities:
Accounts receivable (902,289) (72,777) (106,711)
Advances - officers (35,052) (14,869) 2,501
Due from related party 50,000 (50,000)
Other assets (21,822) (1,490) --
Accounts payable 27,502 80,197 5,806
Accrued liabilities (34,920) (8,073) 35,733
Accrued payroll and related costs 46,678 57,740 12,580
Deferred revenue (7,169) 22,550 30,183
Deferred income taxes -- 11,400 (11,400)
----------- ----------- -----------
Net cash (used in) provided by
operating activities (1,521,134) (604,421) 177,038
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (391,541) (241,311) (34,542)
Proceeds from disposal of equipment 4,173 -- --
Capitalization of software development tools (3,431) (42,511) --
Capitalization of software development costs (67,734) (389,658) --
Restricted cash (700,000) -- --
----------- ----------- -----------
Net cash used in investing
activities (1,158,533) (673,480) (34,542)
----------- ----------- -----------
Cash flows from financing activities:
Private placement of common stock -- 48,100 --
Net proceeds from public offering -- 6,439,788 --
Warrant issuance 59,400 -- --
Notes receivable 100,000 (100,000) --
Proceeds from note payable -- 1,300,000 --
Repayment of note payable -- (1,300,000) --
----------- ----------- -----------
Net cash provided by
financing activities 159,400 6,387,888 --
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents (2,520,267) 5,109,987 142,496
Cash and cash equivalents, beginning of year 5,336,009 226,022 83,526
----------- ----------- -----------
Cash and cash equivalents, end of year $ 2,815,742 $ 5,336,009 $ 226,022
=========== =========== ===========
Cash paid during the period for:
Income taxes $ -- $ 7,448 --
Interest $ -- $ 20,693 --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 30
INNOVATIVE TECH SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
SENIOR PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------------- ---------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1993 1,521 $ 28 1,431,240 $ 26,478 $ 616,072
Net income -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, January 31, 1994 1,521 28 1,431,240 26,478 616,072
Private placement -- -- 518,878 9,599 38,501
Bridge debt warrants -- -- -- -- --
Conversion of senior preferred stock (1,521) (28) 1,521 28 --
Proceeds from public offering -- -- 1,457,640 26,966 5,947,072
Notes receivable -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, January 31, 1995 -- -- 3,409,279 63,071 6,601,645
Repayment of notes receivable -- -- -- -- --
Stock split -- -- 6,818,558 126,144 (126,144)
Warrant issuance -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, January 31, 1996 -- $ -- 10,227,837 $ 189,215 $ 6,475,501
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
NOTES ACCUMULATED SHAREHOLDERS'
WARRANTS RECEIVABLE DEFICIT EQUITY
-------- ---------- ------- ------
<S> <C> <C> <C> <C>
Balance, January 31, 1993 -- $ -- (316,273) $ 326,305
Net income -- -- 138,653 138,653
----------- ----------- ----------- -----------
Balance, January 31, 1994 -- -- (177,620) 464,958
Private placement -- -- -- 48,100
Bridge debt warrants $ 325,000 -- -- 325,000
Conversion of senior preferred stock -- -- -- --
Proceeds from public offering 465,750 -- -- 6,439,788
Notes receivable -- (100,000) -- (100,000)
Net loss -- -- (1,088,851) (1,088,851)
----------- ----------- ----------- -----------
Balance, January 31, 1995 790,750 (100,000) (1,266,471) 6,088,995
Repayment of notes receivable -- 100,000 -- 100,000
Stock split -- -- -- --
Warrant issuance 59,400 -- -- 59,400
Net loss -- -- (858,174) (858,174)
----------- ----------- ----------- -----------
Balance, January 31, 1996 $ 850,150 $ -- $(2,124,645) $ 5,390,221
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Innovative Tech Systems, Inc. (the "Company") is principally involved in the
business of designing, developing and marketing facilities management software
products. All design, development and marketing of the Company's products is
performed at its headquarters in Warminster, Pennsylvania. The Company derives
revenues from selling and installing hardware and software for licensed use by
clients in diverse industries, such as insurance, banking, manufacturing and
healthcare. The Company's revenues are predominantly generated through sales to
customers in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents:
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash investments. The Company
restricts investment of temporary cash investments to financial institutions
with high credit ratings.
Revenue Recognition and Accounts Receivable:
Sales and related costs under contracts to customers are recognized as units are
delivered, since there are no significant obligations after delivery. Accounts
receivable arising from sales are not collateralized and, as a result,
management monitors the financial condition of its customers to reduce the risk
of loss. Revenue from the licensing of computer software is recognized at the
time all significant contractual commitments are fulfilled. Revenue under
maintenance contracts is recognized ratably over the life of the contract.
Revenues from consulting and custom programming services are recognized as the
services are performed.
Property and Equipment:
Property and equipment are carried at cost. Expenditures for major renewals,
improvements and betterments are capitalized and minor repairs and maintenance
are charged to expense. When assets are sold, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss from such
disposition is included in operations.
Property and equipment is depreciated on the straight-line method over the
estimated useful lives of the respective assets, generally over a period of five
to seven years for property and equipment and over the lesser of its estimated
useful life or the remaining lease term for leasehold improvements. For
federal income tax purposes, accelerated depreciation methods are used.
Computer Software:
The Company capitalizes purchased computer software. Internally developed
computer software costs and costs of product enhancements are capitalized
subsequent to the determination of technological feasibility; such
capitalization continues until the product becomes available for general
release. Maintenance and general upgrades are expensed as incurred.
Capitalized software costs are written down to net realizable value when the
carrying amount is in excess thereof.
Computer software development and enhancements costs are amortized on a
product-by-product basis over a period of 5 years. Amortization, which is
included in cost of revenues, is the greater of the amount computed using (1)
the ratio of the current year's gross revenues to the total current and
anticipated future gross revenues for that product or (2) the straight-line
method over the estimated life of the product. Software amortization was
$104,226, $75,747 and $46,330 for the years ended January 31, 1996, 1995 and
1994, respectively.
F-7
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - (CONTINUED)
Income Taxes:
Effective February 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No.
109). SFAS No. 109 changes the method of computing deferred income taxes from
the deferred method to the liability method. Under the liability method,
deferred income taxes are determined based on temporary differences between the
financial statement and tax bases of assets and liabilities, using enacted tax
rates in effect during the years in which the differences are expected to
reverse, and on available tax credits and carryforwards. The Company did not
restate its prior financial statements in conjunction with adoption of the new
standard.
Prior to February 1, 1993, income taxes were provided in accordance with the
provisions of Accounting Principles Board Opinion No. 11, "Accounting for Income
Taxes" (APB 11).
Earnings (Loss) Per Share:
Primary earnings (loss) per common share is calculated using the weighted
average number of common shares outstanding during the period plus (in periods
in which they have a dilutive effect) the additional number of shares which
would be issuable upon the exercise of stock options, assuming that the Company
used the proceeds received to purchase additional shares at the stock's average
market price for the period. The fully-diluted computation reflects additional
dilution related to stock options due to the use of the market price at the end
of the period, which are higher than the average price for the period.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassification:
Certain reclassifications have been made to the 1995 and 1994 financial
statements and related footnotes to conform to the 1996 presentation.
Statements of Financial Accounting Standards Not Yet Adopted:
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
for fiscal years beginning after December 15, 1995. The provisions of SFAS No.
121 require the Company to review its long-lived assets for impairment on an
exception basis whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through future cash flows.
Any loss will be recognized in the income statement and certain disclosures
regarding the impairment are to be made in the financial statements. The
Company is evaluating the provisions of SFAS No. 121 and does not anticipate
adoption to have a material effect on its financial position or results of
operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," for fiscal years beginning after December 15, 1995. SFAS No.
123 allows companies to recognize compensation expense for grants of stock,
stock options, and other equity instruments to employees based upon fair value
or permits them to continue to apply the existing accounting rules contained
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25). Companies choosing to continue on APB No. 25 are
required to disclose pro forma net income and earnings per share data based on
fair value. The Company anticipates continuing to account for stock-based
compensation in accordance with APB No. 25 and therefore the adoption of SFAS
No. 123 will not have an impact on the Company's financial position or results
of operations.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
January 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Computers and office equipment $ 416,559 $ 315,112
Furniture and fixtures 233,313 89,717
Leasehold improvements 155,314 --
--------- ---------
805,186 404,829
Less accumulated depreciation (193,638) (90,563)
--------- ---------
$ 611,548 $ 314,266
========= =========
</TABLE>
Depreciation expense was $104,122, $49,805 and $21,063 in 1996, 1995 and 1994,
respectively.
F-8
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. INCOME TAXES:
Effective February 1, 1993, the Company adopted the provisions of SFAS No. 109.
The cumulative effect of this accounting change for fiscal years prior to 1994,
which is shown separately in the statement of operations, decreased net income
for the year ended January 31, 1994 by $2,300 (see Note 2).
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
For the years ended January 31,
------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal income taxes:
Current - $ (20,200) $ 20,200
Deferred - 6,700 (6,700)
-------------- ------------- -------------
- (13,500) 13,500
-------------- ------------- -------------
State:
Current - - 24,800
Deferred - 4,700 (4,700)
-------------- ------------- -------------
- 4,700 20,100
-------------- ------------- -------------
- $ (8,800) $ 33,600
============== ============= =============
</TABLE>
As of January 31, 1996, the Company has federal net operating loss carryforwards
of approximately $2,470,700, which expire over various years through 2010. As
of January 31, 1996, the Company has state net operating loss carryforwards of
approximately $1,850,300, which expire over various years through 1998.
The reconciliation of income taxes at the U.S. statutory rate to the provision
for income taxes for 1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
For the years ended January 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income taxes at the U.S. Statutory rate (34)% (34)% 34 %
Increase (reduction) in income taxes resulting from:
Benefit of the federal graduated rates - 1 % (7)%
State income taxes, net of federal benefit - 1 % 8 %
Limitation on the utilization of tax benefits 31% 32 % -
Utilization of net operating loss carryforwards - - (16)%
Other, net 3% (1)% -
-------- ------- --------
- (1)% 19%
======== ======= ========
</TABLE>
F-9
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. INCOME TAXES: - (CONTINUED)
The tax effects of temporary differences which comprise the deferred tax assets
and liabilities at January 31, 1996 and 1995 were determined using an effective
rate of 41%. Tax effects of temporary differences are as follows:
<TABLE>
<CAPTION>
January 31, January 31,
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax debits:
Computer software -- $ 41,800
Net operating loss carryforwards $ 1,038,900 596,100
Other liabilities 45,600 48,600
Valuation allowance (1,034,000) (663,900)
----------- -----------
50,500 22,600
Deferred tax credits:
Property and equipment (50,500) (22,600)
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
</TABLE>
The increase in the valuation allowance at January 31, 1996 is mainly
attributable to the increase in the net operating loss carryforwards.
5. COMMITMENTS:
The Company leases office facilities under operating leases. The future minimum
rental payments under noncancellable operating leases are as follows:
<TABLE>
<S> <C>
1997 $ 130,000
1998 $ 130,000
1999 $ 130,000
2000 $ 130,000
---------
$ 520,000
=========
</TABLE>
Total rent expense for the years ended January 31, 1996, 1995 and 1994 was
$124,164, $41,094 and $21,910, respectively.
6. PRIVATE PLACEMENT OF COMMON STOCK:
On April 29, 1994 the Company completed a private placement, agreed to on
November 18, 1993, in which 1,556,634 shares of restricted Common Stock were
sold to six outside investors for $48,100. All voting rights pertaining to such
shares of the Common Stock have been assigned to two officers of the Company.
The funds raised in the private placement were used for the purchase of computer
equipment and furniture. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, the 1,556,634 shares privately placed at a price
lower than the public offering price on July 26, 1994 (see Note 10) are treated
as outstanding for all periods presented.
F-10
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. BRIDGE DEBT:
On May 11, 1994, the Company issued $1,300,000 principal amount of seven percent
Promissory Notes (the "Bridge Debt") and 3,900,000 common stock purchase
warrants (the "Bridge Debt Warrants"). The Bridge Debt Warrants were valued at
the public offering price of $.083 per warrant, aggregating $325,000, which
constituted original issue discount on the debt. Each Bridge Debt Warrant is
exercisable to purchase one share of Common Stock at an exercise price of $2.33
per share during the 60 month period commencing 12 months after the effective
date of the Company's Public Offering, which was July 26, 1994. The Company
issued the Bridge Debt and the Bridge Debt Warrants to a limited group of
investors, who were previously unaffiliated with the Company, for aggregate
consideration of $1,300,000. The Bridge Debt was repayable together with
interest at the rate of seven percent per annum upon the earlier of (I) the
Company's consummation of a public or private financing of its equity securities
or (ii) 12 months after issuance. The effective rate of interest on this Bridge
Debt was 42.7%. The Bridge Debt Warrants were automatically converted into
Redeemable Warrants on July 26, 1994, when the Company's Public Offering became
effective. On August 2, 1994, the Company repaid the $1,300,000 Bridge Debt,
including interest of $20,693. The original issue discount was charged to the
statement of operations as interest expense of $62,608 and an extraordinary loss
on extinguishment of debt of $262,392. There were no underwriting discounts or
commissions paid in connection with these transactions.
8. STOCK SPLITS:
The Board of Directors of the Company approved a three-for-one forward split of
all outstanding shares of Common Stock and all outstanding Common Stock Purchase
Warrants on August 23, 1995. The three-for-one split was effective on September
18, 1995. The shareholders of the Company approved a one-for-18.54 reverse stock
split of all outstanding shares of Common Stock on July 22, 1994.
As a result, all historic share amounts and per share amounts in the
accompanying financial statements, except for the statements of changes in
shareholders equity, have been adjusted to reflect the stock splits.
9. PREFERRED STOCK:
On July 22, 1994, the shareholders of the Company approved the conversion of all
Senior Preferred Stock into Common Stock on a one-for-one basis (prior to the
reverse stock split) and the authorization of a new class of preferred stock
with no par value and 200,000,000 authorized shares.
10. PUBLIC OFFERING:
On July 26, 1994, the Company completed a public offering of 3,900,000 shares of
its Common Stock and 5,400,000 Redeemable Warrants. On August 2, 1994, the
Company received net proceeds of $6,043,433 from the offering, and charged
$347,179 relating to legal, accounting, printing and filing fees to equity as a
reduction of the net proceeds.
On September 14, 1994, the Company's underwriter exercised the over-allotment
option to purchase up to 585,000 additional shares of Common Stock and/or
810,000 Redeemable Warrants. An additional 472,920 shares of Common Stock and
810,000 Redeemable Warrants were purchased. The net proceeds received by the
Company were $743,534.
The shares of Common Stock and Redeemable Warrants are separately tradeable.
Each Redeemable Warrant entitles the holder to purchase one share of Common
Stock at an exercise price of $2.33 for a period of 60 months commencing 12
months after the effective date of the offering. Each Redeemable Warrant is
redeemable by the Company at a redemption price of $.083 per Redeemable Warrant
commencing 15 months after the effective date of the offering upon not less than
30 days' prior written notice by the Company, provided that the average closing
bid price of the Common Stock equals or exceeds $2.92 for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
immediately prior to the notice of redemption.
F-11
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
11. 1994 STOCK OPTION PLAN:
On July 22, 1994, the shareholders of the Company approved the adoption of the
1994 Stock Option Plan which provides for the granting of options to purchase up
to an aggregate of 975,000 shares of Common Stock. The Company granted options
to acquire 225,000 shares of the Common Stock, at an exercise price of $1.67 per
share, to each of William M. Thompson and John M. Thompson pursuant to the terms
of their 1994 employment agreements with the Company.
Changes in shares under option during the fiscal years ended January 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Shares under option at beginning of year 975,000 --
Additions:
Options granted 500,000 975,000
Options exercised -- --
Options expired or terminated -- --
--------- ---------
Shares under option at end of year 1,475,000 975,000
========= =========
Options exercisable at end of year 325,000 --
========= =========
</TABLE>
These stock options are exercisable in whole or in part, in three (3) equal
annual installments, with the first such installment exercisable twelve (12)
months from the date of the grant, but any such exercise must occur within ten
(10) years from the date of grant
12. SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION:
The Company acquired $14,800 and $6,995 of property and equipment for which
payment had not been made at January 31, 1996 and 1995, respectively, which is
included in accounts payable.
13. SIGNIFICANT CUSTOMERS:
In fiscal 1996, revenues from the United States Department of Defense, CIBC
Development Corp. and Intergraph Corporation were approximately 25%, 16% and
11%, respectively, of total revenues. In fiscal 1995, revenues from the United
States Department of Defense, Washington Hospital Center and Principal Financial
Group were approximately 43%, 11% and 9%, respectively, of total revenues. In
fiscal 1994, revenues from the United States Department of Defense, Wawa Inc.
and MBNA Corporation were approximately 40%, 16% and 11%, respectively, of total
revenues.
F-12
<PAGE> 37
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
14. RELATED PARTY TRANSACTIONS:
On September 2, 1994 the Company loaned $50,000 to each of two officers, who are
also major shareholders of the Company. The notes were not collateralized,
non-interest bearing and were repayable in full on September 2, 1995. The notes
have been classified as a reduction of shareholders' equity in the accompanying
balance sheets. On April 28, 1995, the notes were repaid in full.
On March 29, 1995 the Company loaned an additional $50,000 to each of these two
officers. The notes were not collateralized, non-interest bearing and were
repayable in full on March 29, 1996. These notes were repaid in full on November
28, 1995.
On January 20, 1995, the Company loaned $50,000 to Thompson Enterprises, L.P., a
limited partnership, which is classified as a current asset in the Company's
balance sheet at January 31, 1995. The amount was repaid in full on April 20,
1995.
On March 17, 1995, the Company pledged a $700,000 certificate of deposit as
collateral for a mortgage loan obtained by Thompson Enterprises, L.P., which is
classified as restricted cash in the accompanying balance sheet.
15. NOTES RECEIVABLE:
On March 3, 1995, the Company loaned $1,000,000, which was held in escrow, to a
non-affiliated company. The loan was evidenced by a promissory note, which
provided for the payment of $100,000 in origination fees. The loan and the
origination fees were paid in full on May 5, 1995.
On May 12, 1995, the Company loaned $750,000, which was held in escrow, to a
non-affiliated company. The loan was evidenced by a promissory note, which
provided for the payment of a $55,000 origination fee which was paid on June 1,
1995. The loan was paid in full on August 24, 1995.
16. 401(K) PLAN:
Effective January 1, 1996 the Company instituted a 401(k) Plan to cover all
eligible employees. The Company makes a matching contribution of $.25 for every
dollar a participant contributes on the first 6% contributed, subject to a 5
year vesting schedule. The Company made a matching contribution of $1,821 for
the year ended January 31, 1996.
F-13
<PAGE> 1
EXHIBIT 10.7
STRATEGIC MARKETING AGREEMENT
Between
LANDIS & GYR (EUROPE) CORP.
And
INNOVATIVE TECH SYSTEMS, INC.
<PAGE> 2
STRATEGIC MARKETING AGREEMENT
THIS AGREEMENT is entered by and between:
Landis & Gyr (Europe) Corp.
Gubelstrasse 22
CH-6301 Zug
Switzerland
(hereinafter referred to as "Landis & Gyr")
and
Innovative Tech Systems, Inc.
444 Jacksonville Road, Suite 200
Warminster, Pennsylvania 18974
(hereinafter referred to an "Innovative Tech")
WHEREAS, Innovative Tech is the owner of certain application Software products,
listed herein in Exhibit A, and is in the business of developing, producing,
marketing and distributing Software under the trade name SPAN-FM for Windows,
and
WHEREAS, Landis & Gyr wishes to market and distribute the Software produced by
Innovative Tech, and
WHEREAS, Landis & Gyr is prepared to market and distribute the Software to its
customers and Innovative Tech provides authorization to Landis & Gyr to market
and distribute the Software listed herein in Exhibit A, and agree to be
mutually bound by the terms and conditions of this Strategic Marketing
Agreement, hereinafter called Agreement.
WITNESSETH:
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL COVENANTS AND PROMISES
CONTAINED HEREIN, LANDIS & GYR AND INNOVATIVE TECH DO HEREBY AGREE AS FOLLOWS:
1 DEFINITIONS
1.1 The term "Software" shall include the Software Interface
described in 1.7 and shall mean the object code versions of the Innovative Tech
software described in Exhibit A and shall include any modifications or
improvements thereof made by Innovative Tech and the enhancements as defined
under 1.6, and any other materials which are provided for use in connection
with said object code.
1.2 The term "Software Source Code" shall mean the human-readable
version of the Software, including without limitation, associated flowcharts,
algorithms, comments and other written instructions and technical documentation.
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1.3 The term "use" shall include, without limitation, copying any portion
of the Software, including copying into a computer, or transmitting any portion
of the Software, including transmission to a computer for processing of the
instructions or statements contained therein.
1.4 The term "End User License" shall mean an agreement, in writing,
between Innovative Tech and the "End User", containing the terms set forth in
Exhibit B hereto.
1.5 The term "End User" shall mean any person or entity who has entered
into an "End User License" with Innovative Tech.
1.6 The term "Enhancements" shall mean performing the functions and/or
changes which shall be mutually agreed in Specification Document.
1.7 The term "Interface Link" shall mean the link commonly designed by
Innovative Tech and Landis & Gyr to facilitate exchange of data between the
Software and the Landis & Gyr software application products.
The Interface Link consists of two parts, one integrated and developed by
Innovative Tech into the Software owned by Innovative Tech, which will be known
as the "Software Interface", another integrated and developed by Landis & Gyr
into the software application products owned by Landis & Gyr, which will be
known as the "Application Interface".
1.8 The term "Specification Document" shall mean a written document which
contains the design, functional and technical specifications for the Software
and Documentation.
1.9 The term "Documentation" shall mean any human readable materials, and
any modifications and additions thereto, provided with, or available for, the
Software for its implementation, operation, and maintenance, such as
installation guides, tutorials, reference guide, technical and/or user manuals,
and release notes. The Documentation available when this Agreement comes into
force are listed in Exhibit F "Documentation".
1.10 The term "Version" shall mean the highest level of a software
product. New versions contain major additional or improved functionality and/or
performance (often denoted as the first number of X.X.X. used to identify the
current software level).
1.11 The term "Release" shall mean a modification to a Version of a
software product (often denoted as the second number of X.X.X used to identify
the current software level).
1.12 The term "Revision" shall mean a defect correction (bug fix) for
maintenance purposes and minor functional enhancements (often denoted as the
last number of X.X.X used to identify the current software level).
1.13 The term "Upgrade" shall mean a change to an End User License to
permit greater capacity operation, e.g. on a higher control process unit group
or with a greater number of users.
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1.14 The term "Update" shall mean any and all Revisions, Releases and
Versions of the Software and Documentation, as the context may require.
2. OWNERSHIP OF SOFTWARE AND OF APPLICATION INTERFACE
2.1 Landis & Gyr acknowledges and agrees that:
(a) Innovative Tech reserves for itself all proprietary rights in
the Software and all designs, engineering details and other data pertaining to
the Software. Such proprietary rights shall be reserved to and owned by
Innovative Tech. Landis & Gyr shall not obtain any proprietary rights in the
Software and agrees to hold the Software subject to such reservations.
(b) All writings or works of authorship developed by Innovative Tech
in the course of performing services for Landis & Gyr hereunder, shall not be
"works for hire" and Innovative Tech shall own all rights, title and interest
in such writings or works of authorship, including all rights of patent,
copyright, trade secret or other proprietary rights throughout the world. If
any such writings or works of authorship are deemed to be "works for hire" by
operation of law, then this Agreement shall constitute an irrevocable
assignment to Innovative Tech of all of Landis & Gyr's right, title and
interest in any such writings or works of authorship.
(c) The Software is comprised of Innovative Tech's trade secrets and
proprietary information; and
(d) Landis & Gyr will not lend, sell, lease, hypothecate, or
otherwise dispose of the Software except as expressly authorized by this
Agreement.
2.2 Innovative Tech acknowledges and agrees that:
(a) Landis & Gyr reserves for itself all proprietary rights in the
Application Interface and all designs, engineering details and other data
pertaining to the Application Interface. Such proprietary rights in the
Application Interface shall be reserved to and owned by Landis & Gyr. Innovative
Tech shall not obtain any proprietary rights in the Application Interface and
agrees to hold the Application Interface subject to such reservations.
(b) The Application Interface is comprised of Landis & Gyr's trade
secrets and proprietary information; and
(c) Innovative Tech will not lend, sell, lease, hypothecate, or
otherwise dispose of the Application Interface except as expressly authorized
by Landis & Gyr.
3 LICENSE
3.1 Innovative Tech grants Landis & Gyr the non-exclusive right to market
and distribute the Software as an independent product or bundled with other
products provided to End Users. The bundling of the Software with any other
products shall not excuse or diminish any license prices required to be paid to
Innovative Tech nor
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imply the granting of any rights to Landis & Gyr or any End User beyond those
specifically set forth herein.
3.2 Landis & Gyr shall offer under its own name the Software for sale
only and not for lease or rental. Landis & Gyr shall not represent itself as
the manufacturer of the Software and shall not relabel, remark, or otherwise
affix any labels or devices upon the Software or materials which obscure the
trademark or other identification of Innovative Tech. However, Landis & Gyr
shall have the right to affix a phrase similar to "Distributed by Landis &
Gyr", including the Landis & Gyr logo [Landis & Gyr logo] on the packaging.
Landis & Gyr shall be responsible for all changes associated with the affixing
of any language or logo to any Software or materials.
3.3 Landis & Gyr agrees that Innovative Tech's name, trademark and
copyright information, shall be included on all copies of the Software, both in
machine readable form and on all Documentation related thereto.
3.4 Landis & Gyr assures Innovative Tech that it shall abide by and fully
comply with all export regulations both foreign and domestic.
3.5 Landis & Gyr shall have the right to translate the Software and
Documentation into languages other than English. Innovative Tech shall support
Landis & Gyr in such translations as described in Paragraph 8.5.2. The ownership
of the Software and of the Documentation stay with Innovative Tech. Innovative
Tech does not get the rights to distribute the translation of the Software and
Documentation done and paid by Landis & Gyr except as expressly authorized by
Landis & Gyr. However Landis & Gyr recognizes that Innovative Tech may have the
Software and Documentation translated at Innovative Tech's own expenses at any
time and distribute such translations without any restrictions.
3.6 Innovative Tech will provide Landis & Gyr with up to 200 (two
hundred) copies of versions of the Software and Documentation for internal
demonstration purposes ("Demonstration License"). Innovative Tech will charge
Landis & Gyr 200.00 USD (two hundred) per Demonstration License to help cover
the costs of the Demonstration License. This Demonstration License will be a
fully working single-user version of the Software and of the Documentation.
Landis & Gyr will be required to purchase AutoCAD R13 for Windows as this will
not be supplied with the Demonstration License. The license price for
Demonstration License in excess of two hundred copies shall be negotiated at
the time of purchase. However all Software purchased for Landis & Gyr's own
business use shall require the license price to Innovative Tech as in
accordance with Exhibit A.
4 LICENSE PRICES AND REPORTS
4.1 Landis & Gyr agrees to pay to Innovative Tech a license price for
each End User License distributed. This license price shall be in accordance
with Exhibit A.
4.2 A license price is not payable for the transfer of the Software from
one End User to another End User within the same organization, provided the
first End User does not retain any portion of the Software after such transfer.
Additionally, a
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license price is not payable for the transfer of the Software from one host to
a second host provided that no portion of the Software remains with the first
host and the second host is property licensed.
4.3 The End User will be granted a license price free right to move the
Software from one host to another within a Local Area Network (LAN) within the
same organization. Landis & Gyr agrees to provide the End User with the same
mechanisms to monitor usage and to verify compliance with existing purchase
agreements as it provides relating to its own licensed software products.
4.4 The license prices referred to in paragraph 4.1 hereto do not include
any taxes or duties, and any such taxes or duties shall be assumed and paid for
by Landis & Gyr. If Innovative Tech shall pay such taxes or duties, Landis & Gyr
shall reimburse Innovative Tech within thirty (30) days of receiving a written
request that it do so. Innovative Tech's federal, state and local income and
tangible property taxes, if any, shall remain the sole responsibility of
Innovative Tech.
4.5 Innovative Tech shall invoice Landis & Gyr upon the shipment of any
Software order. Landis & Gyr shall remit payment in US Funds drawn on a US Bank
within thirty (30) days after receipt of a proper invoice, but not earlier than
within thirty (30) days after receipt of the Software and Documentation.
4.6 Landis & Gyr agrees that it shall maintain complete, clear and
accurate records of each End User License distributed. Within thirty (30) days
after the end of each quarterly period during which this Agreement is in effect,
which periods end on March 31st, June 30th, September 30th and December 31st,
Landis & Gyr shall provide Innovative Tech a statement, certified by an
authorized representative of Landis & Gyr, setting forth the number of End User
Licenses distributed during the quarter, along with the names, addresses,
telephone numbers and point of contact for each End User.
4.7 Innovative Tech shall have the right to audit Landis & Gyr's records
pertaining to the statement provided to Innovative Tech. All audits must be
conducted during Landis & Gyr's regular business hours, and prior to an audit,
Innovative Tech must have given thirty (30) days advance written notice. The
right of audit shall be limited to once per calendar year and shall not cover
records over two (2) years old. Prior to the start of an audit, Innovative Tech
personnel must sign a non-disclosure agreement to be provided by Landis & Gyr.
During the audit, Innovative Tech personnel shall be provided reasonable access
to both Landis & Gyr's records and personnel.
5 ENHANCEMENTS AND TRAINING
5.1 The Enhancements include, but are not limited to functionality that is
currently found in Landis & Gyr's DOS VISONIK(R) MMS product. Innovative Tech
and Landis & Gyr will mutually agree to the Specification Document.
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5.2 Innovative Tech shall be responsible for accomplishing the
Enhancements effort. During the Enhancements effort, Landis & Gyr shall provide
Innovative Tech with a reasonable level of technical support.
5.3 During the Enhancements effort and upon reasonable notice,
Innovative Tech shall send at least one (1) of its training personnel to Landis
& Gyr's office in Zug, Switzerland to present training classes on the Software
as detailed in Exhibit A herein. Landis & Gyr shall be responsible for
providing adequate classroom space and the required equipment. Innovative Tech
shall provide training personnel knowledgeable in the Software. The training
dates and length of training shall be as mutually agreed between the parties.
Landis & Gyr shall reimburse Innovative Tech for out of pocket expenses,
including but not limited to air fare, lodging and meal expenses for Innovative
Tech's personnel attending such training sessions.
6 ACCEPTANCE
6.1 Enhancements shall be considered complete when the Software
executives in accordance with the Specification Document. The parties will
jointly cooperate to create a Specification Document. The scheduled date for
completion of the Enhancements shall be September 30, 1996.
6.2 Upon receipt of the Software, including any enhanced Software,
Landis & Gyr shall evaluate whether such Software executes in accordance with
the Specification Document. Landis & Gyr shall accept or reject such Software,
in writing, within twenty (20) business days after receipt of such software
("the Acceptance Period"). If Landis & Gyr fails to a accept or reject such
Software in writing within the Acceptance Period, the Software shall be deemed
to be accepted by Landis & Gyr. If Landis & Gyr rejects any software within the
Acceptance period, Landis & Gyr shall identify in writing and in detail the
basis for the rejection.
6.3 If the Software is deemed unacceptable to Landis & Gyr in
accordance herewith, Innovative Tech shall exercise its best efforts to correct
all non-conformities and to redeliver the corrected Software to Landis & Gyr
within thirty (30) business days of a rejection in conformance with this
Agreement.
6.4 Upon acceptance of the Software, Landis & Gyr shall provide
Innovative Tech with a written Acceptance Certification in the form attached
hereto as Exhibit C. If Landis & Gyr does not reject the Software in writing
within the Acceptance Period, Landis & Gyr shall provide Innovative Tech with a
written Acceptance Certification for the Software upon written request by
Innovative Tech.
6.5 In the event that Innovative Tech fails, during Enhancements,
to deliver the Software to Landis & Gyr which executes in accordance with the
Specification Document, after three (3) attempts to correct the same non
conformity, Landis & Gyr may at its option terminate this Agreement. In the
event of any such election to terminate, Landis & Gyr shall have no right to
use or retain, and shall return to Innovative Tech, all Software and
Deliverables defined in Paragraph 8.1 hereof, and/or portions thereof
(including any and all copies).
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7 END USERS
Landis & Gyr agrees to take all reasonable steps to enforce the provisions of
each End User License. In the event Innovative Tech requests legal action be
initiated against any End User for breach of the End User License, and Landis &
Gyr declines to initiate or continue such action, Landis & Gyr shall, upon
Innovative Tech's request, and at Innovative Tech's expense, take all steps
deemed necessary as mutually agreed by Innovative Tech and Landis & Gyr to
permit Innovative Tech to initiate and/or prosecute the action including,
without limitation, to assign the cause of action to Innovative Tech or permit
Innovative Tech to prosecute the action.
8 DOCUMENTATION AND TRANSLATION
8.1 Deliverables
Innovative Tech shall deliver to Landis & Gyr all Documentation for the
Software, including subsequent documents and revisions, in human readable form
and one (1) set of Documentation in the format specified in 8.5 below.
8.2 Reference Materials for End User Licenses
Innovative Tech shall produce End User reference materials describing how
End User shall use the Software. All End User Software and user manuals shall be
shipped by Innovative Tech to Landis & Gyr for distribution to the End User.
Landis & Gyr shall be responsible for all shipping costs, customs fees or any
other costs associated with the shipment of the Software to Landis & Gyr,
including any costs resulting from Landis & Gyr directed changes to End User
reference materials.
8.3 Reproduction of Promotional Material
Landis & Gyr shall translate promotional material, in whole or in part,
into languages other than English. Innovative Tech hereby grants Landis & Gyr
the right to modify and/or reproduce promotional material and to use such
material to further Landis & Gyr's marketing efforts. Innovative Tech shall
review and approve any Landis & Gyr generated changes to Innovative Tech's
materials. The right of approval shall be for a period of fifteen (15) working
days, and if Landis & Gyr has not received a written response within fifteen
(15) working days, the revised materials shall be deemed acceptable. Landis &
Gyr shall be responsible for all charges associated with Landis & Gyr directed
changes to promotional material or packaging.
8.4 Translation of Documentation and Software
Landis & Gyr shall translate at its own costs all Documentation and
Software, in whole or in part, into languages other than English. Landis & Gyr
shall provide all translations in electronics version so that Innovative Tech
may proceed with documentation production.
8.5 Documentation Specifications
8.5.1 Innovative Tech shall provide a complete list of documents as
specified in Exhibit F.
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8.5.2 Landis & Gyr shall be provided document files in Microsoft Word
format, Version 6.0 or later as applicable.
9 NON-DISCLOSURE
By virtue of this Agreement, each party may have access to information of
the other party which is considered confidential and proprietary. For
convenience, all such information will be called "Confidential Information."
Confidential Information shall include the source code, source code
materials, and all other information, documentation, designs, concepts,
inventions, trade secrets, know-how, private processes, customer lists or other
materials provided by either party in written or other tangible form and clearly
marked as proprietary or confidential. Notwithstanding the foregoing,
Confidential Information shall not include information which a) is at the time
of disclosure to the receiving party in the public domain or subsequently
becomes part of the public domain without a breach of its confidentiality
obligations hereunder by the receiving party; b) was in the receiving party's
lawful possession prior to the disclosure and had not been subject to
limitations on disclosure; c) is lawfully disclosed to the receiving party by a
third party without any obligation of secrecy to the disclosing party, of which
the receiving party is aware.
The parties agree, both during the term of this Agreement and for a period
of five (5) years after termination or expiration of this Agreement for any
reason, that all Confidential Information owned or legally controlled or used by
one party and disclosed to the other party shall remain solely the property of
the disclosing party (and shall thereafter remain solely the property of the
disclosing party), and its confidentiality shall be maintained and protected
by the other party with the same effort used to protect its own confidential
information. Except to the extent required by this Agreement, both parties agree
not to duplicate in any manner the other's Confidential Information for any
purpose other than the implementation of this Agreement.
In the event that one of the parties, or anyone to whom Confidential
Information is disclosed pursuant to this Agreement is or becomes legally
required or compelled to disclose any of the Confidential Information, such
party shall provide the other party with prompt notice so that such other party
may seek a protective order or other appropriate remedy and/or waive compliance
with the provisions of this Paragraph. In the event that such protective order
or other remedy is not sought or obtained or in the event that the other party
waives compliance with the provisions of this Paragraph, the compelled party
will furnish only that portion of the Confidential Information which it is
legally required to disclose and will seek to obtain reliable assurance that
confidential treatment will be accorded the Confidential Information.
During the term of this Agreement it is not the intent of Landis & Gyr to
independently develop or acquire software within the Computer Integrated
Facilities Management (CIFM) industry which is functionally similar to the
Software. In the event Landis & Gyr does elect to develop its own software or to
obtain software through the undertaking of an agreement with a third party,
Landis & Gyr shall notify Innovative Tech at the inception of its decision to
develop or acquire similar software and Innovative Tech shall then have the
right, to be exercised by written notice to Landis & Gyr within ninety (90) days
from the receipt of such notice, to terminate this
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Agreement in which event all marketing and distribution license prices shall
continue as provided in this Agreement, but the parties shall otherwise treat
this Agreement and handle existing customers in the same manner as described
under Paragraph 14.1 and 14.6
Results of benchmark tests may not be disclosed unless Innovative Tech
consents to such disclosure in writing.
Nothing provided in this Agreement shall prohibit Innovative Tech from
selling any End User any products of Innovative Tech.
Landis & Gyr and Innovative Tech shall not disclose the terms and
conditions of this Agreement; provided however, that either party may disclose
such terms and conditions (a) when required by law, and (b) to its professional
advisors and financial professionals. For news release or public announcements
regarding this Agreement, each party shall obtain consent from the other party
prior to publication. Such consent shall not be unreasonably withheld.
Landis & Gyr and Innovative Tech acknowledge that money damages would not
be a sufficient remedy for any breach of this Agreement and that the other
party shall be entitled to specific performance and injunctive relief as
remedies for any such breach in addition to all other remedies at law or equity.
10 MAINTENANCE AND SUPPORT
10.1 During the term of this Agreement, Landis & Gyr shall provide the
first line of support to End Users and this shall consist of the following:
(a) Entering into software maintenance contracts with Landis & Gyr's
End Users.
(b) Taking all initial support calls from Landis & Gyr's End Users.
(c) Consolidating problems/errors in the Software and providing same
to Innovative Tech.
(d) Providing all Revisions, patches and work-arounds to End Users
which shall be provided in advance by Innovative Tech.
(e) Providing Updates (i.e. Revisions, Releases and Versions) to End
Users under maintenance contract with Landis & Gyr.
(f) Where Updates (i.e. Revisions, Releases and Versions) are made
available as separately purchasable items, selling Updates to existing End
Users. Under this scenario, End Users will not necessarily be under a
maintenance contract.
10.2 Upon the issuance of a new Version, Landis & Gyr will be invoiced by
Innovative Tech a license price of 200.00 USD (two hundred) for each
Demonstration License as per 3.6 above.
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10.3 End User Program Errors shall be handled as follows:
10.3.1 Upon Innovative Tech's receipt of an error reported by
an End User to Landis & Gyr's designated technical contact, and which cannot be
handled under paragraph 10.1 above, Innovative Tech shall take corrective
action so as to remedy the reported problems within the time schedule outlined
in 10.3.2
10.3.2 Innovative Tech shall respond to all requests for
service made by Landis & Gyr within four (4) hours following Landis & Gyr's
first call to Innovative Tech help-line, and Innovative Tech and Landis & Gyr
shall cooperate in the identification, verification and possible resolution of
problems with the Software. For any "Critical Error" reported by Landis & Gyr,
Innovative Tech shall either correct such Critical Error or supply Landis & Gyr
with a satisfactory work-around within five (5) business days. In any event,
all Critical Errors shall be corrected within ten (10) business days following
Landis & Gyr's first call to the Innovative Tech Help Line. For any
"Non-Critical Error" reported by Landis & Gyr, Innovative Tech shall correct
such Non-Critical Error in the future releases of such module. A "Critical
Error" shall mean any Error which materially interferes with the normal use and
operation of the Software. A "Non-Critical Error" shall mean any Error other
than a critical error.
10.4 It is intended that Landis & Gyr and Innovative Tech will work
within the framework of the Maintenance and Support guidelines. In the event
that an exceptional circumstance arises, the parties will discuss the
circumstances and mutually agree on the correct course of action to take.
Exceptions may include, but not be limited to, impossibility of Innovative Tech
to perform, severe impact on one of Landis & Gyr's major customers or potential
sales, or availability of a more efficient approach.
10.5 Innovative Tech agrees to provide support, in addition to that
specified herein, based upon Landis & Gyr's request, in a expeditious manner,
and at charges to be paid by Landis & Gyr which shall not exceed those
Innovative Tech charges its customers for similar services.
10.6 Landis & Gyr agrees to pay to Innovative Tech an annual
maintenance and support fee of seventeen (17) percent of the cumulative license
prices paid in accordance with Exhibit A. This fee will be applied to cover
labor costs incurred by Innovative Tech for performing second line support and
for providing product Updates to End Users at no additional charge. The
maintenance and support fee shall be payable on every anniversary date of this
Agreement.
11 WARRANTY
Innovative Tech warrants for a period of ninety (90) days from
acceptance by Landis & Gyr of the Software listed in Exhibit A that the
Software, when properly installed and used by Landis & Gyr and End Users, will
conform with the Specification Document in effect at the time the Software is
accepted by Landis & Gyr. This warranty shall be solely for the benefit of
Landis & Gyr, but shall be in addition to the warranty provided by Innovative
Tech to End User Licenses as set forth in the End User License Agreements in
Exhibit B.
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12 PATENT OR COPYRIGHT INFRINGEMENT AND INDEMNITY
12.1 Innovative Tech will defend, indemnify and hold harmless Landis & Gyr
against a claim that the Software was created in part by violation of the
protected trade secret of another or infringe a patent or copyright and will pay
resulting costs, damages and attorney's fees provided that:
(a) Landis & Gyr notifies Innovative Tech within thirty (30) days of the
claim;
(b) Landis & Gyr cooperates with Innovative Tech in the defense; and
(c) Innovative Tech has sole control of the defense and all related
settlement negotiations.
12.2 If such claim occurs, or in Innovative Tech's opinion is likely to
occur, Landis & Gyr agrees to permit Innovative Tech, at its option and expense,
either to procure for Landis & Gyr the right to continue using the Software or
to replace or modify same so that it becomes noninfringing.
12.3 Innovative Tech shall have no obligation to defend Landis & Gyr or
pay costs, damages or attorneys' fees for any claim based upon use of other than
a current, unaltered Release of the Software if such infringement would have
been avoided by the use of a current, unaltered Release of the Software. Should
such infringement occur, Innovative Tech shall only be obliged to remedy the
infringing Software by replacing at their own costs the older Release with the
current Release. Innovative Tech shall have no obligation to defend Landis &
Gyr or pay costs, damages or attorneys' fees for any claim which results from
negligence or breach of this Agreement by Landis & Gyr. The concept of
"comparative negligence" shall be used to allocate the parties liability based
on their relative responsibility for any infringement claim.
12.4 Innovative Tech represents and warrants it is not aware the Software
was created in part by violation of the protected trade secret of another or
that the Software infringes any patent or copyright.
13 TERM
This Agreement and the rights and obligations of the parties shall be valid
for a period of Seven (7) years, unless terminated under the provisions of
Paragraph 14 herein. Provided, however, that the provisions of Paragraph 9 shall
survive. The Agreement will continue on an annual basis thereafter unless One
Hundred and Twenty (120) days notice is given to terminate this Agreement by
either party prior to the annual renewal. All notices shall be given in
accordance with Paragraph 18.1.
14 TERMINATION
14.1 Upon termination of this Agreement, the parties shall create and
implement a phase-out plan which will facilitate continued service to End
Users. During the phase-out period Landis & Gyr and Innovative Tech shall draft
a mutually
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agreed letter that describes the phase-out plan and Landis & Gyr shall notify
the existing End Users of the Software of the mutually agreed phase-out plan.
The End User Licenses existing at the time of termination of this Agreement
shall continue without limitation as stated in the End User License Agreement
in Exhibit B.
14.2 Mutual Consent - This Agreement may be terminated at any time by
written agreement executed by both parties.
14.3 Breach - If either party shall be in material breach of its
obligations herein and shall have failed or been unable to remedy such breach
within thirty (30) days after receipt of written notice from the other party
specifying such breach, said other party may terminate this Agreement by giving
written notice of termination, effective upon the date of its sending. If
Landis & Gyr fails to remedy any breach on its part occurring during 1996
within such thirty (30) day period, Landis & Gyr shall immediately pay to
Innovative Tech all non-refundable fees dues for the balance of Fiscal Year
1996, as described on Exhibit A. If one party fails to remedy a breach on its
part during the balance of the term after 1996, the other party shall be
entitled to pursue all legal or equitable remedies.
14.4 Bankruptcy - If a receiver is appointed over the whole or part of
the assets of either party, or if any petition is filed by or against either
party initiating any bankruptcy reorganization proceeding or if either party
makes an assignment for the benefit of creditors, or if any order is made or
resolution is adopted for the dissolution of either party (unless such order or
resolution is part of a scheme or recapitalization, merger or consolidation)
then such party shall immediately notify the other party of such event, and the
other party may terminate this Agreement by written notice thereof, effective
upon the date of its sending.
14.5 In the event of Innovative Tech becoming insolvent, or by its own
decision ceases to do business, or if Innovative Tech decides to stop marketing
and/or support of the Software, Innovative Tech shall deliver to Landis & Gyr
the current version of the Software Source Code as described in the Escrow
Agreement, Exhibit E herein, and any and all documentation related to such
Source Code (including without limitation, all programmers materials and
notes). If any of the events in the preceding sentence occur, Landis & Gyr
shall also have a continuing right to use the Source Code in order to license
and support the Software to Landis & Gyr's customers, in its original form or
as modified by Landis & Gyr, provided that Landis & Gyr pays to Innovative Tech
or the bankruptcy court or trustee, as applicable, the license prices set forth
as follows: The license price for the first year shall be 30% of List Price,
the second year shall be 25% of List Price, and each year thereafter shall be
20% of List Price.
14.6 In the event Landis & Gyr elects to develop software or enter into
a similar agreement which is functionally similar to this Agreement as
described in Paragraph 9 hereof, Innovative Tech shall be entitled to terminate
this Agreement as described in Paragraph 9 hereof.
14.7 Upon termination of this Agreement, or at the end of its term,
Landis & Gyr shall return to Innovative Tech or destroy any demonstration or
unpaid Software and all copies and portions thereof, in any form whatsoever,
including
<PAGE> 14
drawings, writings, prints, documents and all materials, and shall erase from
all computer, electronic, or other storage devices or otherwise destroy all
images or copies of the Software and all portions thereof except as required to
provide continuing support of the then current End Users.
15 LIABILITY
THE WARRANTIES AND REPRESENTATIONS SET FORTH IN THIS AGREEMENT ARE IN LIEU
OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED (INCLUDING, WITHOUT LIMITATION, THE
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE). NEITHER
PARTY SHALL HAVE ANY LIABILITY WITH RESPECT TO ITS OBLIGATIONS UNDER THIS
AGREEMENT FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES EVEN IF
IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Innovative Tech and Landis & Gyr agree that Innovative Tech's liability
shall be limited to actual direct damages proven by Landis & Gyr, not in excess
of the total amount of license prices, maintenance and support fees and other
remuneration paid and payable by Landis & Gyr to Innovative Tech under this
Agreement.
16 TERRITORY
Landis & Gyr shall be granted by this Agreement the non exclusive right to
market and distribute the Software in the territories identified in Exhibit D.
17 SOURCE CODE ESCROW
Innovative Tech has placed a copy of the Software's Source Code into escrow
subject to the terms of an Escrow Agreement by and between Landis & Gyr,
Innovative Tech and the Escrow Agent, which document shall govern the
maintenance and release of such Source Code. Innovative Tech agrees to update,
enhance, or otherwise modify such escrowed Source Code promptly upon its release
of a new version of the Software. A true and correct copy of the Escrow
Agreement is set forth in Exhibit E.
18 MISCELLANEOUS
18.1 All notices, requests and demands given to or made upon the parties
hereto shall, except as otherwise specified herein, be in writing and may be
personally delivered, certified mailed or faxed to the party at its address as
follows:
<PAGE> 15
In the case of Innovative Tech: In the case of Landis & Gyr:
_______________________________ ____________________________
Innovative Tech Systems, Inc. Landis & Gyr (Europe) Corp.
444 Jacksonville Road, Suite 200 Gubelstrasse 22
Warminster, Pennsylvania 18974, USA CH-6301 Zug, Switzerland
Attention: Brad Chambers Attention: Dr. Gaetano D'Emma
Phone: +1 215 441 5600 Phone: +41 41 724 5577
Fax: +1 215 441 5733 Fax: +41 41 724 5618
Any party may, by notice hereunder to all parties, designate a changed
address for such party. Any notice, if mailed, properly addressed, postage
prepaid, registered or certified mail, return receipt or any fax with the
proper date, shall be deemed received.
18.2 The various headings in this Agreement are inserted for
convenience only and shall not affect the meaning or interpretation of this
Agreement or any Paragraph or provision hereof. References in this Agreement to
any Paragraph are to the applicable Paragraph of this Agreement.
18.3 All covenants, stipulations and promises in this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors, and legal representatives. Neither party shall have the
right to assign or otherwise transfer this Agreement or any rights or
obligations hereunder without the express written consent of the other, such
consent not to be unreasonably withheld.
18.4 Each party hereby agrees to indemnify, defend and hold harmless
the other from and against any and all claim, damage, cost, loss or expense,
including reasonable attorney's fees which may arise, directly or indirectly,
from any breach by the indemnifying party of any covenant, representation or
warranty on the part of such party set forth in this Agreement.
18.5 This Agreement shall be construed under the law of the
Commonwealth of Pennsylvania. Further, the parties hereto agree that in
connection with any litigation brought under or in connection with this
Agreement, the sole jurisdiction and venue shall be in the United States
Federal Court for the Eastern District of Pennsylvania in Philadelphia,
Pennsylvania.
18.6 Wherever possible, each provision of this Agreement and each
related document shall be interpreted in such a manner as to be effective and
valid under applicable law. However, if any provision of this Agreement or any
related document shall be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or the
remaining provisions of this Agreement or such related document.
18.7 No failure on the part of either party to exercise any right,
power or privilege under this Agreement, or under any instrument executed
pursuant hereto, shall operate as a waiver. No single or partial exercise of any
right, power or privilege shall preclude any other, or further exercise of any
other right, power or privilege. All rights and remedies granted herein shall be
in addition to other rights and remedies to
<PAGE> 16
which the parties may be entitled at law or in equity. No waiver of any of the
provisions hereof shall be effective unless in writing and signed by the party
charged with such waiver. No waiver shall be deemed a continuing waiver, or a
waiver in respect of any breach or default whether similar or different in
nature unless expressly so stated in writing.
18.8 This Agreement cannot be, and shall not be deemed or construed to
have been, modified, amended, rescinded, canceled or waived, in whole or in
part, except by a written instrument signed by the parties hereto.
18.9 Any dispute arising out of this Agreement or Amendments hereto which
cannot be settled by Innovative Tech and Landis & Gyr through friendly
negotiations shall be settled, at the option of either party by arbitration.
The arbitration shall be conducted under the rules and jurisdiction of the
American Arbitration Association in Philadelphia, Pennsylvania.
If arbitration is chosen to settle the dispute, the arbitration shall be
conducted by three arbitrators who are knowledgeable in the subject matter of
this Agreement. Innovative Tech and Landis & Gyr shall each choose one
arbitrator and the two arbitrators shall choose a third arbitrator. The third
arbitrator shall be an active attorney knowledgeable in the applicable laws of
contract, rules of evidence and rules of procedure. Should the two arbitrators
fail to agree upon a third arbitrator, the third arbitrator shall be chosen by
the American Arbitration Association. The arbitration shall be conducted in
accordance with the rules of the American Arbitration Association, except as
modified herein. The decision of the arbitration panel shall be final and
binding, and the award so rendered shall be entered in any court having
jurisdiction thereof. In the event of arbitration or litigation under or
arising out of this Agreement, the prevailing party in such arbitration or
litigation shall be awarded reasonable attorneys' fees incurred in connection
with such arbitration or litigation, including all matters related to such
dispute.
Pending final disposition of any dispute under this Agreement, Innovative
Tech shall, at the option of Landis & Gyr, proceed diligently with the
performance of this Agreement.
18.10 This Agreement supersedes all other quotations, proposals, prior
agreements or representations, oral or written and all other communications
between the parties related to the subject matter of this Agreement.
18.11 Neither party shall be liable for any failure to perform or observe
any of its obligations under this Agreement for as long as and to the extent
that such performance is prevented or hindered by any circumstances beyond its
reasonable control. By way of example and not limitation, such causes may
include acts of God or public enemies; labor disputes; acts of local, state, or
national governments or public agencies; utility or communications failure;
fire; flood; epidemics; riots; or strikes. The time for performance of any
right or obligation delays by such events will be postponed for a period equal
to the delay. The party wishing to claim relief by reason of any such
circumstances shall notify the other party in writing without delay on the
intervention and on the cessation thereof.
<PAGE> 17
18.12 This Agreement may be executed in two counterparts, each and all of
which shall be deemed to be an original and all of which shall constitute
together one and the same Agreement. Each and every person named a party hereto
may execute this Agreement by signing any such counterpart. Both parties
acknowledge that they have read this Agreement, understand it, and agree to be
bound by its terms and conditions.
18.13 This Agreement shall be effective retroactively as per 1st of
February, 1996.
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE CAUSED THIS AGREEMENT TO BE DULY
EXECUTED AS OF THE DAY AND YEAR FIRST ABOVE WRITTEN.
LANDIS & GYR (EUROPE) CORP. INNOVATIVE TECH SYSTEMS, INC.
Date: 4 April 1996 Date: 4-11-96
------------------------ ------------------------
By: /s/ sig illegible By: /s/ William M. Thompson
-------------------------- --------------------------
Title: Vice-President Title: CEO
Commercial Building Services
By: /s/ sig illegible By:
-------------------------- --------------------------
Title: Product Development Manager Title:
Building Management Tools -----------------------
<PAGE> 18
EXHIBIT A
LICENSE PRICE SCHEDULE AND ADDITIONAL TERMS
Standard License Software Pricing: (All pricing quoted herein is in US Dollars)
A. SPAN-FM Windows Workgroup: $5,000 Per License
SPAN-FM Maintenance Manager
SPAN-FM Materials Management
SPAN-FM Asset Management
SPAN-FM Lease Management
SPAN-FM Project Budgeting
SPAN-FM Space Analysis
SPAN-FM Winstack
B. SPAN-FM Cable Management Windows Workgroup $9,500 Per License
SPAN-FM Maintenance Manager
SPAN-FM Materials Management
SPAN-FM Asset Management
SPAN-FM Cable Management
SPAN-FM Lease Management
SPAN-FM Project Budgeting
SPAN-FM Space Analysis
SPAN-FM Winstack
C. SPAN-FM CAD Integrator $3,500 Per License
For informational purposes, our current Software license prices are described
herein above.
<PAGE> 19
The Annual Revenue Commitment as discussed below is a non-refundable fee
that Landis & Gyr will remit to Innovative Tech Systems, Inc. as described in
the payment schedule listed herein. This Agreement will commence in February of
1996 and shall continue for the term outlined in Paragraph 13, or until
terminated by either of the parties. The Agreement may be extended upon mutual
consent of the parties.
The agreed upon breakdown of the Annual Revenue Commitment for Fiscal
1996 is as follows:
YEAR ONE - FISCAL 1996 (FEBRUARY TO SEPTEMBER 1996)
Landis & Gyr will pay to Innovative Tech Systems, Inc. a non-refundable
fee of 420,000.00 USD (four hundred twenty thousand) for the following:
1 300,000.00 USD (three hundred thousand) for the Enhancements.
2 60,000 USD (sixty thousand) for 10 weeks of product training for Landis
& Gyr's personnel. This training will provide Landis & Gyr personnel with the
required product and market knowledge to ensure success.
3 60,000 USD (sixty thousand) for 12 weeks of consultative services from
Innovative Tech to Landis & Gyr. This will include, but is not limited to
Specification Document, marketplace consulting services, and database
conversions.
4 Payment Schedule
(a) 300,000.00 USD as described in 1 above to be paid as follows:
1 150,000.00 USD - Upon signing Agreement
2 90,000.00 USD - Due May 31, 1996
3 60,000.00 USD - Due August 31, 1996
(b) 60,000.00 USD as described in 2 above to be paid as follows:
1 30,000.00 USD - Upon signing Agreement
2 30,000.00 USD - Due August 31, 1996
(c) 60,000.00 USD as described in 3 above to be paid as follows:
1 30,000.00 USD - Upon signing Agreement
2 30,000.00 USD - Due August 31, 1996
Landis & Gyr will retain 60% (sixty percent) of the agreed upon list
price as a marketing and distribution license price on all Software that is
sold by Landis & Gyr in the territory as set forth in Exhibit D. The marketing
and distribution license price will be based on an agreed upon product price
list for each individual country or region. Once the product price list for
each country has been determined, a fixed unit cost in US dollars will be
assigned for each End User License of SPAN-FM.
<PAGE> 20
Landis & Gyr's input will be required in, but not limited to the
following areas: Specification Document, alpha and beta product testing,
product certification, and long term product development.
By utilizing the SPAN-FM Property Portfolio, Landis & Gyr will be able
to share data between the SPAN-FM Product Suite and the Consumption Control
product. A joint Specification Document will be created to path the integration
of these products. The level of effort for this integration shall be applied
against the Fiscal 1996 budget for consulting services.
Innovative Tech will work with Landis & Gyr to develop conversion
routines that will allow data currently residing in the VISONIK(R) MMS product
to be converted to SPAN-FM.
YEARS TWO THROUGH SEVEN - FISCAL 1997 THROUGH FISCAL 2002
In years two through seven, Landis & Gyr will retain 60% of the agreed
upon list price as a marketing and distribution license price on all Software
that is sold by Landis & Gyr.
ADDITIONAL TERMS
1 The fee for additional consulting services for 1996 shall be 1,000.00
USD/day (one thousand).
2 The fee for additional training services for 1996 shall be 1,200.00 USD
/day (one thousand two hundred).
3 The fee for additional programming services for 1996 shall be 1,000.00
USD/day (one thousand).
4 Landis & Gyr shall be responsible for all out-of-pocket expenses
including, air fare, lodging, meals and other related reasonable and
verifiable expenses.
5 Landis & Gyr shall be responsible for all shipping costs, custom fees,
duties or other related expenses or taxes required for the shipment of
Software or other Documentation or materials.
6 Landis & Gyr will be responsible for all costs associated with language
conversion with respect to Software, Documentation and promotional or
marketing literature.
7 Based on the Specification Document, additional resources may be
required by Landis & Gyr, and these resources may be purchased from
Innovative Tech in Fiscal 1996 and thereafter at the license prices
described above.
8 Innovative Tech reserves the right to adjust the fees for consulting,
programming, training and annual maintenance at the beginning of each
calendar year beginning in 1997; provided, however, that Innovative Tech
provides Landis & Gyr with a ninety (90) day notice of any fee increase.
<PAGE> 21
EXHIBIT B
END USER LICENSE AGREEMENT
(Attached hereto)
<PAGE> 22
SPAN-FM SOFTWARE LICENSE AGREEMENT
In consideration of the payment of a licensing fee paid by you when obtaining
this package, Innovative Tech Systems, Inc. (INNOVATIVE TECH) grants you (USER)
a nontransferable and nonexclusive license to use this software, including any
associated manuals or other documentation (together referred to herein as
SOFTWARE), under the following terms and conditions:
1. USER acknowledges that INNOVATIVE TECH holds all proprietary rights,
including copyright and trade secret, in the SOFTWARE and that neither title,
ownership, nor any rights other than the right to use the SOFTWARE as specified
herein shall pass to the USER.
2. USER may make one backup copy of the software for archival purposes only.
USER may only use the SOFTWARE on one microcomputer at a single time. USER may
not make additional copies of the SOFTWARE or disclose or otherwise make
available the SOFTWARE, in whole or in part, in any form to any third party.
USER may not modify, reverse engineer, decompile, or create derivative works
based upon the SOFTWARE.
3. INNOVATIVE TECH warrants to the USER that the medium upon which the SOFTWARE
is recorded is free from defects in materials and workmanship and that the
software, under normal use with the compatible hardware identified in the
software manual, will operate in conformance with the descriptions in the
associated manual. INNOVATIVE TECH'S LIABILITY AND THE USER'S SOLE REMEDY WITH
RESPECT TO THIS WARRANTY SHALL BE LIMITED TO THE CORRECTION OR REPLACEMENT OF
THE DEFECTIVE MEDIUM, WITHOUT ADDITIONAL CHARGE, FOR A PERIOD OF NINETY DAYS
FROM THE DATE OF USER LICENSING THE SOFTWARE. NO OTHER WARRANTIES, EXPRESS OR
IMPLIED, SHALL APPLY, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT WILL
INNOVATIVE TECH BE LIABLE FOR SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES ARISING
FROM OR IN CONNECTION WITH THE USE OF THE SOFTWARE. (SOME JURISDICTIONS DO NOT
ALLOW THE EXCLUSION OR LIMITATION OF IMPLIED WARRANTIES OR LIABILITY FOR
INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THIS LIMITATION MAY NOT APPLY TO ALL
USERS.)
4. This Agreement, the license granted herein, and the SOFTWARE itself may not
be assigned or transferred by the USER to any other party without the prior
written consent of INNOVATIVE TECH.
5. This Agreement is effective from the date on which you break the seal on
the package and shall remain in effect until or unless terminates by INNOVATIVE
TECH as provided herein. INNOVATIVE TECH may terminate this license if USER
fails to comply with any of the terms and conditions of the Agreement. Upon
termination as specified herein, USER shall promptly certify that the original
and any copies, in any form, of the SOFTWARE have been destroyed or returned to
INNOVATIVE TECH.
6. This Agreement constitutes the entire agreement and understanding between
INNOVATIVE TECH and the USER concerning the subject matter hereof. Any
representation, promise, modification, or amendment to this Agreement shall not
be binding upon either party unless in writing and signed on behalf of each duly
authorized representative. If any of the provisions, or portions thereof, of
this Agreement are found to be invalid by any court of competent jurisdiction,
the remaining provision shall continue to be valid and enforceable.
*SPAN-FM IS A PRODUCT OF: INNOVATIVE TECH SYSTEMS, INC.
444 JACKSONVILLE ROAD, SUITE 200
WARMINSTER, PA 18974
(215) 441-5600
<PAGE> 23
EXHIBIT C
ACCEPTANCE CERTIFICATION
Landis & Gyr hereby gives notice to Innovative Tech pursuant to Section 6.4 of
the Agreement that the Software identified in Exhibit A for delivery on
______________ has been received and evaluated by Landis & Gyr and that such
Software is hereby accepted by Landis & Gyr.
The accepted Software is identified with particularity below:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________
LANDIS & GYR (EUROPE) CORP.
Date:_______________________
By:_________________________
Title:______________________
By:_________________________
Title:______________________
<PAGE> 24
EXHIBIT D
TERRITORY DESIGNATION
In accordance with Paragraph 16 of this Agreement, Innovative Tech grants to
Landis & Gyr the non-exclusive right to market and distribute the Software in
the territories identified below.
The limitation on marketing and distribution rights shall be restricted to the
"Region Europe" of Landis & Gyr, i.e. Europe, Eastern Europe, Africa, Near,
Middle and Central East Asia.
<PAGE> 25
EXHIBIT E
ESCROW AGREEMENT
(Attached Hereto)
<PAGE> 26
ESCROW AGREEMENT
THIS AGREEMENT is made this 4th day of April, 1996, by and among ARCHER
& GREINER, a law firm with an address at 1 Centennial Square, Haddonfield, New
Jersey 08033 ("Escrow Agent"), INNOVATIVE TECH SYSTEMS, INC., ("Innovative
Tech") with its principal place of business at 444 Jacksonville Road, Suite
200, Warminster, Pennsylvania 18974 and LANDIS & GYR (EUROPE) CORP., with its
principal place of business located at Gubelstrasse 22, CH-6301, Zug,
Switzerland ("Landis & Gyr").
Intending to be legally bound, Escrow Agent, Landis & Gyr, and
Innovative Tech hereby agree as follows:
1 As used herein, the following have the indicated meaning:
"Code" means the source code for the Software, including all revisions,
improvements, enhancements, or updates so that all times the source code
corresponds with the Software in use by Landis & Gyr.
"Code Copy" means a copy of the Code.
"Mail" means registered or certified mail, return receipt requested,
postage prepaid.
"Mailing Date" means the date Escrow Agent sends Innovative Tech notice
by Mail that a request for Code Copy has been made by Landis & Gyr.
"Software" means the computer software product developed by Innovative
Tech that is the subject of the Strategic Marketing Agreement.
2 (a) Innovative Tech hereby deposits as its own costs with Escrow
Agent in escrow two Code Copies, receipt of which is acknowledged by Escrow
Agent. The Software is a trade secret and confidential information of
Innovative Tech. Escrow Agent shall not distribute or copy the Code Copies
other than as expressly permitted by this Agreement or at the written direction
of Innovative Tech.
(b) Escrow Agent shall not accept deposits of any documentation,
assets, or moneys other than as expressly specified by this Agreement.
3 Escrow Agent shall use reasonable care to assure that the Code Copies
are not damaged or destroyed. Escrow Agent need not provide any climatic
controls for the Code Copies.
4 If the Code is revised, Innovative Tech shall promptly deliver to
Escrow Agent two revised Code Copies and Escrow Agent shall return to
Innovative Tech the Code Copies previously deposited.
5 Landis & Gyr shall be entitled to a Code Copy in the event of
Innovative Tech becoming insolvent, or by its own decision ceases to do
business, or if Innovative Tech decides to stop marketing and/or support of the
Software. In the event that Landis & Gyr requests Escrow Agent to deliver a
Code Copy to it for any reason, Escrow Agent shall notify Innovative Tech by
Mail within five (5) days following
<PAGE> 27
receipt of such written request. If Innovative Tech does not object by notice
to Escrow Agent within ten (10) days of the Mailing Date, Escrow Agent shall
deliver a Code Copy to Landis & Gyr. Escrow Agent shall at all times retain one
Code Copy in its possession. In the event Escrow Agent delivers a Code Copy to
Landis & Gyr pursuant to this Agreement, Escrow Agent shall request a
replacement Code Copy from Innovative Tech, and Innovative Tech shall promptly
deliver such replacement.
6 (a) In the event that Innovative Tech notifies Escrow Agent by Mail
within ten (10) days of the Mailing Date that it objects to Escrow Agent's
delivery of a Code Copy to Landis & Gyr, Escrow Agent shall not deliver such
Code Copy to Landis & Gyr until (i) a final and binding arbitration award, as
described, in Section 6(b), is entered authorizing Landis & Gyr to receive a
Code Copy or (ii) Innovative Tech withdraws its objection in writing.
(b) If Innovative Tech disputes the existence of any of the
conditions listed in Section 5 above upon which Landis & Gyr shall be entitled
to a Code Copy, then Landis & Gyr and Innovative Tech shall submit to the
jurisdiction of the American Arbitration Association (the "Association") to
resolve the dispute promptly and shall be prepared to commence a hearing before
a Board of Arbitrators (the "Board") in Philadelphia, Pennsylvania within five
(5) business days after delivery of Innovative Tech's objection to the Escrow
Agent. The Board shall consist of three (3) members of the Association, one (1)
of which shall be chosen by each party and one (1) of which shall be chosen by
the two (2) arbitrators chosen by the parties. The sole question before the
Board shall be whether or not there existed, at the time Landis & Gyr requested
Escrow Agent to deliver a Code Copy to it pursuant to Section 5 above, one or
more of the conditions specified in Section 5. Each party shall have two (2)
hours to present the reasons which justify its position. After each party has
presented its position, each party shall have an additional one (1) hour for
rebuttal or responding. The parties agree that the Board shall have either
authority to grant injunctive or other equitable relief and that the decision
of the Board shall be final and binding and shall be immediately delivered to
Landis & Gyr and Innovative Tech. If the Board finds that none of the
conditions specified in Section 5 above existed at the time of Landis & Gyr's
request to Escrow Agent, and that accordingly such request was not properly
given by Landis & Gyr, then Escrow Agent shall not deliver a Code Copy to
Landis & Gyr. All fees and charges by the Association shall be split equally
between them. The provisions for arbitration described above shall represent
the exclusive means for resolving a dispute arising from a request for delivery
of a Code Copy pursuant to Section 5, but shall not preclude either party from
instituting a legal action against the other party for performance of any other
obligations under this Agreement.
7 Landis & Gyr and Innovative Tech agree that the Code and any Code Copy
delivered to Landis & Gyr under the provisions of this Agreement shall
constitute confidential information of Innovative Tech and no proprietary
rights thereto shall be transferred to Landis & Gyr by this Agreement or by the
delivery of any Code Copy to Landis & Gyr pursuant to this Agreement except as
expressly provided herein. Landis & Gyr shall not make any disclosure of any
such confidential information to anyone except employees of Landis & Gyr or
third parties subject to Landis & Gyr's control, which third parties shall be
deemed to include any vendor performing outsourcing of facilities management
functions for Landis & Gyr; Landis & Gyr shall
<PAGE> 28
make such disclosure only when reasonably necessary for the use and maintenance
of Landis & Gyr's facilities management system. Landis & Gyr shall
appropriately notify each such employee or third party to whom such disclosure
is made of the confidential and proprietary nature of such confidential
information, shall use reasonable efforts to ensure that the employees or third
party maintains and protects the confidentiality of the disclosed information,
and shall enter into a confidentiality agreement with each third party
confirming the confidentiality restrictions set forth herein. Landis & Gyr
agrees that these obligations will survive any termination of this Agreement,
In the event that the Code and any Code Copy is delivered to Landis & Gyr under
the provisions of this Agreement, then Landis & Gyr's license for the Software
shall immediately be amended to authorize Landis & Gyr or any vendor performing
outsourcing or facilities management functions for Landis & Gyr to develop
derivative works from or modify the Software and to reproduce and distribute
the same internally.
8 Escrow Agent may resign its duties hereunder upon not less than thirty
(30) days notice; in which case, Innovative Tech shall agree upon the identity
of a successor Escrow Agent, subject to the consent of Landis & Gyr, which
consent shall not be unreasonably withheld. Upon notice to Escrow Agent and
Landis & Gyr of the identity of the successor Escrow Agent, Escrow Agent shall
deliver the Code Copies to its successor on the effective date of its
resignation. If Innovative Tech has failed to designate a successor Escrow
Agent acceptable to Landis & Gyr before the effective date of the Escrow
Agent's resignation, Escrow Agent may, by notice to Innovative Tech and Landis
& Gyr, designate the successor Escrow Agent and deliver the Code Copies to such
successor on the effective date of the resignation. Any successor Escrow Agent
shall be bound by the terms of this Agreement.
9 (a) Each of Innovative Tech and Landis & Gyr, jointly and severally,
agrees to absolutely and irrevocably remise, release, and forever discharge
Escrow Agent from any and all actions, suits, payments, liabilities, claims and
demands relating in any way to the performance of its duties hereunder except
for such actions based on claims caused solely by the willful misconduct or
negligence of Escrow Agent.
(b) Each of Innovative Tech and Landis & Gyr, jointly and severally,
agrees to indemnify and hold harmless the Escrow Agent in respect of any
liability for taxes imposed on the Escrow Agent (other than taxes imposed on the
income of Escrow Agent) relating to the assets held by Escrow Agent pursuant to
this Agreement.
10 Each party shall promptly notify all other parties by Mail of any
change in its address listed above. Any correspondence or notifications to
such party pursuant to this Agreement shall thereafter be sent to such new
address by Mail.
11 This Agreement shall commence on the date hereof and shall terminate
upon one of the following conditions: mutual agreement between the Escrow Agent,
Innovative Tech and Landis & Gyr, upon delivery of the Source Code to Landis &
Gyr, or when the Strategic Marketing Agreement is terminated.
12 This Agreement and the rights and obligations hereunder shall be
construed in accordance with and governed by the laws of the Commonwealth of
Pennsylvania.
<PAGE> 29
13 This Agreement constitutes the entire understanding between parties hereto
and the parties shall not be bound by any agreements, understandings or
conditions respecting the subject matter hereof other than those expressly set
forth and stipulated in the Agreement.
14 This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
Date: 4-11-96
----------------------------
ARCHER & GREINER
By:
----------------------------
INNOVATIVE TECH SYSTEMS, INC.
By: /s/ sig illegible
----------------------------
LANDIS & GYR (EUROPE) CORP.
Date: 4 April 1996
----------------------------
By: /s/ sig illegible
----------------------------
Title : Vice-President
Commercial Building Services
By: /s/ sig illegible
----------------------------
Title: Product Development Manager
Building Management Tools
<PAGE> 30
EXHIBIT F
DOCUMENTATION
Installation manual
User manual
Application guides
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
1. Micro Computer Company of Delaware, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Innovative Tech Systems, Inc. on Form S-3 (File No. 33-98100), and
Post-Effective Amendment No. 1 on Form S-3 to Registration Statement on Form
SB-2 (File No. 33-78940) of our report dated April 2, 1996 (which includes an
explanatory paragraph regarding the Company's change in method of accounting for
income taxes), on our audits of the financial statements of Innovative Tech
Systems, Inc. as of January 31, 1996 and 1995 and for the years ended January
31, 1996, 1995 and 1994, which report is included in this Annual Report on Form
10-K.
/s/ COOPERS & LYBRAND LLP
Coopers & Lybrand, L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
April 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 2,815,742
<SECURITIES> 0
<RECEIVABLES> 1,291,707
<ALLOWANCES> (10,000)
<INVENTORY> 0
<CURRENT-ASSETS> 4,173,182
<PP&E> 805,186
<DEPRECIATION> (193,638)
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0
0
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