<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the three months ended April 30, 1996
Commission File Number: 33-17856-C
INNOVATIVE TECH SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
ILLINOIS 65-0071222
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
444 JACKSONVILLE ROAD, SUITE 200, WARMINSTER, PA 18974
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(Address, including zip code, of registrant's
principal executive offices)
(215) 441-5600
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(Registrant's telephone number,
including area code)
(Former name, address and fiscal year, if changed
since last report)
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
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Indicate the number of shares outstanding of each of the Issuer's
classes of common stock, as of the latest practicable date.
Class: Common
Outstanding at June 18, 1996: 10,227,837
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INNOVATIVE TECH SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE(S)
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<S> <C>
Item 1.
Balance Sheets as of April 30, 1996 and January 31, 1996 3-4
Statements of Operations for the three months ended April 30, 1996 and 1995 5
Statements of Cash Flows for the three months ended April 30, 1996 and 1995 6
Notes to Financial Statements 7-9
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-12
PART II - OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K 13
</TABLE>
2
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INNOVATIVE TECH SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS April 30, January 31,
1996 1996
----------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,027,114 $ 2,815,742
Accounts receivable, net 1,847,894 1,281,707
Officer advance 53,698 49,921
Other current assets 184,980 25,812
----------------- ----------------
Total current assets 4,113,686 4,173,182
Property and equipment, net 662,581 611, 548
Restricted cash 700,000 700,000
Computer software, net of accumulated amortization of
$360,909 and $335,599 at April 30, 1996 and
January 31, 1996, respectively 348,524 369,693
----------------- ----------------
Total assets $ 5,824,791 $ 5,854,423
================= ================
</TABLE>
The accompanying notes are an integral part of the financial statements
3
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INNOVATIVE TECH SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
1996 1996
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(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 198,983 $ 215,888
Accrued liabilities 33,118 35,273
Accrued payroll and related costs 88,834 138,160
Deferred revenue 60,419 74,881
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Total current liabilities 381,354 464,202
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Commitments & contingent liabilities
Shareholders' equity:
Preferred stock, no par value; authorized 200,000,000
shares - -
Common stock, par value $.0185; authorized
100,000,000 shares, issued and outstanding
10,227,837 as of April 30, 1996 and January 31, 1996 189,215 189,215
Additional paid-in capital 6,475,501 6,475,501
Warrants 851,500 850,150
Accumulated deficit (2,072,779) (2,124,645)
-------------- --------------
Total shareholders' equity 5,443,437 5,390,221
-------------- --------------
Total liabilities and shareholders' equity $ 5,824,791 $ 5,854,423
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
4
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INNOVATIVE TECH SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended
----------------------------------
April 30, April 30,
1996 1995
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<S> <C> <C>
Revenues $ 1,155,355 $ 467,825
Cost of revenues 31,105 44,834
Selling, general and administrative expenses 1,110,288 755,909
-------------- ---------------
Income (loss) from operations 13,962 (332,918)
Other income 37,904 153,500
-------------- ---------------
Income (loss) before income taxes 51,866 (179,418)
Provision for income taxes - -
-------------- ---------------
Net income (loss) $ 51,866 $ (179,418)
============== ===============
Primary income (loss) per common share $ .004 $ (.02)
============== ===============
Weighted average shares outstanding (see note 2) 14,218,809 10,227,837
============== ===============
Fully Diluted income (loss) per common share $ .004 $ (.02)
============== ===============
Weighted average shares outstanding (see note 2) 14,218,809 10,227,837
============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
5
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INNOVATIVE TECH SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------------
April 30, April 30,
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 51,866 $ (179,418)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 64,641 52,589
Changes in operating assets and liabilities:
Accounts receivable (566,187) (117,451)
Officer advance (3,777) (3,060)
Due from related party - 50,000
Accrued interest receivable - (87,000)
Other current assets (159,168) (44,550)
Accounts payable (16,905) (26,288)
Accrued liabilities (2,155) 14,507
Accrued payroll and related costs (49,326) (48,872)
Deferred revenue (14,462) 15,312
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Net cash used in operating activities (695,473) (374,231)
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Cash flows from investing activities:
Purchase of property and equipment (89,184) (3,354)
Leasehold improvements (1,180) -
Capitalization of software development tools (4,141) (3,431)
Capitalization of software development costs - (67,734)
Restricted cash - (700,000)
Note receivable - 1,000,000)
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Net cash used in investing activities (94,505) (1,774,519)
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Cash flows from financing activities:
Warrant issuance 1,350 -
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Net cash provided by financing activities 1,350 -
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Net decrease in cash and cash equivalents (788,628) (2,148,750)
Cash and cash equivalents, beginning of period 2,815,742 5,336,009
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Cash and cash equivalents, end of period $ 2,027,114 $ 3,187,259
============= ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
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NOTES TO FINANCIAL STATEMENTS
The accompanying financial statements are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted of normal recurring
items. Interim results are not necessarily indicative of results for a full
year. The financial statements and notes are presented as permitted by Form
10-Q and do not contain certain information included in the Company's annual
financial statements and notes.
1. PROPERTY AND EQUIPMENT:
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
April 30, January 31,
1996 1996
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(unaudited) (audited)
<S> <C> <C>
Computers and office equipment $ 498,643 $ 416,559
Furniture and fixtures 240,413 233,313
Leasehold improvements 156,494 155,314
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895,550 805,186
Less accumulated depreciation (232,969) (193,638)
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$ 662,581 $ 611,548
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</TABLE>
2. INCOME (LOSS) PER SHARE:
Primary income (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 is the same as the
primary calculation due to the use of the average market price for the period,
which was higher than the market price at the end of the period.
3. RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS:
On February 1, 1996 the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of." This statement requires that
long-lived assets and certain intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. As of February 1, 1996, no material impact
resulted from the adoption of this accounting standard.
4. DEFERRED REVENUE:
Deferred revenue of $61,419 at April 30, 1996 represents advances paid by
customers for maintenance services not yet performed. This amount is recognized
ratably over the life of the maintenance contract.
7
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. STOCK SPLIT:
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 forward split was effective on
September 18, 1995.
All historic share amounts in the accompanying financial statements and notes
to financial statements have been adjusted to reflect the stock split. All
references in the statements of operations with regard to average number of
shares of Common Stock and related per share amounts have been calculated
giving retroactive effect to the stock split.
6. 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
a one-for-18.54 reverse stock split) and the authorization of a new class
of preferred stock with no par value and 200,000,000 authorized shares.
7. 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.
On November 27, 1995, the Company received proceeds of $59,400 from the
exercise of underwriter warrants, which were offered in connection with the
July 26, 1994 Public Offering.
8. SIGNIFICANT CUSTOMERS:
For the three months ended April 30, 1996, revenues from the United States
Department of Defense, Georgetown University, and Landis & Gyr (Europe) Corp.
were approximately 27%, 18% and 18%, respectively, of total revenues. For the
three months ended April 30, 1995, revenues from Washington Hospital Center,
the United States Department of Defense, and Intergraph Corporation were
approximately 21%, 17% and 16%, respectively, of total revenues.
8
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
9. RELATED PARTY TRANSACTION:
On March 17, 1995, the Company pledged a six month $700,000 certificate of
deposit as collateral for a mortgage loan obtained by Thompson Enterprises,
L.P., a limited partnership, which is classified as restricted cash in the
accompanying balance sheet.
10. SUBSEQUENT EVENT:
On May 31, 1996, the Company entered into an agreement with Facility Management
Systems, Inc. ("FMS") whereby the Company and FMS would merge in a
stock-for-stock transaction to be accounted for as a pooling of interests.
Under the terms of the agreement, FMS shareholders would receive 50.114 shares
of Innovative Tech common stock in exchange for each share of FMS common
stock. This exchange ratio will result in approximately 646,000 shares of
Innovative Tech common stock being issued to FMS shareholders. The closing of
the merger is subject to various conditions including but not limited to the
approval by the shareholders of FMS, and opinions regarding the ability to
account for the transaction as a pooling of interests. The merger is expected
to close during the second quarter of fiscal 1997.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW AND SIGNIFICANT EVENTS
The significant progress made during fiscal 1996 has continued through the
first quarter of fiscal 1997, as the Company reported record revenues for the
three months ended April 30, 1996. The continued revenue growth indicates
that the Company's fundamental strategies are working. The Company's
SPAN-FM(TM) software products have been well received, as evidenced by the
April 1996 Readers' Choice Award for Excellence in Computer Software from
Today's Facility Manager Magazine.
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 the 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 $72,300 in royalties pursuant to the agreement
for the three months ended April 30, 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.
On May 31, 1996, the Company entered into an agreement with Facility Management
Systems, Inc. ("FMS") whereby the Company and FMS would merge in a
stock-for-stock transaction to be accounted for as a pooling of interests.
Under the terms of the agreement, FMS shareholders would receive 50.114 shares
of Innovative Tech common stock in exchange for each share of FMS common
stock. This exchange ratio will result in approximately 646,000 shares of
Innovative Tech common stock being issued to FMS shareholders. The closing of
the merger is subject to various conditions including but not limited to the
approval by the shareholders of FMS, and opinions regarding the ability to
account for the transaction as a pooling of interests. The merger is expected
to close during the second quarter of fiscal 1997.
10
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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.
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 foreseeable working capital
and capital investment requirements.
The Company's cash position at April 30, 1996 decreased $788,628 or 28% from
the January 31, 1996 balance. The decrease was primarily attributable to
$695,473 used in operations to support the Company's ongoing product
development efforts, and increased advertising and marketing activities. In
addition, the Company purchased $90,364 of property and equipment.
Accounts receivable at April 30, 1996 increased $566,187 from the January 31,
1996 balance. This increase is due primarily to the increased sales volume
experienced for the three months ended April 30, 1996. Working capital at
April 30, 1996 was $3,732,332. The Company had no loans or notes payable at
April 30, 1996.
The Company's cash position at April 30, 1995 decreased $2,148,750 or
40% from the January 31, 1995 balance. This decrease was attributable
primarily to a $1,000,000 loan, which was held in escrow, that the Company made
to a non-affiliated company, a six month certificate of deposit pledged as
collateral for a mortgage loan by a related party, and $374,231 used in
operations to support the Company's product development efforts, and
the expansion of the technical services and project management departments.
Accounts receivable at April 30, 1995 increased $117,451 over the January 31,
1995 balance. The Company did not experience any material collection
difficulties. Working capital at April 30, 1995 was $5,161,670. Included in
accounts payable at April 30, 1995 is $4,967 of computer equipment which was
paid in the second quarter of fiscal year 1996. The Company had no loans or
notes payable at April 30, 1995.
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 proceeds of $6,043,433 from the offering.
11
<PAGE> 12
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 proceeds received by the
Company were $743,534.
RESULTS OF OPERATIONS
Revenues for the three months ended April 30, 1996 and 1995 were $1,155,355 and
$467,825, respectively. The Company's first quarter revenues increased $165,407
or 17% over fourth quarter revenues of $989,948. Management attributes this
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 27% and 17% of the Company's total revenues for the three months
ended April 30, 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 $31,105 and $44,834 for the three months ended April 30,
1996 and 1995, 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.
Software amortization was $25,310 and $33,461 for the three months ended April
30, 1996 and 1995, respectively.
Selling, general and administrative expenses for the three months ended April
30, 1996 increased $354,379 over the three month period ended April 30, 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.
12
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
None.
(b) Reports on form 8-K.
None.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INNOVATIVE TECH SYSTEMS, INC.
-----------------------------
(Registrant)
Dated: June 18, 1996
Innovative Tech Systems, Inc.
By:\s\Louis J. Desiderio
---------------------
Louis J. Desiderio,
Vice President, Chief Financial Officer
and Assistant Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 2,027,114
<SECURITIES> 0
<RECEIVABLES> 1,857,894
<ALLOWANCES> (10,000)
<INVENTORY> 0
<CURRENT-ASSETS> 4,113,686
<PP&E> 895,550
<DEPRECIATION> (232,969)
<TOTAL-ASSETS> 5,824,791
<CURRENT-LIABILITIES> 381,354
<BONDS> 0
0
0
<COMMON> 189,215
<OTHER-SE> 5,254,222
<TOTAL-LIABILITY-AND-EQUITY> 5,824,791
<SALES> 1,155,355
<TOTAL-REVENUES> 1,155,355
<CGS> 31,105
<TOTAL-COSTS> 1,141,393
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 51,866
<INCOME-TAX> 0
<INCOME-CONTINUING> 51,866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,866
<EPS-PRIMARY> .004
<EPS-DILUTED> .004
</TABLE>
