<PAGE> 1
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 October 31, 1997
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 (IRS Employer
of incorporation or organization Identification Number)
444 JACKSONVILLE ROAD, SUITE 200, WARMINSTER, PA 18974
(Address, including zip code, of registrant's
principal executive offices)
(215) 441-5600
(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
--- ---
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 December 15, 1997: 10,888,456
<PAGE> 2
INNOVATIVE TECH SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE(S)
--------
<S> <C>
Item 1.
Balance Sheets as of October 31, 1997 and January 31, 1997 3
Statements of Operations for the three months ended October 31, 1997 and 1996 4
Statements of Operations for the nine months ended October 31, 1997 and 1996 5
Statements of Cash Flows for the nine months ended October 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7 - 8
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 12
PART II - OTHER INFORMATION
Item 2.
Changes in Security 13
Item 4.
Submission of Matters to a Vote of Security Holders 13
Item 6.
Exhibits and Reports on Form 8-K 14
</TABLE>
2
<PAGE> 3
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
ASSETS 1997 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,317,526 $ 1,787,561
Accounts receivable, net 5,111,656 3,514,541
Inventory 212,989 264,205
Officer advance 134,556 89,307
Other current assets 287,083 99,006
----------- -----------
Total current assets 7,063,810 5,754,620
Property and equipment, net 1,133,208 884,801
Computer software, net of accumulated amortization of $928,235 and $591,434 at
October 31, 1997 and January 31, 1997 1,112,431 1,049,253
Other assets 94,536 77,637
----------- -----------
Total assets $ 9,403,985 $ 7,766,311
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 42,857 $ 42,857
Accounts payable 1,069,729 713,751
Accrued liabilities 101,909 128,656
Accrued payroll and related costs 219,474 118,526
Deferred revenue 1,491,570 651,232
----------- -----------
Total current liabilities 2,925,539 1,655,022
Long-term debt 225,000 257,143
----------- -----------
Total liabilities 3,150,539 1,912,165
----------- -----------
Commitments and contingent liabilities
Shareholders' equity:
Senior Preferred stock, par value $.001; authorized 200,000,000 shares;
issued and outstanding -0- shares as of October 31, 1997 and January 31,
1997 -- --
Common stock, par value $.0185; authorized 100,000,000 shares; issued and
outstanding 10,888,456 as of October 31, 1997 and January 31, 1997 201,436 201,436
Additional paid-in capital 7,290,038 7,290,038
Warrants 1,640,766 851,500
Accumulated deficit (2,878,794) (2,488,828)
----------- -----------
Total shareholders' equity 6,253,446 5,854,146
----------- -----------
Total liabilities and shareholders' equity $ 9,403,985 $ 7,766,311
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED,
------------------------------------
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Software $ 2,016,963 $ 1,026,506
Hardware 533,080 335,394
Services and support 1,490,485 1,178,957
------------ ------------
Total revenues 4,040,528 2,540,857
------------ ------------
Cost of revenues:
Software 135,154 184,138
Hardware 285,592 207,944
Services and support 1,036,923 682,181
------------ ------------
Total cost of revenues 1,457,669 1,074,263
------------ ------------
Gross margin 2,582,859 1,466,594
------------ ------------
Operating expenses:
Selling, general and administrative 2,101,520 1,605,580
Research & development 191,828 257,124
------------ ------------
Total operating expenses 2,293,348 1,862,704
------------ ------------
Income/(loss) from operations 289,511 (396,110)
Interest income 7,394 7,584
Interest (expense) (6,515) (1,341)
------------ ------------
Income/(loss) before income taxes 290,390
(389,867)
Provision for income taxes -- --
------------ ------------
Net income/(loss) $ 290,390 $ (389,867)
============ ============
Basic and diluted income/(loss)
per common share $ 0.03 $ (0.03)
============ ============
Weighted average shares outstanding-basic 10,888,456 11,717,997
============ ============
Weighted average shares outstanding-diluted 11,308,323 11,717,997
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED,
------------------------------------
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Software $ 4,507,718 $ 2,018,641
Hardware 1,734,104 659,556
Services and support 3,742,109 2,318,438
------------ ------------
Total revenues 9,983,931 4,996,635
------------ ------------
Cost of revenues:
Software 433,926 254,924
Hardware 999,334 430,533
Services and support 1,862,044 1,111,675
------------ ------------
Total cost of revenues 3,295,304 1,797,132
------------ ------------
Gross margin 6,688,627 3,199,503
------------ ------------
Operating expenses:
Selling, general and administrative 5,551,592 3,134,444
Research & development 755,103 671,406
------------ ------------
Total operating expenses 6,306,695 3,805,850
------------ ------------
Income/(loss) from operations 381,932 (606,347)
Interest income 39,658 76,856
Interest (expense) (22,290) (2,600)
------------ ------------
Income/(loss) before income taxes 399,300 (532,091)
Provision for income taxes -- --
------------ ------------
Net income/(loss) $ 399,300 $ (532,091)
============ ============
Basic and diluted income/(loss)
per common share $ 0.04 $ (0.04)
============ ============
Weighted average shares outstanding-basic 10,888,456 12,874,616
============ ============
Weighted average shares outstanding-diluted 11,027,529 12,874,616
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED,
---------------------------------
OCTOBER 31, OCTOBER 31,
1997 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 399,300 $ (532,091)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 554,652 329,697
Loss on disposal of equipment 14,710 --
Changes in operating assets and liabilities:
Accounts receivable (1,597,115) (449,668)
Inventory 51,216 (38,250)
Advances - officers (45,249) (28,069)
Other assets (188,077) (31,883)
Accounts payable 355,978 80,743
Accrued liabilities (26,747) (2,649)
Accrued payroll and related costs 100,948 (15,155)
Deferred revenue 840,338 122,575
----------- -----------
Net cash provided by (used in) operating activities 459,954 (657,977)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (497,867) (289,809)
Purchase of software (78,473) --
Capitalization of software development (321,506) (53,052)
----------- -----------
Net cash used in investing activities (897,846) (342,861)
----------- -----------
Cash flows from financing activities:
Warrant issuance -- 1,350
Repayment under line of credit -- (371,341)
Repayment of long-term debt (32,143) (659,295)
----------- -----------
Net cash used in financing activities (32,143) (1,029,286)
----------- -----------
Net decrease in cash and cash equivalents (470,035) (2,030,124)
Cash and cash equivalents, beginning of period 1,787,561 2,815,742
----------- -----------
Cash and cash equivalents, end of period $ 1,317,526 $ 785,618
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements are unaudited. In the
opinion of management, all adjustments necessary for a fair presentation of
such consolidated 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 consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the Company's annual consolidated financial statements
and notes.
1. DESCRIPTION OF BUSINESS:
The consolidated financial statements include the accounts of Innovative Tech
Systems, Inc. (the "Company") and its wholly-owned subsidiaries. The Company is
principally involved in the business of designing, developing and marketing
facilities management software products. The Company derives revenues from
selling and installing hardware and software for licensed use by clients in
diverse industries. The Company's revenues are predominantly generated through
sales to customers in the United States.
2. PROPERTY AND EQUIPMENT:
Property and equipment comprised the following:
<TABLE>
<CAPTION>
October 31, 1997 January 31, 1997
---------------- ----------------
(unaudited)
<S> <C> <C>
Computers and office equipment $ 1,094,653 $ 924,697
Furniture and fixtures 462,661 388,356
Leasehold improvements 358,301 218,058
Automobiles 10,746 10,746
----------- -----------
1,926,361 1,541,857
Less accumulated depreciation (793,153) (657,056)
----------- -----------
$ 1,133,208 $ 884,801
=========== ===========
</TABLE>
3. INVENTORIES:
Inventories consist of hardware, accessories and repair parts that are
purchased and resold to customers. Inventories are valued at cost, but not in
excess of net realizable value. Cost is determined using the first-in,
first-out method.
4. INCOME PER SHARE:
Income per common share is computed for each period based upon the weighted
average number of common shares outstanding and dilutive common stock
equivalents (using the treasury stock method). For purposes of this calculation,
stock options and redeemable warrants are considered common stock equivalents in
periods in which they have a dilutive effect. Basic and diluted income and
loss per loss per share data are the same for each period presented. Diluted
weighted average shares outstanding include share from the assumped exercise
of the redeemable common stock purchase warrants.
In February, 1997 the FASB issued Statement of Financial Accounting Standards
No. 128 (FAS 128), Earnings Per Share, which is effective for financial
statements for both interim and annual periods ending after December, 1997. FAS
128 simplifies the standards for computing earnings per share previously found
in
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Accounting Principles Board Opinion No. 15 (APB 15), Earnings Per Share. FAS
128 defines basic earnings per share as net income applicable to common
stockholders divided by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur from the exercise or conversion of securities or
other contracts to issue common stock. Had the Company adopted FAS 128 as of
February 1, 1997, there would have been no change in earnings per share as
reported.
5. SIGNIFICANT CUSTOMERS
Revenues from significant customers as a percentage of total revenues were as
follows:
<TABLE>
<CAPTION>
For the nine months ended,
-----------------------------------------
Customer October 31, 1997 October 31, 1996
------------------------------------- ---------------- ----------------
<S> <C> <C>
Customer A 9% --
Customer B 7% 6%
Customer C 5% --
Customer D 5% --
Customer E 4% 10%
Customer F -- 8%
</TABLE>
6. RELATED PARTY TRANSACTIONS:
On September 1, 1995, the Company moved its headquarters to 444 Jacksonville
Road, Warminster, Pennsylvania, 18974. The Company has a five year lease for
20,000 square feet of office space. The annual rent is $260,000. The building is
owned and operated by Thompson Enterprises, L.P., a Pennsylvania 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, directors and shareholders of the Company.
Karen A. Thompson is an executive officer and shareholder of the Company.
7. 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. On November 7, 1994 975,000
options were granted at an exercise price equal to the market price of $1.67 per
share. On February 25, 1997, the stock option committee of the board of
directors approved an amendment of the plan, which was subject to shareholder
approval, to increase the maximum number of shares issuable pursuant to the plan
from 975,000 to 2,175,000. Approval was obtained at the 1997 annual shareholder
meeting. See Item 4 for results of the voting.
8. REVERSE SPLIT OF WARRANTS:
On September 30, 1997 the Company obtained consent from its warrant holders to
effect a one-for-eight reverse split of the redeemable common stock purchase
warrants and a one-for-twenty-nine and one-eighth reduction in the exercise
price of the warrants. The total number of issued and outstanding redeemable
common stock purchase warrants was reduced from 10,596,000 to 1,324,500 and the
exercise price was reduced to $.08 from $2.33 per share. As a result the
Company recorded an increase in warrants and accumulated deficit of $789,266.
9. ACQUISITION:
Effective July 26, 1996 the Company acquired 100% of the outstanding common
stock of Facility Management Systems, Inc. ("FMS"). Under the terms of the
agreement, FMS shareholders received 50.114 shares of Innovation Tech common
stock in exchange for each share of FMS common stock. This exchange ratio
resulted in 645,619 shares of Innovation Tech common stock being issued to FMS
shareholders. The acquisition was recorded using the purchase method of
accounting. Upon completion of the purchase price allocation in the fourth
quarter of fiscal 1997, the Company expensed $485,000 of the fair value of
in-process development projects that had not reached technoligical feasibility
and had no probable alternative future use.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The matters discussed in this Form 10-Q that are forward-looking statements are
based on current management expectations that involve a number of risks and
uncertainties. Potential risks and uncertainties include, without limitation,
the impact of economic conditions generally and in the facilities management
industry; the competitive nature of the software development and marketing
industry; dependence on the Company's proprietary technology; the Company's
ability to enhance its existing products and develop and introduce new products
which keep pace with technological developments in the marketplace; and the
risk of unavailability of adequate capital or financing.
OVERVIEW AND SIGNIFICANT EVENTS
The significant progress made during Fiscal 1997 has continued through for the
third quarter and the first three quarters of Fiscal 1998, as Innovative Tech
reported revenues of $4,040,528 for the three (3) months ended October 31, 1997
and $9,983,931 for the nine (9) months ended October 31, 1997. The continued
revenue growth experienced by the Company continues to be the result of
increased volume from its strategic marketing efforts and new product releases.
On July 26, 1996, a subsidiary of the Company acquired 100 percent of the
outstanding Common Stock of Facility Management Systems, Inc. (FMS) of Chicago,
Illinois in exchange for 645,619 shares of Innovative Tech common stock. FMS
develops specialty software systems used in the management of facilities,
utilizing hand-held data collection devices to monitor operating conditions and
ensure regulatory compliance within a facility. FMS has changed its name to
Innovative Tech Systems - Chicago ("ITS-C").
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 $2.1 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 the 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 (6) years of the contract, Innovative Tech is to receive
royalties based on revenue generated from product distribution and sales of
SPAN-FM(TM) by Landis & Gyr (Europe) Corp. in Europe. To date, SPAN-FM(TM)
software has been translated into German, Swedish and Italian; a French
translation is presently underway. Innovative Tech recognized $90,795 in
revenues pursuant to the agreement for the nine (9) months ended October 31,
1997.
The Company also has signed a five (5) year OEM agreement with Intergraph
Corporation to market, sell and distribute certain Innovative Tech software
packages. The financial terms of the agreement provide for Innovative Tech to
receive royalties on all sales of the SPAN-FM(TM) software by Intergraph
Corporation. Pursuant to the agreement, Innovative Tech recognized royalties of
$84,800 for the nine (9) months ended October 31, 1997. On September 12, 1997,
this OEM agreement was amended so that Intergraph Corporation would be able to
develop an exit and transition strategy. This strategy would enable Intergraph
to discontinue the distribution of the SPAN-FM(TM) product line through
Intergraph Software Solutions and transition all support of current SPAN-FM(TM)
customers, certain services and all sales activities to Innovative Tech
directly.
9
<PAGE> 10
Also, the amendment calls for Intergraph to grant a perpetual royalty-free
license to the current source code of the CAD Integrator for Microstation
product. The parties also agreed to enter into good faith negotiations for
possible separate marketing agreements with Intergraph sales organizations for
Federal, U.S. and international markets. As part of the amendment, Intergraph
Software Solutions also agreed not to reenter the facilities management market
with a competing product for a period of two years. Intergraph Corporation paid
a one-time maintenance fee of $115,300 for the calendar year 1997. The Company
recognized $96,083 of maintenance revenue for the nine (9) months ended October
31, 1997. The Company does not believe that there will be a material adverse
effect to revenue as a result of this transaction.
RESULTS OF OPERATIONS
FOR THE THREE (3) MONTHS ENDED OCTOBER 31, 1997 AND 1996
Total revenues for the three (3) months ended October 31, 1997 and 1996 were
$4,040,528 and $2,540,857, respectively. Management attributes the 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. Software revenues for the three (3) months ended October
31, 1997 increased by $990,457 or 97 percent over the same three (3) month
period in fiscal 1997. For the three (3) months ended October 31, 1997 hardware
revenues increased $197,686 over fiscal 1997 hardware revenues. Services and
support revenues for the three (3) months ended October 31, 1997 increased
$311,528 over the same three (3) month period in fiscal 1997.
The Company continues to provide services to the Department of Defense, and
sales made by the Company to the Department of Defense constituted approximately
3 percent and 4 percent of the Company's total revenues for the three (3) months
ended October 31, 1997 and 1996. The Company anticipates that sales to the
United States Department of Defense will continue during fiscal year 1998. 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 $1,457,669 and $1,074,263 for the three (3) months ended
October 31, 1997 and 1996, respectively. Included within cost of revenues is
hardware, software and accessories purchased by the Company and subsequently
sold to customers, amortization of capitalized software, and salaries and wages
of service and support personnel. Hardware purchases are made only as required
under customer contracts. Therefore, the volume of hardware purchases may
fluctuate significantly based upon specific contract requirements. Amortization
of capitalized software for the three (3) months ended October 31, 1997 was
$125,585 and $106,965 for the three (3) months ended October 31, 1996.
Selling, general and administrative expenses were $2,101,520 and $1,605,580 for
the three (3) months ended October 31, 1997 and 1996, respectively. The
increase in 1997 is due to increased wages resulting from hiring additional
employees to support the Company's sales and marketing efforts. The increased
sales and marketing efforts have resulted in increased revenues. Selling,
general and administrative expenses as a percentage of revenues was 52 percent
and 63 percent for the three (3) months ended October 31, 1997 and 1996,
respectively.
Research & development expenses were $191,828 and $257,124 for the three (3)
months ended October 31, 1997 and 1996, respectively.
FOR THE NINE (9) MONTHS ENDED OCTOBER 31, 1997 AND 1996
Total revenues for the nine (9) months ended October 31, 1997 and 1996 were
$9,983,931 and $4,996,635, respectively. Management attributes the 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, and the acquisition of ITS-C, which accounted for $3,776,712
or 38 percent of the revenues for the nine (9) months ended October 31, 1997.
10
<PAGE> 11
Software revenues for the nine (9) months ended October 31, 1997 increased by
$2,489,077 or 123 percent over the same nine (9) month period in fiscal 1997. Of
this increase, $1,316,576 or 53 percent related to the ITS-C acquisition.
Hardware revenues for the nine (9) months ended October 31, 1997 increased
$1,074,548 over fiscal 1997 hardware revenues, which was due primarily to the
acquisition of ITS-C. Services and support revenues increased by $1,423,671 over
the same nine (9) month period in fiscal 1997. The majority of this increase
related to the ITS-C acquisition.
The Company continues to provide services to the Department of Defense, and
sales made by the Company to the Department of Defense constituted approximately
4 percent and 10 percent of the Company's total revenues for the nine (9) months
ended October 31, 1997 and 1996. The Company anticipates that sales to the
United States Department of Defense will continue during fiscal year 1998. 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 $3,295,304 and $1,797,132 for the nine (9) months ended
October 31, 1997 and 1996, respectively. Included within cost of revenues is
hardware, software and accessories purchased by the Company and subsequently
sold to customers, amortization of capitalized software, and salaries and wages
of service and support personnel. Hardware purchases are made only as required
under customer contracts. Therefore, the volume of hardware purchases may
fluctuate significantly based upon specific contract requirements. The
significant increase in fiscal 1998 is primarily attributable to the ITS-C
acquisition. The ITS-C product line utilizes hand-held collection devices and
accessories which are purchased and resold to customers. The cost of revenues
for the nine (9) months ended October 31, 1997 included $1,487,112 related to
sales of the ITS-C product line, which represents 45 percent of the fiscal 1998
total. Cost of revenues as a percentage of revenues was 33 percent and 36
percent for the nine months ended October 31, 1997 and 1996, respectively.
Amortization of capitalized software development for the nine (9) months ended
October 31, 1997 was $339,801 and $157,683 for the nine (9) months ended
October 31, 1996.
Selling, general and administrative expenses were $5,551,593 and $3,134,444 for
the nine (9) months ended October 31, 1997 and 1996, respectively. The increase
in fiscal 1998 is due to increased wages incurred by the Company as a result of
hiring additional employees to support the Company's sales and marketing
efforts. The increased sales and marketing efforts have resulted in increased
revenues. The increase in these types of expenses is also due to the ITS-C
acquisition, which accounted for $1,837,576 or 33 percent of the fiscal 1998
total. Selling, general and administrative expenses as a percentage of revenues
was 56 percent and 63 percent for the nine (9) months ended October 31, 1997 and
1996, respectively.
Research & development expenses were $755,103 and $671,406 for the nine (9)
months ended October 31, 1997 and 1996, respectively. The Company capitalized
$321,506 of software development cost during the nine (9) months ended October
31, 1997, which represents cost incurred after various products have reached
technological feasibility.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs have related to and are expected to continue to
relate to capital investments and working capital requirements. The Company has
met its liquidity needs over the last three (3) years primarily through funds
provided by the issuance of Common Stock in an underwritten public offering
completed on July 26, 1994. 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.
11
<PAGE> 12
For the nine (9) months ended October 31, 1997 the Company generated $459,954
from operations and utilized $897,846 for the purchases of property and
equipment, software, software development and $32,143 for repayment of long-term
debt.
Accounts receivable at October 31, 1997, increased by $1,597,115 from the
January 31, 1997, balance. This increase is due primarily to the higher sales
revenue in the third quarter than that of the fourth quarter of fiscal 1997. The
Company has not experienced any material collection difficulties. Working
capital at October 31, 1997 was $4,138,272. The Company had $267,857 of term
debt at October 31, 1997.
For the nine (9) months ended October 31, 1996 the Company utilized $657,977
from operations, $342,861 for the purchases of property and equipment, software
and $1,030,636 for repayment of long-term debt and line of credit.
Accounts receivable at October 31, 1996 increased by $449,668 from the January
31, 1996 balance. This increase is due primarily to the increased sales volume
experienced for the nine months ended October 31, 1996. Working capital at
October 31, 1996 was $2,466,986. The Company had no loans or notes payable at
October 31, 1996.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On September 30, 1997 the Company obtained consent from its warrant holders to
effect a one-for-eight reverse split of the redeemable common stock purchase
warrants and a one-for-twenty-nine and one-eight reduction in the exercise
price of the warrants. The total number of issued and outstanding redeemable
common stock purchase warrants was reduced from 10,596,000 to 1,324,500 and the
exercise price was reduced to $.08 from the $2.33 per share. The trading symbol
for the redeemable common stock purchase warrants is ITSYW.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A) Annual meeting of shareholders held on August 21, 1997: -
1) Election of directors:
<TABLE>
<CAPTION>
Director For Withheld
----------------------- --------- --------
<S> <C> <C>
Mark R. Hernick 9,704,771 99,210
Julie Moore 9,705,006 98,975
John Smart 9,703,506 100,475
John Thompson 9,684,351 119,630
William Thompson 9,684,351 119,630
</TABLE>
2) Amendment to Company's 1994 Stock Option Plan to increase the maximum
number of shares authorized to be issued thereunder from 975,000 to
2,175,000:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non Votes
--------- ------- ------- ---------
<S> <C> <C> <C>
4,442,157 627,132 145,341 4,589,351
</TABLE>
3) Ratification of the appointment of Price Waterhouse LLP as the
Company's independent accountants:
<TABLE>
<CAPTION>
For Against Abstain
--------- ------- -------
<S> <C> <C>
9,760,096 19,350 24,535
</TABLE>
B) Consent Solicitation, effective as of September 30, 1997 to approve an
amendment to the existing Warrant Agreement to effect (a) a one-for-eight
reverse split of all of the outstanding Redeemable Common Stock Purchase
Warrants, and (b) a one-for-twenty-nine and one-eighth reduction in the
exercise price of the Redeemable Common Stock Purchase Warrants. To be
effective the Company needed to receive the consents of least 66-2/3 percent
of the 10,596,000 outstanding Redeemable Common Stock Purchase Warrants.
<TABLE>
<CAPTION>
Consent Withheld Abstain
--------- -------- -------
<S> <C> <C>
8,751,056 291,236 47,720
</TABLE>
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
Item no. 4, Form of Redeemable Common Stock Purchase Warrant
Item no. 27, Financial Data Schedule.
(b) Reports on Form 8-K.
None.
ITEM 10. MATERIAL CONTRACT - AMENDMENT TO INTERGRAPH AGREEMENT.
14
<PAGE> 15
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: December 15, 1997
Innovative Tech Systems, Inc.
By:\s\John M. Thompson
----------------------------
John M. Thompson,
President and Chief Operating Officer
15
<PAGE> 1
[NUMBER] VOID AFTER JULY 25, 1999 [WARRANTS]
ITWR
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
INNOVATIVE TECH SYSTEMS, INC.
PURCHASE WARRANT CUSIP 45764L 17 9
THIS CERTIFIES THAT
FOR VALUE RECEIVED:
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and nonassessable share of Common Stock, par value
$.0185 per share, of Innovative Tech Systems, Inc., an Illinois corporation (the
"Company"), at any time from July 26, 1995 and prior to the Expiration Date (as
hereinafter defined) upon the presentation and surrender of this Warrant
Certificate with the Subscription Form on the reverse hereof duly executed, at
the corporate office of Continental Stock Transfer & Trust Company, 2 Broadway,
New York, New York 10004, as Warrant Agent, or its successor (the "Warrant
Agent"), accompanied by payment of $.08 subject to adjustment (the "Purchase
Price") in lawful money of the United States of America in cash or by check made
payable to the Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement") dated July 26, 1994, by
and between the Company and the Warrant Agent, as amended from time to time.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on July
25, 1999. If such date shall in the State of New York be a holiday or a day on
which the banks are authorized to close, then the Expiration Date shall mean
5:00 p.m. (New York time) the next following day which in the State of New York
is not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such securities
is effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective and
to keep such registration statement current, if required under the Act, while
any of the Warrants are outstanding, and deliver a prospectus which complies
with Section 10(a) (3) of the Act to the Registered Holder exercising this
Warrant. This Warrant shall not be exercisable by a Registered Holder in any
state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office a new Warrant Certificate or
Warrant Certificates representing an equal aggregate number of Warrants will be
issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
(Continued on reverse side)
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to by duly
executed manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
DATED: COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
JERSEY CITY, NJ
WARRANT AGENT
BY:
AUTHORIZED OFFICER
<TABLE>
<S> <C> <C>
/S/ JOHN M. THOMPSON [INNOVATIVE TECH SYSTEMS INC. CORPORATE SEAL 1986 ILLINOIS] /S/ WILLIAM M. THOMPSON
PRESIDENT CHAIRMAN
</TABLE>
<PAGE> 2
INNOVATIVE TECH SYSTEMS, INC.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, at a redemption price of $.083 per
Warrant, at any time commencing October 26, 1995, provided that (i) the average
closing bid price for the Company's Common Stock in the over-the-counter market
as reported by the National Association of Securities Dealers Automated
Quotation System, or (ii) the average closing sale price on the primary
exchange on which the Common Stock is traded if the Common Stock is traded on a
national securities exchange, shall have for twenty (20) consecutive trading
days within a period of thirty (30) trading days ending on the fifth trading
day prior to the Notice of Redemption as defined below, equalled or exceeded
$2.92 per share (subject to adjustment in the event of any stock splits or
other similar events). Notice of redemption (the "Notice of Redemption") shall
be given not later than the thirtieth day before the date fixed for redemption,
all as provided in the Warrant Agreement. On and after the date fixed for
redemption, the Registered Holder shall have no rights with respect to this
Warrant except to receive the $.083 per Warrant upon surrender of this
Certificate.
Under certain circumstances, A.S. Goldman & Co., Inc., shall be entitled
to receive an aggregate of four percent of the Purchase Price of the Warrants
represented hereby.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to conflicts of
law.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
==============================================================================
SUBSCRIPTION FORM
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO EXERCISE WARRANTS)
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
________ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of:
_________________________________________
_______________________________________________________________________________
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER
and be delivered to: __________________________________________________________
(PLEASE PRINT OR TYPE NAME AND ADDRESS)
_______________________________________________________________________________
and, if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below:
_______________________________________________________________________________
(PLEASE PRINT OR TYPE ADDRESS)
IMPORTANT PLEASE COMPLETE THE FOLLOWING:
1). The exercise of this Warrant was solicited by A.S. Goldman & Co., Inc.
unless the following box is checked [ ]
2). The exercise of this Warrant was solicited by_________________________.
3). If the exercise of this Warrant was not solicited, please check the
following box. [ ]
__________________________________________
Dated_____________________, 19___. Signature(s)
__________________________________________
__________________________________ __________________________________________
Signature(s) Guaranteed (Social Security or Taxpayer
Identification Number)
ASSIGNMENT
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO ASSIGN WARRANTS)
FOR VALUE RECEIVED
the undersigned hereby sell(s), assign(s) and transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER
________________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPE NAME AND ADDRESS)
______________________________________________ of the Warrants represented by
this Warrant Certificate, and hereby irrevocably constitutes and appoints
______________________________________________ attorney to transfer this Warrant
Certificate on the books of the Company, with full power of substitution in the
premises.
__________________________________________
Dated_____________________, 19___. Signature(s)
__________________________________________
__________________________________ __________________________________________
Signature(s) Guaranteed (Social Security or Taxpayer
Identification Number)
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A
COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF A NATIONAL OR REGIONAL OR
OTHER RECOGNIZED STOCK EXCHANGE IN CONFORMANCE WITH A SIGNATURE GUARANTEE
MEDALLION PROGRAM.
STOCK MARKET INFORMATION EXCHANGE
www.stockinformation.com
PRINTED BY: COLUMBIA FINANCIAL PRINTING CORP., BOX 219, BETHPAGE, NY 11714
<PAGE> 1
AMENDMENT #9
to the OEM License Agreement between
Intergraph Corporation and Innovative Tech Systems, Inc.
The parties mutually agree to terminate the third party OEM License Agreement
dated January 21, 1994, as amended May 31, 1994, June 13, 1994, January 9, 1995,
June 28, 1995, December 12, 1995, September 24, 1996, October 31, 1996 and March
21, 1997, and develop an exit and transition strategy that incorporates the
terms and conditions outlined below:
1. The parties will develop a joint letter for distribution by Intergraph to
each of their customers that own either SPAN-FM or IFM. The parties will also
develop a joint statement to publicly announce the change in relationship and
will distribute this through a press release and by posting on their
respective web pages. Furthermore, Intergraph will develop and support for
the term of the reference account agreement noted in paragraph 6, but not
less than a period of one year from the date of signing AMENDMENT #9, a link
to Innovative Tech's web page from a facilities management section of
Intergraph Software Solutions' web page.
2. The parties will transition sales activities as noted herein. Any outstanding
quotes already extended by Intergraph sales will be honored by Innovative
Tech for a period of 30 days from the date of the signing of AMENDMENT #9. In
these cases, Intergraph will receive a finders fee of 10% of the net SPAN-FM
software revenue. Intergraph will be responsible for paying any commissions
due to their own sales force in this regard.
3. Intergraph agrees to make commercially reasonable efforts to close all
SPAN-FM related formal proposals to RFP's that have been submitted prior to
the date of signing of AMENDMENT #9. Innovative Tech will honor such price
quotes as a pass through up to a maximum of 40% discount from US List Price.
Intergraph will receive a finders fee of 10% of the net value of SPAN-FM
software when such awards are made. Related services will be assigned to
Innovative Tech at the full price quoted but not less than $800/day. Software
maintenance for SPAN-FM will be contracted with Innovative Tech directly.
4. The parties agree that any existing stock of SPAN-FM version 6.2a will be
destroyed and that any further shipments made by Intergraph, to satisfy
existing current orders and quotes, will be based on SPAN-FM version 6.3.
Shipments for Intergraph proposals that lead to an award for SPAN-FM after
the date of signing of AMENDMENT #9, will be processed by Innovative Tech
directly.
5. The parties agree that Intergraph sales force will not be compensated for any
follow on business conducted by Innovative Tech within current Intergraph
accounts that own either SPAN-FM or IFM.
6. For a period of two years from the signing of AMENDMENT #9, any new sales
leads received by Intergraph that relate to Facilities Management will be
forwarded to Innovative Tech. Intergraph proposes good faith negotiations for
a reference account agreement with Innovative Tech. Reference account
agreement allows Intergraph to sell Innovative Tech's products when sole
source opportunities arise. Intergraph will receive a finders fee of 10% of
net value. Net value will be agreed upon for each sole source opportunity.
- --------------------------------------------------------------------------------
Intergraph/Innovative Tech 1 of 3
<PAGE> 2
7. In order to satisfy contractual issues beyond Intergraph's Software
Solution sales, the parties agree to enter into good faith negotiations
for possible separate agreements covering federal, USA and international
markets.
8. The parties agree to develop a joint letter to be sent by Intergraph to
their existing SPAN-FM or IFM business partners. This will outline the
changes to the agreement and indicate that Intergraph will no longer offer
SPAN-FM products and that Innovative Tech will consider signing new
contracts with each business partner on a case by case basis. The letter
will also include recommendations from Intergraph and their endorsement
of Innovative Tech as a viable vendor.
9. The parties agree, as opportunities arise, to recommend each others
solutions. Intergraph will recommend Innovative Tech's SPAN-FM suite of
products as the facilities management solution of choice. Whereas,
Innovative Tech will recommend Intergraph's hardware and software solutions
such as AIM and Imagineer Technical.
10. All SPAN-FM services contracts in the commercial segment (Intergraph
Software Solution's Huntsville based resources) that remain outstanding
at the time of signing of AMENDMENT #9, will be assigned or sub-contracted
to Innovative Tech for completion, at Innovative Tech discretion. The
rate due Innovative Tech for such sub-contracted services will be 90%
of the fee quoted by Intergraph but not less than $800/day. Furthermore,
SPAN-FM services contracts that have not been booked by Intergraph
Software Solutions but are in their sales pipeline, will also be
forwarded to Innovative Tech for processing. In such cases, no fee will
be due to Intergraph.
11. Intergraph hereby agrees to pay Innovative Tech a one time maintenance fee
of $115,300 based on the number of SPAN FM or IFM end users on current
maintenance.
12. Intergraph will continue to provide SPAN-FM support to end users via their
help desk for a period of 30 days after the signing of AMENDMENT #9.
13. Intergraph hereby grants a perpetual, royalty-free license to the
current source code of the CAD Integrator for MicroStation as set forth
in Amendment #6 to the OEM License Agreement dated September 24, 1996.
Intergraph will remove this product from their price list and no longer
market or sell this product.
14. A final audit of software sales of IFM and SPAN-FM will be conducted at
Intergraph's Huntsville location. The audit will be conducted as set forth
in the OEM License Agreement dated January 21, 1994. This audit shall be
at each respective parties own expense and will be used to determine
the royalty and maintenance fees due to Innovative Tech. The companies
will also determine the disposition of the $72,000 payment due from direct
shipments made to DLA Fuels by Innovative Tech at the direction of
Intergraph Federal Systems Division, as well as all outstanding invoices.
All payments determined to be due will be payable within 30 days.
- --------------------------------------------------------------------------------
Intergraph/Innovative Tech 2 of 3
<PAGE> 3
15. Intergraph Software Solutions agrees not to re-enter the facilities
management market with a competing product for a period of two years. In the
event that Intergraph decides to establish a third party OEM agreement for
Facilities Management software in the future, Innovative Tech will be
considered by Intergraph to be the most favored vendor.
16. The parties agree to continue to cooperate on mutually beneficial interfaces
to integrate SPAN-FM with Intergraph products including, but not limited to,
Imagineer Technical, Geomedia and AIM.
17. The parties will transition support of existing SPAN-FM Intergraph
customers to Innovative Tech.
18. The provisions of Paragraph 9 -- NONDISCLOSURE, as noted in the OEM License
agreement, shall survive the termination of the OEM License Agreement.
This Amendment supersedes all other representations, oral or written, and
all other communications between the parties related to the subject matter of
this Amendment.
In witness whereof, the undersigned have caused this Letter of Understanding to
be executed and delivered by their respective officers thereunto duly
authorized.
INTERGRAPH CORPORATION INNOVATIVE TECH SYSTEMS, INC.
By: /s/ Milton H. Legg By: /s/ John M. Thompson
-------------------------------- ----------------------------
Name: Milton H. Legg Name: John M. Thompson
------------------------------ --------------------------
Title: Executive Director Title: President
----------------------------- -------------------------
Date: 9/12/97 Date: 9-12-97
------------------------------ --------------------------
- -----------------------------------------------------------------------------
Intergraph/Innovative Tech 3 of 3
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 1,317,526
<SECURITIES> 0
<RECEIVABLES> 5,111,656
<ALLOWANCES> (127,646)
<INVENTORY> 212,989
<CURRENT-ASSETS> 7,063,810
<PP&E> 3,967,027
<DEPRECIATION> (1,721,388)
<TOTAL-ASSETS> 9,403,985
<CURRENT-LIABILITIES> 2,925,539
<BONDS> 0
0
0
<COMMON> 201,436
<OTHER-SE> 6,052,010
<TOTAL-LIABILITY-AND-EQUITY> 9,403,985
<SALES> 4,040,528
<TOTAL-REVENUES> 4,040,528
<CGS> 1,457,669
<TOTAL-COSTS> 3,751,017
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,515
<INCOME-PRETAX> 290,390
<INCOME-TAX> 0
<INCOME-CONTINUING> 290,390
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.027
<EPS-DILUTED> 0.027
</TABLE>
