<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended January 31, 1997
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 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:
Title of each class: Name of each exchange on which registered:
- -------------------- ------------------------------------------
Common Stock, $.0185 par value Nasdaq Small Cap, Boston and Pacific Stock
Exchanges
Redeemable Warrants Nasdaq Small Cap, Boston and Pacific Stock
Exchanges
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. [X]
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 May 13, 1997, was $12,589,777.
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 May 13, 1997: 10,888,456
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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 Facilities Automation software
and remote data collection systems to automate the tracking and management of
facilities, assets, maintenance and operations, space design, security, and life
safety. Facilities Automation 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 Facilities Automation products and solutions.
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. 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 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, 1994. 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 matters discussed in this Form 10-K 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.
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THE FACILITIES AUTOMATION INDUSTRY
The Facilities Automation industry refers to Facilities Automation software and
remote data collection systems to automate the tracking and management of
facilities, assets, maintenance and operations, space design, security, and life
safety. 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-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 Facilities Automation industry is developing due
to the fact that Facilities Automation 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 Facilities Automation
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 SPAN-FM(TM) brand solutions, including SPAN-FM(TM) software, the leading
enterprise-wide Facilities Automation software. Also under the SPAN-FM(TM) brand
is the remote data collection systems product line, which includes Inspection
Manager(TM), FireProof(TM) and TourWatch(TM). These systems automate field data
collection and management systems for operations, maintenance, security and fire
safety applications. The Company believes that its integrated product line meets
the needs of a wide range of users in the Facilities Automation marketplace. The
Company's robust SPAN-FM(TM) 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.
SPAN-FM applications are designed to be integrated with every other SPAN-FM
product as well as the individual client's existing core business systems. In
addition, SPAN-FM solutions may interface to various computer-aided design
systems and other control systems. This universal connectivity is accomplished
by developing SPAN-FM products on an open system architecture in our software.
In practical terms, this enables SPAN-FM solutions to link with information
throughout the organization, including financial and human resources databases.
SPAN-FM software solutions operate on Windows 3.1(R), Windows 95(R) or NT and
can access Microsoft Access(R), Watcom(R), SQL Anywhere(R), Oracle 7.x(R),
Microsoft SQL Server(R), and Sybase(R) databases stored on Novell, Windows NT or
UNIX(R) servers, using ODBC or direct drivers. SPAN-FM software is developed
under PowerBuilder(R), widely recognized as the standard in client-server
development tools.
SPAN-FM solutions are compatible with most core business systems, and offer an
integrated approach that spans all facilities management disciplines. This
enables organizations to become fully integrated in a step-by-step approach,
adding applications as growth demands. In addition, the SPAN-FM(TM) brand series
of products is one of the few existing Facilities Automation PC-based products
that will run independent of 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.
The Company's customers include Fortune 1000 companies, private and public
corporations, healthcare organizations, municipal governments, domestic
government agencies, international government agencies, universities and
colleges, financial institutions, retail chains, facility management service
providers, manufacturers, telecommunications providers and utilities.
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COMPETITION
The Company competes with numerous companies. The Company is not aware of any
published information as to the size of the Facilities
Automation/CAFM/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, patents 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 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 has made all appropriate filings and registrations to obtain and
protect all trademarks, patents, copyrights, tradenames and all other
intellectual property rights relating to the Company's products. 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 Facilities Automation industry, the Company's ability to establish
and maintain a position of technological leadership in the Facilities Automation
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 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, technological developments and by competitive analysis.
MARKETING AND DISTRIBUTION - THE INNOVATIVE TECH STRATEGY
The Company has identified several specific markets for the Company's
SPAN-FM(TM) brand of Facilities Automation 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.
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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 and its regional
offices in Chicago, Illinois, Walnut Creek, California, and Winnipeg Canada. The
Company currently has regional sales representatives located in Tampa, Florida;
Los Angeles, California; New York, New York; Philadelphia, Pennsylvania;
Atlanta, Georgia; Houston, Texas; St. Charles, Illinois and Winnipeg, Canada.
During fiscal 1998, the Company plans to hire additional sales representatives
in the Philadelphia area, as well as in the Midwest and Western portions of the
country. The Company has also instituted direct mail, trade journal, and
telephone solicitation campaigns in order to develop new customers.
Indirect Marketing. Under the terms of a five-year OEM agreement, Intergraph
Corporation markets, sells and distributes 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 received royalties of
$398,832, $214,558 for the years ended January 31, 1997, and 1996, respectively.
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 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.
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. To date, SPAN-FM software has been translated into German, Swedish
and Italian; a French translation is presently underway. Innovative Tech
recognized $545,365 in revenues pursuant to the agreement for the year ended
January 31, 1997.
SERVICE AND SUPPORT
As part of its strategy to provide complete facilities automation 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-user support programs currently offered by the
Company:
Software Upgrades and Telephone Support. This program allows end-users to
obtain, for an 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 an 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 automation consulting
services for a negotiated fee with the end-user based on scope and length of
required services.
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Custom Programming and Data Conversion. The Company offers custom programming
services either for a negotiated 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, 1997, revenues from software sales,
hardware sales, and services and support were 41%, 13% and 46%, respectively, of
total revenues. For the fiscal year ended January 31, 1996, revenues from
software sales, hardware sales, and services and support were 52%, 1% and 47%,
respectively, of total revenues. For the fiscal year ended January 31, 1995,
revenues from software sales, hardware sales, and services and support were 40%,
1% and 59%, respectively, of total revenues. This information is not readily
available for years prior to 1995.
SIGNIFICANT CUSTOMERS
Revenues from significant customers as a percentage of total revenues were as
follows:
<TABLE>
<CAPTION>
Customer 1997 1996 1995
-------- ---- ---- ----
<S> <C> <C> <C>
Customer A 6.4% 11% -
Customer B 6.1% - -
Customer C 6.0% 25% 43%
Customer D - 16% -
Customer E - - 11%
Customer F - - 9%
</TABLE>
EMPLOYEES
As of May 13, 1997, the Company had 94 full-time employees and 6 part-time
employees. 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
The Company's corporate offices are located at 444 Jacksonville Road,
Warminster, Pennsylvania, 18974. Under the terms of a five (5) year lease, the
Company leases 20,000 square feet of office space, with the option to renew for
two (2) successive additional terms of five (5) years. 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 significant shareholders of the Company. Karen A.
Thompson is an executive officer of the Company.
The Company's midwest regional office is located at 7250 N. Cicero Avenue,
Chicago, Illinois, 60646. Under the terms of a five (5) year lease, the Company
leases 9,612 square feet of office space, with the option to renew for one (1)
term of five (5) years.
The Company's western regional office is located at 2175 N. California
Boulevard, Suite 990, Walnut Creek, California, 94596. Under the terms of a
twenty eight (28) month lease, the Company leases 3,444 square feet of office
space.
The Company's Canadian regional office is located at 812 - 1661 Portage Avenue,
Winnipeg, Manitoba, R3J 3T7. Under the terms of a five (5) year lease, the
Company leases 2,840 square feet of office space.
Management of the Company believes that each of the facilities occupied by the
Company is adequate to meet current needs.
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 Company's fiscal year ended on January 31, 1997.
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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 bid prices of the Company's Common Stock and Redeemable Warrants as
reported on the Nasdaq small cap market:
<TABLE>
<CAPTION>
Common Stock Redeemable Warrants
------------ -------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
FISCAL 1997
January 31, 1997 2 3/8 1 1/4 21/32 3/16
October 31, 1996 3 1/2 1 3/4 31/32 11/32
July 31, 1996 3 5/16 2 1 3/16 15/32
April 30, 1996 4 3/8 3 1 15/16 1
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
</TABLE>
Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
At January 31, 1997, the number of record holders of the Common Stock and
Redeemable Warrants were 124 and 21, respectively. Such numbers of record owners
was determined from the Company's shareholder records and do 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 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 of the Company as of and for each of the five years
in the period ended January 31, 1997 are derived from the audited financial
statements of the Company. 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>
For The Year Ended January 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ------------ ----------- -----------
STATEMENT OF OPERATIONS DATA (3):
<S> <C> <C> <C> <C> <C>
Revenues $ 8,903,682 $ 2,784,965 $ 1,325,991 $ 1,686,203 $ 1,082,277
Income (loss) from operations (460,658) (1,226,194) (902,591) 170,170 58,657
Net income (loss) (364,183) (858,174) (1,088,851) (2) 138,653 56,827
Income (loss) per common share (1) (0.03) (0.08) (0.13) (2) 0.02 0.01
</TABLE>
<TABLE>
<CAPTION>
As of January 31,
----------------------------------------------------------------------------------------
BALANCE SHEET DATA (3): 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $1,787,561 $2,815,742 $5,336,009 $ 226,022 $ 83,526
Working capital 4,099,598 3,708,980 5,367,985 301,561 161,470
Total assets 7,766,311 5,854,423 6,506,306 724,060 469,892
Long-term obligations 257,143 -- -- -- --
Total liabilities 1,912,165 464,202 417,311 259,102 143,587
Cash dividends paid -- -- -- -- --
Shareholders' equity 5,854,146 5,390,221 6,088,995 464,958 326,305
</TABLE>
(1) See Note 10 to the financial statements
(2) Includes an extraordinary loss on extinguishment of debt in 1995 of
$262,392 or $.03 per common share
(3) Statement of operations data for 1997 includes the results of operations
of Facility Management Systems, Inc. from the date of acquisition, and
includes a $485,000 write-off of in-process research and development
related to the acquisition. Balance sheet data for 1997 includes the
accounts of Facility Management Systems, Inc. as of January 31, 1997.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW AND SIGNIFICANT EVENTS
The significant progress made during Fiscal 1996 continued through Fiscal 1997,
as the Company reported record revenues for the year ended January 31, 1997. The
continued revenue growth experienced by the Company was the result of
acquisition activity and 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. Current users of the systems
include Boston College, Ford Motor Company, Pitney Bowes and Sun Company. The
acquisition brings Innovative Tech's total workforce to 100 and creates a
significant presence for the Company in the Midwestern United States.
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 software
has been translated into German, Swedish and Italian; a French translation is
presently underway. Innovative Tech recognized $545,365 in revenues pursuant to
the agreement for the year ended January 31, 1997.
The Company also has signed a five-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 received royalties of
$398,832 and $214,558 for the years ended January 31, 1997 and 1996,
respectively.
RESULTS OF OPERATIONS
Total revenues for the fiscal years ended January 31, 1997, 1996 and 1995 were
$8,903,682, $2,784,965 and $1,325,991, respectively. Management attributes the
current year increase to the release of the Windows(TM) version of its SPAN-FM
product line, increased sales and marketing activities, which generated a higher
volume of sales transactions, and the acquisition of FMS, which accounted for
$2,521,572 or 28% of fiscal 1997 revenues.
Fiscal 1997 software revenues increased $2,139,331 or 147% over fiscal 1996
software revenues. Of this increase, $880,627 or 41% related to the FMS
acquisition. Fiscal 1997 hardware revenues increased $1,154,946 over fiscal 1996
hardware revenues, which was due primarily to the acquisition of FMS. Fiscal
1997 services and support revenues increased $2,824,440 over fiscal 1996
services and support revenues. Of this increase, $508,994 or 18% related to the
FMS acquisition.
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Fiscal 1996 software revenues increased $931,824 or 177% over fiscal 1995
software revenues. Fiscal 1996 hardware revenues increased $7,743 or 88% over
fiscal 1995 hardware revenues. Fiscal 1996 services and support revenues
increased $519,407 or 66% over fiscal 1995 services and support revenues. The
increased revenues were due to the release of the Windows version of the SPAN-FM
product line, and increased sales and marketing activities.
The Company continues to provide services to the Department of Defense, and
sales made by the Company to the Department of Defense constituted approximately
6%, 25% and 43% of the Company's total revenues for the fiscal years ended
January 31, 1997, 1996 and 1995. 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 $3,121,428, $1,001,157 and $544,664 for fiscal years 1997,
1996 and 1995, 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 1997 is primarily attributable to the FMS
acquisition. The FMS product line utilizes hand-held collection devices and
accessories which are purchased and resold to customers. The fiscal 1997 cost of
revenues included $977,473 related to sales of the FMS product line, which
represents 31% of the fiscal 1997 total. Cost of revenues as a percentage of
revenues was 35%, 36% and 41% for fiscal years 1997, 1996 and 1995,
respectively.
Selling, general and administrative expenses were $4,963,942, $2,585,587 and
$1,675,139 for fiscal years 1997, 1996 and 1995, respectively. The increase in
fiscal 1997 is due 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 increase in these types of expenses is also
due to the FMS acquisition, which accounted for $1,459,383 or 29% of the fiscal
1997 total. Selling, general and administrative expenses as a percentage of
revenues was 56%, 93% and 126% for fiscal years 1997, 1996 and 1995,
respectively.
Research & development expenses were $793,970, $424,415 and $8,779 for fiscal
years 1997, 1996 and 1995, respectively. The 1997 amount includes $107,498 or
14% related to the FMS acquisition. The Company expensed $485,000 of in-process
research and development acquired as part of the acquisition of FMS. This
one-time charge resulted in the Company reporting a loss in fiscal 1997 (see
note 17 to the consolidated financial statements).
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 two (2) years primarily through funds
provided by the issuance of Common Stock in an underwritten public offering. On
January 30, 1997, the Company obtained a $1.5 million bank line of credit. The
Company believes that cash provided by operating activities, together with the
remaining net proceeds generated from the sale of shares of the Common Stock,
and the available bank line of credit should be adequate for its presently
foreseeable working capital and capital investment requirements.
The Company's cash position at January 31, 1997, decreased $1,028,181 or 37%
from the January 31, 1996 balance. The decrease was primarily attributable to
$830,044 used in operations to support the Company's ongoing product development
efforts, and increased sales and marketing activities. In addition, the Company
11
<PAGE> 12
repaid $568,721 of long-term debt and $421,342 of short-term borrowings under a
line of credit agreement of its wholly-owned subsidiary, the former Facility
Management Systems, Inc. The Company also purchased $223,061 of property and
equipment.
Accounts receivable at January 31, 1997, increased $2,232,834 from the January
31, 1996 balance. This increase is due primarily to the increased sales volume
experienced during the year, and the acquisition of FMS. The Company has not
experienced any material collection difficulties. Working capital at January 31,
1997 was $4,099,598.
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 corporate headquarters in Warminster,
Pennsylvania.
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. The Company had no loans
or notes payable at January 31, 1996.
12
<PAGE> 13
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-16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 22, 1996, the Registrant dismissed Coopers & Lybrand, L.L.P.,
independent accountants, who had previously been engaged as the Registrant's
principal accountant to audit the Registrant's financial statements. Coopers &
Lybrand, L.L.P.'s dismissal was intended to be effective as of December 2, 1996
and Coopers & Lybrand, L.L.P. continued to provide services to the Registrant
through November 27, 1996 in connection with the filing by the Registrant of an
amendment to its Form 10-Q filed with respect to the period ended July 31, 1996.
The Registrant disputes the accuracy of the statement made in the letter of
Coopers & Lybrand, L.L.P. (Exhibit 16.1(a)) concerning the resignation of
Coopers & Lybrand, L.L.P. prior to its dismissal. It is the Registrant's
position that Coopers & Lybrand, L.L.P. did not notify the Registrant's
president of its intention to resign until after Coopers & Lybrand, L.L.P. had
been notified that the Registrant's letter of dismissal had been sent. Written
confirmation as to the termination of the client-auditor relationship between
the Registrant and Coopers & Lybrand, L.L.P. was not issued by Coopers &
Lybrand, L.L.P. until November 27, 1996 (Exhibit 16.1(b)). The Registrant did
not receive any other form of written notification from Coopers & Lybrand,
L.L.P. concerning its resignation as the Registrant's principal accountant.
The decision to change accountants was approved by the Registrant's Board of
Directors. The former accountant's report on the Registrant's financial
statements for either of the past two years did not contain an adverse opinion
or a disclaimer of opinion, nor was either report qualified as to uncertainty,
audit scope or accounting principles.
It is the Registrant's position that, during the Registrant's two most recent
fiscal years and subsequent interim periods, there were no disagreements with
the former accountant on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the former accountant,
would have caused it to make a reference to the subject matter of the
disagreements in connection with its reports. The registrant takes exception to
the "reportable event" noted in the letter of Coopers & Lybrand, L.L.P. (Exhibit
16.1(a)) for the following reasons:
1. On the date the Registrant filed its Form 10-Q for the fiscal period ended
July 31, 1996, a partner at Coopers & Lybrand, L.L.P. advised the Registrant
that information had come to their attention that it had concluded
materially impacted the fairness of the unaudited, management-prepared
financial statements included in such Form 10-Q.
2. The item in the financial statements which was in issue was the presentation
as a gain of the extinguishment of debt payable to certain former
shareholders of a company acquired by the Registrant.
3. In determining the proper presentation to be used for such item, the
Registrant had repeatedly consulted with Coopers & Lybrand, L.L.P. and had
been advised that the extinguishment of such debt was properly shown as a
gain.
4. Based upon Coopers & Lybrand, L.L.P.'s advice, the Registrant prepared the
Form 10-Q for the period ended July 31, 1996 and showed the extinguishment
of the debt as a gain.
5. After the Registrant received notification from Coopers & Lybrand, L.L.P.
that the debt owed to the former shareholders of the company acquired by the
Registrant should have been recorded at its fair value at the time
13
<PAGE> 14
of acquisition and, upon extinguishment of such debt, no gain or loss should
have been recorded, the Registrant further investigated, in consultation
with Coopers & Lybrand, L.L.P., the correct financial statement presentation
for such item and concurred with Coopers & Lybrand, L.L.P.'s recommendation.
6. The Registrant prepared an Amendment to its Form 10-Q for the fiscal period
ended on July 31, 1996 which was forwarded to Coopers & Lybrand, L.L.P. for
its review and approval on November 22, 1996 and filed with the Securities
and Exchange Commission on November 27, 1996.
7. Based upon the foregoing chronology of events and discussions which took
place between the Registrant's management and Coopers & Lybrand, L.L.P. at
the time the original Form 8-k was filed, the Registrant maintains that, at
the time of Coopers & Lybrand, L.L.P.'s dismissal, there were no unresolved
issues between the Registrant and Coopers & Lybrand, L.L.P. concerning
financial statement preparation or disclosure or financial reporting.
On March 3, 1997 the Company engaged Price Waterhouse LLP as its independent
accountants to audit the Company's consolidated financial statements for the
year ended January 31, 1997 . During the two fiscal years ended January 31, 1996
and the interim periods of fiscal 1997 prior to engaging Price Waterhouse LLP,
the Registrant did not consult with Price Waterhouse LLP on any matters.
(The remainder of this page is intentionally blank.)
14
<PAGE> 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
William M. Thompson 38 Chairman, Chief Executive Officer and Director
John M. Thompson 35 President, Chief Operating Officer, Treasurer and Director
Karen A. Thompson 31 Executive Vice President of Information Services and
Secretary
John R. Smart 32 Executive Vice President of Strategic Marketing and Director
Louis J. Desiderio 32 Vice President, Chief Financial Officer and Assistant
Secretary
Mark R. Hernick 35 Director
Julie Moore 38 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 received a Bachelor of Science Degree in accounting from
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
COMPLIANCE WITH REPORTING OBLIGATIONS
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, 1997, 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, 1997 paid to its Chief
Executive Officer and its Chief Operating Officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Principal Position Year Salary Bonus
- --------------------------- ---- ------ -----
<S> <C> <C> <C>
William M. Thompson 1997 $110,000 -
Chairman and Chief Executive Officer 1996 $110,000 -
1995 $100,140 -
John M. Thompson 1997 $110,000 -
President, Chief Operating Officer and Treasurer(1) 1996 $110,000 -
1995 $100,140 -
</TABLE>
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.
There were no stock options granted to executive officers during the years ended
January 31, 1997 and 1996.
18
<PAGE> 19
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.
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.)
19
<PAGE> 20
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
of the Company as a group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature
of Beneficial Owner of Beneficial Ownership (1) Percentage Ownership of Class (2)
- ------------------- --------------------------- ---------------------------------
<S> <C> <C>
William M. Thompson (3)
444 Jacksonville Road
Warminster, PA 18974 2,864,629 25.15%
John M. Thompson (3)
444 Jacksonville Road
Warminster, PA 18974 2,152,657 18.90%
Karen A. Thompson (5)
444 Jacksonville Road
Warminster, PA 18974 132,361 1.16%
John R. Smart (5)
444 Jacksonville Road
Warminster, PA 18974 116,989 1.03%
Mark R. Hernick
444 Jacksonville Road
Warminster, PA 18974 1,617 -
Julie Moore (4)
444 Jacksonville Road
Warminster, PA 18974 2,022 -
Executive Officers and
Directors as a group (six
persons) (6) 4,297,375 37.73%
</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 972,900 shares of Common Stock owned of record by three 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 three 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 150,000 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 100,000 vested stock options.
(6) Includes 972,900 shares of Common Stock owned of record by three 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 three outside investors. Also
includes 1,617 shares of Common Stock owned by Ms. Moore's husband as to which
Ms. Moore disclaims beneficial ownership.
20
<PAGE> 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 and majority shareholders of the Company. Karen
A. Thompson is an executive officer of the Company.
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. On January
30, 1997, Thompson Enterprises, L.P. refinanced the mortgage loan, and the
certificate of deposit was released and is classified as cash and cash
equivalents in the January 31, 1997 balance sheet.
(The remainder of this page is intentionally blank.)
21
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a). Documents filed as a part of this Report:
(1) Consolidated Financial Statements
Report of Independent Accountants; Balance Sheets;
Statements of Operations; Statements of Cash Flows;
Statements of Stockholders' Equity; and Notes to
Consolidated Financial Statements
(2) Financial Statement Schedules - not applicable
(b). Reports on Form 8-K
The Company has filed with the Securities and Exchange Commission,
(i) a Current Report on Form 8-K dated November 27, 1996 reporting
that the Company had dismissed Coopers & Lybrand, L.L.P. as its
independent accountants.
The Company has filed with the Securities and Exchange Commission,
(i) a Current Report on Form 8-KA dated January 8, 1997 amending
the Current Report on Form 8-K dated November 27, 1996 reporting
that the Company had dismissed Coopers & Lybrand, L.L.P. as its
independent accountants.
22
<PAGE> 23
3. EXHIBITS
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
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.**
10.2 Employment Agreement with William M. Thompson.*
10.3 Employment Agreement with John M. Thompson.*
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. ***
10.8 Agreement and Plan of Merger, dated as of May 31, 1996,
between Innovative Tech Systems, Inc. and Facility Management
Systems, Inc.****
16.1(a) Letter Regarding Change in Certifying Accountant.*****
16.1(b) Letter Regarding Change in Certifying Accountant.*****
21.1 List of Subsidiaries. ******
23.1 Consent of Price Waterhouse LLP.******
23.2 Consent of Coopers & Lybrand L.L.P.******
27.1 Financial Data Schedule. ******
</TABLE>
* 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).
*** Incorporated by reference to Company's 1996 Form 10-K (File
No. 33-17856-C).
**** Incorporated by reference to Company's Form 8-K dated
August 9, 1996.
***** Incorporated by reference to Company's Form 8-K/A dated
January 6, 1997.
****** 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 May 15, 1997
--------------------------
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 May 15, 1997
- ----------------------- Officer and Director (Principal
William M. Thompson executive officer)
/s/ John M. Thompson President, Chief Operating May 15, 1997
- -------------------- Officer, Treasurer and Director
John M. Thompson
/s/ John R. Smart Executive Vice President and May 15, 1997
- ----------------- Director
John R. Smart
/s/ Mark R. Hernick Director May 15, 1997
- -------------------
Mark R. Hernick
/s/ Julie Moore Director May 15, 1997
- -------------------
Julie Moore
/s/ Louis J. Desiderio Vice President, Chief Financial May 15, 1997
- ---------------------- Officer and Assistant Secretary
Louis J. Desiderio (Principal financial and accounting
officer)
</TABLE>
24
<PAGE> 25
INNOVATIVE TECH SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
CONSOLIDATED FINANCIAL STATEMENTS:
<S> <C>
Reports of Independent Accountants F-2 - F-3
Balance Sheets, as of January 31, 1997 and 1996 F-4
Statements of Operations for the years ended January 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows for the years ended January 31, 1997, 1996 and 1995 F-6
Statements of Changes in Shareholders' Equity for the years ended January 31,
1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8 - F-16
</TABLE>
F-1
<PAGE> 26
Report Of Independent Accountants
To the Board of Directors and
Shareholders of Innovative Tech Systems, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 22 present fairly, in all material
respects, the financial position of Innovative Tech Systems, Inc. and its
subsidiaries at January 31, 1997, and the results of their operations and their
cash flows for the year ended January 31, 1997, in conformity with generally
accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
1about 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
May 7, 1997
F-2
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Innovative Tech Systems, Inc.:
We have audited the accompanying balance sheet of Innovative Tech Systems, Inc.
as of January 31, 1996 and the related statements of operations, changes in
shareholders' equity and cash flows for each of the two 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 the results of its operations and its cash flows for
each of the two years in the period ended January 31, 1996, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 2, 1996
F-3
<PAGE> 28
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------------
ASSETS 1997 1996
---------------- ----------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,787,561 $ 2,815,742
Accounts receivable, net 3,514,541 1,281,707
Inventory 264,205 -
Officer advance 89,307 49,921
Other current assets 99,006 25,812
---------------- ----------------
Total current assets 5,754,620 4,173,182
Property and equipment, net 884,801 611,548
Restricted cash - 700,000
Computer software, net of accumulated amortization of
$591,434 and $335,599 at January 31, 1997 and 1996 1,049,253 369,693
Other assets 77,637 -
---------------- ----------------
Total assets $ 7,766,311 $ 5,854,423
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 42,857 -
Accounts payable 713,751 $ 215,888
Accrued liabilities 128,656 35,273
Accrued payroll and related costs 118,526 138,160
Deferred revenue 651,232 74,881
---------------- ----------------
Total current liabilities 1,655,022 464,202
Long-term debt 257,143 -
---------------- ----------------
Total liabilities 1,912,165 464,202
---------------- ----------------
Commitments and contingent liabilities
Shareholders' equity:
Senior Preferred stock, par value $.001; authorized
200,000,000 shares; issued and outstanding -0-
shares as of January 31, 1997 and 1996, respectively - -
Common stock, par value $.0185; authorized
100,000,000 shares; issued and outstanding
10,888,456 as of January 31, 1997 and 10,227,837
as of January 31, 1996 201,436 189,215
Additional paid-in capital 7,290,038 6,475,501
Warrants 851,500 850,150
Accumulated deficit (2,488,828) (2,124,645)
---------------- ----------------
Total shareholders' equity 5,854,146 5,390,221
---------------- ----------------
Total liabilities and shareholders' equity $ 7,766,311 $ 5,854,423
================ ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 29
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
------------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Software $ 3,599,002 $ 1,459,671 $ 527,847
Hardware 1,171,439 16,493 8,750
Services and support 4,133,241 1,308,801 789,394
------------ ------------ ------------
Total revenues 8,903,682 2,784,965 1,325,991
------------ ------------ ------------
Cost of revenues:
Software 442,776 154,516 95,204
Hardware 747,790 10,429 5,533
Services and support 1,930,862 836,212 443,927
------------ ------------ ------------
Total cost of revenues 3,121,428 1,001,157 544,664
------------ ------------ ------------
Gross margin 5,782,254 1,783,808 781,327
Operating expenses:
Selling, general and administrative 4,963,942 2,585,587 1,675,139
Research & development 793,970 424,415 8,779
Write-off of in-process research and development 485,000 -- --
------------ ------------ ------------
Total operating expenses 6,242,912 3,010,002 1,683,918
------------ ------------ ------------
Loss from operations (460,658) (1,226,194) (902,591)
Interest income 99,073 368,020 150,633
Interest expense (2,598) -- (83,301)
------------ ------------ ------------
Loss before income taxes, and extraordinary item (364,183) (858,174) (835,259)
Benefit from income taxes -- -- (8,800)
------------ ------------ ------------
Loss before extraordinary item (364,183) (858,174) (826,459)
Extraordinary item - loss on extinguishment of debt -- -- (262,392)
------------ ------------ ------------
Net Loss $ (364,183) $ (858,174) $ (1,088,851)
============ ============ ============
Loss per common share:
Primary loss before extraordinary item $ (0.03) $ (0.08) $ (0.10)
Extraordinary item - loss on extinguishment of
debt -- -- (0.03)
------------ ------------ ------------
Primary loss per common share $ (0.03) $ (0.08) $ (0.13)
============ ============ ============
Weighted average number of shares outstanding 10,569,089 10,227,837 7,989,519
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 30
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------------------------------------
1997 1996 1995
-------------------- --------------------- ----------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (364,183) $ (858,174) $ (1,088,851)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 458,227 208,348 125,552
Write-off of in-process research and development 485,000 - -
Loss on disposal of equipment 52 764 -
Extraordinary loss on extinguishment of debt - - 262,392
Amortization of original issue discount - - 62,608
Bad debt expense 35,336 5,000 9,200
Changes in operating assets and liabilities, net
of effects from acquisition:
Accounts receivable (1,736,964) (902,289) (72,777)
Inventory (151,502)
Advances - officers (39,386) (35,052) (14,869)
Due from related party - 50,000 (50,000)
Other assets (65,331) (21,822) (1,490)
Accounts payable 394,043 27,502 80,197
Accrued liabilities (4,958) (34,920) (8,073)
Accrued payroll and related costs (19,634) 46,678 57,740
Deferred revenue 179,226 (7,169) 22,550
Deferred income taxes - - 11,400
-------------------- --------------------- ----------------------
Net cash used in operating activities (830,044) (1,521,134) (604,421)
-------------------- --------------------- ----------------------
Cash flows from investing activities:
Purchase of property and equipment (223,061) (391,541) (241,311)
Proceeds from disposal of equipment 80 4,173 -
Capitalization of software development costs (11,493) (71,165) (432,169)
Restricted cash 700,000 (700,000) -
-------------------- --------------------- ----------------------
Net cash provided by (used in)
investing activities 465,526 (1,158,533) (673,480)
-------------------- --------------------- ----------------------
Cash flows from financing activities:
Private placement of common stock - - 48,100
Net proceeds from public offering - - 6,439,788
Proceeds from exercise of stock options 25,050
Warrant conversion 1,350 59,400 -
Notes receivable - 100,000 (100,000)
Proceeds from long-term debt 300,000
Proceeds from note payable - - 1,300,000
Repayment of note payable - - (1,300,000)
Repayment of long-term debt (568,721)
Repayment under line of credit (421,342) - -
-------------------- --------------------- ----------------------
Net cash provided by (used in)
financing activities (663,663) 159,400 6,387,888
-------------------- --------------------- ----------------------
Net (decrease) increase in cash and cash
equivalents (1,028,181) (2,520,267) 5,109,987
Cash and cash equivalents, beginning of year 2,815,742 5,336,009 226,022
-------------------- --------------------- ----------------------
Cash and cash equivalents, end of year $ 1,787,561 $ 2,815,742 $ 5,336,009
==================== ===================== ======================
Cash paid during the period for:
Income taxes $ - $ - $ 7,448
Interest $ 2,598 $ - $ 20,693
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 31
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended January 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Senior Preferred Stock Common Stock Additional
------------------------- --------------------------- Paid-In
Shares Amount Shares Amount Capital Warrants
----------- ----------- -------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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 - - - - - 325,000
Conversion of senior preferred stock (1,521) (28) 1,521 28 - -
Proceeds from public offering - - 1,457,640 26,966 5,947,072 465,750
Notes receivable - - - - - -
Net loss - - - - - -
----------- ----------- -------------- ----------- --------------- -------------
Balance, January 31, 1995 - - 3,409,279 63,071 6,601,645 790,750
Repayment of notes receivable - - - - - -
Stock split - - 6,818,558 126,144 (126,144) -
Warrant conversion - - - - - 59,400
Net Loss - - - - - -
----------- ----------- -------------- ----------- --------------- -------------
Balance, January 31, 1996 - - 10,227,837 189,215 6,475,501 850,150
Warrant conversion 1,350
Acquisition of Facility Management
Systems, Inc. 645,619 11,944 814,537
Stock options exercised 15,000 277
Net income
----------- ----------- -------------- ----------- --------------- -------------
- $ - 10,888,456 $ 201,436 $ 7,290,038 $ 851,500
=========== =========== ============== =========== =============== =============
</TABLE>
<TABLE>
<CAPTION>
Total
Notes Accumulated Shareholders'
Receivable Deficit Equity
------------ ------------- --------------
<S> <C> <C> <C>
Balance, January 31, 1994 $ - $ (177,620) $ 464,958
Private placement - - 48,100
Bridge debt warrants - - 325,000
Conversion of senior preferred stock - - -
Proceeds from public offering - - 6,439,788
Notes receivable (100,000) - (100,000)
Net loss - (1,088,851) (1,088,851)
------------ ------------- --------------
Balance, January 31, 1995 (100,000) (1,266,471) 6,088,995
Repayment of notes receivable 100,000 - 100,000
Stock split - - -
Warrant conversion - - 59,400
Net Loss - (858,174) (858,174)
------------ ------------- --------------
Balance, January 31, 1996 - (2,124,645) 5,390,221
Warrant conversion 1,350
Acquisition of Facility Management
Systems, Inc. 826,481
Stock options exercised 277
Net income (364,183) (364,183)
------------ ------------- --------------
$ - $ (2,488,828) $ 5,854,146
============ ============= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
The consolidated financial statements include the accounts of Innovative Tech
Systems, Inc. (the "Company") and its wholly-owned subsidiaries, which were
formed during fiscal year 1997. 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents:
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 rating.
Revenue Recognition and Accounts Receivable:
Sales and related costs under contracts to customers are recognized as units are
delivered, since there are no obligations after delivery. 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.
Revenue is reduced for estimated customer returns and allowances. 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. Accounts receivable is reduced for estimated uncollectible accounts.
The reserve for uncollectible accounts was $45,000 and $10,000 at January 31,
1997 and 1996, respectively.
Inventories:
Inventories consist of hardware, accessories and repair parts that are purchased
and resold to customers. Inventories are valued at actual cost, but not in
excess of net realizable value. Cost is determined using the first-in, first-out
method.
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:
Internally developed computer software costs and costs of product enhancements
are capitalized subsequent to achieving 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
F-8
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - (CONTINUED)
Computer Software:
costs are amortized on a product-by-product basis over periods of 3 to 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. Software amortization was $255,835, $104,226, and $75,747
for the years ended January 31, 1997, 1996 and 1995, respectively.
Income Taxes:
The Company utilizes the liability method of accounting for income taxes. 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.
Loss Per Share:
Loss 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. Fully diluted and
primary loss per share data are the same for each period presented. Primary
loss per share for fiscal 1996 of $.08 was previously reported as $.07.
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 amounts reported in the consolidated financial statements and
accompanying disclosures. Although these estimates are based on management's
best knowledge of current events and actions the company may undertake in the
future, actual results ultimately may differ from those estimates.
Reclassification:
Certain reclassifications have been made to the 1996 and 1995 financial
statements and related footnotes to conform to the 1997 presentation.
Long-Lived Assets:
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 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 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
recognized in the income statement and certain disclosures regarding the
impairment are to be made in the financial statements. SFAS No. 121 had no
material effect on the Company's financial position or results of operations.
Stock-Based Compensation:
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
requires companies to either recognize or disclose compensation expense for
grants of stock, stock options, and other equity instruments to employees based
upon fair value. 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
for all awards granted in fiscal years beginning after December 15, 1994. The
Company has
F-9
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - (CONTINUED)
Stock-Based Compensation:
adopted the disclosure requirements and will therefore continue to account for
stock-based compensation in accordance with APB No. 25. No pro-forma disclosures
are currently required as no awards have been issued since November 7, 1994.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
January 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Computers and office equipment $ 924,697 $ 416,559
Furniture and fixtures 388,356 233,313
Leasehold improvements 218,058 155,314
Automobiles 10,746 -
----------- -----------
1,541,857 805,186
Less accumulated depreciation (657,056) (193,638)
----------- -----------
$ 884,801 $ 611,548
=========== ===========
</TABLE>
Depreciation expense was $202,392, $104,122, and $49,805 in 1997, 1996 and 1995,
respectively.
4. INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
For the years ended January 31,
-----------------------------------
1997 1996 1995
-------- ---------- ---------
<S> <C> <C> <C>
Federal income taxes:
Current - - $ (20,200)
Deferred - -
6,700
-------- ---------- ---------
- - (13,500)
-------- ---------- ---------
State:
Current - - -
Deferred - - 4,700
-------- ---------- ---------
- - 4,700
======== ========== =========
- - $ (8,800)
======== ========== =========
</TABLE>
F-10
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. INCOME TAXES: - (CONTINUED)
As of January 31, 1997, the Company has federal net operating loss carryforwards
of approximately $2,080,000, which expire over various years through 2010. Due
to certain substantial changes in the Company's ownership, there will be an
annual limitation on the amount of the carryforwards which can be utilized. As
of January 31, 1997, the Company has state net operating loss carryforwards of
approximately $956,000, which expire over various years through 1998. The
reconciliation of income taxes at the U.S. statutory rate to the provision
(benefit) for income taxes for 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
For the years ended January 31,
---------------------------------------------
1997 1996 1995
----------- --------- ---------
<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 %
State income taxes, net of federal benefit (7)% - 1 %
Limitation on the utilization of tax benefits - 31 % 32 %
Acquisition accounting differences 56 % -
Deferred revenue 17 % 1 %
Utilization of net operating loss carryforwards (36)% - -
Other, net 4 % 2 % (1)%
=========== ========= =========
- - (1)%
=========== ========= =========
</TABLE>
The tax effects of temporary differences which comprise the deferred tax assets
and liabilities at January 31, 1997 and 1996 were determined using an effective
rate of 41%. Tax effects of temporary differences are as follows:
<TABLE>
<CAPTION>
January 31, January 31,
1997 1996
-------------- -------------
<S> <C> <C>
Deferred tax debits:
Net operating loss carryforwards $ 809,800 $ 1,038,900
Deferred revenue 267,600 30,800
Other liabilities 29,200 14,800
Valuation allowance (1,047,700) (1,034,000)
-------------- -------------
58,900 50,500
Deferred tax credits:
Property and equipment (58,900) (50,500)
============== =============
Net deferred taxes $ - $ -
============== =============
</TABLE>
Net deferred tax assets are offset by a full valuation allowance because the
lack of history of consistent earnings gives rise to uncertainty as to whether
the deferred tax assets are realizable.
F-11
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. LINE OF CREDIT:
On January 30, 1997, the Company secured a $1.5 million line of credit with a
bank. The line is payable on demand and bears interest at the rate of prime plus
1/2 %. The line is collateralized by all of the assets of the Company. There
were no borrowings outstanding under the line of credit at January 31, 1997. The
terms of this arrangement contain requirements for maintaining defined levels of
working capital, tangible net worth and cash flow.
The Company's wholly-owned subsidiary, the former Facility Management Systems,
Inc., maintained a line of credit with a bank bearing interest at the rate of
prime plus 1/2 %. The line expired on July 31, 1996, and the outstanding balance
of $351,341 was paid in full on August 16, 1996.
6. LONG-TERM DEBT:
On January 30, 1997, the Company secured a $300,000 term loan to finance
leasehold improvements and furniture and equipment purchases. The loan is
payable in fixed monthly principal payments of $3,571 plus interest at the rate
of prime plus 3/4 %, with a final installment of $89,286 payable on February 1,
2002. The loan is collateralized by all of the assets of the Company.
7. COMMITMENTS:
The Company leases office facilities, company automobiles and company
apartments, under operating leases. The future minimum rental payments under
noncancellable operating leases are as follows:
<TABLE>
<S> <C>
1998 $518,679
1999 528,923
2000 470,245
2001 138,720
------------
$1,656,567
============
</TABLE>
Rent expense for the years ended January 31, 1997, 1996 and 1995 was $313,990,
$124,164 and $41,094, respectively.
8. 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. The funds raised in the private
placement were used for the purchase of computer equipment and furniture.
9. BRIDGE DEBT:
On May 11, 1994, the Company issued $1,300,000 principal amount of 7%
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 an annual rate of 7% upon the
F-12
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. BRIDGE DEBT: - (CONTINUED)
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.
10. STOCK SPLITS:
The Board of Directors of the Company approved a three-for-one 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 have been adjusted to reflect the stock splits.
11. 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.
12. 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 July
26, 1995. Each Redeemable Warrant is redeemable by the Company at a redemption
price of $.083 per Redeemable Warrant commencing 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.
13. 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 the issuance of 1,200,000 additional shares pursuant to
the plan, which is subject to shareholder approval.
F-13
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. 1994 STOCK OPTION PLAN: - (CONTINUED)
Changes in shares under option during the fiscal years ended January 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Shares under option at beginning of year 1,475,000 975,000
Additions (deductions):
Options granted - 500,000
Options exercised 15,000 -
Options expired or terminated 530,000 -
--------- ---------
Shares under option at end of year 930,000 1,475,000
--------- ---------
Options exercisable at end of year 620,000 325,000
========= =========
</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.
14. SIGNIFICANT CUSTOMERS:
Revenues from significant customers as a percentage of total revenues were as
follows:
<TABLE>
<CAPTION>
Customer 1997 1996 1995
-------- ---- ---- ----
<S> <C> <C> <C>
Customer A 6.4% 11% -
Customer B 6.1% - -
Customer C 6.0% 25% 43%
Customer D - 16% -
Customer E - - 11%
Customer F - - 9%
</TABLE>
15. 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 majority shareholders of the
Company. Karen A. Thompson is an executive officer of the Company.
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. On January
30, 1997, Thompson Enterprises, L.P. refinanced the mortgage loan, and the
certificate of deposit was released and is classified as cash and cash
equivalents in the January 31, 1997 balance sheet.
F-14
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. 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 a $100,000 origination fee. The loan and the
origination fee 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.
17. ACQUISITION:
Effective July 26, 1996, a subsidiary of the Company acquired 100% of the
outstanding common stock of Facility Management Systems, Inc. ("FMS") in
exchange for 645,619 shares of Innovative Tech common stock valued at $850,603.
The total purchase price aggregated $2,559,739, including acquisition costs of
$82,203, and liabilities assumed of $1,626,933, and was allocated based on
relative fair values as follows:
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 814,252
Property and equipment 251,084
Software development costs 923,903
In-process research & development 485,000
Other assets 85,500
------------
$ 2,559,739
============
</TABLE>
The in-process research and development of $485,000 represents the fair value of
in-process development projects that had not reached technological feasibility
and had no probable alternative future uses, which the Company expensed at the
date of the acquisition.
The results of operations are included in the Company's consolidated financial
statements from the date of acquisition. The following unaudited pro forma
financial information combines the consolidated results of operations as if the
acquisition had occurred as of the beginning of the periods presented. Pro forma
adjustments include only the effects of events directly attributed to the
transaction that are factually supportable and expected to have a continuing
impact.
<TABLE>
<CAPTION>
For The Year Ended January 31,
---------------------------------
1997 1996
--------------- -------------
<S> <C> <C>
Revenues $ 10,564,018 $ 7,224,252
Net loss $ (658,248) $ (1,220,378)
Loss per share $ (.06) $ (.12)
</TABLE>
The pro forma financial information does not necessarily reflect the operating
results that would have occurred had the acquisitions been consummated as of the
above dates, nor is such information indicative of future operating results. In
addition, the pro forma financial results contain estimates since the acquired
business did not maintain information on a period comparable with the Company's
fiscal year end.
F-15
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
18. 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 five
(5) year vesting schedule. The Company made matching contributions of $24,906
and $1,821 for the years ended January 31, 1997 and 1996, respectively.
F-16
<PAGE> 1
EXHIBIT 21.1 LIST OF SUBSIDIARIES
Innovative Tech Systems, Inc. of Delaware
Micro Computer Company, Inc. of Delaware
<PAGE> 1
EXHIBIT 23.1 CONSENT OF PRICE WATERHOUSE LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-98100),
the Prospectus constituting part of the Registration Statement on Form S-8 (No.
333-09841) and the Prospectus constituting part of Post-Effective Amendment No.
1 on Form S-3 to Form SB-2 (No. 33-78940) of Innovative Tech Systems, Inc. of
our report dated May 7, 1997 appearing on page F-2 of this Form 10-K.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
May 14, 1997
<PAGE> 1
23.2 CONSENT OF COOPERS & LYBRAND L.L.P.
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), Post-Effective
Amendment No. 1 to Form S-3 to Registration Statement on Form SB-2 (File No.
33-78940) and on Form S-8 (File No. 333-09841) of our report dated April 2,
1996, on our audits of the financial statements of Innovative Tech Systems, Inc.
as of January 31, 1996 and for the years ended January 31, 1996 and 1995, which
report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 1,787,561
<SECURITIES> 0
<RECEIVABLES> 3,559,541
<ALLOWANCES> (45,000)
<INVENTORY> 264,205
<CURRENT-ASSETS> 5,754,620
<PP&E> 1,541,857
<DEPRECIATION> (657,056)
<TOTAL-ASSETS> 7,766,311
<CURRENT-LIABILITIES> 1,655,022
<BONDS> 0
0
0
<COMMON> 201,436
<OTHER-SE> 5,652,710
<TOTAL-LIABILITY-AND-EQUITY> 7,766,311
<SALES> 8,903,682
<TOTAL-REVENUES> 8,903,682
<CGS> 3,121,428
<TOTAL-COSTS> 6,242,912
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,598
<INCOME-PRETAX> (364,183)
<INCOME-TAX> 0
<INCOME-CONTINUING> (364,183)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (364,183)
<EPS-PRIMARY> (0.030)
<EPS-DILUTED> (0.030)
</TABLE>
