<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, 1998
Commission File Number: 33-17856-C
INNOVATIVE TECH SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
ILLINOIS 65-0071222
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
444 JACKSONVILLE ROAD, SUITE 200
WARMINSTER, PENNSYLVANIA 18974
------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 441-5600
--------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class:
--------------------
<S> <C>
Common Stock, $.0185 par value NASDAQ Small Cap, Boston and Pacific Stock Exchanges
Redeemable Warrants NASDAQ Small Cap, Boston and Pacific Stock Exchanges
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [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 April 30, 1998, was approximately
$32,660,744. Shares of Common Stock held by each officer and director of the
Registrant, and by each person who may be deemed to be an affiliate of the
Registrant, have been excluded from this computation. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practicable date.
Class: Common
Outstanding at April 30, 1998: 11,334,023
<PAGE> 2
PART I
ITEM 1. BUSINESS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. 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.
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).
Effective July 26, 1996, a subsidiary of the Company, Innovative Tech Systems,
Inc. of Delaware, merged with Facility Management Systems, Inc. ("FMS"), an
Illinois corporation. The former shareholders of Facility Management Systems,
Inc. received 645,619 restricted shares of Innovative Tech common stock in
connection with such merger. The FMS product line utilitizes hand-held
collection devices and accessories which are purchased and resold to customers.
At the end of 1998, Innovative Tech Systems, Inc. of Delaware was merged into
Innovative Tech and the separate corporate existence of the subsidiary was
terminated.
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.
CAPITAL STRUCTURE
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. In addition, the Company
issued 130,000 non-redeemable warrants to the Underwriter. 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 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 Board of Directors
of the Company approved a three-for-one stock split of all outstanding shares of
Common Stock and all outstanding Warrants on August 23, 1995. The three-for-one
split was effective on September 18, 1995.
2
<PAGE> 3
The shares of Common Stock and Redeemable Warrants are separately tradable. 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.
On September 30, 1997, the Company obtained consent from its warrant holders to
effect a one-for-eight reverse split of the redeemable common stock purchase
warrants and a one-for-twenty-nine and one-eighth reduction in the exercise
price of the warrants. The total number of issued and outstanding redeemable
common stock purchase warrants was reduced from 10,596,000 to 1,324,500 and the
exercise price was reduced to $0.08 from $2.33 per share. As a result, the
Company recorded an increase to warrants and accumulated deficit of $789,266.
The Company also has outstanding (1) non-redeemable warrants to purchase 390,000
common shares at $2.50 per share which expire July 25, 1999 and (2) warrants to
acquire redeemable warrants to purchase 6,750 shares of common stock at a total
exercise price of $.09 per share which expire July 25, 1999.
The following table summarizes certain information set forth herein with respect
to warrants previously issued by the Company:
<TABLE>
<CAPTION>
Underwriter's Underwriter's
Non-Redeemable Warrants Exercisable for Redeemable
Warrants to purchase Redeemable Common Stock Common Stock
Event Date Common Stock Purchase Warrants Purchase Warrants
- ---------------- ------------------ -------------------- ------------------------ -----------------
<S> <C> <C> <C> <C>
1994 public offering July 26, 1994 130,000 180,000 3,100,000
Exercise of Underwriter's
overallotment September 14, 1994 0 0 270,000
------- -------- ----------
Total Outstanding
following 1994 offering -- 130,000 180,000 3,370,000
3 for 1 stock split September 18, 1995 X 3 X 3 X 3
------- -------- ----------
Conversions of certain 390,000 540,000 10,110,000
Underwriter's warrants
by Underwriter 1995/1996 0 (486,000) 486,000
------- -------- ----------
Total Warrants
outstanding following
conversions -- 390,000 54,000 10,596,000
Reverse 1 for 8 split of
outstanding Redeemable
Common Stock Purchase
Warrants September 30, 1997 N/A divided by 8 divided by 8
------- -------- ----------
Warrants January 31, 1998 390,000 6,750 1,324,500
======= ======== ==========
</TABLE>
All information contained in this form 10-K has been adjusted to give effect to
the above stock and warrant splits.
3
<PAGE> 4
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 and its subsidiaries have developed, field-tested and actively
market an exclusive line of SPANoFM(TM) brand solutions, including SPANoFM(TM)
software, the leading enterprise-wide Facilities Automation software. Also under
the SPANoFM(TM) brand is the remote data collection systems product line, which
includes Inspection Manager, 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.
SPANoFM(TM) applications are designed to be integrated with every other
SPANoFM(TM) product as well as the individual client's existing core business
systems. In addition, SPANoFM(TM) solutions may interface to various
computer-aided design systems and other control systems. This universal
connectivity is accomplished by developing SPANoFM(TM) products on an open
system architecture in our software. In practical terms, this enables SPANoFM
solutions to link with information throughout the organization, including
financial and human resources databases. SPANoFM(TM) 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. SPANoFM(TM) software is developed under PowerBuilder(R),
widely recognized as the standard in client-server development tools.
SPANoFM(TM) 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 SPANoFM(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 SPANoFM(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.
4
<PAGE> 5
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's success is heavily dependent upon proprietary technology. 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 appropriate filings and registrations to obtain and protect
the Company's significant trademarks and patents. Management believes that no
single copyright, patent or technology license is material to the Company's
business. 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.
There can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar or superior technology. Policing unauthorized use of the
Company's software is difficult and, while the Company is unable to determine
the extent to which piracy of its software products exists, software piracy can
be expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States. Litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets or to determine the validity and scope of the proprietary rights
of others. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company is not aware that any of its products infringes the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim infringement by the Company with respect to current or future
products. The Company expects that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to the Company or at all, which could have
a material adverse effect on the Company's business, operating results and
financial condition.
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 that keep
pace with technological developments in the marketplace and address the
increasingly sophisticated needs of its end-users. The Company intends to
continue to use its best efforts 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, although there can be no assurances that this practice
will continue. 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
SPANoFM(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.
5
<PAGE> 6
The Company pursues the following strategies with respect to the 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; Huntsville, Alabama; and
Winnipeg, Canada. The Company currently has regional sales representatives
located in Los Angeles, California; New York, New York; Philadelphia,
Pennsylvania; Atlanta, Georgia; Dallas, Texas; Herdon, Virginia; Fairfax,
Virginia; and St. Charles, Illinois. During fiscal 1999, the Company plans to
hire additional sales representatives throughout the United States and Canada.
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 an OEM agreement, Intergraph Corporation
marketed, sold and distributed certain Innovative Tech software packages. The
financial terms of the agreement provided for Innovative Tech to receive
royalties on all sales of the SPANoFM(TM) software made by Intergraph
Corporation. Pursuant to the agreement, Innovative Tech received royalties of
$100,550, $398,832, and $214,558 for the years ended January 31, 1998, 1997, and
1996, respectively. In September, 1997, both parties mutually agreed to
terminate the OEM agreement. In connection with such termination, Intergraph
paid the Company a one time fee of $115,300, which was recognized as revenue for
the fiscal year ended January 31, 1998.
Penetration of International Markets. On April 11, 1996, the Company signed a
seven (7) year strategic marketing agreement with Elektrowatt AG Landis & Staefa
(Europe), a Swiss-based provider of building performance and energy efficiency
solutions, with approximately $2.1 billion in annual revenues. Under the terms
of the agreement, Elektrowatt AG Landis & Staefa (Europe) will distribute and
market Innovative Tech's SPANoFM(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 Elektrowatt AG Landis & Staefa (Europe) to commit financial resources
for revisions and enhancements to the SPANoFM(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 SPANoFM(TM) by
Elektrowatt AG Landis & Staefa (Europe) in Europe. As the new European partner
of Innovative Tech, Elektrowatt AG Landis & Staefa (Europe) will also translate
the SPANoFM(TM) software into the various languages used in the market area. To
date, SPANoFM(TM) software has been translated into German, Swedish and Italian;
a French translation is presently underway. Innovative Tech recognized $291,633
and $545,365 in revenues pursuant to the agreement for the years ended January
31, 1998 and 1997, respectively.
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.
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<PAGE> 7
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.
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 SPANoFM(TM) database
modules purchased by the end-user.
For the fiscal year ended January 31, 1998, revenues from software sales,
hardware sales, and services and support were 54%, 15% and 31%, respectively, of
total revenues. 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.
SIGNIFICANT CUSTOMERS
Revenues from significant customers as a percentage of total revenues were as
follows:
<TABLE>
<CAPTION>
Customer 1998 1997 1996
- -------- ---- ---- ----
<S> <C> <C> <C>
Customer A 17% - -
Customer B 11% - -
Customer C 3% 6% 25%
Customer D 2% 6% 11%
Customer E - 1% 16%
</TABLE>
EMPLOYEES
As of January 31, 1998, the Company had 125 full-time employees and 7 part-time
employees. None of the Company's employees are represented by labor unions and
the Company believes that its employee relations are satisfactory.
(The remainder of this page is intentionally blank).
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<PAGE> 8
ITEM 2. PROPERTIES
The Company's principal corporate offices are located at 444 Jacksonville Road,
Warminster, Pennsylvania, 18974. Under the terms of a five (5) year lease, dated
as of June 1, 1995, 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 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 significant shareholders of the
Company. Karen A. Thompson is an executive officer of the Company. William
Thompson and John Thompson are brothers and Karen Thompson is their sister.
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, dated as of
February 1, 1995, 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, dated as of October 1, 1996, 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, dated as
of May 1, 1997, the Company leases 2,840 square feet of office space.
The Company's Alabama regional office is located at 9238 Highway 20 West, Suites
1300A and 1400, Madison, Alabama, 35758. Under the terms of a five (5) year
lease, dated as of March 1, 1998, the Company leases 4,313 square feet of office
space, with the option to renew for two (2) terms of three (3) years.
Management of the Company believes that each of the facilities occupied by the
Company is adequate to meet current needs.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to various legal proceedings or
claims, either asserted or unasserted, which arise in the ordinary course of
business. Management of the Company has reviewed all pending legal matters to
which the Company is party and believes that the resolution of such matters will
not have a significant adverse effect on the Company's financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to vote of security holders during the fourth
quarter of the Company's fiscal year ended on January 31, 1998.
(The remainder of this page is intentionally blank).
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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
---- --- ---- ---
FISCAL 1998
<S> <C> <C> <C> <C>
January 31, 1998 3-7/16 1-1/2 3-1/4 1-7/16
October 31, 1997 2-15/16 1-7/64 2-3/4 1
July 31, 1997 1-35/64 3-1/32 2-1/2 3/4
April 30, 1997 2 1-1/8 3-1/4 1
FISCAL 1997
January 31, 1997 2-3/8 1-1/4 5-1/4 1-1/2
October 31, 1996 3-1/2 1-3/4 7-3/4 2-3/4
July 31, 1996 3-5/16 2 9-1/2 3-3/4
April 30, 1996 4-3/8 3 15-1/2 8
</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.
Effective September 30, 1997, the Company completed a one-for-eight reverse
split of the redeemable common stock purchase warrants and a one-for-twenty-nine
and one-eighth reduction in the exercise price of the warrants. All information
in the above table has been adjusted giving retroactive effect to the warrant
reverse split.
At April 30, 1998, the number of record holders of the Common Stock and
Redeemable Warrants were 287 and 40, 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.
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.
RECENT SALES OF UNREGISTERED SECURITIES
On July 26, 1996, the Company issued 645,619 restricted shares of its Common
Stock to the former shareholders of Facility Management Systems, Inc., in
conjunction with the merger of Facility Management Systems, Inc. with and into
the Company's wholly-owned subsidiary, Innovative Tech Systems, Inc. of
Delaware. Since the transaction involved a limited number of former
shareholders of the acquisition target who had ample access to all available
information concerning the transaction and the Company, the shares of the
Company's Common Stock were issued in reliance on the exemption from
registration provided for by Section 4(2) of the Securities Act of 1933.
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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, 1998 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 10-K.
<TABLE>
<CAPTION>
For the Year Ended January 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- -------------- --------------- --------------- --------------
STATEMENT OF OPERATIONS DATA (3):
<S> <C> <C> <C> <C> <C>
Revenues $15,082,742 $8,903,682 $2,784,965 $1,325,991 $1,686,203
Income (loss) from operations 952,107 (460,658) (1,226,194) (902,591) 170,170
Net income (loss) 911,242 (364,183) (858,174) (1,088,851)(2) 138,653
Basic net income (loss)
per common share (1) 0.08 (0.03) (0.08) (0.13)(2) 0.02
Diluted net income (loss)
per common share (1) 0.08 (0.03) (0.08) (0.13)(2) 0.02
</TABLE>
<TABLE>
<CAPTION>
As of January 31,
---------------- -----------------------------------------------------------------
BALANCE SHEET DATA (3): 1998 1997 1996 1995 1994
---------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 3,438,319 $1,787,561 $2,815,742 $5,336,009 $ 226,022
Working capital 4,940,699 4,099,598 3,708,980 5,367,985 301,561
Total assets 11,100,586 7,766,311 5,854,423 6,506,306 724,060
Long-term obligations 620,000 257,143 - - -
Total liabilities 4,215,198 1,912,165 464,202 417,311 259,102
Cash dividends paid - - - - -
Shareholders' equity 6,885,388 5,854,146 5,390,221 6,088,995 464,958
</TABLE>
(1) See Note 14 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.
(The remainder of this page is intentionally blank).
10
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW AND SIGNIFICANT EVENTS
The significant progress made during Fiscal 1997 continued through Fiscal 1998,
as the Company reported record revenues for the year ended January 31, 1998. The
continued revenue growth experienced by the Company was the result of increased
volume from its strategic marketing efforts and new product releases.
Hardware sales and related costs are recognized as units are delivered. Revenue
from the licensing of computer software is recognized when the products are
shipped provided there are no significant vendor obligations remaining and
collection of the receivable is probable at the time all significant
contractual commitments are fulfilled. Revenue under maintenance contracts is
recognized ratably over 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.
On July 26, 1996, the Company acquired Facility Management Systems, Inc.
("FMS"), a developer of 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 Ford Motor Company, Chrysler Corporation, and Pitney Bowes.
The acquisition created 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 Elektrowatt AG Landis & Staefa (Europe), a Swiss-based provider
of building performance and energy efficiency solutions, with approximately $2.1
billion in annual revenues. Under the terms of the agreement, Elektrowatt AG
Landis & Staefa (Europe) will distribute and market Innovative Tech's
SPANoFM(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 Elektrowatt AG
Landis & Staefa (Europe) to commit financial resources for revisions and
enhancements to the SPANoFM(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 SPANoFM(TM) by Elektrowatt AG
Landis & Staefa (Europe) in Europe. As the new European partner of Innovative
Tech, Elektrowatt AG Landis & Staefa (Europe) will also translate the
SPANoFM(TM) software into the various languages used in the market area. To
date, SPANoFM(TM) software has been translated into German, Swedish and Italian;
a French translation is presently underway. Innovative Tech recognized $291,633
and $545,365 in revenues pursuant to the agreement for the years ended January
31, 1998 and 1997, respectively.
Under the terms of an OEM agreement, for several years Intergraph Corporation
marketed, sold and distributed certain Innovative Tech software packages. The
financial terms of the agreement provided for Innovative Tech to receive
royalties on all sales of the SPANoFM(TM) software by Intergraph Corporation.
Pursuant to the agreement, Innovative Tech received royalties of $100,550,
$398,832, and $214,558 for the years ended January 31, 1998, 1997, and 1996,
respectively. In September, 1997, both parties mutually agreed to terminate the
OEM agreement. In connection with such termination, Intergraph paid the Company
a one time fee of $115,300, which was recognized as revenue for the fiscal year
ended January 31, 1998.
RESULTS OF OPERATIONS
Total revenues for the fiscal years ended January 31, 1998, 1997 and 1996 were
$15,082,742, $8,903,682 and $2,784,965, respectively. Management attributes the
current year increase to the release of the Windows(TM) version of its
SPANoFM(TM) product line and increased sales and marketing activities, which
generated a higher volume of sales transactions and its single largest order of
approximately $2,300,000.
Fiscal 1998 software revenues increased $4,502,026 or 125% over fiscal 1997
software revenues, of which 51% was from the single largest order. Fiscal 1998
hardware revenues increased $1,108,664 or 95% over fiscal 1997 hardware which
included FMS for the full fiscal year. Fiscal 1998 services and support revenues
increased $568,370 or 14% over fiscal 1997 services and support revenues.
11
<PAGE> 12
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.
Though some revenues are generated through sales to some significant customers,
the Company does not rely on any one significant customer. If the Company was to
lose some of these customers, the Company feels that the effect on its financial
position and continuing operations would be minimal.
Cost of revenues were $4,295,534, $3,121,428 and $1,001,157 for fiscal years
1998, 1997 and 1996, respectively. Included within cost of revenues are
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 increase
from 1997 to 1998 is mainly attributable to the growth in sales made by the
Company, which can be evidenced through its increase in revenues. 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 29%, 35% and 36% for fiscal years 1998, 1997 and 1996,
respectively.
Selling, general and administrative expenses were $8,730,088, $4,963,942 and
$2,585,587 for fiscal years 1998, 1997 and 1996, respectively. The increases in
fiscal years 1998 and 1997 are 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 in
1997 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 58%, 56% and 93% for fiscal years 1998, 1997 and
1996, respectively.
Research & development expenses were $1,105,013, $793,970 and $424,415 for
fiscal years 1998, 1997 and 1996, 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 12 to the consolidated financial statements).
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs have related to and are expected to continue to
relate to capital investments and working capital requirements. The Company has
met its liquidity needs over the last three (3) years primarily through funds
provided by the issuance of Common Stock in an underwritten public offering. On
January 30, 1997, the Company obtained a $1.5 million bank line of credit. The
line is payable on demand and bears interest at the rate of prime plus 1/4%.
There were no borrowings outstanding under the line of credit on January 31,
1998. On February 9, 1998, the Company entered into a Letter of Credit for
$102,600 which is supported by the Line of Credit. The Company believes that
cash provided by operating activities 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, 1998, increased $1,650,758 or 92%
from the January 31, 1997 balance. The increase was primarily attributable to a
collection of a $1,278,000 trade receivable on January 23, 1998 from one of the
Company's customers. During the year ended January 31, 1998, the Company
purchased approximately $751,000 in property and equipment.
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
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.
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.
Accounts receivable, net at January 31, 1998, increased $835,161 from the
January 31, 1997 balance. This increase is due primarily to the increased sales
volume experienced during the year, especially during the fourth quarter. The
Company has not experienced any material collection difficulties. Working
capital at January 31, 1998 was $4,940,699. Also, the Company paid off its
$300,000 term loan and entered into a new $775,000 term loan in January, 1998.
The balance of the new term loan at January 31, 1998 was $775,000.
Accounts receivable, net 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. At January 31, 1997, the Company had a term loan in the
amount of $300,000 outstanding.
Accounts receivable, net 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 outstanding
at January 31, 1996.
13
<PAGE> 14
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 ("Y2K") Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, process billing, or
engage in similar normal business activities.
All software and hardware manufactured and sold by the Company is Y2K compliant.
Furthermore, based on an assessment done by the Company's Information Systems
department, it was determined that the Company will not need to modify or
replace significant portions of its internal software or hardware so that its
systems will properly utilize dates beyond December 31, 1999.
The Company is also in the process of initiating formal communications with all
of its significant suppliers to determine where the Company could be vulnerable
if they do not correct their own Y2K issues. At this time, it is too soon to
estimate the potential impact that could occur if the Company's suppliers do not
correct their own Y2K issues.
IMPACT OF INFLATION
The Company can increase its prices to counter the effects of inflation. By
doing so, inflation should have little effect on net sales and on income from
continuing operations for new sales. However, for sales made in the past where
prices are fixed for a period of time, inflation may adversely affect the
Company's earnings in the future. The effect of inflation on the Company's
financial position has not been significant to date.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this
discussion and analysis are forward-looking statements that involve risks and
uncertainties. The Company wishes to caution readers that 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. Any of the preceding factors could cause the Company's
actual results to differ materially from those expressed in any forward-looking
statements.
14
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Company's Financial Statements, and Notes to Financial Statements, are
attached hereto as pages F-3 to F-17.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Reports of Independent Accountants F-1 - F-2
Consolidated Financial Statements:
Balance Sheets, as of January 31, 1998 and 1997 F-3
Statements of Operations for the years ended January 31, 1998, 1997 and 1996 F-4
Statements of Cash Flows for the years ended January 31, 1998, 1997 and 1996 F-5
Statements of Changes in Shareholders' Equity for the years ended January 31, 1998,
1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 - F-17
</TABLE>
15
<PAGE> 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) hereto) 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 (a copy of which is attached hereto as
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. (a copy
of which is attached hereto as 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 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.
16
<PAGE> 17
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.)
17
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
William M. Thompson 39 Chairman, Chief Executive Officer and Director
John M. Thompson 36 President, Chief Operating Officer, Chief Financial Officer, Treasurer
and Director
Karen A. Thompson 32 Executive Vice President of Information Services and Secretary
John R. Smart 33 Executive Vice President of Strategic Marketing and Director
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 has also been serving as the Company's
Chief Financial Officer since June, 1997 and he also filled this role 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.
18
<PAGE> 19
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.
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.
MARK R. HERNICK
Mr. Hernick has served as a Director of the Company since May, 1994. Mr. Hernick
is currently a Partner and Vice-President of the Display Division of Showtime
Enterprises, Inc. Showtime Enterprises is engaged in the design and production
of Point of Purchase displays, Tradeshow exhibits, Museums, Retail environments,
Merchandising fixtures and Premium/Incentive programs with facilities in
Philadelphia, Atlanta and Boston. Previously, Mr. Hernick was Vice President of
Sales and Marketing for the display division of Art Guild, Inc. Mr. Hernick had
been with Art Guild, Inc. from November, 1987 to November, 1997, 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.
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.
William Thompson and John Thompson are brothers, and Karen Thompson is their
sister.
19
<PAGE> 20
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, 1998, 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.)
20
<PAGE> 21
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, 1998 to its Chief
Executive Officer and its other Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Options
Name and Principal Position Year Salary Bonus Granted
- --------------------------- ---- ------ ----- -------
<S> <C> <C> <C> <C>
William M. Thompson 1998 $110,000 $75,000 50,000
CHAIRMAN AND CHIEF EXECUTIVE OFFICER 1997 $110,000 -- --
AND DIRECTOR 1996 $110,000 -- --
John M. Thompson 1998 $110,000 $75,000 50,000
PRESIDENT, CHIEF OPERATING OFFICER, CHIEF 1997 $110,000 -- --
FINANCIAL OFFICER, TREASURER AND DIRECTOR 1996 $110,000 -- --
John R. Smart 1998 $ 90,000 $35,000 93,500
EXECUTIVE VICE PRESIDENT OF STRATEGIC 1997 $ 65,000 -- --
MARKETING AND DIRECTOR 1996 $ 65,000 -- --
Karen A. Thompson 1998 $ 90,000 $25,000 150,000
EXECUTIVE VICE PRESIDENT OF INFORMATION 1997 $ 65,000 -- --
SERVICES AND SECRETARY 1996 $ 65,000 -- --
</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.
During the past three fiscal years of the Company, none of the above named
executives exercised any stock options granted by the Company.
21
<PAGE> 22
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.
22
<PAGE> 23
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 2,939,629 26.45%
John M. Thompson(3)
444 Jacksonville Road
Warminster, PA 18974 2,227,657 20.04%
Karen A. Thompson(5)
444 Jacksonville Road
Warminster, PA 18974 182,361 1.65%
John R. Smart(5)
444 Jacksonville Road
Warminster, PA 18974 166,989 1.51%
Julie Moore(4)
444 Jacksonville Road
Warminster, PA 18974 2,022 0.02%
Mark R. Hernick
444 Jacksonville Road
Warminster, PA 18974 1,617 0.01%
Executive Officers and
Directors as a group (six
persons)(6) 4,547,375 39.07%
</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 a Private Placement completed by the
Company in 1994. 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 225,000 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 150,000 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 750,000 vested stock options and 1,617 shares of Common Stock owned by
Ms. Moore's husband as to which Ms. Moore disclaims beneficial ownership.
23
<PAGE> 24
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 $270,000. 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 significant shareholders of the Company.
Karen A. Thompson is an executive officer of the Company. William Thompson and
John Thompson are brothers and Karen Thompson is their sister.
(The remainder of this page is intentionally blank.)
24
<PAGE> 25
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
Reports 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
None.
25
<PAGE> 26
3. EXHIBITS
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C> <C>
3.1 Articles of Incorporation, as amended.+
3.2 By-Laws.+
4.1 Form of Redeemable Warrant Agreement entered into between the Company,
A. S. Goldmen & Co., Inc. and the Warrant Agent.+
4.2 Amendment to Redeemable Warrant Agreement entered into between the Company,
A. S. Goldmen & Co., Inc. and the Warrant Agent.*
4.3 Specimen of Common Stock Certificate.+
4.4 Specimen of New Redeemable Common Stock Purchase Warrant Certificate.#
4.5 Form of Selling Security Holders' Subscription Agreement and Warrant Certificate.+
4.6 Form of Underwriter's Warrant Agreement entered into between the Company and
A. S. Goldmen & Co., Inc.
9.1 Voting Trust Agreements executed by investors in Private Placement.+
10.1 Employment Agreement with William M. Thompson.+
10.2 Employment Agreement with John M. Thompson.+
10.3 1994 Stock Option Plan, as amended January 31, 1998.*
10.4 Lease with Thompson Enterprises, L.P.*
10.5 Form of Consulting Agreement with Underwriter.+
10.6 Elektrowatt AG Landis & Staefa (Europe) Agreeement.(PHI)
10.7 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.(PHI)
16.1(b) Letter Regarding Change in Certifying Accountant.(PHI)
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.*
+ Incorporated by reference to Company's Registration Statement on Form SB-2 (File No. 33-78940).
(psi) Incorporated by reference to Company's 1995 Form 10-K (File No. 33-17856-C).
(phi) 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.
(PHI) Incorporated by reference to Company's Form 8-K/A dated January 6, 1997.
# Incorporated by reference to Company's Form 10-Q dated October 31, 1997.
* Filed herewith.
</TABLE>
26
<PAGE> 27
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
-----------------------
William M. Thompson
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Titles Date
- ---------- ------ ----
<S> <C> <C>
/s/ William M. Thompson Chairman, Chief Executive April 30, 1998
- ----------------------- Officer and Director (Principal
William M. Thompson executive officer)
/s/ John M. Thompson President, Chief Operating April 30, 1998
- -------------------- Officer, Chief Financial Officer, Treasurer
John M. Thompson and Director
/s/ John R. Smart Executive Vice President and Director April 30, 1998
- -----------------
John R. Smart
/s/ Mark R. Hernick Director April 30, 1998
- -------------------
Mark R. Hernick
/s/ Julie Moore Director April 30, 1998
- ---------------
Julie Moore
</TABLE>
<PAGE> 28
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 8 present fairly, in all material respects, the financial
position of Innovative Tech Systems, Inc. and its subsidiaries as of January 31,
1998 and 1997, and the results of their operations and their cash flows for the
years then ended, 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 audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
April 27, 1998
F-1
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Innovative Tech Systems, Inc.:
We have audited the accompanying statements of operations, changes in
shareholders' equity and cash flows of Innovative Tech Systems, Inc. for the
year 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 audit 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 audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Innovative
Tech Systems, Inc., for the year 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-2
<PAGE> 30
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------
ASSETS 1998 1997
--------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,438,319 $ 1,787,561
Accounts receivable, net 4,349,702 3,514,541
Inventory 314,320 264,205
Officer advance 85,727 89,307
Deferred taxes 152,000 --
Other current assets 195,829 99,006
------------ -----------
Total current assets 8,535,897 5,754,620
Property and equipment, net 1,340,463 884,801
Computer software, net of accumulated amortization of
$1,053,498 and $591,434 at January 31, 1998 and 1997 1,138,876 1,049,253
Other assets 85,350 77,637
------------ -----------
Total assets $ 11,100,586 $ 7,766,311
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 155,000 $ 42,857
Accounts payable 745,005 713,751
Accrued liabilities 248,477 128,656
Accrued income taxes 217,000 --
Accrued payroll and related costs 479,746 118,526
Deferred revenue 1,749,970 651,232
------------ -----------
Total current liabilities 3,595,198 1,655,022
Long-term debt 620,000 257,143
------------ -----------
Total liabilities 4,215,198 1,912,165
------------ -----------
Commitments and contingent liabilities
Shareholders' equity:
Senior Preferred stock, par value $.001; authorized 200,000,000 shares;
issued and outstanding -0- shares as of January 31, 1998 and 1997,
respectively
Common stock, par value $.0185; authorized 100,000,000 shares; issued and
outstanding 10,888,456 as of January 31, 1998 and 1997,
respectively 201,436 201,436
Additional paid-in capital 7,410,038 7,290,038
Warrants 1,640,766 851,500
Accumulated deficit (2,366,852) (2,488,828)
------------ -----------
Total shareholders' equity 6,885,388 5,854,146
------------ -----------
Total liabilities and shareholders' equity $ 11,100,586 $ 7,766,311
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 31
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
---------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Software $ 8,101,028 $ 3,599,002 $ 1,459,671
Hardware 2,280,103 1,171,439 16,493
Services and support 4,701,611 4,133,241 1,308,801
----------- ----------- -----------
Total revenues 15,082,742 8,903,682 2,784,965
----------- ----------- -----------
Cost of revenues:
Software 512,020 442,776 154,516
Hardware 1,311,003 747,790 10,429
Services and support 2,472,511 1,930,862 836,212
----------- ----------- -----------
Total cost of revenues 4,295,534 3,121,428 1,001,157
----------- ----------- -----------
Gross margin 10,787,208 5,782,254 1,783,808
Operating expenses:
Selling, general and administrative 8,730,088 4,963,942 2,585,587
Research & development 1,105,013 793,970 424,415
Write-off of in-process research and development -- 485,000 --
----------- ----------- -----------
Total operating expenses 9,835,101 6,242,912 3,010,002
----------- ----------- -----------
Income (Loss) from operations 952,107 (460,658) (1,226,194)
Interest income 56,363 99,073 368,020
Interest expense (32,228) (2,598) --
----------- ----------- -----------
Income (Loss) before income taxes 976,242 (364,183) (858,174)
Provision for income taxes 65,000 -- --
----------- ----------- -----------
Net Income (Loss) $ 911,242 $ (364,183) $ (858,174)
=========== =========== ===========
Basic per share data:
Basic earnings per share $ 0.08 $ (0.03) $ (0.08)
Weighted average common stock outstanding 10,888,456 10,569,089 10,227,837
Diluted per share data:
Diluted earnings per share $ 0.08 $ (0.03) $ (0.08)
Average common stock and dilutive securities outstanding 11,583,382 10,569,089 10,227,837
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 32
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 911,242 $ (364,183) $ (858,174)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 745,407 458,227 208,348
Write-off of in-process research and development -- 485,000 --
Loss on disposal of equipment 12,420 52 764
Stock based compensation 120,000 -- --
Bad debt expense 223,069 35,366 5,000
Changes in operating assets and liabilities, net
of effects from acquisition:
Accounts receivable (1,058,230) (1,736,964) (902,289)
Inventory (50,115) (151,502) --
Advances - officers 3,580 (39,386) (35,052)
Due from related party -- -- 50,000
Other assets (104,536) (65,331) (21,822)
Accounts payable 31,254 394,043 27,502
Accrued liabilities 119,821 (4,958) (34,920)
Accrued income taxes 217,000 -- --
Accrued payroll and related costs 361,220 (19,634) 46,678
Deferred revenue 1,098,738 179,226 (7,169)
Deferred income taxes (152,000) -- --
------------ ------------ ------------
Net cash provided by (used in)
operating activities 2,478,870 (830,044) (1,521,134)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (751,425) (223,061) (391,541)
Proceeds from disposal of equipment -- 80 4,173
Purchase of software (230,181) -- --
Capitalization of software development costs (321,506) (11,493) (71,165)
Restricted cash -- 700,000 (700,000)
------------ ------------ ------------
Net cash provided by (used in)
investing activities (1,303,112) 465,526 (1,158,533)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 25,050 --
Warrant conversion -- 1,350 59,400
Notes receivable -- -- 100,000
Proceeds from long-term debt 775,000 300,000 --
Repayment of long-term debt (300,000) (568,721) --
Repayment under line of credit -- (421,342) --
------------ ------------ ------------
Net cash provided by (used in)
financing activities 475,000 (663,663) 159,400
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents 1,650,758 (1,028,181) (2,520,267)
Cash and cash equivalents, beginning of year 1,787,561 2,815,742 5,336,009
============ ============ ============
Cash and cash equivalents, end of year $ 3,438,319 $ 1,787,561 $ 2,815,742
============ ============ ============
Cash paid during the period for:
Income taxes $ 6,599 $ -- $ --
Interest $ 28,506 $ 2,598 $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 33
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the years ended January 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Senior Additional Total
Preferred Stock Common Stock Paid-In Notes Accumulated Shareholders'
Shares Amount Shares Amount Capital Warrants Receivable Deficit Equity
------ ------ ------ ------ ------- -------- ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 31,
1995 3,409,279 $ 63,071 $6,601,645 $ 790,750 $(100,000) $(1,266,471) $6,088,995
Repayment of
notes
receivable 100,000 100,000
Stock split 6,818,558 126,144 (126,144)
Warrant
conversion 59,400 59,400
Net loss (858,174) (858,174)
--------- -------- ---------- -------- ---------- ---------- --------- ----------- ----------
Balance,
January 31,
1996 -- -- 10,227,837 189,215 6,475,501 850,150 -- (2,124,645) 5,390,221
Warrant
Conversion 1,350 1,350
Acquisition of
Facility
Management
Systems, Inc. 645,619 11,944 789,764 801,708
Stock options
exercised 15,000 277 24,773 25,050
Net loss (364,183) (364,183)
--------- -------- ---------- -------- ---------- ---------- --------- ----------- ----------
Balance,
January 31,
1997 -- -- 10,888,456 201,436 7,290,088 851,500 -- (2,488,828) 5,854,146
Reverse split
of warrants 789,266 (789,266) --
Stock based
compensation 120,000 120,000
Net income 911,242 911,242
--------- -------- ---------- -------- ---------- ---------- --------- ----------- ----------
Balance,
January 31,
1998 -- $ -- 10,888,456 $201,436 $7,410,088 $1,640,766 $ -- $(2,366,852) $6,885,388
========= ======== ========== ======== ========== ========== ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 34
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:
Fiscal Year:
The Company's fiscal year ends on January 31. The year ended January 31, 1998 is
fiscal 1998. References to years in this annual report relate to fiscal years
rather than calendar years.
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.
Financial Instruments:
Financial instruments which are subject to fair value disclosure requirements
are included in the financial statements at cost which approximates fair value.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash investments. The Company
restricts investment of temporary cash investments to financial institutions
with high credit ratings.
Revenue Recognition and Accounts Receivable:
Hardware sales and related costs are recognized as units are delivered. Revenue
from the licensing of computer software is recognized when the products are
shipped provided there are no significant vendor obligations remaining and
collection of the receivable is probable at the time all significant contractual
commitments are fulfilled. Revenue under maintenance contracts is recognized
ratably over 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 $204,790 and $45,000 at January 31, 1998 and 1997, respectively.
Inventories:
Inventories consist of hardware, accessories and repair parts that are purchased
and resold to customers. Inventories are valued at cost, but not in excess of
net realizable value. Cost is determined using the first-in, first-out method.
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.
F-7
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - (CONTINUED)
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 if the carrying amount
is in excess thereof. Software development costs are amortized on a
product-by-product basis over periods of 3 to 5 years. Software amortization was
$462,064, $255,835, and $104,226 for the years ended January 31, 1998, 1997 and
1996, 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.
Earnings Per Share:
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share" ("SFAS 128"). This statement establishes standards for
computing and presenting earnings per share. Basic earnings per share is
calculated using the average shares of common stock outstanding, while diluted
earnings per share reflects the potential dilution that could occur if stock
options and warrants were exercised. Stock options and warrants are excluded
from the calculation if their effect would be antidilutive. The Company adopted
SFAS 128 in the fourth quarter of fiscal 1998.
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.
Long-Lived Assets:
In fiscal 1996, the Company adopted 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". SFAS No. 121 requires 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 would be recognized in the income statement and certain disclosures
regarding the impairment would be made in the financial statements. SFAS No. 121
had no material effect on the Company's financial position or results of
operations.
F-8
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - (CONTINUED)
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
adopted the disclosure requirements and will therefore continue to account for
stock-based compensation in accordance with APB No. 25.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
January 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Computers and office equipment $1,154,863 $ 924,697
Furniture and fixtures 539,415 388,356
Leasehold improvements 506,586 218,058
Automobiles 10,746 10,746
---------- ----------
2,211,610 1,541,857
Less : Accumulated depreciation (871,147) (657,056)
---------- ----------
$1,340,463 $ 884,801
========== ==========
</TABLE>
Depreciation expense was $ 283,343, $202,392, and $104,122 in 1998, 1997 and
1996, respectively.
F-9
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
For the years ended January 31,
-------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current taxes:
Federal $ 860,000 -- --
State 187,000 -- --
---------- ---------- ----------
1,047,000 -- --
---------- ---------- ----------
Benefit of net operating loss carryforwards:
Federal (718,000) -- --
State (93,000) -- --
---------- ---------- ----------
(811,000)
---------- ---------- ----------
Deferred taxes:
Federal (142,000)
State (29,000)
---------- ---------- ----------
(171,000)
---------- ---------- ----------
$ 65,000 $ -- $ --
========== ========== ==========
</TABLE>
The reconciliation of income taxes at the U.S. statutory rate to the provision
(benefit) for income taxes for 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
For the years ended January 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income taxes at the U.S. Statutory rate 34% (34)% (34)%
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal benefit 7% (7)% --
Limitation on the utilization of tax benefits -- -- 31%
Acquisition accounting differences 11% 56% --
Deferred revenue 38% 17% 1%
Utilization of net operating loss carryforwards (74)% (36)% --
Other, net (9)% 4% 2%
--- --- ---
7% -- --
=== === ===
</TABLE>
F-10
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. INCOME TAXES: - (CONTINUED)
The tax effects of temporary differences which comprise the deferred tax assets
and liabilities at January 31, 1998 and 1997 were determined using an effective
rate of 41%. Tax effects of temporary differences are as follows:
<TABLE>
<CAPTION>
January 31, January 31,
1998 1997
----------- ------------
<S> <C> <C>
Deferred tax debits:
Net operating loss carryforwards $ 0 $ 809,800
Deferred revenue 719,551 267,600
Other liabilities 99,346 29,200
Valuation allowance (584,197) (1,047,700)
---------- ------------
234,700 58,900
Deferred tax credits:
Property and equipment (82,700) (58,900)
---------- ------------
Net deferred taxes $ 152,000 $ --
========== ============
</TABLE>
Net deferred tax assets have been recorded to the extent realizable through
reversing temporary differences. The remaining net deferred tax assets are
offset by a valuation allowance due to the lack of consistent earnings history.
F-11
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. LINE OF CREDIT:
The Company has 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 1/4 %. 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, 1998. The terms of this
arrangement contain requirements for maintaining defined levels of working
capital, tangible net worth and cash flow. On February 9, 1998, the Company
entered into an irrevocable Letter of Credit for $102,600 which is supported by
the Line of Credit and will expire on December 31, 1998.
A wholly-owned subsidiary 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 23, 1998, the Company refinanced its term loan to $775,000 to finance
leasehold improvements and furniture and equipment purchases. The loan is
payable in sixty (60) fixed monthly principal payments of $12,917 plus interest
at the rate of prime plus 1/4 %.
7. COMMITMENTS AND CONTINGENCIES:
The Company leases office facilities, company automobiles and company
apartments, under operating leases.
The future minimum rental payments under noncancellable operating leases as of
January 31, 1998, are as follows:
1999 601,840
2000 548,000
2001 213,706
2002 72,114
2003 &
Thereafter 66,603
-----------
$ 1,502,263
============
Rent expense for the years ended January 31, 1998, 1997 and 1996 was $632,017,
$313,990 and $124,164, respectively.
The Company is a defendant in various litigation matters in the ordinary course
of business, none of which management expects will have a material adverse
effect on the Company's financial position or results of operations.
F-12
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. SHAREHOLDERS' EQUITY
The shares of Common Stock and Redeemable Warrants are separately tradable. 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.
On September 30, 1997, the Company obtained consent from its warrant holders to
effect a one-for-eight reverse split of the redeemable common stock purchase
warrants and a one-for-twenty-nine and one-eighth reduction in the exercise
price of the warrants. The total number of issued and outstanding redeemable
common stock purchase warrants was reduced from 10,596,000 to 1,324,500 and the
exercise price was reduced to $0.08 from $2.33 per share. As a result, the
Company recorded an increase to warrants and accumulated deficit of $789,266.
The Company also has outstanding (1) non-redeemable warrants to purchase 390,000
common shares at $2.50 per share which expire July 25, 1999 and (2) warrants to
acquire redeemable warrants to purchase 6,750 shares of common stock at a total
exercise price of $.09 per share which expire July 25, 1999.
The Board of Directors of the Company approved a three-for-one split of all
outstanding shares of Common Stock and all outstanding Redeemable Common Stock
Purchase Warrants on August 23, 1995. The three-for-one split was effective on
September 18, 1995.
As a result of the above transactions, all historic share amounts and per share
amounts in the accompanying financial statements have been adjusted to reflect
the stock splits.
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.
9. STOCK OPTIONS
The 1994 Stock Option Plan ("Plan") which became effective July 22, 1994
provides for the granting of options to purchase up to an aggregate of 2,175,000
shares of Common Stock. 975,000 of the options were authorized during fiscal
year 1995 and 1,200,000 were authorized during fiscal year 1998.
F-13
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. STOCK OPTIONS - (CONTINUED)
A summary of the status of the Company's Plan as of January 31, 1998, January
31, 1997 and January 31, 1996 and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at January 31, 1995 975,000 $1.67
Granted 500,000 $1.67
- ------------------------------------------------------------------------------------------
Outstanding at January 31, 1996 1,475,000 $1.67
Granted 12,500 $2.13
Exercised (15,000) $1.67
Terminated (530,000) $1.67
- ------------------------------------------------------------------------------------------
Outstanding at January 31, 1997 942,500 $1.68
Granted 1,321,800 $1.45
Terminated (111,800) $1.52
- ------------------------------------------------------------------------------------------
Outstanding at January 31, 1998 2,152,500 $1.55
- ------------------------------------------------------------------------------------------
Exercisable at January 31, 1998 986,667 $1.62
- ------------------------------------------------------------------------------------------
</TABLE>
These stock options are exercisable in whole or in part, in three (3) equal
annual installments, except for two (2) grants, one which vested immediately and
the other which vested in two (2) equal 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.
The Company granted 100,000 options to non-employees as compensation for
services rendered. The fair value of the options, $120,000, was charged to
expense.
The Company applies APB 25 and related interpretations in accounting for its
plan. Accordingly, no compensation cost has been recognized for stock options.
Had compensation costs for stock options been determined based on the fair value
at the grant dates for awards under this plan consistent with the method of SFAS
123, the Company's net earnings and net earnings per share would have been
reduced to the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1997
---------------- ----------------
<S> <C> <C>
Net Earnings (Loss):
As Reported $911,242 $(364,183)
Pro Forma $579,558 $(368,000)
Net Earnings (Loss) Per Share:
As Reported - Basic and Dilutive $0.08 $(0.03)
Pro Forma - Basic and Dilutive $0.05 $(0.03)
</TABLE>
F-14
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. STOCK OPTIONS - (CONTINUED)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for options granted in fiscal 1998 and fiscal 1997: expected
volatility of 92% and 74% for the years ended January 31, 1998 and 1997,
respectively; no dividend payments are made for the expected terms; expected
term of ten years; risk free interest rate on the date of grant with the
maturity equal to the expected term; exercise price equal to the fair market
value on the grant date.
10. SIGNIFICANT CUSTOMERS:
Revenues from significant customers as a percentage of total revenues were as
follows:
<TABLE>
<CAPTION>
Customer 1998 1997 1996
-------- ---- ---- ----
<S> <C> <C> <C>
Customer A 17% -- --
Customer B 11% -- --
Customer C 3% 6% 25%
Customer D 2% 6% 11%
Customer E -- 1% 16%
</TABLE>
11. RELATED PARTY TRANSACTIONS:
The Company leases office space under a five year lease at an annual rent of
$270,000. The building is owned by a Pennsylvania Limited partnership owned by
William M. Thompson, John M. Thompson and Karen A. Thompson, who are executive
officers, directors and significant shareholders of the Company
In 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 was classified as cash and cash
equivalents in the January 31, 1997 balance sheet.
F-15
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. 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:
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
==========
The in-process research and development of $485,000 represented 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.
For The Year Ended
January 31, 1997 January 31, 1996
---------------- ----------------
Revenues $10,564,018 $ 7,224,252
Net Loss $ (658,248) $(1,220,378)
Loss per Share $ (.06) $ (.12)
The pro forma financial information does not necessarily reflect the operating
results that would have occurred had the acquisition 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-16
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. 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 $28,050
and $24,906 for the years ended January 31, 1998 and 1997, respectively.
14. EARNINGS PER SHARE:
Earnings per share have been restated in accordance with Statement of Financial
Accounting Standards No. 128, Earnings per Share. This restatement resulted in
no material change from amounts previously reported. Earnings per share are
computed as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic earnings per share:
Net income (loss) available for Common Stock $ 911,242 $ (364,183) $ (858,174)
----------- ----------- -----------
Average common stock outstanding 10,888,456 10,569,089 10,227,837
Basic earnings per share $ 0.08 $ (0.03) $ (0.08)
=========== =========== ===========
Diluted earnings per share:
Net income (loss) available for
Common Stock and dilutive securities $ 911,242 $ (364,183) $ (858,174)
=========== =========== ===========
Average Common Stock outstanding 10,888,456 10,569,089 10,227,837
Additional common shares resulting from
dilutive securities:
Stock options 266,310 -- --
Warrants 428,616 -- --
----------- ----------- -----------
Average Common Stock and dilutive securities
outstanding 11,583,382 10,569,089 10,227,837
=========== =========== ===========
Diluted earnings per share $ 0.08 $ (0.03) $ (0.08)
=========== =========== ===========
</TABLE>
F-17
<PAGE> 1
Exhibit 4.2
AMENDMENT NO. 1 TO
WARRANT AGREEMENT
Amendment No. 1 (the "Amendment") to a certain Warrant Agreement, dated
as of July 26, 1994, between Innovative Tech Systems, Inc., an Illinois
corporation (the "Company"), and Continental Stock Transfer & Trust Company, a
New York corporation, as Warrant Agent (the "Warrant Agent").
WHEREAS, the Company and the Warrant Agent made, executed and delivered
a certain Warrant Agreement, dated July 26, 1994 (the "Original Warrant
Agreement"); and
WHEREAS, the Company and the Warrant Agent have agreed to make certain
amendments to the terms and provisions of the Original Warrant Agreement upon
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and each intending to be legally bound hereby, the parties hereto
hereby agree as follows:
1. Except as expressly defined herein, all capitalized terms
used herein shall have the meanings ascribed to them in the Original Warrant
Agreement. This Amendment is intended to amend the Original Warrant Agreement
and the Original Warrant Agreement shall be so amended from and as of the date
hereof.
2. The Original Warrant Agreement shall be amended so that all
references to "Agreement" contained therein shall mean the Original Warrant
Agreement, as amended herein, and as further amended, supplemented or modified
from time to time.
3. The Original Warrant Agreement is hereby further amended so
that the term "Warrants" shall mean (a) the 1,324,500 redeemable common stock
purchase warrants heretofore issued by the Company and outstanding on the date
hereof (after giving effect to the one-for-three split of the redeemable common
stock purchase warrants effectuated by the Company on September 18, 1995 and the
one-for-eight reverse split of all outstanding redeemable common stock purchase
warrants effectuated by the Company on the date hereof), and (b) the 6,750
additional redeemable common stock purchase warrants issuable by the Company
upon the exercise of the Underwriter's Warrants outstanding on the date hereof
(after giving effect to the one-for-three split of the Underwriter's Warrants
effectuated by the Company on September 18, 1995 and the one-for-eight reverse
split of all outstanding Underwriter's Warrants effectuated by the Company on
August 21, 1997). Each Warrant entitles the holder thereof to purchase one share
of the Company's Common Stock, par value $.0185 per share.
3. The Original Warrant Agreement is hereby further amended so
that Section 1(f) thereof reads in its entirety as follows:
"Purchase Price" shall mean, subject to modification and
adjustment as provided in Section 8, $0.08 per share of
Common Stock and further subject to the Company's right, in
its sole
<PAGE> 2
discretion, to decrease the Purchase Price for a period of
not less than thirty days on not less than thirty days'
prior written notice to the Registered Holders and the
Underwriter."
4. As soon as practicable following the date hereof, the
Company and Warrant Agent shall cause all outstanding Warrant Certificates to be
returned to the Warrant Agent in exchange for new warrant certificates (the
"Replacement Warrant Certificates") which incorporate the revisions to the
Original Warrant Agreement effected by this Amendment, but which otherwise are
substantially in the same form as the original Warrant Certificates. Following
the issuance of the Replacement Warrant Certificates, all references to the
"Warrant Certificates" contained in the original Warrant Agreement shall mean
the Replacement Warrant Certificates.
5. Except as modified by the terms hereof, all terms,
provisions and conditions of the Original Warrant Agreement, and all documents
duly executed and delivered in connection therewith, are in full force and
effect, and are hereby incorporated by reference as if set forth herein. If
there is any conflict or discrepancy between the provisions of this Amendment
and any provision of the Original Warrant Agreement, the terms and provisions of
this Amendment shall control and prevail.
6. This Amendment (a) shall be construed and enforced in
accordance with the laws of the State of New York, without giving effect to
conflicts of laws; (b) shall inure to the benefit of, and be binding upon, the
parties hereto and their respective successors and assigns; (c) may be executed
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument; and (d) may only
be amended or modified pursuant to a writing signed by the parties hereto.
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
executed and delivered by their respective officers thereunto duly authorized as
of the 30th day of September, 1997.
INNOVATIVE TECH SYSTEMS, INC.
By:
--------------------------------
John M. Thompson, President
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
2
<PAGE> 3
CONSENT OF A.S. GOLDMEN & CO., INC.
The undersigned hereby irrevocably consents to the terms and provisions
of the foregoing Amendment to the Warrant Agreement dated as of July 26, 1994
between Innovative Tech Systems, Inc. and Continental Stock Transfer & Trust
Company. The undersigned further ratifies and confirms that all references to
the "Redeemable Warrant Agreement" contained in the Underwriter's Warrant
Agreement, dated as of July 26, 1994, between the undersigned and Innovative
Tech Systems, Inc. (the "Underwriter's Warrant Agreement") shall, from and after
the date hereof, mean the Redeemable Warrant Agreement, as amended by the
preceding Amendment. The undersigned further irrevocably consents to an
amendment to the Underwriter's Warrant Agreement to effectuate (a) a
one-for-eight reverse split of all of the outstanding Underwriter's Warrants
(from 54,000 to 6,750 Underwriter's Warrants), and (b) a one-for-twenty-nine and
one-eighth reduction in the present exercise price of the outstanding
Underwriter's Warrants (from $0.125 to $0.01 per Underwriter's Warrant).
IN WITNESS WHEREOF, the undersigned has caused this instrument to be
duly executed, intending to be legally bound hereby, as of the 30th day of
September, 1997.
A.S. GOLDMEN & CO., INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
<PAGE> 1
Exhibit 10.3
INNOVATIVE TECH SYSTEMS, INC.
1994 STOCK OPTION PLAN
(as amended through January 31, 1998)
1. PURPOSE
The purpose of the Innovative Tech Systems Inc. (the "Company") Stock
Option Plan (referred to herein as the "Plan") is to provide a means by which
certain employees and directors of, and others providing services to or having a
relationship with, the Company and. its subsidiaries (as such term is defined in
Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code") may
be given an opportunity to purchase common stock of the Company ("Common Stock")
. The Plan is intended to promote the interests of the Company by encouraging
stock ownership on the part of such individuals, by enabling the Company and its
subsidiaries to secure and retain the services of highly qualified persons, and
by providing such individuals with an additional incentive to advance the
success of the Company and its subsidiaries.
2. ADMINISTRATION
The Plan shall be administered by a Committee consisting of not less
than two directors (the "Committee") to be appointed from time to time by the
Board of Directors. Membership on the Committee shall in any event be limited to
those members of the Board who are "Non-Employee Directors" as defined in the
regulations promulgated by the Securities Exchange Commission pursuant to
Section 16(b) of the Securities Exchange Act of 1934. The Committee shall have
the power to select optionees, to establish the number of shares and other terms
applicable to each such option, to construe the provisions of the Plan, and to
adopt rules and regulations governing the administration of the Plan.
Notwithstanding anything to the contrary contained herein, any authority granted
to the Stock Option Committee under the Plan may also be exercised by the
Company's Board of Directors. The members of the Board of Directors or the
Committee shall not be liable for any action or determination made in good faith
with respect to the Plan or to any option granted pursuant thereto.
3. ELIGIBILITY
The persons who shall be eligible to participate in this Plan and
receive options hereunder shall be the Company's directors and such employees
and other individuals who provide services to or otherwise have a relationship
with the Company or its subsidiaries as the Committee shall from time to time
determine to be key individuals to the success of the Company.
4. ALLOTMENT OF SHARES
A maximum of 2,175,000 authorized but unissued shares of the Common
Stock of the Company will be allotted to the Plan, subject to the required
approval by the stockholders. Shares that by reason of the expiration of an
option or otherwise are no longer subject to
<PAGE> 2
purchase pursuant to an option granted under the Plan may be reoptioned under
the Plan. The Company shall not be required upon the exercise of any option to
issue or deliver any shares of stock prior to the completion of such
registration or other qualification of such shares under any state or federal
law, rule or regulation as the Company shall determine to be necessary or
desirable.
5. EFFECTIVE DATE AND TERM OF PLAN
The effective date of the Plan is the date on which it is approved by
the shareholders of the Company. The Plan shall terminate on the tenth
anniversary of its effective date; but the Board of Directors may terminate the
Plan at any time prior thereto. Termination of the Plan shall not alter or
impair, without the consent of the optionee, any of the rights or obligations of
any option theretofore granted under the Plan.
6. TERMS AND CONDITIONS
A. All Options
Stock options granted pursuant to this Plan shall be evidenced
by agreements in such form as the Committee shall from time to time approve.
Nothing in this Plan or any option granted hereunder shall govern the employment
rights and duties between the optionee and the Company or subsidiary. Neither
this Plan, nor any grant or exercise pursuant thereto, shall constitute an
employment agreement among such parties. The following shall also apply to all
options granted under the Plan:
(i) Option Price
Except as otherwise set forth herein, the option
price per share for each stock option shall be determined by
the Committee and shall not be less than the fair market value
on the date the option is granted. The fair market value shall
be determined as prescribed by the Internal Revenue Code and
Regulations thereunder.
(ii) Time of Exercise of Option
Except as otherwise set forth herein, the Committee
shall establish the option period and time or times within the
option period when the stock option may be exercised in whole
or in such parts as may be specified from time to time by the
Committee. With respect to an optionee who is about to retire,
the Committee may in its discretion accelerate the time or
times when any particular stock option held by said optionee
may be so exercised so that such time or times are earlier
than those originally provided in said option. In all cases
exercise of a stock option shall be subject to the provisions
of Section 6A(vi).
2
<PAGE> 3
(iii) Payment and Manner of Exercise
The entire option price shall be paid at the time the
option is exercised. To the extent that the right to purchase
shares has accrued hereunder, options may be exercised from
time to time by written notice to the Company stating the full
number of shares with respect to which the option is being
exercised and the time of delivery thereof, which shall be at
least fifteen days after the giving of such notice unless an
earlier date shall have been mutually agreed upon. Such notice
of exercise shall be accompanied by full payment for the
shares by certified or official bank check or the equivalent
thereof acceptable to Company. Upon exercise, the Company
shall, without transfer or issue tax to the optionee (or other
person entitled to exercise the option), deliver to the
optionee (or such other person) at the principal office of the
Company, or such other place as shall be mutually agreed upon,
a certificate or certificates for such shares; provided,
however, that the time of delivery may be postponed by the
Company for such periods as may be required for it with
reasonable diligence to comply with any requirements of law;
and provided further that in the event the Common Stock
issuable upon exercise is not registered under the Securities
Act of 1933 (the "Act") , then the Company may require that
the registered owner deliver an investment representation in
form acceptable to the Company and its counsel and the Company
will place a legend on the certificate for such Common Stock
restricting the transfer of same. There shall be no obligation
or duty for the Company to register under the Act at any time
the Common Stock issuable upon exercise of the options. If the
optionee (or other person entitled to exercise the option)
fails to accept delivery, the optionee's payment shall be
returned and the right to exercise the option with respect to
such undelivered shares shall be terminated.
(iv) Non-Transferability of Option
An option by its terms shall not be transferable by
the optionee otherwise than by will or by the laws of descent
and distribution.
(v) Adjustment in Event of Recapitalization of the
Company
In the event of a reorganization, recapitalization,
stock split, stock dividend, combination of shares, merger,
consolidation, rights offering, or any other change in the
corporate structure or shares of the Company, the Board of
Directors shall make such adjustment as it may deem equitably
required, in the number and kind of shares authorized by and
for the Plan, in the number and kind of shares covered by the
options granted, and in the option price.
3
<PAGE> 4
(vi) Rights after Termination of Employment
In the event of termination of employment due to any
cause other than death or disability, rights to exercise the
stock option shall terminate three months following cessation
of employment. In the event of termination of employment due
to disability (within the meaning of Section 22 (e) (3) of the
Code) or death, such optionee or executor, administrator or
devisee of an optionee, shall have the right to exercise such
option (to the extent otherwise exercisable) at any time
within one year after cessation of employment by reason of
such disability or death.
B. Non-Qualified Stock Options
The Committee may, in its discretion, grant options under the
Plan which, in whole or in part, do not qualify as incentive stock options under
Section 422 of the Code ("Non-Qualifying Options"). The terms and conditions of
the Non-Qualifying Options shall be governed by Section 6A above.
C. Incentive Stock Options
The Committee may, in its discretion, grant options under the
Plan which qualify, in whole or in part, as incentive stock options under
Section 422 of the Code. In addition to the terms and conditions set forth in
Section 6A above, the following terms and conditions shall govern any incentive
stock option issued under the Plan:
(i) Maximum Fair Market Value of Incentive Stock Options
No optionee may have incentive stock options which
become exercisable for the first time in any calendar year
(under all incentive stock option plans of the Company and its
subsidiary corporations) with an aggregate fair market value
(determined as of the time such option is granted) in excess
of one Hundred Thousand Dollars ($100,000).
(ii) Option Price
The option price per share for each stock option
shall be 100% of the fair market value of the Common Stock on
the date the option is granted; except, in the case of the
grant to an optionee who owns Common Stock of the Company
possessing more than 10% of the total combined voting power of
all classes of stock of the Company or its subsidiaries, the
option price of such option shall be at least 110% of the fair
market value of the Common Stock on the date the option is
granted. The fair market value shall be determined as
prescribed by the Internal Revenue Code and Regulations.
4
<PAGE> 5
(iii) Period of Option
Each option shall expire ten years from the date it
is granted or at the end of such shorter period as may be
designated by the Committee on the date of grant; except, in
the case of the grant of an incentive stock option to an
optionee who owns Common Stock of the Company possessing more
than 10% of the total combined voting power of all classes of
stock of the Company or its subsidiaries, such option shall
not be exercisable after the expiration of five years from the
date it is granted.
(iv) Purpose for which Option may be Granted
Each option may be issued to an otherwise eligible
individual only for reasons connected with his employment by
the Company or its parent or subsidiary corporation (or
corporations).
7. AMENDMENT OF PLAN
The Board, within its discretion, shall have authority to amend the
Plan and the terms of any option issued hereunder without the necessity of
obtaining further approval of the stockholders, unless such approval is required
by law.
5
<PAGE> 1
Exhibit 10.4
BUSINESS LEASE
THE LANDLORD AND THE TENANT AGREE TO LEASE THE RENTAL SPACE FOR THE TERM AND AT
THE RENT STATED, AS FOLLOWS: (The words Landlord and Tenant include all
landlords and all tenants under this Lease.)
LANDLORD: Thompson Enterprises, L.P., a Pennsylvania Limited Partnership
444 Jacksonville Road, Suite 200
Warminster, PA 18974
TENANT: Innovative Tech Systems, Inc., an Illinois Corporation
444 Jacksonville Road, Suite 200
Warminster, PA 18974
RENTAL SPACE: land and improvements, including approximately 20,000
square foot office building, located at 444 Jacksonville Road,
Warminster, Pennsylvania
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------------------------------------
<S> <C>
1. Possession and Use 22. Violation, Eviction, Re-Entry and
2. Delay in Giving of Possession Damages
3. No Assignment or Subletting 23. Notices
4. Rent and Additional Rent 24. No Waiver
5. Liability Insurance 25. Survival
6. Unavailability of Fire Insurance, Rate Increases 26. End of Term
7. Water Damage 27. Binding
8. Landlord's Repairs 28. Full Agreement
9. Liability of Landlord and Tenant 29. Late Payment
10. Real Estate Taxes 30. Waiver of Subrogation
11. Acceptance of Rental Space 31. Waiver of Claims
12. Quiet Enjoyment 32. Brokers
13. Utilities and Services 33. Landlord's Obligations/Liability
14. Tenant's Repairs, Maintenance, and Compliance 34. Holdover
15. No Alterations 35. Tenant's Improvements
16. Signs 36. Net, Net, Net Lease
17. Access to Rental Space 37. Renewal Options
18. Fire and Other Casualty 38. Environmental Matters
19. Eminent Domain
20. Subordination to Mortgage
21. Tenant's Certificate
- -------------------------------------------------------------------------------------------------------------
</TABLE>
DATE OF LEASE: as of June 1, 1995
TERM: Five (5) years
BEGINNING June 1, 1995
ENDING May 31, 2000
BROKER: NONE
LIABILITY INSURANCE: Minimum amounts for each person injured
$2,000,000, single limit.
RENT FOR THE TERM IS:
<TABLE>
<CAPTION>
PERIOD PER SQ. FT. ANNUAL MONTHLY
- ------ ----------- ------ -------
<S> <C> <C> <C>
June 1, 1995 - June 30, 1996 $13.00 $130,000.00 $10.833.33
July 1, 1996 - May 31, 1997 $13.00 $260,000.00 $21,666.66
June 1, 1997 - May 31, 1998 $13.50 $270,000.00 $22,500.00
June 1, 1998 - May 31, 1999 $14.00 $280,000.00 $23,333.33
June 1, 1999 - May 31, 2000 $14.50 $290,000.00 $24,166.66
</TABLE>
Basic annual rent ("Basic Rent", together
with all additional rent, the "Rent") is
payable in advance on the first day of each
month, without notice or demand, on or prior
to the first day of each month. The Tenant
shall pay to Landlord all Rent without
notice, demand, setoff or deduction. The
first month's Basic Rent and security
deposit shall be payable upon the execution
of this Lease.
USE OF RENTAL SPACE: General office purposes.
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1. POSSESSION AND USE
The Landlord shall give possession of the Rental Space to the Tenant
for the Term. The Tenant shall take possession of and use the Rental Space for
the purpose stated above. The Tenant may not use the Rental Space for any other
purpose without the written consent of the Landlord.
The Tenant shall not allow the Rental Space to be used for any unlawful
or hazardous purpose. The Tenant is satisfied that the Rental Space is zoned for
the Use stated. The Tenant shall obtain any necessary certificate of occupancy
or other certificate permitting the Tenant to use the Rental Space for that Use.
The Tenant shall not use the Rental Space in any manner that results in
(1) an increase in the rate of fire or liability insurance or (2) cancellation
of any fire or liability insurance policy on the Rental Space. The Tenant shall
comply with all requirements of the insurance companies insuring the Rental
Space. The Tenant shall not abandon the Rental Space during the Term of this
Lease or permit it to become vacant for extended periods.
Tenant shall, in the use and occupancy of the Rental Space and the
conduct of Tenant's business or profession therein, at all times and at Tenant's
expense comply with, and conform the Rental Space to the following requirements
(the "Requirements"): all applicable laws, ordinances, orders, notices and
regulations of the federal, state and municipal governments, or any of their
departments and the regulations of the insurers of the Rental Space and building
(including Title III of the Americans with Disabilities Act). Tenant shall
indemnify, protect, defend and save harmless Landlord with regard to any
non-compliance or alleged non-compliance by Tenant with any Requirements.
2. DELAY IN GIVING OF POSSESSION
This paragraph applies if (a) the Landlord cannot give possession of
the Rental Space to the Tenant on the beginning date and (b) the reason for the
delay is not the Landlord's fault. The Landlord shall not be held liable for the
delay. The Landlord shall then have thirty (30) days in which to give
possession. If possession is given within that time, the Tenant shall accept
possession and pay the Rent for that date. The ending date of the Term shall not
change. If possession is not given within that time this Lease may be canceled
by either party on notice to the other.
3. NO ASSIGNMENT OR SUBLETTING
The Tenant may not do any of the following without the Landlord's
written consent which shall not be unreasonably withheld or delayed: (a) assign
this Lease, (b) sublet all or any part of the Rental Space or (c) permit any
other person or business to use the Rental Space. Tenant shall not, by operation
of law, merger, or otherwise, assign, mortgage, pledge or encumber in any manner
by reason of any act or omission on the part of Tenant, this Lease, or the term
and estate hereby granted, or sublet or license the whole or any part of the
Rental Space or permit the Rental Space or any part thereof to be used or
occupied by others. Notwithstanding anything to the contrary contained in the
Lease if Tenant is a corporation or partnership, and if at any time during the
term of this Lease (as same may be extended), the person or persons who, on the
date of this Lease, own or owns a majority of such corporation's voting shares
or such partnership's partnership interest, as the case may be, cease or ceases
to own a majority of such shares, or such partnership interest as the case may
be (whether such sale occurs at one time or at intervals so that, in the
aggregate such a transfer shall have occurred), same shall be deemed an
assignment requiring Landlord's consent hereunder.
4. RENT AND ADDITIONAL RENT
Tenant shall pay the Rent to the Landlord at the Landlord's address. If
the Tenant fails to comply with any agreement in this Lease, the Landlord may do
so on behalf of the Tenant. The Landlord may charge the cost to comply,
including reasonable attorney's fees, to the Tenant as "additional rent". The
additional rent shall be due and payable as Rent with the next monthly Base Rent
payment. Non-payment of additional rent shall give the Landlord the same rights
against the Tenant as if the Tenant failed to pay the Basic Rent.
5. LIABILITY INSURANCE
The Tenant shall obtain, pay for, and keep in effect for the benefit of
the Landlord and the Tenant public liability insurance on the Rental Space. The
insurance company and the broker must be acceptable to the Landlord. This
coverage must be in at least the minimum amounts stated above.
All policies shall state that the insurance company cannot cancel or
refuse to renew without at least ten (10) days written notice to the Landlord.
The Tenant shall deliver the original policy to the Landlord with proof
of payment of the first year's premiums. This shall be done not less than
fifteen (15) days before the Beginning of the Term. The Tenant shall deliver a
renewal policy to the Landlord with proof of payment not less than fifteen (15)
days before the expiration date of each policy.
6. UNAVAILABILITY OF FIRE INSURANCE, RATE INCREASES
If due to the Tenant's use of the Rental Space the Landlord cannot
obtain and maintain fire insurance on the Building in an amount and form
reasonably acceptable to the Landlord, the Landlord may cancel this Lease on
thirty (30) days notice to the Tenant. If due to the Tenant's use of the Rental
Space the fire insurance rate is increased, the Tenant shall pay the increase in
the premium to the Landlord on demand.
2
<PAGE> 3
7. WATER DAMAGE
The Landlord shall not be liable for any damage or injury to any
persons or property caused by the leak or flow of water from or into any part of
the building located upon the Rental Space.
8. LANDLORD'S REPAIRS
The Landlord shall be responsible to make all required repairs to the
structural portions of the Rental Space and all other required repairs or
replacements which cost more than $2,500 as to any individual repair or
replacement.
9. LIABILITY OF LANDLORD AND TENANT
The Landlord shall not be liable for injury or damage to any person or
property unless it is due to the Landlord's negligence. The Tenant is liable for
any loss, injury or damage to any person or property caused by the act or
omission of the Tenant or the Tenant's employees or agents. The Tenant shall
defend the Landlord from and reimburse the Landlord for all liability and costs
(including reasonable attorneys' fees) resulting from any injury or damage due
to the act or omission of the Tenant or the Tenant's employees or agents.
10. REAL ESTATE TAXES
The Landlord shall pay all real estate taxes and assessments on the
Rental Space.
11. ACCEPTANCE OF RENTAL SPACE
The Tenant has inspected the Rental Space and agrees that the Rental
Space is in satisfactory condition. The Tenant accepts the Rental Space "as is".
12. QUIET ENJOYMENT
The Landlord has the right to enter into this Lease. If the Tenant
complies with this Lease, the Landlord must provide the Tenant with undisturbed
possession of the Rental Space.
13. UTILITIES AND SERVICES
The Tenant shall arrange and pay for all utilities and services
required for the Rental Space, including the following:
(a) Heat (c) Electric
(b) Hot and cold water (d) Gas
(e) Sewer
The Landlord shall pay for the following utilities and services:
NONE.
The Landlord is not liable for any inconvenience or harm caused by any
stoppage or reduction of utilities and services beyond the control of the
Landlord. This does not excuse the Tenant from paying Rent.
14. TENANT'S REPAIRS, MAINTENANCE, AND COMPLIANCE
The Tenant shall:
(a) Promptly comply with all laws, orders, rules and requirements
of governmental authorities, insurance carriers, board of fire
underwriters, or similar groups.
(b) Maintain the Rental Space and all equipment and fixtures in it
in good repair and appearance.
(c) Make all necessary repairs and replacements to the Rental
Space and all equipment and fixtures, except those that are
specifically provided herein to be Landlord's obligation.
(d) Maintain the Rental Space in a neat, clean, safe, and sanitary
condition, free of all garbage.
(e) Keep the walks, driveway, parking area, yard, entrances,
hallways, and stairs clean and free from trash, debris, snow
and ice.
(f) Use all electric, plumbing and other facilities in the Rental
Space safely.
(g) Use no more electricity than the wiring or feeders to the
Rental Space can safely carry.
(h) Promptly replace all broken glass in the Rental Space.
(i) Do nothing to destroy, deface, damage, or remove any part of
the Rental Space.
(j) Keep nothing in the Rental Space which is inflammable,
dangerous or explosive or which might increase the danger of
fire or other casualty.
3
<PAGE> 4
(k) Promptly notify the Landlord when there are conditions which
need repair.
(l) Do nothing to destroy the peace and quiet of the Landlord,
other tenants, or persons in the neighborhood.
(m) Avoid littering in the building or on it grounds.
(n) Make all other repairs and perform all other maintenance not
described above, or required of Landlord under Article 8.
The Tenant shall pay any expenses involved in complying with the above.
15. NO ALTERATIONS
The Tenant may not make any changes or additions to the Rental Space
without the Landlord's written consent which shall not be unreasonably withheld
or delayed. Any changes or additions made without the Landlord's written consent
shall be removed by the Tenant on demand.
All changes or additions made with the Landlord's written consent shall
become the property of the Landlord when completed and paid for by the Tenant.
They shall remain as part of the Rental Space at the end of the Term. The
Landlord may demand that the Tenant remove any changes or additions at the end
of the Term. The Tenant shall promptly pay for all costs of any permitted
changes or additions. The Tenant shall not allow any mechanic's lien or other
claim to be filed against the Rental Space. If any lien or claim is filed
against the Rental Space, the Tenant shall have it promptly removed.
Notwithstanding any provision of the Lease to the contrary, in the
event Landlord permits or requires Tenant to remove any alteration, addition or
improvement to the Rental Space made by Tenant, Tenant, at Tenant's expense,
shall promptly restore the Rental Space to the condition existing prior to such
Alteration, reasonable wear and tear excepted. Should Tenant fail to remove any
alteration required to be removed at the end of the Term, Landlord may do so,
collecting at Landlord's option the cost and expense thereof from Tenant as
additional rent or by deduction from the Security Deposit. All furniture,
movable trade fixtures and equipment installed by Tenant may be removed by
Tenant at the termination of this Lease if Tenant so elects, and shall be so
removed if required by Landlord, or if not so removed shall, at the option of
Landlord, become the property of Landlord. All such installations, removals and
restoration shall be accomplished in a good and workmanlike manner so as not to
damage the Rental Space.
16. SIGNS
The Tenant shall obtain the Landlord's written consent before placing
any sign on or about the Rental Space. Signs must conform with all applicable
municipal ordinances and regulations.
17. ACCESS TO RENTAL SPACE
The Landlord shall have access to the Rental Space on reasonable notice
to the Tenant to (a) inspect the Rental Space, (b) make necessary repairs,
alterations, or improvements, (c) supply services, and (d) show it to
prospective buyers, mortgage lenders, contractors or insurers.
The Landlord may show the Rental Space to rental applicants at
reasonable hours on notice to the Tenant within six (6) months before the end of
the Term.
The Landlord may enter the Rental Space at any time without notice to
the Tenant in case of emergency.
4
<PAGE> 5
18. FIRE AND OTHER CASUALTY
The Tenant shall notify the Landlord at once of any fire or other
casualty in the Rental Space. The Tenant shall carry business/rental
interruption insurance and shall be required to continue to pay Rent whether or
not the Rental Space is usable.
Unless Landlord's mortgage Lender requires otherwise, or retains the
proceeds of insurance, if the Rental Space is partially damaged by fire or other
casualty, the Landlord shall repair it as soon as possible, subject to
adjustment and receipt of insurance proceeds. This includes the damage to the
Rental Space and fixtures installed by the Landlord. The Landlord need not
repair or replace anything installed by the Tenant.
Landlord may cancel this Lease if the Rental Space is so damaged by
fire or other casualty that it cannot be repaired within one hundred eighty
(180) days or if adequate insurance proceeds are not available to complete the
repairs. If the parties cannot agree, the opinion of a contractor chosen by the
Landlord will be binding on both parties.
This Lease shall end if the Rental Space is totally destroyed. The
Tenant shall pay Rent to the date of destruction.
19. EMINENT DOMAIN
Eminent domain is the right of a government to lawfully condemn and
take private property for public use. Fair value must be paid for the property.
The taking occurs either by court order or by deed to the condemning party. If
any part of the building located upon the Rental Space is taken by eminent
domain, either party may cancel this lease on thirty (30) days notice to the
other, unless Landlord's mortgage lender requires otherwise. The entire payment
for the taking shall belong to the Landlord. The Tenant shall make no claim for
the value of this Lease for the remaining part of the Term.
20. SUBORDINATION TO MORTGAGE
In a foreclosure sale all mortgages which now or in the future affect
the Rental Space have priority over this Lease. This means that the holder of a
mortgage may end this Lease on a foreclosure sale. The Tenant shall sign all
papers need to give any mortgage priority over this Lease. If the Tenant
refuses, the Landlord may sign the papers on behalf of the Tenant.
21. TENANT'S CERTIFICATE
At the request of the Landlord, the Tenant shall sign a certificate
stating that (a) this Lease has not been amended and is in effect, (b) the
Landlord has fully performed all of the Landlord's agreements in this Lease, (c)
the Tenant has no rights to the Rental Space except as stated in this Lease, (d)
the Tenant has paid all Rent to date, and (e) the Tenant has not paid Rent for
more than one month in advance. The Certificate shall also list all the property
attached to the Rental Space owned by the Tenant.
22. VIOLATION, EVICTION, RE-ENTRY AND DAMAGES
The Landlord reserves a right of re-entry which allows the Landlord to
end this Lease and re-enter the Rental Space if the Tenant violates any
agreement in this Lease. This is done by eviction. Eviction is a court procedure
to remove a tenant. Eviction is started by the filing of a complaint in court
and the service of a summons on a tenant to appear in court. The Landlord may
also evict the Tenant for any one of the other grounds of good cause provided by
law. After a court order of eviction and compliance with the warrant of removal,
the Landlord may re-enter and take back possession of the Rental Space. If the
cause for eviction is non-payment of Rent, notice does not have to be given to
the Tenant before the Landlord files a complaint. If there is any other cause to
evict, the Landlord must give to the Tenant the notice required by law before
the Landlord files a complaint for eviction. The Tenant is liable for all
damages caused by the Tenant's violation of any agreement in this Lease. This
includes reasonable attorney's fees and costs. After eviction, the Tenant shall
pay the Rent for the Term or until the Landlord re-rents the Rental Space, if
sooner. If the Landlord re-rents the Rental Space for less than the Tenant's
Rent, the Tenant shall pay the difference until the end of the Term. The Tenant
shall not be entitled to any excess resulting from the re-renting. The Tenant
shall also pay (a) all reasonable expenses incurred by the Landlord in preparing
the Rental Space for the re-renting and (b) commissions paid to a broker for
finding a new tenant.
The occurrence of any of the following shall constitute a material
default and breach of this Lease by Tenant: (i) a failure by Tenant to pay,
within five (5) days after written notice, any installment of Rent hereunder or
any additional rent or any such other sum herein required to be paid by Tenant;
and/or (ii) a failure by Tenant to observe and perform any other provisions or
covenants of this Lease to be observed or performed by Tenant, where such
failure continues for thirty (30) days after written notice thereof from
Landlord to Tenant provided, however, that if the nature of the default is such
that the same cannot reasonably be cured within such thirty (30) day period,
Tenant shall not be deemed to be in default if Tenant shall within such period
commence such cure and thereafter diligently prosecute the same to completion
(but in no event shall such cure period exceed an additional thirty (30) days).
Upon the occurrence of any such event of default set forth above: (i)
Landlord may (but shall not be required to) perform for the account of Tenant
any such default of Tenant and immediately recover as additional rent any
expenditure made and the amount of any obligations incurred in connection
therewith, plus interest at the (the "Rate") of one and one-half (1-1/2%)
percent per month from the date of such expenditure; (ii) Landlord may at its
option accelerate all Rent and additional rent due for the balance of the term
of this Lease and declare the same to be immediately due and payable as
liquidated damages; (iii) Landlord shall have the re-entry rights provided
above; (iv) In addition to all remedies provided herein or by law, Tenant shall
pay to Landlord reasonable attorneys fees and court costs incurred as a result
of such breach; and/or (v) Landlord shall have all other rights and remedies
available under the lease, or at law or in equity.
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<PAGE> 6
23. NOTICES
All notices given under this Lease must be in writing. Each party must
accept and claim the notices given by the other. Unless otherwise provided by
law, they may be given by (a) personal delivery, or (b) certified mail, return
receipt requested. Notices shall be addressed to the Landlord at the address
written at the beginning of this Lease and to the Tenant at the Rental Space.
24. NO WAIVER
The Landlord's failure to enforce any agreement in this Lease shall not
prevent the Landlord from enforcing the agreement for any violations occurring
at a later time.
25. SURVIVAL
If any agreement in this Lease is contrary to law, the rest of the
Lease shall remain in effect.
26. END OF TERM
At the end of the Term, the Tenant shall (a) leave the Rental Space
clean, (b) remove all of the Tenant's property, (c) remove all signs and restore
that portion of the Rental Space on which they were placed, (d) repair all
damage caused by moving, and (e) return the Rental Space to the Landlord in the
same condition as it was at the beginning of the Term except for normal wear and
tear.
If the Tenant leaves any property in the Rental Space, the Landlord may
(a) dispose of it and charge the Tenant for the cost of disposal, or (b) keep it
as abandoned property.
27. BINDING
This Lease binds the Landlord and the Tenant and all parties who
lawfully succeed to their rights and places.
28. FULL AGREEMENT
The parties have read this Lease. It contains their full agreement. It
may not be changed except in writing signed by the Landlord and the Tenant.
29. LATE PAYMENT
For each payment of Rent or additional rent received after the due
date thereof, Tenant shall pay to Landlord an initial late charge of ten (10%)
percent of the payment due plus one and one-half (1-1/2%) percent for each
additional month such payment is late, which charge must accompany the late
payment. An additional charge will be made for checks returned for insufficient
funds.
30. WAIVER OF SUBROGATION
Tenant and Landlord, respectively, hereby release each other from any
and all liability or responsibility to the other for anyone claiming by, through
or under it or them by way of subrogation or otherwise for any loss or damage to
property covered by any insurance then in force, even if such loss or damage
shall have been caused by the fault or negligence of the other party or anyone
for whom such party may be responsible; provided, however, that this release
shall be applicable and in force and effect only with respect to any loss or
damage occurring during such time as the policy or policies of insurance
covering said loss shall contain a clause or endorsement to the effect that this
release shall not adversely affect or impair such insurance or prejudice the
right of the insured to recover thereunder. Landlord and Tenant each agree to
use their best efforts to obtain such a waiver in all applicable insurance
policies, failing which such party shall immediately notify the other of such
inability to obtain a waiver and provide with such notice written evidence of
all attempts to procure same and the written rejection of the insurers
consulted.
31. WAIVER OF CLAIMS
Landlord and Landlord's agents, servants and employees shall not be
liable for, and Tenant hereby releases and relieves Landlord, its agents,
servants, employees from, all liability in connection with any and all loss of
life, personal injury, damage to or loss of property, or loss or interruption of
business occurring to Tenant, its agents, servants, employees, invitees,
licensees, visitors, or any other person, firm, corporation or entity, in or
about or arising out of the Rental Space.
32. BROKERS
Tenant represents and warrants to Landlord that Tenant has had no
dealings, negotiations or consultations with respect to the Rental Space or this
transaction with any broker or finder other than the Broker, if any, and that
otherwise no broker or finder called the Rental Space to Tenant's attention for
lease or took any part in any dealings, negotiations or consultations with
respect to the Rental Space or this Lease. Tenant agrees to indemnify and hold
harmless Landlord from and against all liability, cost and expense, including
attorney's fees and court costs, arising out of any misrepresentation or breach
of warranty by Tenant under this Article.
33. LANDLORD'S OBLIGATIONS/LIABILITY
Landlord's obligations hereunder shall be binding upon Landlord only
for the period of time that Landlord is in ownership of the Building; and, upon
termination of that ownership, Tenant, except as to any obligations which have
then matured, shall look solely to Landlord's successor in interest in the
Building for the satisfaction of each and every obligation of Landlord
hereunder. Landlord shall have no liability under any of the terms, conditions
or covenants of this Lease and Tenant shall look solely to the equity of the
Landlord in the Building of which the Rental Space form a part for the
satisfaction of any claim, remedy or cause of action accruing to Tenant as a
result of the breach of any action of this Lease by Landlord.
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34. HOLDOVER
In the event Tenant fails to vacate the Rental Space upon the
expiration of the term or upon any earlier termination of this Lease, Tenant
shall pay to Landlord double the Rent and additional rent due and payable for
the month after which this Lease expired or terminated as liquidated damages and
in the event that Tenant holds over for more than thirty (30) days the Rent and
additional rent for such additional periods shall be tripled or Landlord may
pursue any other remedy.
35. TENANT'S IMPROVEMENTS
Tenant agrees that the Rental Space shall be delivered to Tenant in
their "as-is" condition on the date hereof, and that Landlord shall have no
obligation to perform any improvements to the Rental Space.
36. NET, NET, NET LEASE
It is the intention of Landlord and Tenant that the rental herein
specified shall be net to Landlord in each lease year, that all costs, expenses,
and obligations of every kind relating to the Rental Space which may arise
during the term of this Lease shall be paid by Tenant, and that Landlord shall
be indemnified by Tenant against any such costs, expenses, and obligations.
37. RENEWAL OPTIONS.
Tenant expressly acknowledges and agrees that the term of this Lease
may be extended by Landlord at its option for two (2) successive additional
terms of five (5) years each (each a "Renewal Term") to commence immediately
upon expiration of the original term of the Lease as same may have been extended
hereunder by Landlord's delivering written notice to Tenant not later than sixty
(60) days prior to the expiration of the Term of the Lease (as same may be
extended hereunder). Such notice shall be given to Landlord in accordance with
the Lease. If Landlord exercises any one or more of the extensions, the Lease
shall continue during the Renewal Term upon the same covenants, terms and
conditions applicable to the original Term of the Lease (including, without
limitation, payment of all additional rent as provided herein), except for
provisions which by their nature are applicable only to the original Term of the
Lease, and provided that Basic Rent during each Renewal Term, if exercised,
shall be paid in accordance with the terms of this Lease but shall be in the
following amounts:
<TABLE>
<CAPTION>
PERIOD PER SQ. FT. ANNUAL MONTHLY
- ------ ----------- ------ -------
<S> <C> <C> <C>
June 1, 2000 - May 31, 2001 $15.00 $300,000.00 $25,000.00
June 1, 2001 - May 31, 2002 $15.50 $310,000.00 $25,833.33
June 1, 2002 - May 31, 2003 $16.00 $320,000.00 $26,666.67
June 1, 2003 - May 31, 2004 $16.50 $330,000.00 $27,500.00
June 1, 2004 - May 31, 2005 $17.00 $340,000.00 $28,333.33
June 1, 2005 - May 31, 2006 $17.50 $350,000.00 $29,166.67
June 1, 2006 - May 31, 2007 $18.00 $360,000.00 $30,000.00
June 1, 2007 - May 31, 2008 $18.50 $370,000.00 $30,833.33
June 1, 2008 - May 31, 2009 $19.00 $380,000.00 $31,666.67
June 1, 2009 - May 31, 2010 $19.50 $390,000.00 $32,500.00
</TABLE>
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38. ENVIRONMENTAL MATTERS.
(a) RISK TO ENVIRONMENT PROHIBITED. Tenant will not use the Rental
Space, except for retail quantities of substances used solely for cleaning or
commercial purposes, or as may otherwise be approved in writing by Landlord
hereinafter, for the generation, manufacture, use, recycling, transportation,
treatment, storage, discharge or disposal of any hazardous, toxic or polluting
substance or waste (including petroleum products and radioactive materials)
("Hazardous Substances") or for any use which poses a substantial risk or damage
to the environment, and will not engage in any activity which could subject
Landlord to any liability under federal, state or local environmental law,
regulation, order or ordinance. It is understood and agreed that the provisions
contained in this Paragraph shall be applicable notwithstanding the fact that
any substance shall not be deemed to be a Hazardous Substance at the time of its
use by Tenant, but shall thereafter be deemed to be a Hazardous Substance.
Tenant will not install any storage tank for the storage of Hazardous
Substances, nor use or install equipment at the Rental Space which contain
asbestos or polychlorinated biphenyl ("PCB") without the advance written
permission of Landlord.
(b) COMPLIANCE WITH ENVIRONMENTAL LAWS. Tenant will comply with all
applicable environmental statutes, rules, regulations and orders of any federal,
state or municipal government in effect at any time during the term of this
Lease, obtain in its own name any and all environmental permits, registration,
licenses or identification numbers necessary for its operations and comply with
all such permits.
(c) HAZARDOUS SUBSTANCE RELEASES. Tenant will assume full
responsibility for reporting any release, spill, leak, discharge, disposal,
pumping, pouring, emission, emptying, injecting, leaching, dumping or escaping
("Release") or threat of Release of any Hazardous Substance at the Rental Space
to the appropriate environmental agencies and immediately provide notice of such
Release or threat of Release to Landlord. Tenant will assume full responsibility
for any investigation, clean-up or other action required in relation to any such
Release, or threat of Release, and will indemnify and hold Landlord harmless for
any claims, loss or expenditures in connection thereto. Tenant will take all
necessary precautions to avoid any such Releases or threats of Release. Tenant
will take no action which could result in a lien being imposed on the Rental
Space or the property of which the Rental Space form a part by the state or
federal government under any environmental statute. Tenant will take no action
which could require Landlord to include in the deed to the property a notice of
disposal or Release of Hazardous Substances at the site.
(d) INDEMNIFICATION OF LANDLORD. Tenant does hereby agree to indemnify
and save harmless Landlord and each mortgagee of the property of which the
Rental Space form a part from all losses, costs, damages and expenses (including
fines, penalties and attorneys fees) resulting from any claim, demand,
liability, obligation, right or cause of action, including but not limited to
governmental action (collectively, "Claims"), that is asserted against Landlord
or any such mortgagee or the Rental Space as a result of Tenant's breach of any
representation, warranty or covenant hereof; or arising out of the operations or
activities or presence of Tenant or any sublessee, agent or representative of
Tenant at the Rental Space; or arising from environmental conditions or
violations at the Rental Space including without limitation the presence of
Hazardous Substances at, on or under the Rental Space or the discharge or
Release of hazardous, polluting or toxic substances from the Rental Space;
provided, however, that Tenant shall not be obligated to indemnify Landlord
under this Paragraph if Tenant demonstrates that the Claim was based on events
or conditions prior to the date of this Lease.
(e) SURVIVAL. The provisions, including without limitation the
indemnities and environmental representations, warranties and covenants of
Tenant, set forth in this Article shall survive termination of this Lease.
SIGNATURES
The Landlord and the Tenant agree to the terms of this Lease by signing
below. If a party is a corporation, this Lease is signed by its proper corporate
officers.
Witnessed: Thompson Enterprises, a Pennsylvania Limited Partnership
- ------------------------------- By:
As to Landlord -------------------------------
Attested: Innovative Tech Systems, Inc., an Illinois Corporation
- ------------------------------- By:
As to Tenant -------------------------------
167615
April 30, 1998
8
<PAGE> 1
Exhibit 21.1
LIST OF SUBSIDIARIES
Innovative Tech Systems, Inc. of Delaware *
Micro Computer Company, Inc. of Delaware
Innovative Tech Systems, Inc. of Canada
* - Subsidiary was merged into the Parent as of January 31, 1998.
<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 April 27, 1998 appearing on page F-1 of this Form 10-K.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
April 27, 1998
<PAGE> 1
Exhibit 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 on 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.
for the year ended January 31, 1996, 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, 1998
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