U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ x ] Annual report under section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the fiscal year ended June 30,
1998.or [ ] Transition report under section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the transition period from
______________ to _______________
Commission file number 33-16531-D
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(Name of small business issuer in its charter)
Utah 87-0447580
------------------------------ ---------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
512 South 860 East, American Fork, Utah 84003
----------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code:(801) 763-9965
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on which registered
N/A N/A
Securities to be registered under section 12(g) of the Act: None
Check whether the registrant (1) 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 report(s)), and (2) has been
subject to such filing requirements for the past 90 days.
x Yes No
Check if disclosure of delinquent filers in response to Item 405 of
Regulations S-B is not contained in this form, and no disclosure
will 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-KSB or any amendment to this Form
10-KSB. [ x ]
State the registrant's net revenue (loss) for its most recent fiscal
year: $(1,257,397).
The aggregate market value of voting stock held by non-affiliates of
the registrant on June 30, 1998, was approximately $ 25,895,263
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: as of
June 30, 1998, there were outstanding 15,546,361 shares of
registrant's Common stock, no par value per share.
Documents incorporated by reference: Exhibits, Item 13.
PART I.
Item 1.
THE COMPANY
Exact corporate name: International Automated Systems, Inc.
State and date of incorporation: Utah- September 26, 1986.
Street address of principal office: 512 South 860 East
American Fork, Utah 84003.
Company telephone number: (801) 763-9965
Fiscal year: June 30
BUSINESS AND PROPERTIES
A. OVERVIEW
International Automated Systems, Inc., a Utah corporation
(hereinafter "Registrant" or "Company") based in American Fork,
Utah, seeks to design, produce and market products based on high
technology. The Company has developed and is currently offering an
automated self-service check-out system. This system allows retail
customers to ring up their purchases without a cashier or clerk.
The system is primarily designed for grocery stores, but may be
applicable in other retail establishments.
The Company has an Automated Fingerprint Identification Machine
("AFIM") which has the capability of verifying the identity of
individuals. Potential AFIM applications include products for
employee time-keeping and security, access control, and debit or
credit card verification. Registrant purports that its identity
verification system has a variety of uses and applications for both
commercial and governmental users.
The Company also purports that it has developed technology that
transmits information and data using different wave patterns,
configurations, and timing in the electromagnetic spectrum. The
Company refers to this technology as digital wave modulation
("DWM"). The Company believes that if the technology is implemented
and applied commercially, the technology has the capability to
increase significantly the amount of information which can be
transmitted. The Company is continuing the development of this
technology and the commercial feasibility of the technology has not
been demonstrated. Registrant believes that it has many competitors
in the communications, information data transfer, and data storage
industries which have greater capital resources, more experienced
personnel, and technology which is more established and accepted in
the market place.
The first anticipated product using this technology for
commercialization is a high speed modem. The modem is projected to
be faster than modems currently in use. Generally modems are used
for purposes of transmitting data over telephone lines, on
telecommunications systems, and over wireless mediums such as
satellite transmissions and other line- of-sight transmission
mediums. The Company has a modem prototype. Additional development
to achieve a commercial product is on going. In addition, the
Company intends to apply the digital wave modulation technology in
other areas. The Company has not established a plan or order of
priorities for any future commercial product development. Because
this technology is sophisticated and new, the Company may not be
successful in its efforts to have commercial exploitable products
because of difficulties and problems associated with development.
Possible problems could be inability to design, construct and
manufacture commercial products; and the Company's lack of funding
and financial resources and experienced personnel. Competitors may
develop technologies which are superior and will make obsolete the
DWM technology even before the Company has completed its development
of any commercial products. Further, cost will be a factor in both
the development and the commercialization of any new product. It is
anticipated that if a commercially viable modem is developed, the
Company will have to expend funds to introduce the product into the
market and to formulate and place into action any marketing plan.
Costs to offer new products and to establish the proper marketing
strategy will be significant. The Company has not made any
projections regarding any anticipated costs. There are risks that
no commercially viable products will be developed from the
technology and any products developed may not be accepted or
successful in the marketplace. Further, the Company may not have
sufficient funds to develop, manufacture, and market any products.
Background.
The Company, was organized under the laws of the State of Utah
on September 26, 1986. In April 1988 the Company filed a
registration statement for a public offering under the provisions of
the Securities Act of 1933 ("1933 Act") to sell a maximum of
1,074,000 units at a price of $.50 per unit. Each unit was
comprised of one share of common stock and one common stock purchase
warrant. The Company sold approximately 200,000 units at the
offering price of $.50 per unit realizing total proceeds of
approximately $100,000. All warrants expired without exercise.
Over time the Company for the most part acquired its different
technologies from its president.
Automated Self-Service Check-Out System.
In 1988 a patent was granted for the automated self-service
check-out system (hereinafter referred to as "Self-Check System" or
"System"). In retail operations customers using the System
check-out the items selected for purchase. For approximately three
years a form of the Self-Check System was used in a grocery store in
Salem, Utah.
Description of the Self-Check System.
The Self-Check System is an automated check-out system for
customers of retail establishments and provides for self-service
check-out lines, stations or lanes. The System has a scanner to
read the bar codes of items purchased and a scale to weigh the items
scanned and placed in the receiving basket. As each item is scanned
by the bar code reader, the scale verifies the accuracy of the item
scanned and placed in the basket by comparing the weight of the item
scanned with the weight change recorded in the receiving basket. If
the weights differ or if other problems arise, a clerk is summoned
to assist the customer and resolve any problem.
The Self-Check System is designed to replace clerk operated
cashier registers that are used in retail and grocery stores. In
addition, the Self-Check System, when fully and completely
implemented, is intended to allow a store manager to maintain
accurate inventory on a contemporaneous basis. The contemporaneous
inventory assists in reordering and restocking. It is believed that
the System may simplify price verification and may provide customers
with better and faster service.
Operation of System.
The Self-Check System operates as follows. Customers make
their selections for purchase. A customer places the grocery cart
at the head of the System, removes the products from the grocery
basket and scans the bar codes on the products across the reader.
The bar code provides the product description, weight and price.
This information is then relayed on an item by item basis to the
computer and the computer transmits the data in its memory to the
check-out terminal. The product information, item description and
price, is then displayed on the screen. A running subtotal for all
items purchased is also shown. Each item scanned is placed into a
receiving basket or cart on a sensitive scale. The weight of the
item scanned and placed in the receiving basket is compared to the
weight for that item as recorded in the computer. The computer
compares the weight of the item scanned and places in the basket with
the weight for that item in the database. If the weight differs, an
error code is displayed and an attendant is summoned to assist the
customer or to override the System. Once all the items are
scanned, a final tally is made. Payment is then made to the
attendant either through a debit or credit card, check or cash. A
payment may also be made without an attendant through the use of the
"AFIM" which will verify the identity of the person making the
transaction and automatically debit their account electronically. An
attendant may be supervising multiple check-out terminals.
The Self-Check System interfaces with computers and data is
transferred back and forth between the check-out terminals and the
main computer. The interface may be compatible with various scanners
and scales so the Self-Check System may be adaptable to equipment
already available from other manufacturers. The System allows one
clerk to handle simultaneously multiple check-out stations or lanes.
Possible Advantages.
Management believes the Self-Check System may have several
possible advantages over conventional retail check-out systems to
operators and customers. For operators the advantages are: reduced
labor costs, more accurate inventory, theft reduction, theft
deterrence, decreased check fraud, and decreased transaction costs.
Also, the retailer can serve customers during peak traffic. For
customers the advantages are: faster service, greater convenience,
less time waiting in line and more privacy. A retail establishment
may not need as many cashiers with the Self-Check System.
Management believes that the market for the Self-Check System
may include several types of retail establishments, including
grocery stores, drug stores, discount stores, and fast food
restaurants. If operating properly the Self-Check system lessens
the impact of having too many attendants or cashiers available.
Customer traffic volume is difficult to predict and retail operators
wanting to reduce the time customers wait in line must have
sufficient clerks or cashiers available.
The Self-Check System uses proprietary software developed by
the Company. The System also offers a hand-held unit to be used for
price verification and taking physical inventory counts. The
hand-held unit reads the bar codes and verifies the price in the
database. This hand-held unit also is used to take physical counts
for inventory control. The System may also include a check-in
station at the loading dock. Items delivered are checked and the
prices verified against purchase orders allowing greater control.
Price verification can be done using the hand-held unit while the
products are on the shelf.
For the Self-Check System to operate efficiently at least 95%
of the items offered for sale must have bar codes. In the past few
years virtually all packaged goods have bar codes. Items purchased
across the counter, such as bakery, meat and deli products usually
have no bar code. Grocery stores or other retail operations using
the System may have to install scales and labelers to place bar
codes on items with no bar code. As an option the Company offers
scales and labelers for produce and delicatessen items which
interface with the Self-Check System.
Management believes that the Self-Check System may help reduce
theft. For instance, one clerk cannot check-out another clerk's or
friend's purchases using incorrect and understated prices. A portion
of the theft in supermarkets is attributable to employees doing what
is called "sweet- hearting" by checking-out the purchases of other
employees or friends at reduced prices.
Possible Marketing as a Franchise.
The Company is considering forming a wholly-owned subsidiary
to market franchise rights to the System. It is anticipated that
franchises would be sold on a store-by-store basis. To sell franchises
the Company must comply with both federal and state franchise statutes
and regulations. The Company will have to make appropriate filings
with federal and state agencies. A System would be designed to fit
the particular needs and requirements of an establishment. It is
anticipated that a franchise would consist of the necessary equipment
to operate the System and the software to implement and operate the
System. The price to purchase a franchise will vary according to the
size of the store or retail operation.
The Company is installing a System in a 25,000 square foot
store which is near completion in Salem, Utah. It is anticipated
that the store will open during the toward the end of 1998. The
store is owned by Neldon Johnson, the company's president, and will
operate under the name of U-Check. The store may be considered as a
pilot project for the System as it will test the effectiveness and
consumer acceptance of the System in a retail grocery store
environment. U-Check will purchase or lease the equipment from the
Company at a price yet to be determined, but the price should exceed
the Company's cost for the equipment and system components. Also,
the Company and Mr. Johnson will enter into a software licensing
agreement for the System.
Automatic Fingerprint Identification Machine.
The company has an Automated Fingerprint Identification Machine
("AFIM") which verifies an individual's identity. The AFIM
digitizes the unique characteristics of a person's fingerprint and
then stores the information on a magnetic strip similar to the strip
on the back of a credit card or on other storage medium. The
identity verification process is simple, quick, easy, and reliable.
AFIM connects to and operates with a personal computer. AFIM has
unique software, lens, and lighting. Management believes that AFIM
is better than other bio-metric and fingerprint based identification
systems. The Company is continuing to make modifications to the AFIM
technology to increase the speed and to reduce the cost and size of
the units.
Operation.
To use the AFIM the person whose identity will be verified has
the fingerprint read by the AFIM. The finger is placed on the lens
and AFIM reads the print, digitizes, and stores the digitized
fingerprint. To verify a person's identity AFIM reads the
fingerprint and compares it to the digitized fingerprint on the
magnetic strip or other medium. The stored number must be accessed
so it can be compared with the actual fingerprint. A match verifies
the person's identity. The AFIM is connected to a personal computer
which processes the information read by the AFIM and makes the
comparison to the digitized fingerprint on the magnetic strip. The
Company believes that it has the ability to connect AFIMs in series
so that multiple stations or readers can be connected and operated
by a single personal computer.
Possible Commercial Applications.
Different commercial applications of the AFIM are under
development. One application is a time clock. The digitized
fingerprint stored on the magnetic strip on the back of a card like
a credit card must match the person's fingerprint who is recording
his arrival at or departure from the workplace. Because the AFIM
system validates the identity of the person using the time clock,
fellow workers can not make in or out entries for other workers.
Also, AFIM with appropriate software may be used with a
database of fingerprints. The fingerprint is read by the AFIM and
then verified against the database for identification and, where
appropriate or required, for access control purposes. Searching the
database requires additional time to verify the identity of the
individual using the fingerprint stored in the database. To date
the full marketing of the AFIM time clock has been delayed as
development of the product is continuing and modifications to the
AFIM are made.
The Company has no comprehensive study or evaluation to
determine the reliability of the AFIM or the frequency of false
positives. A false positive is where a verification is sought and
the person is identified as correct when it is not the person
claimed. Management believes, based on the limited experience
available, that AFIM does not yield false positives or false
negatives at unsatisfactory levels.
In addition, the Company intends to develop an AFIM version
that, if successfully completed, will read and simultaneously
digitize thumb prints and fingerprints on four fingers. To have this
capability the Company will have to develop a different lens and to
write software to read and to process a full set of fingerprints at
one time. The Company believes a market for the full-print AFIM may
exist.
Another application of the AFIM technology is door or entry
security. The AFIM would read a card on which the fingerprint of
the person seeking entry would be encoded. The fingerprint of the
person seeking entry as read by the AFIM would have to match the
fingerprint digitized and encoded on the card. To be successful the
Company believes that the door security adaptation must be
compatible with or adaptable to other door entry security systems
already in place. Development is ongoing.
Another application of the "AFIM" technology which is being
developed is a vending machine which will allow items to be
purchased which now require age and identity verification.
Another product based on AFIM technology is identity
verification on computer networks or identification when data is
transmitted or accessed. Under development is a smaller version of
the AFIM that would fit into the tower or case of a personal
computer or workstation. The AFIM would read the fingerprint to
validate the identity of the user. Depending on the system
protocols the person would then be allowed access to data, files,
information or programs. Also, the identity verification, if
development is completed, may validate the identity of the person
either receiving or sending information.
For future development and possible commercialization of the
AFIM technology and the possible application the Company may attempt
to enter into licensing agreements or joint ventures. Presently the
Company is merely considering the possibility of licensing
agreements or joint venture agreement. At this time there are no
agreements to which the Company is a party for licensing, royalties,
or joint venture projects.
Competition.
The AFIM based products compete with a broad spectrum of
products which verify identity. Competitors offer products based on
some form of bio-metrics. Some competitors offer fingerprint based
systems. The success of these other entities and the system used
may, individually or collectively, significantly affect the
Company's attempt to commercialize AFIM. The Company has no market
studies to determine its relative position with its competitors in
the market place. Some competitors have been in business longer,
have more experienced personnel, have greater financial resources,
and better name recognition in the marketplace.
Possible Advantages.
The Company believes that when development is completed, AFIM
products will be quicker, more reliable, and more cost-effective
than other identification systems. The Company has no empirical
data or statistics to support its belief.
Digital Wave Technology.
Digital Wave Modulation technology may provide a new way of
transmitting data. Basically different wave patterns are generated
on the magnetic spectrum which may increase flows of data and
information transmission and communication. More data will be
transmitted in a shorter time period and speed may be increased.
DWM technology is based on the transmission of symmetrical,
asymmetrical, and reference waves that are combined and separated.
The Company has a modem prototype that has the capability of sending
and separating combined multiple waves. Depending upon frequencies
and other factors the Company believes it can achieve transmission
rates in excess of modems currently in use. Data transmission speed
will depend on such factors as the transmission medium, frequencies
used, and wave combinations. The rate of data transmission varies
significantly depending on the communications medium used. When
using plain old telephone system commonly known as "POTS"
transmission rates will be slower. DWM is not compatible with the
technology used in other modems.
DWM can be used to transmit over any analog media including
wireless. Because wave frequencies may be higher when sent through
the air, wireless data transmission using DWM technology may
transmit information at higher rates.
Preliminary evaluations indicate that DWM technology may be
used for data storage media which are magnetic based, such as floppy
disks, hard drives, video cassettes, tapes etc. Because various
forms of magnetic media store in analog format, DWM may increase the
storage capacity of some magnetic based devices. DWM storage
enhancement applications have not been fully developed and tested
and may ultimately prove infeasible and impractical.
DWM must be developed from a prototype to a commercially viable
product. Even though the Company has a prototype, the Company makes
no assurance that the DWM technology can be developed into a
commercially viable product or products.
If the research and development of the modem is successful and
the Company then has a commercially viable product, the Company will
consider various alternatives. It may seek a joint venture partner
or it may license the technology to another company and attempt to
structure a royalty payment to the Company in the licensing
agreement. No plan has been adopted regarding the manufacturing,
marketing, or distributing of the modem, when and if
commercialization is achieved. No assurance can be given that the
commercialization efforts for the modem will be successful or that
the Company will be able to effectively penetrate and capture a
share of the modem market. Any possible ventures are predicated on
the Company developing a commercially viable product. Presently, the
Company's efforts regarding DWM are directed primarily toward the
DWM modem.
Management believes that because of the increased amount of
information that can be transmitted, other applications in the
telecommunications industry may be feasible and beneficial. Again
because of the sophisticated and high technology nature of this
technology other applications may not ultimately be successful.
The Company is a development stage company and its business is
subject to considerable risks. The Company activities have not
developed sufficient cash flows from business operations to sustain
itself. The Company is small and has an extremely limited
capitalization. Many of its actual and potential competitors have
greater financial strength, more experienced personnel, and
extensive resources available. Also, the Company is engaged in
technological development. It is expensive to do research and
development on new products or applications of new or existing
technology. Resources can be used and depleted without achieving
the desired or expected results. Also, because of the rapid
development of technology the Company's products may become
obsolete. Some of the Company's technology is revolutionary in that
it is based on unconventional technological theories. The Company's
business activities are subject to a number of risks, some of which
are beyond the Company's control. The Company's future is dependent
upon the Company developing technologically complex and innovative
products. The Company's future depends on its ability to gain a
competitive advantage. Product development based on new technology
is complex and uncertain. New technology must be applied to
products that can be developed and then successfully introduced into
and accepted in the market. The Company's results could be adversely
affected by delay in the development or manufacture, production cost
overruns, and delays in the marketing process.
To the extent that this report contains forward-looking
statements actual results could vary because of difficulties in
developing commercially viable products based on the Company's
technologies. The Company undertakes no obligation to release
publicly the revisions of any forward-looking statements or
circumstances or to report the non-occurrence of any anticipated
events.
Management of the Company has had limited experience in the
operation of a public company and the management of a commercial
enterprise large in scope.
The Company's business, if its technological development is
successful, will require the Company to enter new fields of endeavor
and even new industries. The Company has not adopted a definitive
plan establishing any order of product development or the priority
it will follow in attempting to enter markets. Entry into new
markets will have many risks and require significant capital
resources. If the Company seeks funds from other sources, such
funds may not be available to the Company on acceptable terms.
Success will be dependent on the judgment and skill of management
and the success of the development of any new products.
The Company's success depends, and is expected to continue to
depend, to a large extent, upon the efforts and abilities of its
managerial employees, particularly Neldon Johnson, President of the
Company. The loss of Mr. Johnson would have a substantial, material
adverse effect on the Company. The Company has no employment
contract with Neldon Johnson.
The Company is not insured against all risks or potential
losses which may arise from the Company's activities because
insurance for such risks is unavailable or because insurance
premiums, in the judgment of management, would be too high in
relation to the risk. If the Company experiences an uninsured loss
or suffers liabilities, the Company's operating funds would be
reduced and may even be depleted causing financial difficulties for
the Company.
Patents and Trade Secrets.
The Company has been assigned or will be assigned the rights to
five U.S. patents and to three patents pending. One patent granted
in November 1988 deals with the Self-Check System. The patent
pertains to an apparatus attached to a computer which has in its
database the weights and prices of all items for sale. Another
patent pertaining to the AFIM technology granted January 1997 and
three patents relate to the DWM technology granted May 1996, June
1997 and November 1997. The three patents pending relate to the DWM
technology.
The Company has not sought or received an opinion from an
independent patent attorney regarding the strength of the patents or
patents pending and the ability of the Company to withstand any
challenge to the patent or any future efforts by the Company to
enforce its rights under a patent or patents against others.
The Company believes that it has trade secrets and it has made
efforts to safeguard and secure its trade secrets. There can be no
assurance that these safeguards will enable the Company to prevent
competitors from gaining knowledge of these trade secrets and using
them to their advantage and to the detriment of the Company.
The Company relies heavily on its proprietary technology in the
development of its products. There can be no assurance that others
may not develop technology which competes with the Company's
products and technology.
Future Funding
Because the Company is a development stage company it will
continue to need additional operating capital either from borrowing
or the sale of additional equities. The Company has no present
plans to borrow money or issue additional shares for money. In the
past the Company has received funds from Neldon Johnson and his
relatives in the form of contributed capital. The Company issued no
shares of stock for these contributions. For fiscal year 1998 these
contributions were approximately $1,064,262. Without these funds
the Company most likely would have been unable to continue
operations. No assurance can be given that these contributions to
capital with no shares being issued will continue. No agreements or
understandings exist regarding any future contributions.
General
Registrant's principal executive offices are located at 512
South 860 East, American Fork, Utah 84003 and its telephone number
is (801) 763-9965.
The Company was founded in 1986 by Neldon Johnson to engage in
the supermarket business. Since its formation the Company has
developed technologies which are in different stages of development.
From its inception the Company's primary activity the
development of different technologies. To date the Company has not
marketed a commercially acceptable product.
Employees
The Company has eleven full-time employees and twelve part-time
employees.
Warranty
The Company's products has not set any warranty provisions but
it is anticipated that the Company's warrant will be similar to
warranties for competitive products in the market or industry.
Typically warranties for electronics products are limited.
Marketing
The Company has not finalized its marketing strategy for its
products at this time.
For the marketing of the Self-Check System the Company may sell
franchises or may offer the equipment comprising the System to
retailers. After the System has been operating for a time in the
store located in Salem, Utah, the Company may develop a more
definitive marketing plan and strategy.
For the DWM technology the Company has not determined any
definite marketing plan. The Company may seek joint venture
partners, may license the product to others, or may seek to
establish distribution channels. It is anticipated that any
marketing efforts will require time and capital to develop.
Competition
Because the Company's products are distinct, its products will
face different competitive forces. AFIM competes with all forms and
systems of identity verification. End users have different needs
including cost, sophistication, degree of security, operational
requirements, time for individual verification and convenience. The
Company believes that no firm dominates the identity verification
market.
If the Company successfully completes the development of a
commercially viable modem, the Company will face competition from
large, well-established firms. These firms offer products with
immediate name recognition and are established in the market place
and are compatible with other modems.. The Company believes because
of the speed at which its modem may operate it may have a
competitive advantage. The Company has no marketing studies or
market research reports to determine the acceptance of the modem in
the market place or the best marketing strategy to follow. Further,
no assurance can be given that the Company will be successful in its
further development of the DWM products.
The Company has no market share for any products at this time.
In marketing the Self-Check System the Company faces
competition from major companies with established systems in the
point of sale terminal market. Further, the process of customers
checking out their purchases is a novel concept which is largely
untested. Overcoming reluctance to change may be difficult. In
addition, the System may not be compatible with or applicable to all
types of retail operations. The Company will determine any
marketing strategy it may pursue after the store in Salem, Utah, has
been in operation. The Company may rely on prospects known to
management or developed by word of mouth. The Company may develop a
franchise program as a means to market and distribute the Self-Check
System
Manufacturing and Raw Materials
For production of the initial AFIM units the Company did the
assembly. If the Company were successful in its marketing efforts
and demand for the AFIM were to increase, the Company intends to use
independent contract assemblers. AFIM is comprised of off the shelf
components and proprietary components developed by the Company which
are then assembled. The Company's proprietary software controls
AFIM's operations. The Company has no agreement with any
independent contract assemblers. The Company has entered into
agreements regarding the AFIM technology, but these agreements have
been inactive pending further AFIM development.
Management believes that the supplies and parts are readily
available from sources presently used by the Company or from
alternative sources which can be used as needed. The Company has no
backlog.
The Self-Check System is comprised of off-the-shelf parts and
components. These parts are assembled into the Self-Check System.
The Company's proprietary software ties together the individual
components and operates the System. Scanners, video display
terminals, and computers are available from several sources. The
software and circuit boards used in the System are proprietary
components developed by the Company. The circuit boards were
specifically developed to interact with the various peripherals, the
main computers and the check-out terminals. The circuit boards will
be manufactured by the Company from off-the- shelf components and
parts which the Company believes are readily available from a
variety of sources. Only one Self-Check System has been assembled.
Research and Development
The Company's primary activity is the development of its
technologies. The industries may be subject to rapid and
significant technological change. Future growth for the Company may
be dependent on its ability to innovate and adapt its technologies
to the changing needs of a marketplace. In the past the Company's
activities have primarily consisted of its efforts in research and
development. During fiscal years ended June 30, 1998, 1997 and
1996, research and development expenses were $598,804, $658,198, and
$382,327 respectively. Although no precise dollar amount has been
determined, the Company will continue to allocate resources to
product development. The Company expenses development costs as they
occur. The Company intends to work closely with prospective
customers to determine design possible enhancements and
modifications.
Immediate Plans
Over the next twelve months the Company intends to continue the
research and development of its technologies. For the DWM
technology the Company's goal is to complete the development of one
or more products that can then be marketed. For the Self-check
System and the AFIM product the Company will implement the test
programs at the store in Salem, Utah. The Company may determine its
marketing strategy based on the results from the operations. The
Company has no immediate plans to increase or decrease the number of
employees.
Acquisition of Technology
The Company exchanged 6,000,000 shares of common stock and
1,000,000 shares of Series 1 Class A Preferred Stock for technology
related to AFIM and DWM as well as $468,458 of obligations owed to
the Company's president. The transaction took effect as of June 30,
1996. The shares of Preferred Stock have ten votes for each share
and vote with the common stock on all matters.
Government Regulation
The Company's activities may be subject to government
regulation. If the Company franchises the Self-Check System it will
have to comply with applicable federal and state law. Depending on
the nature of its activities in data transmission, the Company may
need approval or authorization from the Federal Communications
Commission.
Year 2000
The Company does not anticipate incurring any substantial
expenses to modify its software or operations to adjust for the year
2000.
Item 2. Description of the Property and Facilities
The Company leases offices, warehouse and manufacturing space
comprised of approximately 10,000 square feet in American Fork,
Utah. The lease is on a month to month basis and the monthly lease
is $1,000.
Item 3. Legal Proceedings
In July 1996 the Company and its president were named as
defendants in a purported class action lawsuit seeking damages for
violations of the anti-fraud provisions of the federal securities
laws. Except for proceedings resulting in the denial of class
certification, the parties have not engaged in extensive discovery.
No settlement discussions have occurred to date. The company intends
to continue vigorously defending the lawsuit.
An investigation conducted by the Securities and Exchange
Commission ("SEC") of IAS has resulted in a complaint against IAS
and Neldon Johnson being filed by the SEC in the United States
District Court, Central Division, on September 23, 1998. Donnel
Johnson and Randale Johnson were also named as relief defendants.
IAS continues to stand by its Digital Wave Modulation (DWM)
technology and its inventor and president Neldon Johnson. IAS and
Neldon Johnson denies the allegation of participation in fraudulent
microcap schemes and the other substantive allegations filed in the
Complaint by the SEC and intend to vigorously defend the lawsuit.
In April 1997 the Company was named in a defendant in an action
caption Alarm Control Company v. International Automated Systems,
Incorporated. The complaint claims breach of contract and seeks
$60,000 plus interest from the Company. The action was in the Third
District Court of Salt Lake County, State of Utah. The Company has
filed for a Summary Judgement. No decision has occurred at this
time. The Company intends to continue to defend the lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders.
PART II.
Item 5. Market for Common Equity and Related Stockholder Matter
Presently Registrant's common stock is traded on the NASD
Electronic Bulletin Board under the symbol "IAUS". The table below
sets forth the closing high and low bid prices at which the
Company's shares of common stock were quoted during the quarter
identified. The trades are in U. S. dollars but may be inter-dealer
prices without retail mark-up mark down or commission and may not
even represent actual transactions.
High Low
Fiscal 1998
June 30, 1998 5.00 1.38
March 31, 1998 3.25 1.41
December 31, 1997 4.31 1.00
September 30, 1997 4.00 2.25
Fiscal 1997
June 30, 1997 6.375 2.88
March 31, 1996 7.75 2.75
December 31, 1996 8.68 4.00
September 30, 1996 27.00 4.50
Fiscal 1996
June 30, 1996 47.50 10.00
March 31, 1996 35.00 12.50
December 31, 1995 17.00 5.00
September 30, 1995 7.00 2.88
The Company's shares are significantly volatile and subject to
broad price movements and fluctuations. The Company's shares should
be considered speculative and volatile securities. On June 30,
1998, the Company had approximately 765 shareholders of record. The
stock price may also be affected by broader market trends unrelated
to the Company's activities.
As of June 30, 1998, Registrant had 15,546,361 shares of common
stock issued and outstanding. Of these shares approximately
3,959,593 shares were free trading shares. There were approximately
5,754,503 shares of common stock held by non-affiliates of that
amount approximately 1,794,910 are restricted but most of these
shares may be available for resale pursuant to the provisions of
Rule 144 promulgated under the 1933 Act. As of June 30, 1998, at
least 200 shareholders hold not less than 1,000 restricted shares of
common stock and have held the shares for not less than two years.
At least twenty-two shareholders own not less than 10,000 or more
restricted shares of common stock and have held the shares for not
less than one year. These shareholders satisfy the one year holding
period under Rule 144 promulgated under the 1933 Act. Rule 144(k)
allows a restricted legend to be removed after two years have
elapsed from the date of purchase and provides that certain
provisions of Rule 144 are not applicable.
Sales pursuant to the provisions of Rule 144 sold into the
trading market could adversely affect the market price. The
Company's shares trade on the NASD Electronic Bulletin Board. The
per share price in an auction market is based in part on supply and
demand. If more shares are available for sale into the market by
holders of restricted shares who satisfy the conditions of Rule 144
and in particular subsection 144(k), the market price of the shares
of common stock of the Company will be adversely affected.
DIVIDENDS
Registrant has not declared or paid any dividends to holders of
its common stock. In the future it is unlikely that the Company
will pay any dividends.
Item 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
General
Historically, the Company's activities have been dominated by
its research and development. As a result there have not been
revenues and costs associated with operations. The Company has
limited experience regarding profit margins or costs associated with
operating a business.
Results of Operations
Fiscal year ended June 30, 1998
Operations during the year ended June 30, 1998, pertained to
research and development and other activities. Research and
development expenses were $598,804 decreasing by $59,394. The
decrease was attributable to reduced payroll and expenses. General
and administrative expenses decreased from $660,360 to 540,542
during fiscal 1998. The decrease was a result of decreased payroll
and expenses. For 1998 fiscal year total income was $12,527; cost
of sales was $121,331, which included a write down in the carrying
value of inventories of $108,093; total expenses were $1,149,648
resulting in a net loss of $(1,257,397). The net loss decreased
from $(1,427,751) to $(1,257,397) because of the decrease in
payroll and general and administrative expenses. For fiscal 1998
the loss per share was $(0.08) compared to $(0.09) for the same
period a year earlier. Revenues decreased because of the continuing
delays in product development.
Fiscal year ended June 30, 1997
For the year ended June 30, 1997, the Company had revenues of
$19,043 compared to revenues of $96,922 for the year ended June 30,
1996. Cost of sales was $123,818 compared to $51,297 a year
earlier. Total operating expenses were $1,328,670 compared to
$740,729 a year earlier. General and administrative expense
increased from $356,544 to $660,630 for an increase during fiscal
1997 of $304,086. Research and development expense increased from
$382,327 to $658,198 in fiscal 1997 for an increase of $275,871.
These increase were attributable to additional development of the
Company's products.
For the year ended June 30, 1997, the Company had a net loss of
$(1,427,751) compared to a net loss of $(687,189) a year earlier.
The net loss per share was $(.09) in fiscal 1997 compared to $(.04)
in fiscal 1996.
Liquidity and Capital Resources
The Company's liquidity is substantially limited given the
current rate of expenditures. More funds will be required to
support ongoing product development, finance any marketing programs,
and establish any distribution networks. As of June 30, 1998, the
Company has current assets of $118,884 and total assets of $754,615.
Current liabilities were $39,846 and total liabilities of $151,246.
The current ratio of current assets to current liabilities is
approximately 3.1. If the Company continues to have a negative cash
flow or if the Company is unable to generate sufficient revenues to
meet its operation expenses, the Company will experience liquidity
difficulties.
In the past the Company's president and others advanced funds
to the Company to fund its operations. Mr. Johnson and the Company
have no formal agreement as to any future loans or advances. The
Company has no line of credit with any financial institution. The
Company believes that until it has operations and revenues
consistently, it will be unable to establish a line of credit from
conventional sources.
The Company is unable to predict when any products will
commence to contribute to revenues. No assurance can be given that
the objectives will be achieved.
Prior Adjustment
The financial statements have been restated to adjust the
accounting for the issuance of stock rights to acquire 50,261 shares
of common stock, at a grant price less than market value to certain
individuals. The restatement affected a decrease in net income by
$120,283 for the period ended June 30, 1995, and $6,750 for the
period ended June 30, 1994. The adjustment has no effect on income
taxes for the periods mentioned. The financial statements have been
restated to reflect the adjustment.
Stock issuance
The Company issued a total of 6,000 shares of common stock to
two people for services rendered and for the exercise of stock
rights. The individuals have had a prior relationship to the
Company either as a consultant or as an employee.
On November 12, 1997, 35,000 shares of restricted common stock
was sold at $1.43 per share for $50,000.
On May 15, 1998, 250,000 shares of restricted common stock was
sold at $1.20 per share for $300,000.
This report contains forward looking statements regarding the
Company's plans, objectives, expectations and intentions. All
forward looking statements are subject to risks and uncertainties
that could cause the Company's actual results and experience to
differ materially from such projections. Such risks include delays
in product development, the development of marketing and
distribution channels, and market acceptance of its products. Other
risks may be beyond the control of the Company.
Item 7. Financial Statements
The financial statements are filed as part of this Annual
Report on Form 10-KSB.
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants 18
Balance Sheet - June 30, 1998 19
Statements of Operations for the Years Ended
June 30, 1998 and 1997 and for the Period From
September 26, 1986 (Date of Inception) Through
June 30, 1998 20
Statements of Stockholders' Equity for the Period
From September 26, 1986 (Date of Inception) Through
June 30, 1996, and the Years Ended June 30, 1997
and 1998 21
Statements of Cash Flows for the Years Ended June 30,
1998 and 1997 and for the Period From September 26,
1986 (Date of Inception) Through June 30, 1998 22
Notes to the Financial Statements 23 - 30
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms (Fax) (801) 532-7944
Member of SECPS 345 East 300 South Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
International Automated Systems, Inc.
We have audited the accompanying balance sheet of International
Automated Systems, Inc. (a development stage company) as of June 30,
1998, and the related statements of operations, stockholders'
equity, and cash flows for the years ended June 30, 1998 and 1997,
and for the period from September 26, 1986 (date of inception)
through June 30, 1998. 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. The financial statements of the Company from September 26,
1986 through June 30, 1990 were audited by other auditors whose
reports, dated October 21, 1988 and April 30, 1991, were qualified
subject to the effects of such adjustments, if any, as might have
been required had the outcome of the uncertainties referred to in
Note 1 been known. Our opinion, in so far as it relates to the
period from September 26, 1986 through June 30, 1990, is based
solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports
of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other
auditors, the financial statements referred to above present fairly,
in all material respects, the financial position of International
Automated Systems, Inc. as of June 30, 1998, and the results of its
operations and its cash flows for the years ended June 30, 1998 and
1997, and for the period September 26, 1986 through June 30, 1998,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The Company is a
development stage enterprise engaged in developing technology
related to production of electronic security and communication
equipment. As discussed in Note 1 to the financial statements, the
Company's operating losses since inception and the deficit
accumulated during the development stage raise substantial doubt
about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
September 2, 1998
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
BALANCE SHEET
JUNE 30, 1998
ASSETS
Current Assets
Cash and cash equivalents $ 92,030
Receivable from sales representatives, net of
allowance for doubtful accounts of $40,783 --
Prepaid expenses 2,241
Net investment in direct financing leases -
related party - current portion 24,613
----------
Total Current Assets 118,884
Property and Equipment
Computer and electronic equipment 147,684
Furniture and fixtures 20,982
Automobiles 21,657
Leasehold improvements 18,238
Total Property and Equipment 208,561
Accumulated depreciation (109,844)
----------
Net Property and Equipment 98,717
Other Assets
Related party receivable 184,925
Net investment in direct financing leases -
related party 109,570
Patents, net of accumulated amortization of $35,169 242,519
----------
Total Other Assets 537,014
----------
Total Assets $ 754,615
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 12,965
Current portion of long-term debt 4,387
Obligation under capital leases - current portion 17,867
Accrued payroll expenses 4,627
----------
Total Current Liabilities 39,846
Long-Term Liabilities
Notes payable 1,830
Obligation under capital leases 109,570
----------
Total Long-Term Liabilities 111,400
----------
Total Liabilities 151,246
----------
Stockholders' Equity
Preferred stock, Class A, no par value,
5,000,000 shares authorized, 1,000,000
shares issued and outstanding 292,786
Common stock, no par value, 45,000,000
shares authorized, 15,546,361 shares issued
and outstanding 4,260,739
Deficit accumulated during the development stage (3,950,156)
----------
Total Stockholders' Equity 603,369
----------
Total Liabilities and Stockholders' Equity $ 754,615
==========
The accompanying notes are an integral part of these financial stateents.
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Cumulative
For the Period
September 26,
1986 (Inception)
For the Years Ended Through
June 30, June 30,
1998 1997 1998
----------- ----------- -----------
Revenue
Sales $ 179 $ 19,043 $ 108,144
Income from related party 12,348 -- 32,348
----------- ----------- -----------
Total Revenue 12,527 19,043 140,492
Cost of Sales
Cost of sales 13,238 15,725 80,260
Write down of carrying value
of inventories of $108,093
during 1998 and 1997 108,093 108,093 216,186
----------- ----------- -----------
Total Cost of Sales 121,331 123,818 296,446
----------- ----------- -----------
Gross Loss (108,804) (104,775) (155,954)
Operating Expenses
General and administrative expense 540,542 660,630 1,823,183
Research and development expense 598,804 658,198 1,934,805
Amortization expense 10,302 9,842 37,049
----------- ----------- -----------
Total Operating Expenses 1,149,648 1,328,670 3,795,037
Operating Loss (1,258,452) (1,433,445) (3,950,991)
Other Income and (Expense)
Interest income 1,809 7,247 20,155
Interest expense (754) (1,553) (19,320)
----------- ----------- -----------
Net Other Income 1,055 5,694 835
----------- ----------- -----------
Net Loss $(1,257,397) $(1,427,751) $(3,950,156)
=========== =========== ===========
Basic and Diluted Loss Per Share $ (0.08) $ (0.09) $ (0.27)
=========== =========== ===========
Common Shares Used In
Per Share Calculation 16,312,029 16,193,277 14,604,758
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock During
----------------------- ----------------------- Stock Development
Shares Amount Shares Amount Rights Stage
----------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance - September 26, 1986 - $ - - $ - - $ -
Stock issued for cash
September 1986 - $0.002 per share - - 5,100,000 11,546 - -
September 1988 (Net $38,702 of
offering costs) - $0.32 per share - - 213,065 67,964 - -
December 1988 (Net $6,059 of
offering costs) - $0.32 per share - - 33,358 10,641 - -
March 1989 (Net $4,944 of
offering costs) - $0.32 per share - - 27,216 8,681 - -
June 1989 (Net $6,804 of offering
costs) $0.32 per share - - 37,461 11,950 - -
Stock issued for services
September 1986 - $0.002 per share - - 300,000 679 - -
June 1989 - $0.32 per share - - 5,000 1,595 - -
Net loss for the period from September 26,
1986 through June 30, 1990 - - - - - (192,978)
----------- ---------- ----------- ---------- ---------- -----------
Balance - June 30, 1990 - - 5,716,100 113,056 - (192,978)
Stock issued as part of reorganization
Various dates - $0.02 per share 1,000,000 292,786 6,000,000 175,672 - -
Stock issued for cash
January 1994 - $0.40 per share - - 59,856 23,942 - -
May 1994 - $0.20 per share - - 137,500 27,500 - -
January 1996 - $3.86 per share (Net
of $24,387 of deferred offering costs) - - 179,500 693,613 - -
Stock issued for services
April 1991 - $0.10 per share - - 300,000 30,000 - -
January 1995 - $1.00 per share - - 100,000 100,000 - -
Stock issued to satisfy liabilities
June 1991 - $0.03 per share - - 2,700,000 78,101 - -
Grant of stock rights
May 1994 - $0.50 per share - - - 6,750 13,500 -
June 1995 - $3.00 per share - - - 95,283 31,761 -
August 1995 - $5.00 per share - - - 25,000 5,000 -
Purchase and retirement of treasury stock
December 1991 - $0.49 per share - - (5,000) (2,425) - -
December 1992 - $0.49 per share - - (1,856) (900) - -
Net loss for the period from July 1, 1990
through June 30, 1996 - - - - - (1,072,030)
----------- ---------- ----------- ---------- ---------- -----------
Balance - June 30, 1996 1,000,000 292,786 15,186,100 1,365,592 50,261 (1,265,008)
Stock rights exercised
May 1997 - - 36,761 - (36,761) -
June 1997 - - 13,500 - (13,500) -
Stock issued for services
May 1997 - $4.13 per share - - 14,000 57,750 - -
June 1997 - $2.94 per share - - 5,000 14,690 - -
Contributed capital - cash and settlement
of liability, no shares issued - - - 1,401,695 - -
Net loss - - - - - (1,427,751)
----------- ---------- ----------- ---------- ---------- -----------
Balance - June 30, 1997 1,000,000 292,786 15,255,361 2,839,727 - (2,692,759)
Stock issued for cash
November 1997 - $1.43 per share - - 35,000 50,000 - -
May 1998 - $1.20 per share - - 250,000 300,000 - -
Stock issued for services
December 1997 - $1.13 per share - - 6,000 6,750 - -
Contributed capital - cash, no shares issued - - - 1,064,262 - -
Net loss - - - - - (1,257,397)
----------- ---------- ----------- ---------- ---------- -----------
Balance - June 30, 1998 1,000,000 $ 292,786 15,546,361 $ 4,260,739 - $(3,950,156)
=========== =========== ========== =========== ========== ===========
The accompanying notes are an integral part of these financial statements.
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Cumulative
For the Period
September 26, 1986
For the Years Ended (Inception)
June 30, Through
------------------------ June 30,
1998 1997 1998
----------- ----------- -----------
Cash Flows From Operating Activities
Net loss $(1,257,397) $(1,427,751) $(3,950,156)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Allowance for doubtful accounts - 39,193 40,783
Amortization 10,302 9,842 37,049
Depreciation 35,556 33,099 109,844
Stock based compensation 6,750 72,440 338,497
Change in assets and liabilities:
Inventory 108,092 123,822 -
Sales representatives receivable - (8,914) (40,783)
Prepaid expenses 12,572 (7,554) (2,241)
Accounts payable (17,461) (11,655) 12,965
Accrued liabilities (1,914) 4,605 4,627
----------- ----------- -----------
Net Cash Used By Operating Activities (1,103,500) (1,172,873) (3,449,415)
Cash Flows From Investing Activities
Purchase of property and equipment (10,522) (25,274) (189,204)
Purchase of rights to technology (31,321) (79,059) (277,688)
Organization costs - - (1,880)
Cash loaned to related party (173,852) (11,073) (184,925)
----------- ----------- -----------
Net Cash Used By Investing Activities (215,695) (115,406) (653,697)
Cash flows From Financing Activities
Proceeds from issuance of common stock 350,000 - 1,262,346
Cash from controlling shareholder 1,064,262 753,937 2,934,415
Payments for treasury stock - - (3,325)
Payments for stock offering costs - - (56,509)
Proceeds from net borrowings from
related party - - 78,101
Payments on note payable and obligation
under capital leases (10,795) (3,747) (19,886)
----------- ----------- -----------
Net Cash Provided By Financing
Activities 1,403,467 750,190 4,195,142
----------- ----------- -----------
Net Increase (Decrease) In Cash 84,272 (538,089) 92,030
Cash and Cash Equivalents at Beginning
of Period 7,758 545,847 -
----------- ----------- -----------
Cash and Cash Equivalents at
End of Period $ 92,030 $ 7,758 $ 92,030
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1998 and 1997
NOTE 1---ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- International Automated Systems, Inc. (the "Company")
was incorporated in the State of Utah on September 26, 1986. The
Company is involved in the research and development of electronic
security and communication equipment as well as an automated self
check-out system for retail stores. The Company is deemed to be in the
development stage and its activities to date consisted of obtaining the
rights to certain technology involved with an automated self check-out
system for retail stores, developing other electronic security and
communication equipment and developing a business plan.
Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities. revenues and expenses during the
reporting period. Estimates also affect the disclosure of contingent
assets and liabilities at the date of the financial statements. Actual
results could differ from those estimates.
Basis of Presentation -- The accompanying financial statements have
been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. As shown in the financial statements, during the
years ended June 30, 1998 and 1997, the Company incurred net losses of
$1,257,397 and $1,427,751, respectively, and, as of June 30, 1998, the
Company's losses accumulated from inception totaled $3,950,156. These
factors, among others, indicate that the Company may be unable to
continue as a going concern for a reasonable period of time. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the
amount and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's
ability to continue as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing as may be required, and
ultimately to attain successful operations. Management is in the
process of negotiating various sales agreements and is hopeful these
sales will generate sufficient cash flow for the Company to continue as
a going concern.
Fair Value of Financial Instruments -- The estimated fair value of
financial instruments is not presented because, in Management's
opinion, there is no material difference between carrying amounts and
estimated fair values of financial instruments as presented in the
accompanying balance sheet.
Cash and Cash Equivalents -- All highly-liquid debt instruments
purchased with maturities of three months or less have been considered
cash equivalents.
Inventory -- Inventory consists of raw materials and finished goods
pertaining to the Company's automated fingerprint identification
machine. Inventory is valued at the lower of cost or market, with cost
being determined using the first-in first-out method. A write down of
$108,093 was recorded to reduce inventory amounts to its fair market
value of zero.
Receivable From Sales Representatives -- Sales representatives are
independent contractors of the Company who locate potential buyers of
the automated fingerprint identification machine. As part of their
agreement with the Company, they each purchased a machine for $2,500
with a $400 to $800 down payment required. The remaining balance was
not paid within 90 days and a $1,000 finance charge was added to the
outstanding balance due from each sales representative. The income
relating to the finance charge will not be recognized until payments
are received. The Company has established a payment plan whereby the
sales representatives can pay $90 a month until the balance is
satisfied; these payments have been suspended until further
modifications to the automated fingerprint identification machine are
completed. Since no payments were received during fiscal year 1997 and
1998 and no collections were expected, an allowance for doubtful
accounts has been established at June 30, 1998 in the amount of $40,783
relating to these accounts, of which $39,193 was charged to bad debt
expense during the year ended June 30, 1997. The Company has no other
trade receivables at June 30, 1998.
Property and Equipment -- Property and equipment are recorded at cost
and are depreciated using the straight-line method based on the
expected useful lives of the assets which range from five to ten years.
Depreciation expense for the years ended June 30, 1998 and 1997 was
$35,556 and $33,099, respectively.
Impairment -- The Company records impairment losses on property and
equipment, investment in direct financing leases and patents when
indicators of impairment are present and undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount.
Revenue Recognition -- Sales are recognized upon delivery and
acceptance.
Advertising Costs -- Advertising costs are expensed when incurred.
Advertising expense was $1,559 and $16,898, respectively, for the years
ended June 30, 1998 and 1997.
Income Taxes -- The Company recognizes the amount of income taxes
payable or refundable for the current year and recognizes deferred tax
assets and liabilities for the future tax consequences attributable to
differences between the financial statement amounts of certain assets
and liabilities and their respective tax bases. Deferred tax assets and
deferred liabilities are measured using enacted tax rates expected to
apply to taxable income in the years those temporary differences are
expected to be recovered or settled. Deferred tax assets are reduced by
a valuation allowance to the extent that uncertainty exists as to
whether the deferred tax assets will ultimately be realized.
Basic and Diluted Loss Per Common and Preferred Share -- In the fourth
quarter 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share. Under SFAS 128, loss per
common and preferred share is computed by dividing net loss available
to common and preferred stockholders by the weighted-average number of
common and preferred shares outstanding during the period. the preferred
shares outstanding are included because, as further discussed in Note 3,
the preferred shares have equal dividend rights and 10 to 1 rights; thus
considered a common stock equivalent. Diluted loss per share reflects
the potential dilution which could occur if all contracts to issue
common stock were exercised or converted into common stock or resulted
in the issuance of common stock. In the Company's present position,
diluted loss per share is the same as basic loss per share. The effect
of the new standard on prior years was immaterial; accordingly, prior
periods have not been restated.
Reclassification -- Certain previously reported amounts have been
reclassified to conform to the June 30, 1998 presentation. These
reclassifications had no effect on previously reported net loss.
New Accounting Standards -- The Financial Accounting Standard Board
issued SFAS No. 130, Reporting Comprehensive Income and SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information in
1997. These statements, which are effective for fiscal years beginning
after December 15, 1997, expand or modify disclosures and will have no
impact on the Company's financial position, results of operations or
cash flows.
The Company adopted SFAS No. 128, Earnings Per Share, and SFAS No. 129,
Disclosures of Information About Capital Structure in 1997. In
accordance with SFAS Nos. 128 and 129, both basic loss per share and
diluted loss per share as well as rights and liquidation preferences of
debt and equity securities have been presented in the accompanying
financial statements.
NOTE 2--REORGANIZATION/ADVANCES FROM SHAREHOLDER
In November 1996, the Company entered into a reorganization agreement
with Mr. Neldon Johnson, which was effective June 30, 1996. Mr.
Johnson, prior to the reorganization, owned a majority of the common
stock of the Company. The purpose of the reorganization was to transfer
ownership of all patents relating to the Automated Fingerprint
Identification Machine technology and the Digital Wave technology owned
by Mr. Johnson to the Company and to satisfy $468,458 of a liability
payable to Mr. Johnson in the amount of $1,116,216 in exchange for the
issuance of 1,000,000 preferred shares and 6,000,000 common shares of
the Company. The remaining $647,758 which was advanced by Mr. Johnson
in June 1996 was to be used by the Company for future research and
development to be performed for Mr. Johnson. During the year ended June
30, 1997, the advance of $647,758 and an additional advance of $753,937
was converted to contributed capital.
During the period of time that Mr. Johnson advanced the $468,458 to the
Company, he held a controlling ownership interest in the Company and he
held an 80 percent interest in the transferred technology through his
ownership interest in the Company after the transaction. The
reorganization is therefore an exchange between enterprises under
common control and, accordingly, the patents were recorded at Mr.
Johnson's historical cost, which was $0. The preferred and common
shares are presented in the accompanying financial statements as having
been issued on the various dates during the year ended June 30, 1996
when the Company received the cash advances.
During the year ended June 30, 1998, Mr. Johnson advanced the Company
$1,064,262 which was accounted for as contributed capital.
NOTE 3--PREFERRED STOCK
The preferred shares have equal dividend rights to the common shares,
are not convertible into common shares, have no dividend requirements,
and have no liquidation preferences to the common shares. Each
preferred share is entitled to the voting rights of ten common shares.
The proceeds from the issuance of the preferred and common shares were
allocated based on the respective voting rights of the shares issued.
NOTE 4--RELATED PARTY TRANSACTIONS
As of June 30, 1998 and 1997, the Company had receivables from U-Check,
Inc. (U-Check), a corporation solely owned by Mr. Johnson, totaling
$184,925 and $11,073 respectively. U-Check is considered a development
stage company with its activities to date consisting of the
construction of a grocery store scheduled to open in late 1998. Once
opened U-Check will be a franchisee of the Company and a beta-sight for
the Company's technology. U-Check currently has no source of operating
capital other than loans from the Company and capital contributions
from Mr. Johnson. These receivables are due upon demand, bear no
interest and are unsecured from both U-Check and Mr. Johnson. Also, as
discussed in Note 6, U-Check subleased various equipment to be used in
the grocery store from the Company. Included in the receivable amount
for June 30, 1998 was $12,348 in related party revenue from the Company
to U-Check.
See Note 2 for various advances during the period ended June 30, 1998
and 1997 from Mr. Johnson.
NOTE 5--NOTE PAYABLE
At June 30, 1998, the Company had a note payable to a bank, secured by
a vehicle, with monthly payments of $394, including interest at 8%,
through November 1999 in the amount of $6,217.
Annual maturities of this note payable for the next two years are as
follows:
Year Ending June 30, Amount
-------------------- -------
1999 $ 4,387
2000 1,830
-------
$ 6,217
=======
NOTE 6--OBLIGATION UNDER CAPITAL LEASES/NET INVESTMENT IN DIRECT
FINANCING LEASES
In June 1998, the Company entered into capital lease obligations with
a leasing company for various equipment. Immediately after entering
into the obligations, the Company subleased the equipment to a company
related through common ownership (U-Check, Inc.) under the same terms
as the original leases signed by the Company. The Company has ultimate
responsibility to make all payments regarding the leases. A total of
$134,183 of equipment was acquired and subsequently subleased under
these capital leases. These leases expire in May 2003. The following is
a schedule by years of future minimum lease payments under capital
leases together with the present value of the net minimum lease
payments as of June 30, 1998:
Year Ending June 30,
1999 $ 38,959
2000 38,959
2001 38,959
2002 38,959
2003 35,712
---------
Total Minimum Lease Payments 191,548
Less Amount Representing Interest 64,111
---------
Present Value of Net Minimum Lease Payments 127,437
Less Current Portion 17,867
---------
Obligation Under Capital Leases - Long-Term $ 109,570
=========
At June 30, 1998, the Company has an investment in direct financing
leases totaling $134,183. The following is a schedule by years of
future minimum lease proceeds from the related party company:
Year Ending June 30,
1999 $ 45,705
2000 38,959
2001 38,959
2002 38,959
2003 35,712
---------
Total Minimum Lease Payments Receivable 198,294
Less Amount Representing Interest 64,111
---------
Present Value of Net Minimum Lease Proceeds 134,183
Less Current Portion 24,613
---------
Investment in Direct Financing Leases -
Long Term $ 109,570
=========
NOTE 7--INCOME TAXES
The Company did not have a current or deferred provision for income
taxes for the years ended June 30, 1998 and 1997. The following
presents the components of the net deferred tax asset at June 30, 1998:
Operating loss carryforwards $ 277,706
Write off of inventory 84,312
Allowance for doubtful accounts 15,905
Accumulated depreciation/amortization 1,303
---------
Net Deferred Tax Assets Before Valuation
Allowance 379,226
Less: Valuation Allowance (379,226)
---------
Net Deferred Tax Asset $ -
=========
The valuation allowance increased $132,148 and decreased $96,092 during
the years ended June 30, 1998 and 1997, respectively. The Company has
net operating loss carryforwards of $756,292 that expire, if unused, in
years 2002 through 2013.
The following is a reconciliation of the income tax benefit computed at
the federal statutory tax rate with the provision for income taxes for
the years ended June 30, 1998 and 1997:
June 30,
----------------------
1998 1997
---------- ----------
Income tax benefit at statutory rate (34%) $ (427,515) $ (485,435)
Deferred tax valuation allowance change 132,148 (96,734)
Non deductible expenses/taxable income 397,016 478,256
State taxes net of federal benefit (41,494) (47,116)
Effect of change in tax rates (60,155) 103,186
---------- ----------
Provision for Income Taxes $ - $ -
========== ==========
NOTE 8--PATENTS
The Company's policy on recording patent costs is to capitalize legal
fees incurred in obtaining patents and franchises in the United States
and other countries. Costs incurred to develop the technology were
recognized as research and development expense by the Company when
incurred. The patents are being amortized on a straight-line basis over
a 17-year life.
NOTE 9--RESEARCH AND DEVELOPMENT EXPENSE
Research and development has been the principal function of the
Company. Expenses in the accompanying financial statements include
certain costs which are directly associated with the Company's research
and development of both the Automated Fingerprint Identification
Machine technology and the Digital Wave Modulation technology. These
costs, which consist primarily of fees paid to individuals, materials
and supplies amounted to $598,804 and $658,198 for the fiscal years
ended June 30, 1998 and 1997, respectively.
NOTE 10--OPERATING LEASES
The Company leases building and office equipment with lease terms
ranging from month to month to five years. These leases are accounted
for as operating leases.
Commitments for future minimum rental payments required under operating
leases are as follows:
Year Ending June 30,
1999 $ 12,591
2000 12,591
2001 11,148
--------
Total $ 36,330
========
Rental expense during the years ended June 30, 1998 and 1997 was
$31,329 and $22,817, respectively.
NOTE 11--SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended June 30, 1998 and 1997, the Company paid $754 and
$1,553 in interest.
As further discussed in Note 6, the Company acquired $134,183 of
equipment through capital leases, the Company subsequently subleased
the same equipment under the same terms.
As further discussed in Note 2, $647,758 of advances from a related
party have been converted to contributed capital during the year ended
1997.
During the year ended June 30, 1998 and 1997, the Company issued 6,000
and 19,000 shares, respectively, with values ranging from $1.13 to
$4.13 for various services.
Since inception, the Company has issued 780,261 shares of common stock
valued at an average of $0.43 per share for services.
During June of 1991, the Company issued 2,700,000 shares of common
stock to satisfy amounts owed to a majority shareholder in the amount
of $78,101.
NOTE 12--CONTINGENCY
Subsequent to June 30, 1998, the Company was notified by the U. S.
Securities and Exchange Commission (SEC) that they were taking formal
action against the Company and its president and members of his family
for possible securities violations. The action stems from alleged
material misrepresentations by the Company regarding new technology
developed by the Company. This action is in its preliminary stages. The
ultimate outcome of the action cannot presently be determined.
Accordingly, no provision for any liability that may result has been
made in the accompanying financial statements, and the possible effect
it will have on future financial statements is unknown.
On July 2, 1996, a law suit was filed against the Company by
shareholders for securities violations. The suit is seeking damages
incurred based on the decrease in the Company's stock price because of
alleged material misrepresentations by the Company regarding new
technology developed by the Company. This action is in its preliminary
stages. The ultimate outcome of the litigation cannot presently be
determined. Accordingly, no provision for any liability that may result
upon adjudication has been made in the accompanying financial
statements, and the possible effect it will have on future financial
statements is unknown.
During the year ended June 30, 1997, a breach of contract action was
filed against the Company by a vendor whom the Company contacted to
design and build specialized computer hardware and software. The suit
is for $60,000. The Company has filed a counter-claim for damages
incurred due to alleged defective and untimely performance. This action
is in its preliminary stages. The ultimate outcome of the litigation
cannot presently be determined. Accordingly, no provision for any
liability that may result upon adjudication has been made in the
accompanying financial statements, and the possible effect it will have
on future financial statements is unknown.
Item 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
During the fiscal year 1998 there were no changes or disagreements with
the accountants, Hansen, Barnett and Maxwell.
PART III.
Item 9. DIRECTORS AND OFFICERS OF THE REGISTRANT
Directors and Officers
The executive officers and directors of the Company are as follows:
Name Age Position with the Company
Neldon Johnson 52 Chairman of the Board of
Directors and President
Ina Johnson 49 Secretary and Director
Donnel Johnson 33 Director and Vice-President
Christopher Taylor 29 Director
Stacy Curtis Snow 32 Director
Randale Johnson 29 Vice-President
All Directors hold office until the next annual meeting of shareholders
of the Company or until their successors have been elected. All officers are
appointed annually by the Board of Directors and serve at the discretion of
the Board.
Directors will be reimbursed by the Company for any expenses incurred
in attending Directors' meetings. The Company also intends to obtain Officers
and Directors liability insurance, although no assurance can be given that it
will be able to do so.
Background of Executive Officers and Directors
Neldon Johnson is the co-founder of the Company and the primary inventor
of the Self-Check system, AFIM, and the DWM technologies. Mr. Johnson
directs the Company's research and development program. Mr. Johnson studied
physics and mathematics at Brigham Young University in Provo, Utah, and
graduated from Utah Technical College's Electronics Technology Program in
1964. He has taken training courses and has taught courses in electronics
programming, microwave and wave switch programs. From 1965 to 1968 he
worked for American Telephone and Telegraph, Inc., as an engineer.
From 1983 to the present, Mr. Johnson has been developing the Self-Check
System. Also, from 1975 to 1990 he worked at a Ream's Grocery Store and had
management responsibilities for operations. Mr. Johnson has real estate
holdings, one of which is a grocery store of 20,000 square feet presently
under construction in Salem, Utah.
Ina Johnson is the wife of Neldon Johnson. She has been a bookkeeper
for the past 25 years. She has been the secretary and treasurer of the
Company since 1988. Recently she resigned as treasurer of the Company, but
remains the secretary.
Donnel Johnson is the son of Neldon Johnson and Ina Johnson. He has
been a director of the Company since May 1996. He received a bachelor's
degree in Electrical Engineering from Brigham Young University in 1991. He
has been an employee of the Company since 1991.
Christopher Taylor received an Associates of Science Degree from Utah
Valley State College in 1992. He was a sergeant in the U. S. Army. Since
1992 Mr. Taylor has worked on projects relating to Registrant's products and
technology. Presently Mr. Taylor supervises production and product inventory
control and debugs software.
S. Curtis Snow graduated from Brigham Young University in 1991 receiving
a Bachelor's Degree in design engineering. Since 1991 Mr. Snow has worked on
several projects relating to the Self-Check System and AFIM.
Randale P. Johnson is the son of Neldon Johnson and Ina Johnson. He
has been an officer since June 1996. His responsibilities include marketing
and administration. Mr. Johnson who will hold an associate degree in
Computer Science and has four years of experience in the computer industry.
He joined the Company in 1996.
An investigation conducted by the Securities and Exchange Commission
("SEC") of IAS has resulted in a law suit against Neldon Johnson being filed
by the SEC in the United States District Court, Central Division, on
September 23, 1998. Donnel Johnson and Randale Johnson were also named as
relief defendants.
None of the officers or directors of the Company has during the past
five years, been involved in any events such as petitions in bankruptcy,
receivership or insolvency, criminal proceedings or convicted of proceedings
relating to securities violations.
Significant Employees and Managers
Monty Hamilton, age 57, is an employee having responsibilities for
marketing. Mr. Hamilton holds a Master of Business Administration and a
B.S. degree in Banking and Finance from the University of Utah. He joined
the Company in 1996. From 1987 to 1995 Mr. Hamilton was an account executive
with a securities broker-dealer.
Item 10. Executive Compensation
Currently the Company has no employment agreement with any of its
officers, directors or employees. During the year ended June 30, 1998,
Neldon Johnson, who is an officer and a director of the Company, received
benefits of $ 3,168. Mr. Johnson received no other compensation for his
services to the Company. That same amount is attributable to his wife Ina
Johnson, who is an officer and a director of the Company. Mr. Johnson
received no salary.
Employment Agreements
The Company has no employment agreements or contracts with any
employees. Each employee has signed a non-disclosure agreement with the
Company. The Company has no stock option or incentive plans. There are no
warrants or options issued or outstanding as of June 30, 1998.
Item. 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of June 30,
1998, by (i) each person known by the Company to own, directly or
beneficially, more than 5% of the Company's Common Stock, (ii) each of the
Company's directors, and (iii) all officers and directors of the Company as
a group. Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect
to such shares, subject to community property laws, where applicable.
Name and address of Number of
Beneficial Owner Shares Owned Percent(1)
Neldon Johnson
512 South 860 East
American Fork, Utah 10,560,000 68
Donnel Johnson
512 South 860 East
American Fork, Utah 47,400 .3
Christopher Taylor
512 South 860 East
American Fork, Utah 4,753
S. Curtis Snow
512 South 860 East
American Fork, Utah
Randale Johnson
512 South 860 East
American Fork, Utah 7,000
Directors and Officers as a Group
5 persons 10,619,153 68
==========
____________________
1 Based on 15,546,361 shares of common stock issued and
outstanding, but does not include the 1,000,000 shares of Series
1 Class A Preferred Stock held my Neldon Johnson. Each share of the
Series Class A Preferred Stock has ten votes per share and votes with
the shares of common stock on all matters. Mr. Neldon Johnson has
approximately 83 per cent of the voting control of the Company when
the voting power of the shares of preferred stock and common stock
are taken together. Other than Mr. Neldon Johnson, the Company is
unaware of any other persons holding five per cent or more of the
Company's issued and outstanding securities.
Item 12. Certain Relationships and Related Transactions
The Company effective as of June 30, 1996, exchanged 6,000,000 shares
of common stock and 1,000,000 shares of Series 1 Class A Preferred Stock for
technology related to the Automatic Fingerprint Identification Machine and
the Digital Wave Modulation as well as $468,458 of obligations owed to the
Company's President. The transaction is a related party transaction. No
independent appraisal regarding the value of the exchange was available.
The Company's Self-Check System is being installed in a grocery store
under construction in Salem, Utah. The store will operate under the name of
U-Check. Mr. Neldon Johnson, the Company's president, owns the real property
and the business of U-Check. Articles of Incorporation have been filed for
U-Check, Inc. No written agreement has been entered into between the Company
and Mr. Johnson. Mr. Johnson will purchase the equipment from the Company at
a price yet to be determined, but the price should exceed the Company's
costs. In addition, the Company and Mr. Johnson will enter into a written
software licensing agreement for the Self-Check System. As of June 30, 1998
and 1997, the Company had receivables from U-Check totaling $184,925 and
$11,073 respectively. U-Check is considered a development stage company with
its activities to date consisting of the construction of a grocery store. U-
Check currently has no source of operating capital other than loans from the
Company and capital contributions from Mr. Johnson. These receivables are due
upon demand, bear no interest and are unsecured from both U-Check and Mr.
Johnson. Also, U-Check subleased various equipment to be used in the grocery
store from the Company. Included in the receivable amount for June 30, 1998
was $12,348 in related party revenue from the Company to U-Check.
During fiscal 1998 the Johnson family contributed funds to the Company
in the amount of $1,064,262. The Company issued no shares for the funds
received.
PART IV
Item 13. Exhibits and Reports on From 8-K
a. Exhibits
3.(i) *Certificates of Articles of Incorporation
3.(ii) *By-laws.
3.(iii) *Notification of Series 1 Class A Preferred Stock
4.(i) *Specimen Certificate of Common Stock.
4(ii) *Form of Warrant Purchase Option to be issued to Underwriter.
10.(i) *Consulting Agreement with Wilson-Davis
10.(a) *Agreement with Company Officer
10.(11) *Assignment of Patent.
99(1) *Patent No. 5,598,474
(2) *Patent No. 5,640,422
(3) Patent No. 5,689,529
*This document was previously filed with the Commission and is incorporated
in this report by reference.
b. Reports on Form 8-K.
During the period ended June 30, 1998, Registrant filed no report on
Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
INTERNATIONAL AUTOMATED SYSTEMS, INC.
/S/ Neldon Johnson
NELDON JOHNSON
Title: President, Chief Executive Officer,
and Chief Financial Officer (Principal
Executive and Financial Officer)
Date: October 7, 1998
DIRECTORS
/S/ Neldon Johnson
NELDON JOHNSON
Title: Director
Date: October 7, 1998
/S/ Ina Johnson
INA JOHNSON
Title: Director
Date: October 7, 1998
/S/ Donnel Johnson
DONNEL R. JOHNSON
Title: Director
Date: October 7, 1998
/S/ Christopher J. Taylor
CHRISTOPHER J. TAYLOR
Title: Director
Date: October 7, 1998
/S/ S. Curtis Snow
S. CURTIS SNOW
Title: Director
Date: October 7, 1998
</TABLE>
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet as of June 30, 1998, and statements of operations for the year ended June
30, 1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
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<RECEIVABLES> 40,783
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<PP&E> 208,561
<DEPRECIATION> (109,844)
<TOTAL-ASSETS> 754,615
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0
292,786
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<TOTAL-LIABILITY-AND-EQUITY> 754,615
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