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,
1999. 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.
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(Name of small business issuer in its charter)
Utah 87-0447580
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State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
512 South 860 East, American Fork, Utah 84003
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(Address of principal executive offices)
Registrant's telephone number, including area code:(801) 763-9965
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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: $(1,008,308).
The aggregate market value of voting stock held by non-affiliates of
the registrant on June 30, 1999, was approximately $12,818,306
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, 1999, 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.
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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 and management software.
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 has both its automated self-service check-out system
and various AFIM technologies currently in use in U-Check
Supermarket in Salem, Utah.
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.
2
The first anticipated product using this technology for
commercialization is an 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.
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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.
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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. The System is currently
being used by U-Check, a full-line supermarket, in Salem, Utah.
4
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, as a data base index, 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, are 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 scanned and place 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 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.
5
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 customer 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 intends to use 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 has installed a System in a 25,000 square foot store
in Salem, Utah. The system has been in operation, at the Salem,
Utah location, since March 1999. 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.
Automatic Fingerprint Identification Machine.
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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.
6
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 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.
Another application of the AFIM technology is fingerprint secured
financial transactions. A card user designates which personal
account he/she would like to use. Upon positive AFIM verification,
the Company's software sends the transaction information via ACH
protocols to the Company's bank and the Company's bank debits the
customer's bank account. The funds are then deposited into the
participating retailer's account.
7
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.
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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.
8
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.
9
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.
10
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 1999 these
contributions were approximately $1,087,456. 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 So.
860 East, American Fork, Utah 84003 and its telephone number is
(801) 763-9965.
From its inception the Company's primary activity the development
of different technologies. Since its formation the Company has
developed technologies which are in different stages of development.
To date the Company has not marketed a commercially acceptable product.
Employees
The Company has twelve full-time employees.
Warranty
The Company's products do not currently have any warranty
provisions but it is anticipated that the Company's warranties will
be similar to warranties for competitive products in the market or
industry. Typically warranties for electronics products are
limited.
11
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 some of which are also developing and testing self
checkout systems. 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
12
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, 1999, 1998, and
1997 research and development expenses were $463,348, $598,804, and
$658,198 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.
13
Acquisition of Technology
None
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 office lease is on a month to month basis and the monthly
lease is $350. The warehouse and manufacturing facility is leased
until May of 2001 at a rate of $1000 per month.
Item 3. LEGAL PROCEEDINGS
On July 2, 1996, the Company had a class action lawsuit filed
against it by shareholders. The class action was brought on behalf
of all persons and entities who purchased shares of common stock
from May 13, 1996 to June 27, 1996. In April 1999, the lawsuit was
settled with the Company agreeing to pay $170,631 for shareholder
losses and associated legal fees. The $170,631 liability has been
accrued in the accompanying financial statements as of June 30, 1999.
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.
14
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 was for $60,000 but, was dismissed on summary judgment. The
Company filed a counter-claim for damages incurred due to alleged
defective and untimely performance. The counter claim is still pending.
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 MATTERS
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 1999
June 30, 1999 2.00 1.81
March 31, 1999 2.40 2.22
December 31, 1998 2.50 1.81
September 30, 1998 2.13 1.94
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 6.38 2.88
March 31, 1997 7.75 2.75
December 31, 1996 8.68 4.00
September 30, 1996 27.00 4.50
15
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, 1999, the Company had approximately 768 shareholders of
record. The stock price may also be affected by broader market
trends unrelated to the Company's activities.
As of June 30, 1999, Registrant had 15,546,361 shares of common
stock issued and outstanding. Of these shares approximately
5,044,128 shares were free trading shares. There were
approximately 6,409,153 shares of common stock held by
non-affiliates of that amount approximately 1,365,089 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, 1999, 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. SELECTED FINANCIAL DATA
See Item 7.
Item 7. 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.
16
Results of Operations
Fiscal year ended June 30, 1999
Operations during the year ended June 30, 1999, pertained to
research and development and other activities. Research and
development expenses were $463,348 decreasing by $135,456. General
and administrative expenses decreased from $540,542 to $364,052
during fiscal 1999. These decreases are a result of decreased
payroll and expenses. During April 1999, U-Check, opened its
doors and began operations. Much of the labor to prepare U-Check
for its opening was provided by IAS employees. The labor expenses
of these employees have been charged to U-Check and are recorded
on IAS books as Related party receivables. In addition, these
employees were engaged in less research and development because
they were preparing U-Check for its opening. For fiscal year
1999, total income was $3,082; cost of sales was $1,667; operating
expenses were $1,008,685 and other income(expense) was $(1,038)
resulting in a net loss of $(1,008,308). Net loss decreased
$249,089. The majority of this can be attributed to the payroll
and related payroll expenses that were charged to U-Check.
Revenues decreased because of the continuing delays in product
development. For fiscal 1999 the loss per share was $(0.06)
compared to $(0.08) for the same period a year earlier.
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.
17
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, 1999, the Company has current assets of $23,523 and total
assets of $900,156. Current liabilities were $124,923 and total
liabilities of $217,639. The ratio of current assets to current
liabilities is approximately 0.19. 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.
As previously mentioned, U-Check is currently acting as a beta
site for the Company's technology. As this technology proves to
be commercially feasible, potential markets for the technology
could open that could contribute to the Company's revenues. No
assurance can be given that this outcome will be achieved.
Stock issuance
None
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 8. FINANCIAL STATEMENTS
The financial statements are filed as part of this Annual Report
on Form 10-KSB.
18
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants F-2
Balance Sheet - June 30, 1999 F-3
Statements of Operations for the Years Ended
June 30, 1999 and 1998 and for the Period From
September 26, 1986 (Date of Inception) Through
June 30, 1999 F-4
Statements of Stockholders' Equity for the Period
From September 26, 1986 (Date of Inception) Through
June 30, 1997, and the Years Ended June 30, 1998
and 1999 F-5
Statements of Cash Flows for the Years Ended June 30,
1999 and 1998 and for the Period From September 26,
1986 (Date of Inception) Through June 30, 1999 F-6
Notes to the Financial Statements F-7
F-1
<PAGE>
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 Braodway, 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, 1999, and the related statements of operations, stockholders'
equity, and cash flows for the years ended June 30, 1999 and 1998,
and for the period from September 26, 1986 (date of inception)
through June 30, 1999. 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, 1999, and the
results of its operations and its cash flows for the years ended
June 30, 1999 and 1998, and for the period September 26, 1986
through June 30, 1999, 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 27, 1999
F-2
<PAGE>
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
BALANCE SHEET
JUNE 30, 1999
ASSETS
Current Assets
Net investment in direct financing
leases - related party -
current portion $ 23,523
------------
Total Current Assets 23,523
Property and Equipment
Computer and electronic equipment 148,864
Furniture and fixtures 32,746
Automobiles 21,657
Leasehold improvements 18,238
------------
Total Property and Equipment 221,505
Accumulated depreciation (145,035)
------------
Net Property and Equipment 76,470
Other Assets
Related party receivable 454,063
Net investment in direct financing
leases - related party - 88,292
Patents, net of accumulated amortization of $45,820 257,808
------------
Total Other Assets 800,163
------------
Total Assets $ 900,156
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Funds drawn in excess of cash in bank $ 7,084
Accounts payable 65,279
Current portion of long-term debt 7,131
Obligation under capital leases - current portion 23,523
Accrued payroll expenses 21,906
------------
Total Current Liabilities 124,923
Long-Term Liabilities
Notes payable 4,424
Obligation under capital leases - long-term 88,292
------------
Total Long-Term Liabilities 92,716
------------
Total Liabilities 217,639
------------
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 5,348,195
Deficit accumulated during the development stage (4,958,464)
------------
Total Stockholders' Equity 682,517
------------
Total Liabilities and Stockholders' Equity $ 900,156
============
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Cumulative
For the Period
September 26,
1986
For the Years Ended (Inception)
June 30, Through
------------------------ June 30,
1999 1998 1999
----------- ----------- -----------
Revenue
Sales $ 3,082 $ 179 $ 111,226
Income from related party - 12,348 32,348
----------- ----------- -----------
Total Revenue 3,082 12,527 143,574
Cost of Sales
Cost of sales 1,667 13,238 81,927
Write down of carrying value
of inventories - 108,093 216,186
----------- ----------- -----------
Total Cost of Sales 1,667 121,331 298,113
----------- ----------- -----------
Gross Income (Loss) 1,415 (108,804) (154,539)
Operating Expenses
General and administrative expense 364,052 540,542 2,187,235
Research and development expense 463,348 598,804 2,398,153
Stockholder class action settlement
expense 170,634 - 170,634
Amortization expense 10,651 10,302 47,700
----------- ----------- -----------
Total Operating Expenses 1,008,685 1,149,648 4,803,722
Operating Loss (1,007,270) (1,258,452) (4,958,261)
Other Income (Expense)
Interest income 1,090 1,809 21,245
Interest expense (2,128) (754) (21,448)
----------- ----------- -----------
Net Other Income and (Expense) (1,038) 1,055 (203)
----------- ----------- -----------
Net Loss $(1,008,308) $(1,257,397) $(4,958,464)
=========== =========== ===========
Basic and Diluted Loss Per Share $ (0.06) $ (0.08) $ (0.34)
=========== =========== ===========
Common and Preferred Shares Used In
Per Share Calculation 16,546,361 16,312,029 14,756,836
=========== =========== ===========
F-4
<PAGE>
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 - -
May 1997 - $4.13 per share - - 14,000 57,750 - -
June 1997 - $2.94 per share - - 5,000 14,690 - -
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 -
Stock rights exercised
May 1997 - - 36,761 - (36,761)
June 1997 - - 13,500 - (13,500) -
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) - -
Contributed capital - cash and
settlement of liability, no
shares issued - - - 1,401,695 - -
Net loss for the period from
July 1, 1990 through June
30, 1997 - - - - - (2,499,781)
--------- --------- ---------- ------------ --------- -----------
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)
Contributed capital -
cash, no shares
issued - - - 1,087,456 - -
Net loss - - - - -
--------- --------- ---------- ------------ --------- -----------
Balance - June 30, 1999 1,000,000 $ 292,786 15,546,361 $ 5,348,195 $ - $(4,958,464)
========= ========= ========== ============ ========= ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-5
<PAGE>
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Cumulative
For the Period
September 26, 1986
(Inception)
Through
1999 1998 June 30, 1999
----------- ---------- -----------
Cash Flows From Operating Activities
Net loss $(1,008,308) $(1,257,397) $(4,958,464)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Amortization 10,651 10,302 47,700
Depreciation 35,191 35,556 145,035
Stock based compensation - 6,750 338,497
Change in assets and liabilities:
Inventory - 108,092 -
Prepaid expenses 2,241 12,572 -
Accounts payable 52,314 (17,461) 65,279
Accrued liabilities 17,279 (1,914) 21,906
----------- ----------- -----------
Net Cash Used By Operating
Activities (890,632) (1,103,500) (4,340,047)
Cash Flows From Investing Activities
Purchase of property and equipment (1,180) (10,522) (190,384)
Purchase of rights to technology (25,940) (31,321) (303,628)
Organization costs - - 1,880)
Proceeds from capital lease
receivable 22,368 - 22,368
Cash loaned to related party (322,392 (173,852) (507,317)
Repayment of cash loaned to
related party 53,254 - 53,254
----------- ----------- -----------
Net Cash Used By Investing
Activities (273,890) (215,695) (927,587)
Cash Flows From Financing Activities
Proceeds from issuance of common stock - 350,000 1,262,346
Cash from controlling shareholder 1,087,456 1,064,262 4,021,871
Payments for treasury stock - - (3,325)
Payments for stock offering costs - - (56,509)
Increase in Bank Overdraft 7,084 - 7,084
Proceeds from net borrowings
from related party - - 78,101
Payments on note payable and obligation
under capital leases (22,048) (10,795) (41,934)
----------- ----------- -----------
Net Cash Provided By Financing
Activities 1,072,492 1,403,467 5,267,634
----------- ----------- -----------
Net Increase (Decrease) In Cash and
Cash Equivalents (92,030) 84,272 -
Cash and Cash Equivalents at Beginning
of Period 92,030 7,758 -
----------- ----------- -----------
Cash and Cash Equivalents at End
of Period $ - $ 92,030 $ -
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1999 and 1998
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 considered to be a development stage
company with its activities to date consisting 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. During the
years ended June 30, 1999 and 1998, the Company incurred net
losses of $1,008,308 and $1,257,397, respectively. As of
June 30, 1999, the Company's losses accumulated from
inception totaled $4,958,464. 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 in
1998 to reduce inventory amounts to its fair market value of
zero.
F-7
<PAGE>
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, 1999 and 1998 was $35,191 and $35,556,
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.
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 - 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 10 to1 voting rights and
are 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 because
potentially issuable common shares would decrease the loss
per share and have been excluded from the calculation.
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
$1,116,216 liability payable to Mr. Johnson in exchange for
the issuance of 1,000,000 preferred shares and 6,000,000
common shares of the Company. The remaining liability of
$647,758 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
additional advances of $753,937 were converted to contributed
capital.
F-8
<PAGE>
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 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 years ended June 30, 1999 and 1998, Mr. Johnson
advanced the Company $1,087,456 and $1,064,262, respectively,
which has been 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, 1999 and 1998, the Company loaned U-Check,
Inc. (U-Check), a corporation solely owned by Mr. Johnson,
$322,392 and $173,852, respectively. U-Check repaid $53,254
during the year ended June 30, 1999 resulting in a balance of
$454,063 as of June 30, 1999. These receivables consist of
construction and labor costs paid for by IAS on behalf of
U-Check. Also, as discussed in Note 6, U-Check subleased
various equipment 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.
U-Check is a self check out grocery store located in Salem,
Utah. U-Check is acting as a beta site for the Company which
is testing the commercial feasability of some of the
Company's technology. U-Check is using the Company's
technology relating to the self checkout system and
fingerprint identification.
See Note 2 for various advances during the period ended June
30, 1999 and 1998 from Mr. Johnson.
F-9
<PAGE>
NOTE 5--NOTES PAYABLE
Notes payable at June 30, 1999, consisted of the following:
Notes payable to bank bearing interest
at 8%; secured by vehicle; due
November 1999 $ 1,828
Notes payable to a leasing company; bearing
interest at 10%; secured by mobile office;
due April 2001 9,727
---------
Total $ 11,555
Less: Current portion (7,131)
---------
Net Long-Term Debt $ 4,424
=========
Annual maturities for the next two years are as follows:
Year Ending June 30, Amount
-------------------- ---------
2000 $ 7,131
2001 4,424
---------
$ 11,555
=========
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, 1999:
Year Ending June 30,
2000 $ 43,632
2001 38,959
2002 38,959
2003 35,712
---------
Total Minimum Lease Payments 157,262
F-10
<PAGE>
Less Amount Representing Interest 45,447
---------
Present Value of Net Minimum Lease
Payments 111,815
Less Current Portion 23,523
---------
Obligation Under Capital Leases -
Long-Term $ 88,292
=========
At June 30, 1999, the Company has an investment in direct
financing leases totaling $111,815. The following is a
schedule by years of future minimum lease proceeds from the
related party company:
Year Ending June 30,
2000 $ 43,632
2001 38,959
2002 38,959
2003 35,712
2004 -
---------
Total Minimum Lease Payments Receivable 157,262
Less Amount Representing Interest 45,447
---------
Present Value of Net Minimum Lease
Proceeds 111,815
Less Current Portion 23,523
---------
Investment in Direct Financing Leases
Long - Term $ 88,292
=========
NOTE 7--INCOME TAXES
The Company did not have a current or deferred provision for
income taxes for the years ended June 30, 1999 and 1998. The
following presents the components of the net deferred tax
asset at June 30, 1999:
Operating loss carryforwards $ 346,700
Accumulated depreciation/
amortization 2,937
Net Deferred Tax Assets Before Valuation
Allowance 349,637
Less: Valuation Allowance (349,637)
---------
Net Deferred Tax Asset $ -
=========
F-11
<PAGE>
The valuation allowance decreased $29,555 and increased
$132,148 during the years ended June 30, 1999 and 1998,
respectively. The Company has net operating loss
carryforwards of $929,834 that expire, if unused, in years
2002 through 2019.
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, 1999 and 1998:
June 30,
------------------------
1999 1998
---------- ----------
Income tax benefit at statutory rate (34%) $ (342,825) $ (427,515)
Deferred tax valuation allowance change (29,555) 132,148
Non deductible expenses/taxable income 405,654 397,016
State taxes net of federal benefit (33,274) (41,494)
Effect of change in tax rates - (60,155)
--------- ----------
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 to
develop the technology were recognized as research and
development and expensed 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 $463,348 and $598,804 for
the fiscal years ended June 30, 1999 and 1998, 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,
--------------------
2000 $ 12,664
2001 11,664
---------
Total $ 24,328
=========
F-12
<PAGE>
Rental expense during the years ended June 30, 1999 and 1998
was $18,997 and $31,329, respectively.
NOTE 11--SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 1999 and 1998, the Company
paid $2,128 and $754 in interest.
During the year ended June 30, 1998, the Company acquired
$134,183 of equipment through capital leases; the Company
subsequently subleased the same equipment under the same
terms. During the year ended June 30, 1999, the Company
acquired a modular office by issuing a note for $11,764.
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 the Company issued 6,000
shares of common stock valued at $1.13. 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
On September 23, 1998, the Company was notified by the U.S.
Securities and Exchange Commission (SEC) of formal action
against the Company, 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. The SEC is seeking
disgorgement of the proceeds from the sale of stock by the
Company and its principles that occurred between June 1995
and June 1996. This figure is believed to be in excess of
$3,000,000. The SEC is also seeking the imposition of fines
and attorney's fees. 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
the action 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 seeks
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.
During the year ended June 30, 1999 the Company settled the
lawsuit for $170,634.
F-13
<PAGE>
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 was for $60,000 but, was
dismissed on summary judgment. The Company filed a
counter-claim for damages incurred due to alleged defective
and untimely performance. The counter claim is still pending.
The ultimate outcome of the litigation cannot presently be
determined. Accordingly, no provision for any asset that may
result upon adjudication has been made in the accompanying
financial statements, and the possible effect the suit will
have on future financial statements is unknown.
F-14
<PAGE>
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
During the fiscal year 1999 there were no changes or
disagreements with the Company's certified public accountants,
Hansen, Barnett and Maxwell.
PART III.
Item 10. 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 54 Chairman of the Board of Directors
and President
Ina Johnson 51 Secretary and Director
Donnel Johnson 35 Director and Vice-President
Christopher Taylor 31 Director
Stacy Curtis Snow 34 Director
Randale Johnson 31 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 t he 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
19
<PAGE>
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
supermarket of approximately 25,000 square feet in Salem, Utah.
The supermarket is called U-Check.
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 holds 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.
20
<PAGE>
Significant Employees and Managers
Monty Hamilton, age 59, 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 11. EXECUTIVE COMPENSATION
Currently the Company has no employment agreement with any of
its officers, directors or employees. During the year ended June
30, 1999, Neldon Johnson, who is an officer and a director of the
Company, received benefits of $ 11,456. 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, 1999.
Item. 12. 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, 1999, 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 Percent (1)
Beneficial Owner Shares Owned
------------------- ------------
Neldon Johnson
512 South 860 East
American Fork, Utah 9,078,808 58.4
Donnel Johnson
512 South 860 East
American Fork, Utah 47,400
Christopher Taylor
512 South 860 East
American Fork, Utah 3,753
Randale Johnson
512 South 860 East
American Fork, Utah 7,000
Directors and Officers
as a Group
4 persons 9,136,961 58.8
========= ====
21
<PAGE>
(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 by Neldon Johnson. Each share of the
Series 1 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 13. 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 has been installed in a grocery
store in Salem, Utah. The store operates 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.
During fiscal 1999 the Johnson family contributed funds to the
Company in the amount of $1,087,456. The Company issued no shares
for the funds received.
PART IV
Item 14. EXHIBITS AND REPORTS ON FORM 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.
22
<PAGE>
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.
23
<PAGE>
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 12, 1999
----------------------
DIRECTORS
/S/ Neldon Johnson
-------------------------------------
NELDON JOHNSON
Title: Director
Date: October 12, 1999
----------------------
/S/ Ina Johnson
-------------------------------------
INA JOHNSON
Title: Director
Date: October 12, 1999
-----------------------
/S/ Donnel Johnson
-------------------------------------
DONNEL R. JOHNSON
Title: Director
Date: October 12, 1999
----------------------
/S/ Christopher J. Taylor
--------------------------------------
CHRISTOPHER J. TAYLOR
Title: Director
Date: October 12, 1999
----------------------
/S/ S. Curtis Snow
--------------------------------------
S. CURTIS SNOW
Title: Director
Date: October 12, 1999
--------------------------------------
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 23,523
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,523
<PP&E> 221,505
<DEPRECIATION> 145,035
<TOTAL-ASSETS> 900,156
<CURRENT-LIABILITIES> 124,923
<BONDS> 92,716
0
292,786
<COMMON> 5,348,195
<OTHER-SE> (4,958,464)
<TOTAL-LIABILITY-AND-EQUITY> 900,156
<SALES> 3,082
<TOTAL-REVENUES> 3,082
<CGS> 1,667
<TOTAL-COSTS> 1,667
<OTHER-EXPENSES> 1,008,685
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,128
<INCOME-PRETAX> (1,008,308)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,008,308)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,008,308)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
