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, 2000.
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.
326 North SR 198, Salem, Utah 84653
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(Address of principal executive offices)
Registrant's telephone number, including area code:(801) 423-8132
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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: $(740,256).
The aggregate market value of voting stock held by non-affiliates of
the registrant on June 30, 2000, 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
October 11, 2000, there were outstanding 16,251,361 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: 326 North SR 198
Salem, Utah 84653.
Company telephone number: (801) 423-8132
Fiscal year: June 30
ITEM 1 AND 2 DESCRIPTION OF BUSINESS AND PROPERTIES
OVERVIEW
International Automated Systems, Inc., a Utah corporation
(hereinafter "Registrant" or "Company") based in Salem, 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.
-----------
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. 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 item 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.
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 more 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 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.
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.
---------------------------------------------
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. 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 Modulation Technology.
-----------------------------------
Digital Wave Modulation ("DWM")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 entered into an agreement
with Neldon Johnson to act as President and Chief Executive Officer for a
period of ten (10) years.
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
seven U.S. patents. 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 five patents relate to the DWM technology granted May 1996, June
1997, November 1997, July 2000 and September 2000.
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 2000 these
contributions were approximately $919,530. 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 326 North
SR 198, Salem, Utah 84653 and its telephone number is
(801) 423,8132.
From its inception the Company's primary activity has been 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 nine (9) 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. The Company has entered into a preliminary agreement with
Scematics Inc. for the purpose of expanding its U-Check concept.
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 is currently in operation.
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, 2000 and 1999,
research and development expenses were $251,169 and $463,348,
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 plans to implement
at least one more Self-Check System. 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.
Item 3. LEGAL PROCEEDINGS
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. The SEC is also
seeking the imposition of fines and attorney's fees. Though the Company
and the Principles named in the complaint deny any wrong doing and intend
on vigorously defending the lawsuit, 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 that action will have on future financial statements
is unknown.
The Company has filed a civil action complaint in the United States
District Court for the District of Utah Central Division against Optimal
Robotics Corp. and PSC, Inc. alleging patent infringement arising under the
patent laws of the United States, and more specifically, under Title 35,
U.S.C. Sections 271, 281, 283, 284 and 285. Discovery is presently in
progress.
The Company has filed a civil action complaint in the United States District
Court for the district of Utah Central division against The Kroger Company
alleging patent infringement arising under the patent infringement arising
under the patent laws of the United States, and more specifically, under
Title 35, U.S.C., section 271, 281, 283, 284, and 285.
14
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 2000
June 30, 2000 6.41 1.96
March 31, 2000 8.13 1.25
December 31, 1999 1.88 1.00
September 30, 1999 2.25 1.03
Fiscal 1999
June 30, 1999 2.50 1.50
March 31, 1999 3.50 2.25
December 31, 1998 3.69 1.56
September 30, 1998 1.94 4.66
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, 2000, the Company had approximately 789 shareholders of
record. The stock price may also be affected by broader market
trends unrelated to the Company's activities.
As of June 30, 2000, Registrant had 15,596,361 shares of common
stock issued and outstanding. Of these shares approximately
6,194,210 shares were free trading shares. There were
approximately 7,484,441 shares of common stock held by
non-affiliates of that amount approximately 2,000,420 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, 2000, 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.
16
Results of Operations
Fiscal year ended June 30, 2000
Operations during the year ended June 30, 2000, pertained to
research and development and other activities. Research and
development expenses were $251,169 decreasing by $212,179. General
and administrative expenses increased from $364,052 to $478,310
during fiscal 2000. These increases are a result of increased
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 and all the labor since 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. For fiscal year 2000, total income was $0; cost of
sales was $0; operating expenses were $740,001 and other income
(expense) was $(255) resulting in a net loss of $(740,256). Net
loss decreased $268,052. The majority of this can be attributed to
a decrease in research and development expense and not having the
stockholders' class action settlement expense. Revenues decreased
because of the continuing delays in product development. For fiscal
2000 the loss per share was $(0.04) compared to $(0.06) for the same
period a year earlier.
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. The
decrease was attributable to reduced payroll and expenses.
General and administrative expenses decreased from $540,542 to
$364,052 during fiscal 1999. The decrease was a result of
decreased payroll and expenses. For 1999 fiscal year total income
was $3,082; cost of sales was $1,667; total expenses were $1,008,685
resulting in a net loss of $(1,008,308). The net loss decreased from
$(1,257,397) to $(1,008,308) because of the decrease in payroll
and general and administrative expenses. For fiscal 1999 the loss
per share was $(0.06) compared to $(0.08) for the same period a year
earlier.
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, 2000, the Company has current assets of $36,033 and total
assets of $1,260,042. Current liabilities were $235,406 and total
liabilities of $298,251. The ratio of current assets to current
liabilities is approximately 0.15. 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
Common Stock - In October 1999 50,000 shares of common stock were
sold for $2.00 per share from the Company treasury.
In August 2000, the Company issued 400,000 shares of common stock
to an attorney for prior fees and as a retainer against future services.
In August 2000, the company entered into employment agreements with
certain key employees. In connection with these agreements, the company
issued 50,000 shares of common stock per employee for a total of 250,000
shares.
In August 2000, the Company issued 5,000 shares of common stock for
services rendered.
Preferred Stock - In July 2000, the Company issued to key Employees/
Directors 2,000,000 shares of preferred stock in leu of a bonus. 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.
In August 2000, the Company issued 300,000 shares of preferred stock, which
has no value, as part of an employee agreement with certain employees. 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.
In August 2000, the Company issued 300,000 shares of convertible preferred
shares to certain key employees as part of an employee agreement. Each
preferred share has equal dividend rights to the common shares, have no
dividend requirements, and have no liquidation preferences to the common
shares, and is entitled to the voting rights of ten common shares. Each share
can be converted to two options to purchase common stock at $3.00 per share.
Options - In August 2000, the Company issued options to purchase 1,000,000
shares of restricted common stock over a ten year period at $3.00 per share
as part of employment agreements.
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.
18
Item 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
During the fiscal year 2000 there were no changes or
disagreements with the Company's certified public 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 54 Chairman of the Board of Directors
and President
Randale Johnson 31 Secretary, Vice President and Director
Christopher Taylor 31 Director
Stacy Curtis Snow 34 Director
LaGrand Johnson 34 Director
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
19
Neldon Johnson is the 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.
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. 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.
LaGrand T. Johnson is the son of Neldon Johnson. He has worked with
the Company since 1987 but started full time in 1996. He graduated
with a Bachelor's Degree in chemistry in 1991. He received his Doctor
of Osteopathy degree in 1995 from Western University of Health Sciences.
He works as General Manager of the Company and in research and development.
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
Item 10. EXECUTIVE COMPENSATION
The Company has entered into an agreement with Neldon Johnson to act
as President and CEO of the Company for a period of ten years. The
Company has agreed upon an initial compensation of $100,000 per annum
gross salary.
Employment Agreements
The Company has an employee agreement or contract with the
key employees for a period of five years. Each employee will continue
to receive an annual salary which will be reviewed annually. As part
of the employment agreement each employee has received restricted
common and preferred shares of stock and options to be purchased at
$3.00 per share. Each employee has signed a non-disclosure agreement
with the Company.
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, 2000, 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
326 North SR 198
Salem, Utah 8,111,920 52.0
LaGrand Johnson
326 North SR 198
Salem, Utah 50,000
Christopher Taylor
326 North SR 198
Salem, Utah 121,350
Randale Johnson
326 North SR 198
Salem, Utah 50,085
Curtis Snow
326 North SR 198
Salem, Utah 50,000
Directors and Officers
as a Group
5 persons 8,383,355 53.8
========= ====
21
(1) Based on 15,596,361 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, the 1,150,000 shares
of Series 1 Class A Preferred Stock held by LaGrand Johnson,
or the 1,150,000 shares of Series 1 Class A Preferred Stock held by
Randale 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 37 per
cent, LaGrand Johnson 24 percent, and Randale Johnson 24 percent
of the voting control of the Company when the voting power of
the shares of preferred stock and common stock are taken together.
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 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. The Company has advanced funds and paid the payroll for
U-Check from its inception. As of June 30, 2000, U-Check owed the
Company $819,050.
During fiscal 2000 the Johnson family contributed funds to the
Company in the amount of $919,530. 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
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, 2000, Registrant filed no
report on Form 8-K.
23
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, 2000
----------------------
DIRECTORS
/S/ Neldon Johnson
-------------------------------------
NELDON JOHNSON
Title: Director
Date: October 12, 2000
----------------------
/S/ Randale Johnson
-------------------------------------
RANDALE P. JOHNSON
Title: Director
Date: October 12, 2000
-----------------------
/S/ LaGrand Johnson
-------------------------------------
LAGRAND T. JOHNSON
Title: Director
Date: October 12, 2000
----------------------
/S/ Christopher J. Taylor
--------------------------------------
CHRISTOPHER J. TAYLOR
Title: Director
Date: October 12, 2000
----------------------
/S/ S. Curtis Snow
--------------------------------------
S. CURTIS SNOW
Title: Director
Date: October 12, 2000
--------------------------------------
<PAGE>
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants F-1
Balance Sheet - June 30, 2000 F-2
Statements of Operations for the Years Ended
June 30, 2000 and 1999 and for the Period From
September 26, 1986 (Date of Inception) Through
June 30, 2000 F-3
Statements of Stockholders' Equity for the Period
From September 26, 1986 (Date of Inception) Through
June 30, 1998, and the Years Ended June 30, 1999
and 2000 F-4
Statements of Cash Flows for the Years Ended June 30,
2000 and 1999 and for the Period From September 26,
1986 (Date of Inception) Through June 30, 2000 F-5
Notes to the Financial Statements F-6
<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 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,
2000, and the related statements of operations, stockholders' equity,
and cash flows for the years ended June 30, 2000 and 1999, and for the
period from September 26, 1986 (date of inception) through June 30,
2000. 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 auditing standards
generally accepted in the United States. 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, 2000, and the results of its
operations and its cash flows for the years ended June 30, 2000 and
1999, and for the period September 26, 1986 through June 30, 2000, in
conformity with accounting principles generally accepted in the United
States.
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 7, 2000
F-1
<PAGE>
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
BALANCE SHEET
JUNE 30, 2000
ASSETS
Current Assets
Cash $ 8,915
Net investment in direct financing leases -
related party - current portion 27,118
-----------
Total Current Assets 36,033
-----------
Property and Equipment
Computer and electronic equipment 148,864
Furniture and fixtures 20,982
Automobiles 21,657
Mobil office 11,764
Leasehold improvements 18,238
-----------
Total Property and Equipment 221,505
Accumulated depreciation (176,621)
-----------
Net Property and Equipment 44,884
-----------
Other Assets
Related party receivable 819,050
Net investment in direct financing leases -
related party - long-term 62,845
Patents, net of accumulated amortization of $56,342 291,230
Deposits 6,000
-----------
Total Other Assets 1,179,125
-----------
Total Assets $ 1,260,042
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 120,987
Current portion of long-term debt 4,424
Obligation under capital leases - current portion 27,118
Accrued payroll expenses 82,877
-----------
Total Current Liabilities 235,406
-----------
Long-Term Liabilities - obligation under capital
leases - long-term 62,845
-----------
Total Liabilities 298,251
-----------
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, 15,596,361 shares issued and
outstanding 6,367,725
Deficit accumulated during the development stage (5,698,720)
-----------
Total Stockholders' Equity 961,791
-----------
Total Liabilities and Stockholders' Equity $ 1,260,042
===========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
For the Period
September 26,
1986 (Inception)
For the Years Ended Through
----------------------- June 30,
2000 1999 2000
---------- ----------- -----------
<S> <C> <C> <C>
Revenue
Sales $ -- $ 3,082 $ 111,226
Income from related party -- -- 32,348
---------- ----------- -----------
Total Revenue -- 3,082 143,574
Cost of Sales
Cost of sales -- 1,667 81,927
Write down of carrying value of inventories -- -- 216,186
---------- ----------- -----------
Total Cost of Sales -- 1,667 298,113
---------- ----------- -----------
Gross Income (Loss) -- 1,415 (154,539)
Operating Expenses
General and administrative expense 478,310 364,052 2,665,545
Research and development expense 251,169 463,348 2,649,322
Stockholders' class action settlement expense -- 170,634 170,634
Amortization expense 10,522 10,651 58,222
---------- ----------- -----------
Total Operating Expenses 740,001 1,008,685 5,543,723
---------- ----------- -----------
Operating Loss (740,001) (1,007,270) (5,698,262)
Other Income (Expense)
Interest income 982 1,090 22,227
Interest expense (1,237) (2,128) (22,685)
---------- ----------- -----------
Net Other Income and (Expense) (255) (1,038) (458)
---------- ----------- -----------
Net Loss $ (740,256) $(1,008,308) $(5,698,720)
========== =========== ===========
Basic and Diluted Loss Per Share $ (0.04) $ (0.06) $ (0.38)
========== =========== ===========
Common and Preferred Shares Used In
Per Share Calculation 16,581,840 16,546,361 14,889,728
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<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 - -
November 1997 - $1.43 per share - - 35,000 50,000 - -
May 1998 - $1.20 per share - - 250,000 300,000 - -
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 - -
December 1997 - $1.13 per share - - 6,000 6,750 - -
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 - - - 2,465,957 - -
Net loss for the period from July 1, 1990
through June 30, 1998 - - - - - (3,757,178)
---------- ---------- ---------- ---------- ---------- -----------
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 - - - - - (1,008,308)
---------- ---------- ---------- ---------- ---------- -----------
Balance - June 30, 1999 1,000,000 292,786 15,546,361 5,348,195 - (4,958,464)
Stock issued for cash
October 1999 - $2.00 - - 50,000 100,000 - -
Contributed capital - no shares issued - - - 919,530 - -
Net loss - - - - - (740,256)
---------- ---------- ---------- ---------- ---------- -----------
Balance - June 30, 2000 1,000,000 $ 292,786 15,596,361 $6,367,725 $ - $(5,698,720)
========== ========== ========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
For the Period
September 26,
1986 (Inception)
For the Years Ended Through
----------------------- June 30,
2000 1999 2000
---------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (740,256) $(1,008,308) $(5,698,720)
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization 10,522 10,651 58,222
Depreciation 31,586 35,191 176,621
Stock based compensation - - 338,497
Change in assets and liabilities:
Prepaid expenses - 2,241 -
Accounts payable 55,708 52,314 120,987
Accrued liabilities 60,971 17,279 82,877
---------- ----------- -----------
Net Cash Used By Operating Activities (581,469) (890,632) (4,921,516)
Cash Flows From Investing Activities
Purchase of property, equipment and deposits (6,000) (1,180) (196,384)
Purchase of rights to technology (43,944) (25,940) (347,572)
Organization costs - - (1,880)
Proceeds from capital lease receivable 21,852 22,368 44,220
Cash loaned to related party (364,987) (322,392) (872,304)
Repayment of cash loaned to related party - 53,254 53,254
---------- ----------- -----------
Net Cash Used By Investing Activities (393,079) (273,890) (1,320,666)
Cash Flows From Financing Activities
Proceeds from issuance of common stock 100,000 - 1,362,346
Cash from controlling shareholder 919,530 1,087,456 4,941,401
Payments for treasury stock - - (3,325)
Payments for stock offering costs - - (56,509)
Change 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 (28,983) (22,048) (70,917)
---------- ----------- -----------
Net Cash Provided By Financing Activities 983,463 1,072,492 6,251,097
---------- ----------- -----------
Net Increase (Decrease) In Cash and
Cash Equivalents 8,915 (92,030) 8,915
Cash and Cash Equivalents at Beginning
of Period - 92,030 -
---------- ----------- -----------
Cash and Cash Equivalents at End of Period $ 8,915 $ - $ 8,915
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INTERNATIONAL AUTOMATED SYSTEMS, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2000 and 1999
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, 2000 and 1999, the
Company incurred net losses of $740,256 and $1,008,308, respectively.
As of June 30, 2000, the Company's losses accumulated from inception
totaled $5,698,720. The Company had a working capital deficit of
$199,373 at June 30, 2000. 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 is valued at the lower of cost or market,
with cost being determined using the first-in first-out method.
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, 2000 and 1999 was
$31,586 and $35,191, respectively.
F-5
<PAGE>
Advertising Costs -- Advertising costs are expensed when incurred.
Advertising expense, was $27,455 and $66 for the years ended June 30,
2000 and June 30, 1999, respectively.
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, once issued, on a
straight-line basis over a 17-year life. Amortization expense for the
years ended June 30, 2000 and 1999 was $10,522 and $10,651,
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.
Research and Development -- 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 $251,169 and $463,348
for the fiscal years ended June 30, 2000, and 1999, respectively.
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 2,
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.
F-7
<PAGE>
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. 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.
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, 2000 and 1999, Mr. Johnson advanced
the Company $919,530 and $1,087,456, respectively, which has been
accounted for as contributed capital.
NOTE 3--RELATED PARTY TRANSACTIONS
As of June 30, 2000 and 1999, the Company loaned U-Check, Inc. (U-
Check), a corporation solely owned by Mr. Johnson, $364,987 and
$322,392, respectively. U-Check repaid $0 and $53,254 during the year
ended June 30, 2000 and 1999 resulting in a balance of $819,050 as of
June 30, 2000. These receivables consist of construction and labor costs
paid for by IAS on behalf of U_Check. Also, as discussed in Note 5, U-
Check subleased various equipment used in the grocery store from the
Company. 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,
2000 and 1999 from Mr. Johnson.
F-8
<PAGE>
NOTE 4--NOTES PAYABLE
Notes payable at June 30, 2000, consisted of the following:
Notes payable to a leasing company; bearing
interest at 10%; secured by mobile office;
due April 2001 4,424
--------
Total $ 4,424
Less: Current portion (4,424)
--------
Net Long-Term Debt $ 0
========
NOTE 5--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, 2000:
Year Ending June 30,
2001 $ 41,689
2002 38,959
2003 35,712
---------
Total Minimum Lease Payments 116,360
Less: amount representing interest 26,397
---------
Present: value of net minimum lease payments 89,963
Less current: portion (27,118)
---------
Obligation Under Capital Leases - Long-Term $ 62,845
=========
At June 30, 2000, the Company has an investment in direct financing
leases totaling $89,963. The following is a schedule by years of future
minimum lease proceeds from the related party company:
Year Ending June 30,
2001 $ 41,689
2002 38,959
2003 35,712
---------
Total Minimum Lease Payments Receivable 116,360
Less: amount representing interest (26,397)
---------
Present value of net minimum lease proceeds 89,963
Less: current portion (27,118)
---------
Investment in Direct Financing Leases - Long Term $ 62,845
=========
NOTE 6--INCOME TAXES
The Company did not have a current or deferred provision for income
taxes for the years ended June 30, 2000 and 1999. The following presents
the components of the net deferred tax asset at June 30, 2000:
Operating loss carryforwards $ 248,658
Accumulated depreciation/amortization 3,910
---------
Net Deferred Tax Assets Before Valuation
Allowance 252,568
Less: Valuation Allowance (252,568)
---------
Net Deferred Tax Asset $ -
=========
The valuation allowance decreased $97,069 and $29,555 during the
years ended June 30, 2000 and 1999, respectively. The Company has net
operating loss carryforwards of $666,244 that expire, if unused, in
years 2002 through 2020.
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, 2000 and 1999:
June 30,
----------------------
2000 1999
---------- ----------
Income tax benefit at statutory rate (34%) $ (235,800) $ (342,825)
Deferred tax valuation allowance change (97,069) (29,555)
Non deductible expenses/taxable income 355,755 405,654
State taxes net of federal benefit (22,886) (33,274)
Effect of change in tax rates - -
---------- ----------
Provision for Income Taxes $ - $ -
========== ==========
NOTE 7--OPERATING LEASES
The Company leased buildings and office equipment under month-to-
month lease agreements. These leases were accounted for as operating
leases. These leases were terminated during the year ended June 30,
2000.
Rental expense during the years ended June 30, 2000 and 1999 was
$7,400 and $18,997, respectively.
NOTE 8--SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2000 and 1999, the Company paid
$1,237 and $ 2,128 in interest.
During the year ended June 30, 1999, the Company acquired a modular
office by issuing a note for $11,764.
NOTE 9--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.
NOTE 10-SUBSEQUENT STOCK ISSUANCES (Unaudited)
Preferred Stock - In July 2000, the Company issued to certain
Employees/Directors 2,000,000 shares of preferred stock in leu of a
$2,000 bonus. 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.
In August 2000, the Company entered into employment agreements with
certain employees. In connection with these agreements, the Company
issued 300,000 shares of preferred stock which has no value. 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.
In connection with the employment agreements, the Company issued
300,000 shares of convertible preferred stock. Each preferred share has
equal dividend rights to the common shares, has no dividend
requirements, has no liquidation preferences to the common shares, and
is entitled to the voting rights of ten common shares. Each share of the
convertible preferred stock is exchangeable into two options to purchase
common stock at $3.00 per share, exercisable immediately and the options
expire ten years from the date the preferred stock is exchanged. The
Company is accounting for these shares as though they were an issuance
of a stock option. See below for the Company's accounting policy for the
issuance of stock options.
Common Stock - In August 2000, the Company issued 400,000 shares of
common stock to an attorney for prior fees of $55,629 and $844,371 as a
retainer against future services. The Common shares had a fair value of
$900,000 or $2.25 per share on the date of issuance.
In August 2000, the Company entered into employment agreements with
certain employees. In connection with these agreements, the Company
issued; 250,000 shares of common stock valued at $562,500 or $2.25 per
share.
In August 2000, the Company issued 5,000 shares of common stock for
services rendered valued at $11,250 or $2.25 per share.
Options - In August 2000, as part of employment agreements, the
Company issued options to purchase 1,000,000 shares of common stock.
These options are exercisable at $3.00 per share, vest 100,000 shares
per year over a ten year period and expire ten years from the date of
issuance.
The Company accounts for its stock options issued to directors,
officers and employees under Accounting Principles Board Opinion No. 25
and related interpretations ("APB 25"). Under APB 25, compensation
expense is recognized if an option's exercise price on the measurement
date is below the fair value of the Company's common stock. The Company
accounts for options and warrants issued to non-employees in accordance
with SFAS No. 123, Accounting for Stock-Based Compensation" (SFAS 123)
which requires these options and warrants to be accounted for at their
fair value. There will be no compensation expense recognized for the
options under APB 25.
