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 December 31, 1997
_____ TRANSITION REPORT PURSUANT TO SECTION 13 or
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-29138
INTELLECTUAL TECHNOLOGY, INC.
(Name of Small Business Issuer as specified in its charter)
Delaware 84-1130227
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
Incorportion or Organization)
10639 Roselle Street, Suite B, San Diego, California 92121
(Address of Principal Executive Offices) (Zip Code)
(619) 552-0001
Registrant's Telephone Number, including Area Code
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.00001 par value
Class A Common Stock Purchase Warrants
Class B Common Stock Purchase Warrants
Check whether the Registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months(or for such shorter period that the Registrant was required to
file such reports) and (2)has been subject to such filing requirements
for the past 90 days. Yes X No ___.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosures
will be contained, to the best of the 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
The Registrant's revenues for the fiscal year ended December 31, 1997
were $3,011,370.
<PAGE>
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of April 13, 1998 was $2,510,480. For purposes of
this computation, it has been assumed that the shares beneficially held
by directors and officers of Registrant were "held by affiliates;" this
assumption is not to be deemed to be an admission by such persons that
they are affiliates of Registrant.
As of April 13, 1998, the Registrant had outstanding 10,000,000 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Specified exhibits listed in Part III of this report are incorporated
by reference to the Registrant's Registration Statement No. 33-33092-D,
effective April 17, 1990, or to Registrant's Report on Form 8-K dated
March 27, 1997.
Transitional Small Business Disclosure Format: Yes ___ No X
2
<PAGE>
PART I
ITEM 1. BUSINESS.
Historical Development
Image Technology, Inc., a Nevada corporation based in San Diego,
California ("ITI Nevada") was formed on April 23, 1992 to engage in
the design, manufacture and sale of systems for the automated
preparation and dispensing of motor vehicle registration forms and
license plate decals. On March 12, 1997, the shareholders of ITI
Nevada, in a transaction accounted for as a reverse acquisition,
exchanged all of the outstanding common stock of ITI Nevada for
450,000,000 shares of the common stock of Bridgestone Corp., a Delaware
corporation. As a result of this transaction, ITI Nevada shareholders
acquired collectively a 90% interest in Bridgestone Corp., and ITI
Nevada became a wholly-owned subsidiary of Bridgestone Corp.
Bridgestone Corp., which was formed on December 1, 1989, for the
purpose of seeking out and acquiring a business opportunity, had
completed a public offering of common stock and warrants on October 29,
1990, realizing net proceeds of $80,341. In April of 1997, Bridgestone
Corp. changed its name to Intellectual Technology, Inc. and effected a
1 for 50 reverse stock split. References in this report to the Company
and to ITI are references to Intellectual Technology, Inc., a Delaware
corporation, and its predecessor and wholly owned subsidiary, ITI
Nevada, on a consolidated basis.
Industry and Company Background
Vehicle registration services are operated by all 50 states, the
District of Columbia, and many foreign governmental authorities.
Governments use vehicle registration as a means of generating revenues
and to provide an orderly method of regulating the ownership and
transfer of motor vehicles. Management of the Company believes that
traditional methods of motor vehicle registration have resulted in
delays experienced by members of the public, significant personnel and
facility costs, the waste of preprinted materials and a generally
inefficient disbursement process, as well as significant losses
occasioned by fraud and theft. Based upon discussion with law
enforcement officials, the Company believes that losses attributable to
these problems are in the hundreds of millions of dollars.
As early as 1987, ITI's founders envisioned streamlining the
distribution of motor vehicle registrations through the development of
an automated, self-service registration printing and dispensing device.
From 1987 through 1991, the founders of ITI engaged in market research
and product development. Two patents resulting from these activities
were assigned by their inventors to American Registration Systems,
Inc., an Indiana corporation ("ARS"). See "Certain Relationships and
Related Transactions." In 1992, ITI was formed to continue this
process and commercialize the concepts that had been developed. One of
the patents was acquired by ITI Nevada through the enforcement of a
pledge agreement, and in October 1995, the remaining patent was
assigned by ARS to ITI Nevada. ARS subsequently assigned its interest
in both patents to Intellectual Technology, Inc. in October 1995.
3
<PAGE>
The ITI 2101A and Related Print Media
The result of the efforts of ITI and its founders is the ITI 2101A
printing system, which allows for the real time, on-site creation of
vehicle registration forms and license decals on blank stock, including
the imprinting of the vehicle license plate number on the decal. The
Company believes that this on demand printing capability will allow
Departments of Motor Vehicles to substantially reduce fraud and theft,
increase revenue collection, and reduce personnel, inventory, and
facility costs as a consequence of increased efficiencies. The ITI
2101A is designed to operate both as a stand alone unit in a printer
server environment within a Department of Motor Vehicles ("DMV") office
and as a self-service terminal which can be placed in locations remote
from DMV offices. Both versions include user interface hardware and
software and an operator panel to assist maintenance personnel while
they load media, make print adjustments, and perform routine servicing.
The Company believes that the ITI 2101A resolves the problems described
above in "Industry and Company Background," in that it prints a vehicle
registration with an applied decal on blank stock, thereby eliminating
the need to dispose of preprinted stock at year end. Additionally, the
ITI 2101A is designed to satisfy the security demands of Departments of
Motor Vehicles in that it applies the vehicle license plate number to
the decal, thus causing the decal to become significantly less valuable
to thieves. The ITI 2101A is also equipped with a software system
which accounts for all transactions effected through the printer, which
significantly reduces the likelihood of DMV employee fraud or theft.
Finally, when combined with the automated teller technology of NCR
Corporation ("NCR"), the ITI 2101A is capable of acting as a self
service terminal for motor vehicle registrations which can be
established in locations remote from DMV offices, thereby reducing
personnel and facilities costs.
In the early 1990's, ITI worked with 3M Corporation of St. Paul,
Minnesota ("3M") to develop a specially coated validation sheeting to
be used in the printing of decals in real time at the point of issue.
ITI's goal was to provide a validation decal which accepted thermally
transferred printing and required no clear coating to meet industry
standards for durability. This product was developed, and, by a letter
dated January 24, 1995, 3M acknowledged that ITI would be 3M's
exclusive distributor for the product. This exclusivity extends only
to the product developed for ITI's system. Although 3M has on-going
programs the objective of which are to develop other products for the
validation sticker market, it has expressed its intent to limit its
development of other distinct validation sheeting products to those
which will not interfere with the exclusive validation sheeting
distribution plan of the Company. This exclusivity permits the Company
to serve as the sole source of the media in situations where a DMV
might elect to purchase the ITI 2101A, rather than leasing it based on
a per transaction pricing structure.
4
<PAGE>
Marketing and Sales
The primary market for the Company's printing systems and services
consists of the Department of Motor Vehicles in each of the 50 U.S.
states. The Company believes that the decision-making authority to
purchase the Company's products is vested as to any Department, in a
limited number of administrative personnel. Accordingly, the persons
to be contacted by the Company in making sales presentations and
proposals are to be determined on a narrowly focused, strategic basis.
The Company believes that the historical relationships between key
senior management and the State Motor Vehicle administrators and the
limited number of competitors in this market permit the Company to
approach the vehicle registration and renewal market with significant
efficiencies. Consequently, the Company plans to market its products
and services through its in-house marketing and sales staff which
consists of three senior sales and marketing employees.
As new accounts with additional states are established, however, the
Company intends to supplement its sales staff to provide an expanded
and ongoing range of contacts with each customer or client DMV. The
purpose of this expanded sales coverage will be to allow developments
in the Company's product line to be brought to the attention of each
client DMV in a timely fashion and to promote customer satisfaction and
loyalty.
The Company solicits interest in its products primarily through direct
contact with DMV officials and attendance at industry conferences. The
initial marketing package consists of brochures and color photographs,
which are supplemented with an explanation of the product's evolution
and a videotaped demonstration of its performance. References of DMV
officials of states where the Company has installed its products are
supplied, along with an offer to demonstrate the products.
Once a state has accepted the concept of the real time, on-site
printing of motor vehicle registrations and license decals, it must
then decide whether to acquire the ITI 2101A in the form of self-
service terminals or as stand alone units operated by DMV personnel, or
both. Indiana has chosen to acquire both types of units. Maryland
utilizes self-service terminals only. The Company also offers its
customers the opportunity to acquire the ITI 2101A through leases using
a transaction-based pricing mechanism, in which the Company is paid an
amount which varies over time based upon the number of transactions for
which the printer is used.
5
<PAGE>
Contracts
In August 1996, ITI entered into an Equipment Lease, Support and
Maintenance Agreement (the "Indiana Contract") with the Indiana Bureau
of Motor Vehicles Commission (the "BMVC"). The Indiana Contract became
effective by its terms on November 1, 1996, and provides for the BMVC
to lease from ITI both self-service terminals and stand alone printers.
It required ITI to install an initial group of 11 self-service
terminals and 100 stand alone printers in locations designated by the
BMVC. Subsequently, the BMVC authorized the installation of an
additional 25 self service terminals and 195 additional stand alone
printers.
The installation of all of the stand alone printers was completed in
November of 1997. Currently, there are 14 self service terminals
installed with the remaining 22 scheduled for installation by the
fourth quarter of 1998. Effective January 1, 1998, ITI equipment will
process all of the approximately 5.7 million annual registration and
renewal transactions in Indiana.
The Indiana Contract may be terminated only in the event of a breach by
either party which has not been cured after 60 days written notice or
if the Director of the Indiana State Budget Agency makes a written
determination that funds are not appropriated or otherwise available to
support the continuation or performance of the agreement. The pricing
of the Indiana Contract is on a per transaction basis, with the Company
receiving an amount per transaction between $1.22 and $.85, with the
amount per transaction generally decreasing as additional blocks of
printers and self service terminals were leased but increasing with the
passage of time. Additionally, after installation of all of the
blocks, the BMVC, at its option, may lease additional terminals or
printers. Each such additional lease would result in an increase in the
per transaction fee for each installed terminal or printer.
The term of the Indiana Contract is for a period of three years,
subject to an option to renew on the part of the BMVC for an
additional, fourth year. The Indiana Contract provides that title to
the leased equipment and risk of its loss will remain with the Company.
Shipping and delivery costs were paid by the Company. Following
delivery and installation of a printer or terminal and the Company's
certification that it has been successfully installed and is ready for
use, the BMVC is required to inspect the equipment and accept or reject
it. All equipment installed pursuant to the Indiana Contract through
the date of this Report has been accepted by the BMVC. The equipment
may be rejected only if it fails to conform to the requirements of the
agreement, including, but not limited to, the specifications of the
Request for Proposal upon which the Indiana Contract is based. The
Company is required to keep the leased equipment in good operating
condition and provide support and maintenance services. Also, the
Company is required to provide periodic maintenance as specified in its
response to the BMVC Request for Proposal as well as remedial
maintenance which satisfies response times set forth in the Company's
response to the BMVC Request for Proposal. Generally, service and
replacement parts are to be provided without charge to the BMVC.
6
<PAGE>
To assist it in performing its obligations under the Indiana Contract,
effective as of August 1, 1996, ITI entered into a Subcontractor
Agreement with NCR (the "NCR Agreement"), which generally requires the
Company to provide the printers, printing media, facilities management,
printer installation, customer billing, and self-service terminal
provisioning aspects of the Indiana Contract, while NCR is responsible
for providing the self service terminals, program management, software
development, software maintenance, hardware maintenance, and self-
service terminal installation. The NCR Agreement requires NCR to
provide both remedial and preventative maintenance services with
respect to the self service terminals.
The Maryland Department of Motor Vehicles contracted with NCR for the
purchase of 11 self service terminals for the State of Maryland. ITI
supplied NCR with the printing systems necessary for the issuance of
registrations and decals from the self service terminals. As part of
ITI's agreement with NCR in Maryland, all of the media (blank
registration paper and decals) used by the state must be purchased from
ITI.
ITI is negotiating with NCR to provide additional self service
terminals to Maryland and directly with Maryland to lease ITI's over
the counter, stand alone printing system.
Manufacturing and Supply
The Company does not manufacture its products and instead uses vendors
to manufacture and supply all components and subassemblies of the ITI
2101A, to perform final assembly of its product, and to provide the
printing media used by the ITI 2101A. The custom printing unit used
for all existing ITI printing systems were manufactured by Zebra
Technologies, Inc., of Vernon Hills, Illinois. The custom printers
produced by Zebra Technologies are modified by Contract Manufacturing
Integration ("CMI") of Poway, California, which functions as a complete
manufacturing facility for the Company and provides various services,
including without limitation final assembly, firmware integration,
final testing, and quality control. CMI is responsible for employing
the necessary manufacturing personnel. The decal used by the ITI 2101A
is produced exclusively for the Company by 3M Corporation of St. Paul,
Minnesota. The paper materials on which the registrations are supplied
by NCR (see "Business - The ITI 2101A and Related Print Media"). The
Company has identified alternative vendor sources for all materials and
assemblies used in its products other than the 3M printing media. The
Company believes the use of vendors for its manufacturing process has
allowed it to limit the size of its fixed overhead and to respond
quickly to the volatility of its market which consists of a relatively
small number of significant customers who order products at irregular
intervals.
7
<PAGE>
Competition
The Company believes that it has a strong competitive position for the
sale of its self service terminals, printing systems and related media
supplies. Although the market is relatively young, ITI has established
a reputation for providing quality products. ITI's innovative,
successful solutions give it a significant lead over its competitors.
None of ITI's competitors offer a solution incorporating both self
service and real-time, over the counter or mail room applications.
The Company cannot guarantee that a better capitizated competitor will
not develop a competitive product. The Company's proprietary
technology and leading position in the market, however, make it
unlikely that a larger company would choose to devote the time and
resources to develop the technology on its own.
Patents
The ITI 2101A is based in part on technologies which are proprietary to
the Company and covered by two patents owned by ITI. The first patent,
which was issued in 1990 (the "1990 Patent), covers an automatic fee
collecting and receipt dispensing system particularly designed for
vehicle registration transactions, including a customer interface for
displaying information and receiving customer input and fee payments
and a dispenser assembly for storing forms having preprinted areas and
blank areas for receiving information specific to a transaction, a
printer for printing information, and a dispensing device for the
delivery of printed forms to customers. The second patent, which was
issued in 1994 (the "1994 Patent"), covers an automatic form dispensing
system for a variety of transactions which has a housing with an
operator interface and form dispensing assembly and a roll of blank
form stock and two rolls of carrier web containing blank stickers
retained thereon by a pressure sensitive adhesive. The Company has
filed for analogous patent protection in Canada, the United Kingdom,
France, Germany, and Mexico. United States patents are valid for a
period of 17 years from the date of issue. No assurance can be given
that the Company's patents will be enforceable or provide the Company
with meaningful protection from competitors. Even if a competitor's
product infringed upon patents owned by the Company, enforcement of the
Company's rights under the patents in an infringement action would be
costly and would require the Company to divert funds and resources from
other uses. Furthermore, there can be no assurance that the Company
would be successful in enforcing such rights. The Company has patent
protection insurance in place to offset legal costs associated with any
potential patent infringements or challenges.
The 1994 Patent was acquired by ITI from ARS in a transaction which
originally required ITI to pay ARS $4,000,000 for the 1994 Patent by
May 1997 (see "Business Industry and Company Background" and "Certain
Relationships and Related Transactions"). The due date of that payment
obligation has been extended to May 1, 1999. If the Company is unable
to pay this amount when it comes due and consequently loses control of
the 1994 patent, such loss would have a material and adverse affect
upon the business of the Company.
8
<PAGE>
Employees
The Company has fourteen full-time employees, of whom three are in
executive or administrative positions, two are in engineering, and two
are in sales positions. None of the Company's employees are currently
represented by a union, and the Company believes that its relations
with its employees are good.
ITEM 2. PROPERTIES
The Company occupies approximately 3,800 sq. ft. of office space in San
Diego, California. The space is subject to a five year lease expiring
in the year 2001. The Company currently pays monthly rent of
approximately $1,900 for this space. The Company's Vice President of
Sales and Marketing shares a suite of offices in Dayton, Ohio as to
which the Company bears its share of nominal expenses. The Company
also leases approximately 1,875 square feet of office/warehouse space
in Carmel, Indiana. The lease is for two years at a cost of $1,054.69
per month in year one, $1,107.81 per month in year two. The Company
believes that these facilities are adequate to meet its anticipated
needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently the subject of or party to any legal,
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Prior to the first quarter of 1998, there was no active market for the
Company's securities, with transfers occurring on an infrequent and
sporadic basis. The common stock of the Company commenced trading in
the over the counter market in September 1996. The following table
sets forth, for the periods indicated, the range of high and low bid
quotations for the Company's common stock as reported by a market
maker in the Company's securities. The prices reflected in the
following table have been adjusted to reflect the 1 for 50 reverse
stock split in the Company's common stock which occurred in April 1997.
Quarter Ended High Bid Low Bid
September 30, 1996 $0.01 $0.01
December 31, 1996 $0.01 $0.01
March 31, 1997 $ - $ -
June 30, 1997 $ - $ -
September 30, 1997 $3.00 $1.125
December 31, 1997 $2.1875 $1.00
March 31, 1998 $2.25 $1.125
The quotations which appear above reflect inter-dealer prices,
without retail mark-up, mark-down or commission.
The Company has not paid any dividends on its common stock, and the
Board of Directors of the Company presently intends to retain earnings,
if any, for use in the Company's operations and to finance expansion of
its business. The declaration and payment of dividends in the future,
of which there can be no assurance, will be determined by the Board of
Directors in light of conditions then existing, including the Company's
earnings, financial condition, capital requirements and other factors.
As of January 13, 1998, the Company had approximately 60 shareholders
of record, which does not include shareholders whose shares are held in
street or nominee names.
10
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements contained in this report, including statements
concerning the Company's future cash and financing requirements, and
other statements contained herein regarding matters that are not
historical facts, are forward looking statements; actual results may
differ materially from those anticipated.
Plan of Operations
The Company designs, manufactures and leases systems for the automated
preparation and dispensing of motor vehicle registration forms and
license plate decals.
Effective November 1, 1996, the Company commenced its lease contract
with the State of Indiana. Prior to that date, the Company was engaged
principally in research and development of its products and generated
only limited operating revenues. During 1997, the Company's focus was
upon:
Completing the installation of the self service terminals required in
the initial phase of the Indiana Contract,
Installation of all stand alone printers called for in the Indiana
contract,
Expanding the Company's sales and marketing staff and increasing its
marketing efforts,
Seeking agreements for the lease of its products to additional
jurisdictions.
In the coming twelve months, the Company will focus its efforts on:
Completing the installation of the remaining self service terminals in
Indiana,
Expanding the Company's sales and marketing staff and increasing its
marketing efforts
Seeking agreements for the lease of its products to additional
jurisdictions
Obtaining the equity capital necessary to complete its performance of
its initial contracts and to repay the investment notes issued by it as
part of its initial capitalization and to pay off debt associated with
patent acquisition.
Initiating the development of new opportunities in related areas.
11
<PAGE>
Liquidity and Capital Resources
During 1997, the Company's principal source of capital was from
borrowings from third party investors, augmented by internally
generated cash flows. In 1998, the Company anticipates positive cash
flows from operations. The following is a summary of the company's
cash flows from operating, investing and financing activities:
Year ended December 31,
1997 1996
Operating Activities $ (891,524) $ 1,244,939
Investing Activities $(1,634,188) $(2,742,001)
Financing Activities $ 2,924,344 $ 1,499,764
Net increase in cash $ 398,632 $ 2,702
Operating cash flows are primarily derived from the per transaction fee
earned from the Company's contract with the State of Indiana, which
extends for three years, with a one-year renewal at the option of the
State. Although management anticipates that the State will exercise
its renewal option, there can be no guarantee that such renewal will
occur. Likewise, the Indiana contract contains a provision whereby the
contract may be terminated in the event that the State of Indiana fails
to obtain budget approval for its automated vehicle registration
program. Such termination would have a material adverse effect on the
Company and its operations.
In 1997, the Company experienced cash flow deficits during
installation, as the State was gradually automated with ITI equipment.
As of December 31, 1997, all stand alone printers contracted for by
Indiana had been installed and were operational. The Company received
revenue on approximately 2.4 million transactions in 1997, and
anticipates total revenue generating transactions in 1998 to be 5.8
million. Total actual transactions for the first year of this contract
exceeded management projections.
Since the inception of the Indiana contract, the Company has invested a
total of $4,278,000 in equipment and lease-related costs. To finance
this investment, and to fund the repayment of bridge loans extended to
the Company during its initial capitalization, the Company issued debt
to third party investors totaling $4,968,000. These notes are secured
by the Indiana contract equipment, and a pledge of Indiana contract
receivables. The notes will be fully repaid by their terms in November 1999.
The outstanding balance at December 31, 1997 was $4,443,229.
Debt service on the third party financing is $225,000 per month.
The Company continues to seek equity financing to cure working capital
deficiencies and to pay off $3,999,200 for the purchase of Company
patents plus accrued interest ($213,000 at December 31, 1997). These
amounts plus additional accrued interest at 8% are due by May 1, 1999
to a corporation which is 49% owned by a current officer of ITI. The
Company anticipates, in the event that funds are not available to
retire this debt as of May 1, 1999, that the due date will be extended.
12
<PAGE>
Results of Operations
During 1997, 82% of the Company's revenues were generated from the
Indiana contract. Other sources of revenue include revenue from the
sale of printers and printer media to the State of Maryland, and
transaction fees earned from the State of New Hampshire under the
Company's automated drivers' license contract with that state.
Projected revenues from these other sources are expected to remain the
same in 1998.
The Company's cost of sales includes amortization of Indiana and New
Hampshire contract costs, periodic costs for the Company's maintenance
crew, vehicles, and office/warehouse facility in Indiana, costs of
printing media sold or supplied under the various contracts, and costs
of equipment sold to Maryland.
Gross profit as a percentage of revenues was 42% in 1997 vs. 20% in
1996. Future profit margins are anticipated to equal or exceed 1997
levels.
Operating expenses were up 92% in 1997 over 1996 levels. This change
is primarily due to increases in payroll and related costs, and
consulting and legal costs related to public company compliance with
regulatory requirements.
Effect of Inflation and Foreign Currency Exchange
The Company has not experienced material unfavorable effects on its
results of operations as a result of foreign currency fluctuations or
domestic inflation.
Year 2000 Issue
The Company's management does not believe that theCompany will be
materially adversely affected by the computer software Y2K issue.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements set forth in pages F-1 to F-12 of this report
are incorporated herein by reference.
13
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company's principal independent auditors did not resign or decline
to stand for reelection, nor were they dismissed during the Company's
two most recent fiscal years. The Company's financial statements for
the year ended December 31, 1997 were audited by Comiskey & Company
P.C., which had been the auditor for the registrant, Intellectual
Technologies, Inc. (formerly known as Bridgestone Corp.), prior to the
reverse acquisition of Image Technologies, Inc.
The financial statements of Image Technologies Inc. as of and for the
year ended December 31, 1996, which have been presented in comparative
form with the current year consolidated financial statements, were
audited by Charles W. Butman, C.P.A. There have been no disagreements
between Image Technologies, Inc. and Charles W. Butman C.P.A. on
matters of accounting and financial disclosure.
14
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Identification of Directors, Executive Officers, and Significant
Employees
The directors and executive officers of the Company, their ages, and
their positions held in the Company are as follows:
Name Age Position
Christ M. Rousseff 78 Chairman and Chief Executive Officer
Nicholas Litchin 71 Vice Chairman
Walter G. Fuller 57 President and Director
Janice L. Welch 57 Secretary/Treasurer and Director
John F. Grim 42 Vice President Sales/Marketing and
Director
Family Relationships
Mr. Rousseff is the father of Ms. Welch. No other family relationships
exist between any directors or executive officers.
Business Experience
The following is a brief account of the business experience during at
least the past five years of each director and executive officer,
including his or her principal occupation and employment during that
period, and the name and principal business of the organization in
which such occupation and employment were carried out.
15
<PAGE>
Christ M. Rousseff is the Chairman of the Board and Chief Executive
Officer of the Company, positions which he has held since March 12,
1997 and the formation of ITI in April 1992, respectively. From 1987
to 1992 he was the President of American Registration Systems, Inc.,
an Indiana corporation. From 1990 to 1992, he was the President of
Advanced Identification Management Systems, Inc., a California
corporation involved in the production of photographic driver's
licenses for the State of New Hampshire. From 1985 to 1987, Mr.
Rousseff was a consultant to Polaroid Corporation. From 1957 to
1970, Mr. Rousseff was the Chairman and Chief Executive Officer of
DEK Processes, Inc., an Indiana corporation engaged in the production
of photographic driver's licenses. In 1970, DEK was sold
to Scott and Fetzer, a New York Stock Exchange Company, and Mr.
Rousseff remained the President of DEK until 1977, at which time he
repurchased DEK from Scott and Fetzer. He was the Chief Executive
Officer of DEK until 1982, when that company was sold to Mohawk Data
Sciences, for which he consulted until 1984. In 1967 Mr. Rousseff
founded the Industry Advisory Support Committee, a private industry
group formed to assist and advise Departments of Motor Vehicles. He
was the Chairman of that Committee from 1967 to 1977.
Nicholas Litchin is the Vice Chairman of the Board of Directors of the
Company, positions which he has held since March 12, 1997 and the
formation of ITI in April 1992, respectively. From 1988 through 1992
Mr. Litchin was in retirement. Prior to that time from 1980 to 1989,
Mr. Litchin was the President of Mercer Beverage Company of St. Henry,
Ohio, an Ohio corporation engaged in beverage distribution. From 1973
to 1987, he was the Chairman of ABC Distributing Company of Defiance,
Ohio, an Ohio corporation engaged in the distribution of beer, wine and
soft drinks. From 1982 to 1991 Mr. Litchin was a Vice President of WMCR
corporation of Altena, Michigan, an owner/operator of 53 KFC outlets.
Walter G. Fuller is the President and a Director of the Company
positions which he has held since March 12, 1997 and the formation
of ITI in 1992, respectively. He is also the President of M&S Steel
Co., Inc., an Indiana corporation, which is a supplier of structural
steel to the construction industry.
Janice L. Welch is the Secretary/Treasurer and a Director of the
Company. She has held her position with the Company since March 12,
1997 and with ITI since its formation on April 23, 1992.
John F. Grim is the Vice President - Sales and Marketing of the Company.
He has held his position with the Company since March 12, 1997 and with ITI
since October 1, 1995. Prior to this employment Mr. Grim worked for NCR
Corporation for over fourteen years in various sales, marketing, and
management capacities related to networking products and the Public Sector
industry. Prior to departing NCR Mr. Grim was the head of NCR's Public
Sector worldwide marketing organization. Mr. Grim is also a Director of the
Company.
16
<PAGE>
Involvement in Certain Legal Proceedings
No officer director, significant employee, promoter or control person
of the Company has been involved in any event of the type described in
Item 401(d) of Regulation SB during the past five years.
Compliance with Section 16(a) of the Exchange Act
Not applicable
17
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information regarding compensation paid
to the Company's CEO and the other executive officers of the Company
who received in excess of $100,000 of salary and bonus from the Company
during the year ended December 31, 1997:
Long Term
Annual Compensation Compensation Awards
Restricted
Stock Options Other
Name and Position Year Salary Bonus Awards & Sar's Comp.
Christ M. Rousseff 1995 $-0- $-0- $-0- $-0- $-0-
CEO, Chairman of 1996 $-0- $-0- $-0- $-0- $-0-
the Board 1997 $-0- $-0- $-0- $-0- $-0-
John F. Grim 1995 $25,000 $-0- $-0- $-0- $-0-
VP Marketing 1996 $125,000 $-0- $-0- $-0- $-0-
and Director 1997 $125,000 $-0- $-0- $-0- $-0-
Compensation of Directors
The Company has adopted a policy of paying non-employee directors $250
per meeting plus expenses.
Employment Agreements
Mr. Grim has entered into an agreement with the Company to serve as its
Vice President Sales/Marketing. This agreement became effective on
October 1, 1995 and has a term of two years. It provides for monthly
compensation of $8,333 and an annual bonus of $25,000.
Termination of Employment and Change of Control Arrangements
None.
18
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of April 14, 1998, other than certain of its officers and directors,
no person was known by the Company to own or control beneficially more
than five percent of its outstanding voting stock. The table below
sets forth the total number of shares of the Company's outstanding
voting stock owned by each director and officer of the Company and of
all officers and directors as a group. The amounts set forth below
reflect the 1 for 50 reverse stock split, which occurred in April 1997.
Number of Shares
Name and Address of Owned Beneficially
Beneficial Owner Title of Class and of Record % of Class
Janice L. Welch(1) Common Stock 4,194,960 41.9%
10639 Roselle Street
Suite B
San Diego, CA 92121
Walter G. Fuller Common Stock 2,999,880 30.0%
10639 Roselle Street
Suite B
San Diego, CA 92121
Nicholas Litchin (2) Common Stock 1,294,920 12.9%
10639 Roselle Street
Suite B
San Diego, CA 92121
John F. Grim Common Stock 180,000 1.8%
10639 Roselle Street
Suite B
San Diego, CA 92121
Christ M. Rousseff (3) Common Stock 574,920 9.7%
10639 Roselle Street
Suite B
San Diego, CA 92121
All Officers and
Directors as a Group
(5 persons) Common Stock 8,669,760 87.4%
(1) Includes 3,494,920 shares held of record by Ms. Welch as the
Trustee of the J&S Trust.
19
<PAGE>
(2) Includes 214,920 shares held of record by L&R Realty, an Indiana
general partnership, of which Mr. Litchin is a partner, 699,840
shares held of record by the Litchin Family Partnership, of which
Mr. Litchin is a general partner, and 360,000 shares held of
record by Mercer Beverage Co., an Ohio corporation, of which Mr.
Litchin is the President, and of which Mrs. Litchin is a principal
shareholder. Mr. Litchin disclaims beneficial ownership of these
shares.
(3) Consists of 214,920 shares held of record by L&R Realty, of which
Mr. Rousseff, is a partner, and 360,000 shares, held of record by
Mercer Beverage Co. of which Mr. Rousseff's wife is a principal
shareholder. Mr. Rousseff disclaims beneficial ownership of such
shares.
20
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 31, 1995, ITI and American Registration Systems, Inc.
("ARS"), and Indiana corporation 49% owned by the CEO of ITI, entered
into a Purchase and Sale Agreement with regard to the 1994 Patent. In
consideration of the transfer of the 1994 Patent, ITI agreed to pay to
ARS the sum of $4,000,000 before May 1, 1997 and to assume ARS's
royalty obligation to Mr. Rousseff of $0.01 per transaction effected
through any device incorporating the subject matter of the 1994 Patent.
Failure by ITI to pay the purchase consideration would constitute an
event of default, which, under the contract would entitle ARS to
terminate ITI's rights to the 1994 Patent. On March 11, 1997, this
Agreement was amended to provide that ITI will have no payment
obligation to ARS until May 1, 1999.
The Company from time to time has obtained temporary financing from its
directors and officers. A total of $600,000 was borrowed in 1996, and
such amount was repaid in 1997 along with 12% interest.
During 1997, the Company obtained temporary financing from shareholders
or parties related to shareholders. The Company borrowed a total of
$125,325 through December 31, 1997.
21
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements
The following Financial Statements are filed as part of this report:
Report of Independent Certificate Public Accountants
Balance Sheets - December 31, 1997 and 1996
Statements of Loss for the years ended December 31, 1997 and 1996
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1997 and 1996
Statements of Cash Flows for the years ended December 31, 1997 and
1996
Notes to Financial Statements
(b) Reports on Form 8-K:
None.
(c) Exhibits
3.1(a) Certificate of Incorporation (1).
3.1(b) Amendment to Certificate of Incorporation (2).
3.2 Bylaws 4(i). Specimen Stock Certificate(1).
4.2 Specimen Class A Warrant Certificate (1).
Specimen Class B Warrant Certificate (1).
10.1 Purchase and Sale Agreement, dated October 31, 1995, by and
between American Registration Systems, Inc. and Image Technology,
Inc. (3)
10.2 Addendum to Purchase and Sale Agreement dated as of March
11, 1997. (3)
10.3 Equipment Lease, Support and Maintenance Agreement,
effective November 1, 1996, by and between Indiana Bureau of
Motor Vehicles Commission and Image Technology, Inc. (3)
10.4 Subcontractor Agreement, effective as of August 1, 1996, by
and between NCR Corporation and Image Technology, Inc. (3)
10.5 Employment Agreement between Intellectual Technology and John
F. Grim. (3)
22
<PAGE>
21. Subsidiaries of Registrant. (3)
(1) Incorporated by reference to Registrant's Registration Statement
No. 33-33092-D, effective April 17, 1990.
(2) Incorporated by reference to Registrant's Registration on Form
8-K(A), filed April 10, 1997.
(3) Incorporated by reference to Registrant's Form 10KSB for the year ended
December 31, 1996
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the Registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
INTELLECTUAL TECHNOLOGY, INC.
By: /s/ Christ M. Rousseff
----------------------------------
Christ M. Rousseff, Chairman
Date: April 15, 1998
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
By:/s/Christ M. Rousseff Chairman and Chief Executive April 15, 1998
Christ M. Rousseff Officer (Principal Executive
Officer)
By:/s/Janice L. Welch Secretary/Treasurer and April 15, 1998
Janice L. Welch Director
(Principal Financial Officer)
By:/s/Nicholas Litchin Director April 15, 1998
Nicholas Litchin
By:/s/Walter G. Fuller Director April 15, 1998
Walter G. Fuller
By:/s/John F. Grim Director April 15, 1998
John F. Grim
<PAGE>
Index to Financial Statements
INTELLECTUAL TECHNOLOGY, INC.
Report of Comiskey & Company P.C. Independent
Certified Public Accountants F-1(a)
Report of Charles W. Butman, Independent Certified
Public Accountant F-1(b)
Balance Sheet F-2 and F-3
Statements of Operations F-4
Statements of Cash Flows F-5
Statements of Stockholders' Equity F-6
Notes to Financial Statements F-7 through F-12
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited the accompanying balance sheet of
Intellectual Technology, Inc. as of December 31, 1997, and
the related statements of Loss and Accumulated Deficit, Cash
Flows, and Stockholders' Equity for the year then
ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
The financial statements of Image Technology, Inc., the
predecessor of Intellectual Technology, Inc., for the year
ended December 31, 1996, were audited by other auditors,
whose report dated May 23, 1997 expressed an unqualified
opinion on those financial statements.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management. We believe our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Intellectual Technology Inc. as of December 31,
1997, and the results of its operations, cash flows and
changes in stockholders' equity for the year then ended in
conformity with generally accepted accounting principles.
Denver, Colorado
January 28, 1998
COMISKEY & COMPANY
PROFESSIONAL CORPORATION
F-1(a)
<PAGE>
INDEPENDENT AUDITOR'S REPORT
I have audited the accompanying balance sheet of Image
Technology, Inc. (a Nevada corporation) as of December 31,
1996, and the related statements of income and retained
earnings (deficit) and cash flows for the year then
ended. These financial statements are the responsibility of
the Company's management. My responsibility is to express
an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted
auditing standards. Those standards require that I plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management. I believe my audit provides a reasonable
basis for my opinion.
In my opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Image Technology Inc. as of December 31, 1996,
and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting
principles.
Charles W. Butman
Certified Public Accountant
San Marcos, CA
May 23, 1997
F-1(b)
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Balance Sheet
December 31, 1997
ASSETS
Current Assets
Cash and equivalents (including savings of $361,000) $ 404,240
Accounts receivable (net of uncollectible
allowance of $0) 317,538
Inventories 120,148
Employee advances 15,500
Restricted cash 21,202
Prepaid expenses 31,464
----------
Total current assets 910,092
Property and Equipment
Contract equipment 4,277,346
Equipment - non contract 58,121
Office equipment, furniture and improvements 20,084
-----------
4,355,551
Less accumulated depreciation 828,887
-----------
Total property and equipment 3,526,664
Intangibles and Other Assets
Patents, net of accumulated amortization of $607,000 3,657,117
New Hampshire contract costs, net of amortization of
$107,000 16,075
Deposits 81,548
Organization costs, net of amortization of $400 1,669
------------
Total other assets 3,756,409
------------
TOTAL ASSETS $8,193,165
==========
F-2
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $400,502
Accrued expenses 247,072
Notes payable related parties 125,325
Notes payable other 59,000
Current portion of long term debt 2,156,192
Accrued interest payable 268,466
---------
Total current liabilities 3,256,557
Other liabilities
Long term debt (net of current portion) 2,287,037
Due to related party 3,998,000
---------
Total other liabilities 6,285,037
Stockholders' equity
Preferred stock, $0.00001 par value, 10,000,000 shares
authorized,no shares issued or outstanding -
Common stock, $0.00001 par value, 20,000,000 shares
authorized, 10,000,000 shares issued and outstanding 100
Additional paid in capital 1,186,250
Accumulated deficit (2,534,779)
----------
Total stockholders' equity (1,348,429)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 8,193,165
==========
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Statements of Loss
For the years ended December 31, 1997 and 1996
1997 1996
Revenues
Leasing fees, registration equipment $2,472,032 $22,550
Leasing fees, drivers' license equipment 298,927 48,672
Sales, registration equipment and media 240,411 -
---------- -------
Total revenues 3,011,370 71,222
Cost of Revenues
Materials 609,211 25,093
Maintenance 314,293 10,732
Depreciation and amortization 789,355 21,362
Insurance 12,604 -
Taxes 9,250 -
Royalties 24,442 -
----------- -------
Total Cost of Revenues 1,759,155 57,187
----------- -------
Gross Profit 1,252,215 14,035
Operating Expenses:
Selling 133,668 113,701
General and Administrative 884,933 268,854
Research and Development 32,220 34,936
Patent Amortization 281,430 279,201
Depreciation 22,043 3,876
----------- --------
Total operating expenses 1,354,294 700,568
----------- --------
Loss from operations (102,079) (686,533)
Non-operating income and expense
Interest income (4,841) -
Interest expense, including amortization of
loan fees 769,919 279,479
----------- --------
Total non-operating expense 765,078 279,479
----------- --------
Net loss before income taxes (867,157) (966,012)
Income taxes - -
----------- --------
Net loss $(867,157) $(966,012)
=========== ========
Loss per share - basic $(0.09) $(0.11)
=========== ========
Weighted average number of shares outstanding 9,791,667 9,000,000
========= ==========
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Statements of Cash Flows
For the years ended December 31, 1997 and 1996
1997 1996
Cash Flows from Operating Activities
Net Loss $(867,157) $(966,012)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 1,192,026 59,266
Increase/Decrease in:
Accounts receivable (268,427) (49,111)
Inventory (52,262) (67,886)
Prepaid expenses (19,521) (7,651)
Notes receivable / Employee advances (15,100) 6,382
Restricted cash (21,202) -
Deposits and other assets 15,518 -
Accounts payable (1,245,653) 1,643,658
Accrued expenses and interest 390,254 6,293
--------- ---------
Net cash provided (used) by operations (891,524) 1,244,939
Cash flows from investing activities
Investment in patents and other intangibles 17,582 3,056
Purchase of non-contract equipment 71,479 60,726
Investment in contract costs and equipment 1,545,127 2,678,219
--------- ---------
Net cash used by investing activities 1,634,188 2,742,001
Cash flows from financing activities
Additional paid in capital 53,000 295,553
New borrowings 7,296,398 1,254,211
Debt repayments (4,425,054) -
Loan costs - (50,000)
--------- ---------
Net cash provided by financing activities 2,924,344 1,499,764
Net increase in cash 398,632 2,702
--------- ---------
Cash and equivalents, beginning of year 5,608 2,906
--------- ---------
Cash and equivalents, end of year $404,240 $5,608
========= ========
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Statement of Stockholders' Equity
For the years ended December 31, 1997 and 1996
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Additional Total
Number of Number of Paid In Accumulated Stockholders
Description Shares Amount Shares Amount Capital Deficit Equity
Balance,
January 1, 1996 - $ - 25,000 $2,500 $835,297 $(701,610) $136,187
Adjustment
to give effect
to the
recapitalization
of Image
Technology, Inc. - - 8,975,000 (2,410) 2,410 - -
Balance,
January 1, 1996,
as restated - - 9,000,000 90 837,707 (701,610) 136,187
Contribution to
capital - - - - 295,553 - 295,553
Net loss (966,012) (966,012)
Balance December
31, 1996 - - 9,000,000 90 1,133,260 (1,667,622) (534,272)
Stock issued in
business combination
with Bridgestone Corp.
March 12, 1997 - - 1,000,000 10 49,990 - 50,000
Contribution to
capital - - - - 3,000 - 3,000
Net loss - - - - - (867,157) (867,157)
Balance,
December 31,
1997 - - 10,000,000 $100 $1,186,250 $(2,534,779)$(1,348,429)
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
1. Description of Business and Summary of Significant Accounting
Policies
Corporate History
Intellectual Technology, Inc. ("ITI", "the Company") was incorporated
in the State of Delaware under the name Bridgestone Corp. on December
1, 1989. It was formed for the purpose of acquiring an operating
company. In October, 1990, Bridgestone completed an initial public
offering of stock and warrants which resulted in the sale of 10,000,000
units for approximately $80,000. On March 12, 1997, ITI entered into
a stock transfer and exchange with Image Technology, Inc., a privately
held corporation incorporated in Nevada in 1992 and headquartered in
San Diego California. As a result of this transaction, the
shareholders of the Nevada corporation acquired collectively a 90%
interest in the ongoing entity and Image Technology Inc. became a
wholly owned subsidiary of Intellectual Technology Inc. The Company
continues to operate under the name Intellectual Technology, Inc.
Description of Business
ITI is engaged in the design, manufacture and sale or lease of
equipment for the automated preparation and dispensing of motor vehicle
registration forms and license plate decals. The Company's printing
systems are currently installed in the states of Indiana and Maryland.
The printing system is designed as a stand-alone unit, which is used as
such in individual motor vehicle registration offices and mailrooms,
and has also been incorporated into a self-service terminal ("SST")
assembly.
Effective November 1, 1996, the Company entered into a lease with the
Indiana Bureau of Motor Vehicles Commission ("BMVC") to lease
approximately 291 printers and 36 SST's for a period of three years,
with a renewal clause for an additional year. The lease requires ITI to
provide the equipment and media required to print the registrations
and decals, and to support and maintain the equipment during the period
of the contract. ITI will receive an all-inclusive per transaction
lease fee for these services. As of December 31, 1997, all of the
stand-alone printers and 11 self-service terminals had been installed.
ITI printer systems were sold in Maryland on a subcontract basis for
use in SST installations in that state. ITI currently supplies the
media for these printers.
The Company's printing system is based in part on proprietary
technologies which are covered by two patents currently owned by the
Company. All of the Company's equipment is manufactured by
subcontractors.
The Company has also purchased the rights to a contract with the state
of New Hampshire to provide driver's licenses. These amounts are
billed on a per transaction basis. This contract expires January 31,
1999.
Significant Accounting Policies
Principles of consolidation
Unless otherwise indicated, all references to "the Company" in these
financial statements are references to Intellectual Technology, Inc.
and its wholly owned subsidiary, Image Technology, Inc.
Intercompany transactions have been eliminated in consolidation.
F-7
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1997 and 1996
Cost recovery - equipment and contract costs
Leased contract equipment costs have been capitalized, and include the
manufactured cost of the printers and SST's, operating software,
installation, freight, packaging, contract startup costs, and other
costs incidental to making the equipment operational.
All costs are recovered in the ratio that transactions to date bear to
total estimated transactions over the contract term. For purposes of
hardware and software costs, the Company is using the transactions
expected over the period of the Indiana contract, plus the one year
renewal, for a total of four years. Installation and other costs which
are directly associated with the state of Indiana project, are being
depreciated using the projected number of transactions for the initial
three year contract period only.
The amount of cost recovery (depreciation) charged to operations in the
current period is based on management's assumptions. Significant
additional transactions may occur throughout the remaining term of the
contract. Differences in actual results from those estimated by
management could materially accelerate the rate of cost recovery
charged to operations.
Material project management costs paid in advance have been deferred,
and are being amortized on a per transaction basis based on the
expected transaction volume over the period of the project management
contract.
Repairs and maintenance
Maintenance costs are expensed as incurred. All costs associated with
maintenance contracts are being prorated over the period of the
maintenance contract.
Inventory
Inventory consists of media (tag stock paper, ribbon, decals and
laminates) used to produce the motor vehicle registration and driver
license forms and decals. Inventory is stated at the lower of cost or
market on a first-in, first-out basis.
Non-contract equipment
Cost of equipment used in operations has been capitalized and is
depreciated using the declining balance method over useful lives of 3
to 7 years.
Intangibles
Patent costs are capitalized, and are amortized over the remaining
useful life of the patent, which is generally 17 years from issue.
New Hampshire contract costs are amortized ratably over the remainder
of the existing contract, which expires January 31, 1999.
Certain costs to obtain debt financing have been deferred and are
amortized over the length of the loan using the straight line method.
Research and Development
Research and development costs are expensed as incurred.
Cash and Equivalents
For purposes of the statement of cash flows, the Company considers
highly liquid debt instruments purchased with an initial period of
three months or less to be cash equivalents.
F-8
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1997 and 1996
Significant Concentrations
In 1997 the Company derived 82% of its total revenue from its contract
with the state of Indiana. The Company uses a single vendor to supply
its primary printer component, and one vendor to supply all media for
the ITI printing system. Although alternate vendors have been found to
manufacture printer parts, no other vendor is available to produce
certain of the printer media.
The company from time to time maintains cash balances in excess of FDIC
insured limits. The amount of such excess at December 31, 1997 was
$261,000.
Earnings per share
Basic earnings per share are computed using the weighted average number
of shares outstanding. Shares issued in the stock transfer and
exchange described in Note 7 are considered outstanding for all periods
presented. Diluted earnings per share have not been presented, since
the effect of potentially dilutive securities is antidilutive.
Impact of Newly Issued Accounting Standards
The Financial Accounting Standards Board has recently released
Statement of Financial Accounting Standards No. 130 - Reporting
Comprehensive Income, and Statement of Financial Accounting Standards
No. 131 - Segment Reporting. SFAS 130 requires companies to present
comprehensive income (consisting primarily of net income items plus
other direct equity charges and credits) and its components as part of
the basic financial statements. SFAS 131 supercedes SFAS No. 14, and
requires disclosure of disaggregated information by operating segment.
Both standards are effective for years beginning after December 15,
1997. The Company has not elected early adoption of either standard,
and does not anticipate a material impact on operations as a result of
its adoption of these standards in 1998.
2. Presentation as a Going Concern
The Company has experienced operating losses since its inception, and
was in the development stage as defined by SFAS No. 7 until November
1996. It has a deficit in equity of $(1,348,429) at December 31, 1997,
and its working capital is $(2,346,465). These conditions are
primarily as a result of losses incurred in the startup phase and
during the initial year of the Indiana contract, during which the
Company operated at reduced revenues while the printer installations
were accomplished. In addition, the Company experienced additional
costs related to its efforts to raise capital for the manufacture of
the Indiana printers, and ultimately to obtain permanent financing,
which was secured during the second quarter of 1997.
Under the Company's current financing arrangement, receivables from the
Indiana contract have been assigned to the note holder. The amount of
monthly cash flow from this contract is remitted net to the company
after debt service is satisfied. Management projects that this
arrangement will continue to generate positive monthly cash flows for
the remainder of the Indiana contract sufficient to support operations
and the Company's sales effort. It is not anticipated that significant
additional financing will be necessary until the Company is successful
in negotiating the sale or lease of contract equipment in other
jurisdictions.
F-9
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1997 and 1996
3. Related Party Transactions
The Company is contractually obligated to pay a $0.01 per transaction
royalty to a director, officer, and founder of the Company. Amounts
paid or payable were $24,442 and $ 185 for the years ended December 31,
1997 and 1996.
The Company is obligated under a purchase agreement with a company
under common control with ITI in the amount of $3,998,000 which was
incurred as part of the transfer of proprietary technology to the
Company in the form of patent assignments. This obligation was non-
interest bearing until May 1, 1997, after which interest at 8% is
accruing until May, 1999 when this obligation becomes due. A total of
$77,691 of imputed interest and $213,335 in accrued interest was
incurred on this debt during the year ended December 31, 1997.
The Company from time to time has obtained temporary financing from its
directors and officers. A total of $600,000 was repaid at 12% interest
in 1997. Interest expense recognized in 1997 as payable to directors
and officers totaled $32,351. A loan fee of $50,000 was paid to an
unrelated third party during 1997 in connection with this note.
The Company also obtained certain temporary financing from shareholders
or parties related to shareholders. The average interest rate on these
obligations was 8%. At December 31, 1997, principal amounts owed to
shareholders totaled $125,325, and accrued interest was $26,417. The
amount of interest expense on these notes in 1997 totaled $19,792.
The Company leases service vehicles from a company owned by a relative
to a shareholder. The lease calls for monthly payments of $2,233.
4. Notes Payable and Long-Term Debt
The Company is obligated under the following notes at December 31,
1997:
Short Term Long Term
13.05% Installment notes,
secured by all printers, SSTs,
and miscellaneous equipment
leased to Indiana, and the
assignment of accounts receivable
from the Indiana contract,
payable monthly in installments
of $223,600. Maturity
November 1999. $ 2,156,192 $ 2,287,037
8% debt obligation payable to
related party, secured
by patents. Interest and
principal due and payable
May 1, 1999. - 3,998,000
8% unsecured demand note 5,000 -
15% unsecured note, due
June 15, 1997 33,000 -
8% note, secured by savings,
due March 8, 1998 21,000 -
8% unsecured demand notes
payable to related parties 125,325 -
Total notes payable $ 2,340,517 $ 6,285,037
F-10
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1997 and 1996
Scheduled note maturities debt over the next five years and in the
aggregate are as follows:
For the year ended
December 31,
1998 2,340,517
1999 6,285,037
2000 -
2001 -
2002 -
5. Leases
The Company leases for its own use office space, vehicles and office
equipment under non-cancelable operating leases expiring in the years
1999 to 2001. Rent expense for the years ended December 31, 1997 and
1996 was $34,227 and $7,928, respectively. Future minimum lease
payments on non-cancelable operating leases over the next five years
are as follows:
For the year ended
December 31,
1998 64,308
1999 61,462
2000 51,162
2001 23,736
2002 -
6. Income taxes
The Company has federal net operating loss carryforwards totaling
approximately $1.8 million which expire between 2010 and 2012. These
carryforwards were generated by Image Technology, Inc. Net operating
losses generated by Bridgestone Corp. are limited under Section 381 of
the Internal Revenue Code, and the tax effect thereof has been
disregarded for financial reporting purposes. The following are the
components of the Company's deferred tax assets and liabilities:
1997 1996
Non-benefitted net operating loss
Carryforwards 612,000 246,000
Valuation allowance (612,000) (246,000)
------- -------
Total deferred tax assets - -
Deferred tax liabilities - -
F-11
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1997 and 1996
7. Stockholders' Equity
Preferred stock
At December 31, 1997, the Company has authorized a total of 1,000,000
preferred shares to be issued in series with rights and privileges to
be determined by the Board of Directors. No preferred shares are
outstanding, nor have any series of preferred shares been designated.
Common stock
At December 31, 1997, a total of 20,000,000 shares of $0.00001 par
value common stock were authorized, and 10,000,000 were issued and
outstanding.
Stock warrants
The Company has outstanding warrants to purchase a total of 400,000
shares of common stock, in the form of 200,000 Class A warrants
exercisable at $12.50 per share, and 200,000 Class B warrants at $12.50
per share. Both classes of warrants expire in April 1998. The
warrants are subject to redemption by the Company upon 30 days written
notice at a price of $0.00001 per warrant. Such warrants may not be
exercised by the warrant holders unless a current registration
statement is on file with the Securities and Exchange Commission.
Stock transfer and exchange with Image Technology Inc.
On March 12, 1997, the Company entered into a stock transfer and
exchange agreement with Image Technology, Inc. The Company issued a
total of 450,000,000 shares of its common stock to acquire 100% of the
issued and outstanding common stock of Image Technology Inc. As a
result of the transaction, the shareholders of Image Technology Inc.
emerged as holders of 90% of the common shares of the parent company,
with the former Bridgestone shareholders retaining 10% of the
outstanding common shares. The sole officer and directors of
Bridgestone resigned in favor of persons appointed by ITI.
The stock transfer and exchange agreement also provided that certain
members of pre-acquisition management of Bridgestone Corp. be engaged
as consultants to the company after the transaction.
As a direct result of the transaction, and effective March 12, 1997,
the Company changed its name from Bridgestone Corp. to Intellectual
Technology, Inc. The Company also underwent a 1 for 50 reverse split
of common shares, and reduced the number of authorized shares from
500,000,000 common shares to 20,000,000 common shares, and 20,000,000
preferred shares to 1,000,000.
The transaction has been accounted for as a recapitalization of the
private company, Image Technology, Inc. The accompanying financial
statements include the operations of Image Technology, Inc. prior to
the acquisition and the operations of Intellectual Technology, Inc. and
Image Technology, Inc. on a consolidated basis subsequent to the
transaction.
F-12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 404240
<SECURITIES> 0
<RECEIVABLES> 317538
<ALLOWANCES> 0
<INVENTORY> 135648
<CURRENT-ASSETS> 910092
<PP&E> 4355551
<DEPRECIATION> 828887
<TOTAL-ASSETS> 8193165
<CURRENT-LIABILITIES> 3256557
<BONDS> 6285037
0
0
<COMMON> 100
<OTHER-SE> 1186250
<TOTAL-LIABILITY-AND-EQUITY> 8193165
<SALES> 3011370
<TOTAL-REVENUES> 3011370
<CGS> 1759155
<TOTAL-COSTS> 1354294
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 769919
<INCOME-PRETAX> (867157)
<INCOME-TAX> 0
<INCOME-CONTINUING> (867157)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (867157)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
