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, 1998
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.)
Incorporation or Organization)
1945 Camino Vida Roble, Suite O, Carlsbad, CA 92008
(Address of Principal Executive Offices) (Zip Code)
(760) 929-9789
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
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. Yes X No .
The Registrant's revenues for the fiscal year ended December 31, 1998
were $5,521,827.
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of April 13, 1999 was $735,001. 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, 1999, the Registrant had outstanding 10,000,001 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
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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 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 collecting revenues and to provide
an orderly method of regulating the ownership and transfer of motor
vehicles. Management of the Company recognizes 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. In 1992, ITI was formed to continue this process and
commercialize the concepts that had been developed.
The ITI Printing System and Related Print Media
The ITI printing system 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. This
on-demand printing capability allows Departments of Motor Vehicles to
substantially reduce fraud and theft, increase revenue collection, and
reduce personnel, inventory, and facility costs as a result of increased
efficiencies. The ITI printing system 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 self-service terminals which can
be placed in locations remote from DMV offices.
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The ITI Printing System and Related Print Media (continued)
The Company believes that the ITI printing system 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 inventory and inventory management, as well as the need
to dispose of preprinted stock at year end. Additionally, it satisfies
the security demands of Departments of Motor Vehicles in that it applies
the vehicle license plate number to the decal, causing the decal to
become significantly less valuable to thieves. The ITI printing system
is equipped with software which accounts for all transactions effected
through the printer, significantly reducing the likelihood of DMV
employee fraud or theft. Finally, when combined with automated teller
technology, the ITI printer system is capable of acting as a self-service
terminal for motor vehicle registrations which can be established either
in DMV offices or in remote locations, reducing personnel and
facilities' costs.
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 and Canada.
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.
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.
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") to implement ITI's printing
system solution in Indiana. The term of the Indiana Contract was for
a period of three years through October of 1999, subject to an option
to renew on the part of the BMVC for an additional, fourth year. Indiana
has exercised its option to renew for the fourth year with a new
termination date of October 31, 2000.
The Maryland Department of Motor Vehicles contracted with the NCR
Corporation for the purchase of self-service registration 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 to provide additional
self-service terminals to Maryland and to lease ITI's over-the-counter,
stand-alone printing systems to Maryland.
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Contracts (continued)
In the fourth quarter of 1998, the Company entered into a five-year
Agreement with the State of South Dakota to implement ITI's printing
system. Beginning April 1, 1999, ITI will begin processing all of the
approximately 950,000 annual registrations in South Dakota.
The Company processes and distributes drivers' licenses for the State
of New Hampshire. The contract, which the Company has held for over
five years, has been extended several times and is currently set to
expire in May, 1999.
Manufacturing and Supply
The Company uses subcontractors to manufacture and supply all components
and subassemblies of ITI's printing system and to provide the required
printing media. The decal used by the ITI printing system is produced
by 3M Corporation of St. Paul, Minnesota. The paper materials on which
the registrations are printed are supplied by NCR (see "Business - The
ITI printing system 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.
Competition
The Company has identified the automation of vehicle registrations
and registration decal printing as its primary market. Currently there
is only one major competitor targeting this niche market. In some
markets, however, state agencies have decided to bundle the automation
of the vehicle registration process into an overall upgrade of state
computer and information systems projects. In these situations, where
the business targeted by the Company is a component of a larger
technology project, there are many potential competitors, primarily large
computer manufacturers and information technology companies. Several of
these larger companies have approached the Company seeking to partner on
these opportunities.
Employees
The Company has fourteen full-time employees, of whom two are in
executive or administrative positions, two are in engineering, and
three 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.
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ITEM 2. PROPERTIES
The Company occupies approximately 2,500 square feet of office space
in Carlsbad, California pursuant to a three year lease entered into in
March, 1999. Monthly rent during the first year of the lease is $2,876.
The Company is also obligated through 2001 under a lease for its previous
corporate headquarters, which calls for monthly payments of $1,900.
Management is in the process of locating a sub-tenant 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
On January 27, 1999, the Company filed a complaint with the Superior
Court of the State of California for the County of San Diego case number
727654 against American Registration Systems, Inc. ("ARS") and
co-defendents, thereby recording a complaint for rescission of a 1995
Purchase and Sale Agreement between the Company and ARS. The suit
challenges the validity of certain material representations made by ARS
and its affiliates at the time of the Company's entering into the
Purchase and Sale Agreement, and asserts that such agreement was void
or voidable due to a variety of defects, including but not limited to
improper authorization, failure by an interested party to disclose a
gross conflict of interest, and fraud.
To date, ARS has filed no response to the complaint. If ARS does not
respond to the complaint, a default may be entered in the San Diego
County Superior Court after April 30 1999, and ITI will then attempt to
Secure favorable judgment by prove-up after the entry of such default,
if default occurs.
The Purchase and Sale Agreement which the Company seeks to rescind
provides that the Company shall pay to ARS or its assigns $4,000,000,
plus a $0.01 per transaction royalty. Judgement in favor of the
Company would result in the cancellation of approximately $4,600,000
of currently outstanding indebtedness.
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, 1998.
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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 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
March 31, 1997 $ - $ -
June 30, 1997 $ - $ -
September 30, 1997 $ 3.0000 $ 1.1250
December 31, 1997 $ 2.1875 $ 1.0000
March 31, 1998 $ 2.2500 $ 1.1250
June 30, 1998 $ 3.2500 $ 1.7500
September 30, 1998 $ 2.5000 $ 0.7500
December 31, 1998 $ 1.2500 $ 0.6250
March 31, 1999 $ 0.8875 $ 0.6250
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 April 13, 1999, the Company had approximately 76 shareholders
of record, which does not include shareholders whose shares are held
in street or nominee names.
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. Subsequently, the Company has entered
into contracts to supply equipment and material to the State of Maryland,
and has entered into a five year contract with South Dakota.
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Liquidity and Capital Resources
The following is a summary of the Company's cash flows from operating,
investing, and financing activities:
Year ended December 31,
1998 1997
Operating Activities $ 2,710,906 $ (891,524)
Investing Activities (1,062,555) (1,634,188)
Financing Activities (1,867,834) 2,924,344
Net effect on cash $ (219,483) $ 398,632
Operating cash flows are derived from lease revenues and from sales of
the Company's printers and supplies. In 1998, the Company processed a
full year of motor vehicle registrations under its contract with Indiana
resulting in positive cash flows from operations, as compared an
operating cash flow deficit in 1997, which was a phase-in year for the
Company's equipment in Indiana.
Current liabilities includes a $4,000,000 obligation, payable to a
related party, which is due by its terms in May, 1999. The obligation
arose as a result of a 1995 Purchase and Sale Agreement between the
Company and American Registration Systems, Inc. ("ARS") whereby the
Company acquired certain patents for $4,000,000, plus a $0.01 per
transaction royalty payable to ARS.
On January 27, 1999, the Company filed a complaint with the Superior
Court of the State of California for the County of San Diego against
ARS, seeking to rescind the Purchase and Sale Agreement. The suit
challenges the validity of certain material representations made by
ARS and its affiliates at the time of the Company's entering into the
Purchase and Sale Agreement, and asserts that such agreement was void
or voidable due to a variety of defects, including but not limited to
improper authorization, failure by an interested party to disclose a
gross conflict of interest, and fraud.
To date, ARS has filed no response to the complaint. If ARS does not
respond to the complaint, a default may be entered in the San Diego
County Superior Court after April 30 1999, and ITI will then attempt to
Secure favorable judgment by prove-up after the entry of such default,
if default occurs.
Judgement for the Company in this case will result in debt relief of
approximately $4,600,000, representing the purchase liability, accrued
interest thereon of $533,000, and accrued royalties of $86,000. Because
the amount is in dispute, and since ARS has made no demand for payment
of this amount, management anticipates no current cash requirement
related to this obligation.
Results of Operations
Revenues increased 83% from $3,011,000 in 1997 to $5,522,000 in 1998.
The increase is primarily due to a proportional increase in the number
of vehicle registrations processed by the Company in 1998 as compared
with 1997.
Gross profit increased 113% from $1,252,000 (41.5% of sales) in 1997
to $2,333,000 (42.2% of sales) in 1998. The overall increase in gross
profit is due to greater sales volume in 1998. The increase in gross
profit as a percentage of sales results from savings in insurance and
materials costs in 1998.
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Operating expenses increased 24% from $1,354,000 in 1997 to $1,679,000
in 1998. General and administrative expenses accounted for the majority
of the increase, primarily due to increased salary and consultant fees
for 1998 versus 1997.
Interest expense increased slightly as a result of higher average debt
balances. Net loss decreased from $867,000 to $140,000 as a result of
the factors discussed above.
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 has conducted an assessment of the impact of
the Year 2000 issue on its products and operations. Management believes
that all of the Company's products and internal operating systems are
currently Year 2000 compliant. The Company is also in the process of
ascertaining whether strategic vendor relationships will be affected
by Y2K, and projects that this assessment will be complete in the third
quarter of 1999. The Company has been unable to ascertain whether
its governmental customers will be year 2000 compliant. In the event
that one or more of the Company's customers experiences a computer
system disruption caused by the year 2000 issue, the Company could
experience significant loss of revenues until such time as Y2K
remediation is accomplished by the customer. The Company will have
no control over such remediation efforts or their duration.
ITEM 7. FINANCIAL STATEMENTS
The financial statements set forth in pages F-1 to F-13 of this report
are incorporated herein by reference.
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.
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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
Nicholas Litchin 72 Chairman of the Board of Directors
Walter G. Fuller 58 President, Director,
Chief Executive Officer
Janice L. Welch 58 Secretary/Treasurer
John F. Grim 43 Vice President Sales/Marketing and Director
Robert Neece 51 Director
Christopher M. Welch 30 Director
Family Relationships
Christopher M. Welch is the son of Janice L. Welch. There are no other
family relationships 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.
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Business Experience (continued)
Nicholas Litchin is the Chairman of the Board of Directors of the
Company, a position which he has held since July 1998. He was Vice
Chairman since March 12, 1997, and has been a director of the Company
since the formation of Image Technology in April 1992. From 1988 to
1989, 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 and
Image Technology, positions which he has held since March 12, 1997
and the formation of Image Technology 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
and ITI. She has held her position with the Company since March 12,
1997 and with Image Technology 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
Image Technology since October 1, 1995. Previous 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.
Robert Neece has been a Director of the Company since July of 1998.
He has been engaged in the private practice of law in Denver, Colorado
since 1981. Throughout that period of time, he has concentrated his
practice in the areas of corporation, commercial, and securities law.
Since 1992, Mr. Neece has been Special Counsel with the Denver law
firm of Burns, Wall, Smith and Mueller, P.C.
Christopher M. Welch was elected a Director of the Company in February
1999...He is the grandson of Company founder Christ M. Rousseff. Mr.
Welch graduated with honors from San Diego State University in
1994 with a degree in accountancy. He is currently an executive
council agent with New York Life, where he has worked for the past
three years.
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.
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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, 1998:
Annual Compensation Long-term Compensation Awards
Restricted Options
Stock and Other
Name and Position Year Salary Bonus Awards Sar's Compensation
Walter G. Fuller 1996 $ - $ - $ - $ - $ -
CEO, Director 1997 $ - $ - $ - $ - $ -
1998 $ - $ - $ - $ - $ -
John F. Grim 1996 $ 125,000 $ - $ - $ - $ -
VP Marketing 1997 $ 125,000 $ - $ - $ - $ -
and Director 1998 $ 125,000 $ - $ - $ - $ -
Compensation of Directors
The Company has adopted a policy of paying non-employee directors
$250 per meeting plus expenses.
Employment Agreements
None.
Termination of Employment and Change of Control Arrangements
None.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
As of April 13, 1999, 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
by all officers and directors as a group.
Number of Shares
Name and Address of Owned Beneficially
Beneficial Owner Title of Class and of Record Percent of Class
Janice L. Welch(1) Common Stock 4,194,960 41.9%
c/o 1945 Camino Vida
Roble Suite O
Carlsbad, CA 92008
Walter G. Fuller Common Stock 2,654,880 26.5%
217 E. Railroad
P.O. Box 299
Garrett, IN 46738
Nicholas Litchin(2) Common Stock 1,294,920 12.9%
6332 Constitution Ave.
Ft. Wayne, IN 46804
John F. Grim Common Stock 180,000 1.8%
270 Regency Ridge #210
Centerville, OH 45459
Robert Neece Common Stock 214,000 2.1%
c/o 303 East 17th Ave.
Denver, Colorado 80202
Christopher M. Welch
c/o 1945 Camino Vida
Roble Suite O
Carlsbad, CA 92008 n/a none 0.0%
All Officers and Common Stock 8,538,760 85.4%
Directors as a Group
(6 persons)
(1) Includes 3,424,920 shares held of record by Ms. Welch as the
Trustee of the J&S Trust.
(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.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITI and American Registration Systems, Inc. ("ARS"), entered into a
Purchase and Sale Agreement with regard to certain patented technology.
In consideration of the assignment of patents, ITI agreed to pay to ARS
the sum of $4,000,000 before May 1, 1997 and to assume ARS's royalty
obligation of $0.01 per transaction effected through any device
incorporating the subject matter of 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.
On January 27, 1999, the Company filed a complaint with the Superior
Court of the State of California for the County of San Diego case
number 727654 against ARS and co-defendants, thereby recording a
complaint for rescission of the Purchase and Sale Agreement between
the Company and ARS. The suit challenges the validity of certain
material representations made by ARS and its affiliates at the time
of the Company's entering into the Purchase and Sale Agreement, and
asserts that such agreement was void or voidable due to a variety of
defects, including but not limited to improper authorization, failure
by an interested party to disclose a gross conflict of interest,
and fraud.
To date, ARS has filed no response to the complaint. If ARS does not
respond to the complaint, a default may be entered in the San Diego
County Superior Court after April 30 1999, and ITI will then attempt to
Secure favorable judgment by prove-up after the entry of such default,
if default occurs.
From time to time, the Company has obtained temporary financing from
its directors and officers. A total of $118,126 and $600,000 was
repaid at interest rates of 8% in 1998 and 12% interest in 1997.
Interest expense recognized in 1998 and 1997 as payable to directors
and officers totaled $16,609 and $32,351.
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, 1998 and 1997, principal amounts
owed to shareholders totaled $16,200 and $125,325, and accrued interest
was $12,593 and $26,417. The amount of interest expense on these notes
in 1998 and 1997 totaled $2,785 and $19,792.
The Company leases service vehicles from a company owned by a relative
of ITI's Chairman. The lease calls for monthly payments of $2,233.
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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 Public Accountants
Balance Sheet - December 31, 1998
Statements of Loss and Accumulated Deficit for the years ended
December 31, 1998 and 1997
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1998 and 1997
Statements of Cash Flows for the years ended December 31, 1998
and 1997
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).
4.3 Specimen Class B Warrant Certificate (1).
4.4 Unit Warrant Agreement (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).
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10.5 Employment Agreement between intellectual Technology and
John F. Grim. (3).
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-A, filed April 10, 1997.
(3) Incorporated by reference to Registrant's Form 10KSB for
the year ended December 31, 1996.
16
<PAGE>
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/ Nicholas Litchin
Nicholas Litchin, Chairman
Date: April 14, 1999
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/Nicholas Litchin Chairman of the Board April 14, 1999
Nicholas Litchin
By:/s/Janice L. Welch Secretary/Treasurer April 14, 1999
Janice L. Welch (Principal Financial Officer)
By:/s/Walter G. Fuller President, Chief Executive April 14, 1999
Walter G. Fuller Officer, and Director (Principal
Executive Officer)
By:/s/John F. Grim Director April 14, 1999
John F. Grim
By:/s/Robert Neece Director April 14, 1999
Robert Neece
By:/s/Christopher M. Welch Director April 14, 1999
Christopher M. Welch
17
<PAGE>
Index to Financial Statements
INTELLECTUAL TECHNOLOGY, INC.
Page
Report of Comiskey & Company, P.C.
Independent Public Accountants F-1
Balance Sheet F-2
Statements of Loss and Accumulated Deficit F-3
Statements of Cash Flows F-4
Statements of Stockholders' Equity F-5
Notes to Financial Statements F-6 through F-13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying balance sheet of Intellectual
Technology, Inc. as of December 31, 1998, and the related statements of
loss and accumulated deficit, cash flows, and stockholders' equity for
each of the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits 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 audits
provide 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, 1998, and the results of its
operations, cash flows, and changes in stockholders' equity for each of
the years ended December 31, 1998 and 1997 in conformity with generally
accepted accounting principles.
Denver, Colorado
February 18, 1999
/s/ Comiskey & Company
PROFESSIONAL CORPORATION
F-1
<PAGE>
BALANCE SHEET
December 31, 1998
ASSETS
Current Assets
Cash and cash equivalents (including savings of $33,040) $184,757
Accounts receivable 156,645
Inventory 262,045
Prepaid expenses 19,186
--------
Total current assets 622,633
Property & Equipment
Contract equipment 5,323,167
Equipment - non-contract 58,101
Office equipment, furniture and improvements 36,838
--------
5,418,106
Less: Accumulated depreciation 2,803,814
--------
2,614,292
Other Assets
Patents, net of accumulated amortization of $886,198 3,377,695
Deposits 25,755
Organization costs, net of accumulated
amortization of $791 1,259
---------
Total assets $6,641,634
==========
LIABILITIES AND STOCKHOLERS' EQUITY
Current Liabilities
Accounts payable $492,602
Accrued expenses 311,056
Notes payable 1,198,344
Notes payable - related party 16,200
Due to related party 4,000,000
Accrued interest payable 569,201
--------
Total current liabilities 6,587,403
Other Liabilities
Long-term debt, net of current portion 1,543,176
1,543,176
---------
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, 10,000,001 shares
issued and outstanding 100
Additional paid-in capital 1,186,250
Deficit accumulated during the development stage (2,675,295)
----------
(1,488,945)
----------
Total liabilities and stockholders' equity $6,641,634
==========
F-2
<PAGE>
Intellectual Technology, Inc.
STATEMENT OF LOSS AND ACCUMULATED DEFICIT
For the years ended December 31, 1998 and 1997
1998 1997
---------- ----------
REVENUES
Registration decals income $5,198,174 $2,472,032
License income 299,953 298,927
Equipment/material sales 23,700 240,411
---------- ----------
Total revenues 5,521,827 3,011,370
COST OF REVENUES
Depreciation and amortization 1,965,286 789,355
Insurance 19,886 12,604
Maintenance 599,378 314,293
Materials 511,392 609,211
Royalties 61,205 24,442
Taxes 31,250 9,250
---------- ----------
Total cost of revenues 3,188,397 1,759,155
---------- ----------
Gross profit 2,333,430 1,252,215
OPERATING EXPENSES
Depreciation 25,716 22,043
General & administrative expenses 1,036,531 884,933
Patent amortization 279,832 281,430
Research & development 188,817 32,220
Selling 148,120 133,668
---------- ----------
1,679,016 1,354,294
---------- ----------
Income (loss) from operations 654,414 (102,079)
OTHER INCOME (EXPENSE)
Interest income 3,516 4,841
Interest expense (798,446) (769,919)
---------- ----------
Loss before income taxes (140,516) (867,157)
Income tax expense - -
---------- ----------
NET LOSS $ (140,516) $ (867,157)
========== ==========
Loss per share - basic $ (0.01) $ (0.09)
========== ==========
Weighted average number
of shares outstanding 10,000,001 9,791,667
========== ==========
F-3
<PAGE>
Intellectual Technology, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998 and 1997
Common Stock
----------------------
Additional
Number paid-in Accumulated
of shares Amount capital deficit Totals
----------- ----- ---------- ---------- ----------
Balances as of
January 1, 1997 9,000,001 $ 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
Contributed capital - - 3,000 - 3,000
Net loss - - - (867,157) (867,157)
---------- ----- ---------- ---------- ----------
Balances as of
December 31, 1997 10,000,001 100 1,186,250 (2,534,779)(1,348,429)
Net Loss - - - (140,516) (140,516)
---------- ----- ---------- ---------- ----------
Balances as of
December 31, 1998 10,000,001 $ 100 $1,186,250 $(2,675,295)$(1,488,945)
========== ===== ========== =========== ===========
F-4
<PAGE>
Intellectual Technology, Inc.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998 and 1997
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(140,516) $(867,157)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization 295,907 281,430
Depreciation 1,974,927 910,596
Decrease (increase) in accounts receivable 160,893 (268,427)
Increase in inventory (141,897) (52,262)
Decrease (increase) in prepaid expenses 12,278 (19,521)
Decrease (increase) in
notes receivable/employee advances 15,500 (15,100)
Decrease (increase) in restricted cash 21,202 (21,202)
Decrease in deposits and other assets 55,793 15,518
Increase (decrease) in accounts payable 92,100 (1,245,653)
Increase in accrued expenses and interest 364,719 390,254
--------- ----------
Net cash provided (used)
by operating activities 2,710,906 (891,524)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patents and other intangibles - (17,582)
Purchase of non-contract equipment (16,734) (71,479)
Investment in contract costs and equipment (1,045,821) (1,545,127)
---------- ----------
Net cash used by investing activities (1,062,555) (1,634,188)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock
and capital contributions - 53,000
New borrowings 563,000 7,296,398
Debt repayments (2,430,834) (4,425,054)
Loan costs - -
---------- ----------
Net cash provided (used)
by financing activities (1,867,834) 2,924,344
---------- ----------
NET INCREASE (DECREASE) IN CASH (219,483) 398,632
CASH AND CASH EQUIVALENTS, beginning of period 404,240 5,608
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $184,757 $404,240
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $497,081 $354,221
========== ==========
Cash paid during the year for income taxes $ - $ -
========== ==========
F-5
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
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. Image Technology, Inc., a Nevada corporation ("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. 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. had completed a public offering of
common stock and warrants on Octover 29, 1990. In April 1997, Bridgestone
Corp. changed its name to Intellectual Technology, Inc. and effected a 1 for
50 reverse stock split. References in this report ot 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.
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, with
installations in progress at year-end in South Dakota. 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") 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
pper transaction lease fee for these services.
Effective November 15, 1998, the Company entered into a Letter of
Agreement for Consultant Services with the South Dakota Department of
Revenue. This agreement called for the initial lease of printers
for a period of five years, commencing April 1, 1999 and terminating
March 31, 2004. The lease require ITI to provide the equipment and media
required to print automobile registrations and validation decals including,
but not limited to, motorcycles, commercial and non-commercial trucks,
boats and trailers, 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.
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 has also purchased the rights to a contract with the state
of New Hampshire to provide drivers' licenses. These amounts are
billed on a per transaction basis. This contract expires May 31, 1999.
F-6
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
1. Description of Business and Summary of Significant Accounting
Policies (continued)
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.
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 were amortized ratably
through January of 1999.
Certain costs to obtain debt financing have been deferred and are
amortized over the length of the loan using the straight-line method.
F-7
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
1. Description of Business and Summary of Significant Accounting
Policies (continued)
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.
Significant Concentrations
For the years ended December 31, 1998 and 1997, the Company derived
94% and 82% of total revenues from a single contract.
From time-to-time, the Company maintains cash balances in excess of
FDIC insured limits. The amount of such excess at December 31, 1998
was approximately $203,000.
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.
Consideration of Comprehensive Income Items
The Financial Accounting Standards Board has recently released Statement
of Financial Accounting Standards No. 130 - Reporting Comprehensive
Income. 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.
For the year ended December 31, 1998, the Company's financial statements
do not include any changes in equity that are required to be reported
separately in comprehensive income.
Fair Value of Financial Instruments
Unless otherwise indicated, the fair value of all reported assets and
liabilities which represent financial instruments (none of which are
held for trading purposes) approximate the carrying values of such
instruments.
F-8
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 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 $(1,488,945) at December 31, 1998,
and a working capital deficit of $(5,964,770). 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.
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
from the remainder of the Indiana Contract sufficient to support
operations and the Company's sales effort.
In the first quarter of 1999, the Company filed for rescission of the
Purchase and Sale Agreement between the Company and American Registration
Systems. (See Note 8) The debt of $4,000,000 associated with this
agreement, approximately $85,000 of accrued royalties, and approximately
$533,000 of accrued interest, which are included in the accompanying
financial statements as part of current liabilities, may be reduced
or eliminated if the Company is successful in rescinding this transaction.
3. Related Party Transactions
The Company entered into a Purchase and Sale Agreement with American
Registration Systems, Inc. ("ARS"), a for the assignment of two
patents related to ITI's printing system whereby the Company was
to pay a total of $4,000,000 plus a $0.01 per transaction royalty to
ARS or its assigns. This obligation was non-interest bearing until
May 1, 1997, after which interest at 8% has been accrued until
May 1999 when this obligation becomes due. A total of $-0- and
$77,691 of imputed interest and $533,335 and $213,335 in accrued interest
was incurred on this debt during the year ended December 31, 1998
and 1997.
Amounts charged to operations for the per transaction royalty were
$61,205 and $24,442 for the years ended December 31, 1998 and 1997.
The amount payable at December 31, 1998 was $85,647.
This agreement is in dispute. See Note 8.
From time to time, the Company has obtained temporary financing from
its directors and officers. A total of $118,126 and $600,000 was
repaid at interest rates of 8% in 1998 and 12% interest in 1997.
Interest expense recognized in 1998 and 1997 as payable to directors
and officers totaled $16,609 and $32,351.
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, 1998 and 1997, principal amounts
owed to shareholders totaled $16,200 and $125,325, and accrued interest
was $12,593 and $26,417. The amount of interest expense on these notes
in 1998 and 1997 totaled $2,785 and $19,792.
The Company leases service vehicles from a company owned by a relative
of ITI's Chairman. The lease calls for monthly payments of $2,233.
F-9
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
4. Notes Payable and Long-term Debt
The Company is obligated under the following notes at December 31, 1998:
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 $243,368.
Refinanced in March, 1999
through December 2000. $ 1,166,144 $ 1,537,376
8% debt obligation payable
to related party, secured by patents.
Interest and principal due
and payable May 1, 1999. 4,000,000 -
8% unsecured demand note. 5,000 -
15% unsecured note, due June 15, 1997. 33,000 -
11% note, secured by computers
purchased in December 1998,
interest and principal due
monthly at $513, matures December 2000 5,200 5,800
8% unsecured demand
notes payable to related parties. 5,200 -
------------ ------------
Total notes payable $ 5,214,544 $ 1,543,176
============ ============
Scheduled note maturities debt over the next five years and in
the aggregate are as follows:
For the year ended
December 31, Amount
1999 $ 5,214,544
2000 1,543,176
Thereafter -
In the first quarter of 1999, the Company refinanced the debt associated
with the Indiana contract, and obtained financing for its South Dakota
installation. As a result, $1,537,000 of current installment payments
on equipment related debt have been reclassified from current to long
term to reflect the December, 2000 revised due date for existing debt.
The above amounts reflect the ARS obligation as a current liability due
May, 1999. The Company is disputing this amount. See Note 8.
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 2002. Subsequent to year-end the Company relocated its corporate
offices to Carlsbad, California. The Company continues to be obligated
under its original office lease through 2001.
F-10
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
5. Leases (continued)
Future minimum lease payments on non-cancelable operating leases
over the next five years are as follows:
For the year ended
December 31, Amount
----------------- ------------
1999 $ 90,815
2000 86,720
2001 67,391
2002 22,948
2003 -
Rent expense for the years ended December 31, 1998 and 1997 was
$68,399 and $34,277, respectively.
6. Income Taxes
The Company has federal net operating loss carryforwards totaling
approximately $2.7 million which expire between 2010 and 2018. 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:
1998 1997
Non-benefited net operating loss
Carryforwards $ 910,000 $ 612,000
Valuation allowance (910,000) (612,000)
---------- ----------
Total deferred tax assets $ - $ -
========== ==========
Deferred tax liabilities $ - $ -
========== ==========
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 10,000,001 were issued
and outstanding.
F-11
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
7. Stockholder' Equity (continued)
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 10,000,000.
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.
8. Subsequent Events
Proposed Rescission of ARS Purchase and Sale Agreement
On January 27, 1999, the Company filed a complaint with the Superior
Court of the State of California for the County of San Diego case number
727654 against American Registration Systems, Inc. ("ARS") and
co-defendants, thereby recording a complaint for rescission of a 1995
Purchase and Sale Agreement between the Company and ARS. The suit
challenges the validity of certain material representations made by ARS
and its affiliates at the time of the Company's entering into the
Purchase and Sale Agreement, and asserts that such agreement was void
or voidable due to a variety of defects, including but not limited to
improper authorization, failure by an interested party to disclose a
gross conflict of interest, and fraud.
To date, ARS has filed no response to the complaint. If ARS does not
respond to the complaint, a default may be entered in the San Diego
County Superior Court after April 30 1999, and ITI will then attempt to
Secure favorable judgment by prove-up after the entry of such default,
if default occurs.
The Purchase and Sale Agreement which the Company seeks to rescind
provides that the Company shall pay to ARS or its assigns $4,000,000,
plus a $0.01 per transaction royalty. Judgement in favor of the
Company would result in the cancellation of approximately $4,600,000
of currently outstanding indebtedness.
The accompanying financial statements reflect the $4,000,000 obligation,
plus accrued interest and royalties, as current obligations of the
Company according to the terms of the Purchase and Sale Agreement.
Based on amounts outstanding at December 31, 1998, the resolution of
this matter in a manner favorable to the Company will have the following
effects on the financial position of the Company:
Decrease in Other Assets 3,355,355
Decrease in Current Liabilities 4,618,983
Increase in Equity 1,263,628
F-12
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
8. Subsequent Events (continued)
Post year-end financing
In the first quarter of 1999, the Company refinanced $2,600,000 in
installment debt previously maturing in November of 1999 through
December of 2000 at a rate of 9.35%. The new debt is secured by
leased equipment and calls for monthly installments of $134,695.
In the first quarter of 1999, the Company obtained $800,000 in new
equipment financing at 10.4%. This debt calls for monthly installments
of $17,225 through April 15, 2004.
Corporate relocation
In the first quarter of 1999, the Company entered into a three year
lease for approximately 2,500 square feet of office space in Carlsbad,
California at $2,786 per month.
F-13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The accompanying schedule contains summary financial information extracted
directly from the balance sheet at December 31, 1998 and the statement of loss
and accumulated deficit for the year ended December 31, 1998. It is qualified
in its entirety by reference to such financial statements.
</LEGEND>
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<PERIOD-END> DEC-31-1998
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<PP&E> 5418106
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