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, 1999
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, 1999 were
$6,125,751.
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 12, 2000 was $655,000. 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 12, 2000, 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
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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 in 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 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 51 US & many foreign
jurisdictions. 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 its experience working with 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.
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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. ITI began
processing 100% of the annual registrations in South Dakota on April 1, 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 and NCR paper. 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 four are in executive
or administrative positions, three are in engineering/r&d, 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.
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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. The
space is sub leased throughout the remaining lease term. The Company also
leases approximately 1,875 square feet of office/warehouse space in Carmel,
Indiana, with a remaining lease term of one year at $1,107.81 per month.
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-defendants, thereby
recording a complaint for rescission of a 1995 Purchase and Sale Agreement
between the Company and ARS. The suit challenged 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 asserted that
such Agreement was void or voidable due to a variety of defects. Defendant
ARS failed to respond to the complaint and on September 13, 1999, a default
judgment for rescission was entered by the court.
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, 1999.
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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
June 30, 1999 $ 1.0625 $ 0.3125
September 30, 1999 $ 0.5625 $ 0.1875
December 31, 1999 $ 0.4375 $ 0.1875
March 31, 2000 $ 0.4375 $ 0.1875
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 12, 2000, the Company had approximately 71 shareholders of record,
which does not include shareholders whose shares are held in street or nominee
names.
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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 a 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.
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,
1999 1998
------------- -------------
Operating Activities $ 1,640,209 $ 2,710,906
Investing Activities (689,609) (1,062,555)
Financing Activities (629,634) (1,867,834)
------------- -------------
Net effect on cash $ 320,966 $ (219,483)
============= =============
Cash flows provided by operations decreased from $2,710,000 in 1998 to
$1,640,000, a decrease of $1,070,000 due to (1) timing in the collection
of accounts receivable $363,000; (2) acceleration of payment of accounts
payable and accrued expenses $614,000; (3) investment in a non-cash equivalent
certificate of deposit - $100,000 and (4) other items netting to an increase
in cash flows of $7,000.
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Results of Operations
For the year ended December 31, 1999, contract revenues increased from
$5,521,827 to $6,125,751, an increase of 11%. The increase was directly
related to an additional state contract and the additional number of
transactions processed by ITI's equipment.
Gross profit increased 9% from $2,333,430 (42.3% of sales) to $2,545,113
(41.5% of sales) as a result of higher sales volume.
Operating expenses increased 5% from $1,663,327 in 1998 to $1,748,368 in 1999,
an increase of $85,041 of which $51,879 was attributable to patent
amortization. Selling, general and administrative expenses increased from
$1,094,337 to $1,176,990, an increase of $82,653 primarily due to (1) expenses
of relocating the Company's corporate offices; (2) Legal fees associated with
litigation; (3) cost of living adjustments to payroll; and (4) increased
selling expenses related to efforts to obtain additional state contracts.
Research and development decreased from $263,442 in 1998 to $211,958 in 1999
as the Company spent more efforts in improving and adapting existing Company
products to recent customer needs. The Company will continue to engage in
research and development of additional applications of its products in related
areas and new product development.
Interest expense decreased from $798,446 in 1998 to $598,824 in 1999. This
reflects the pay down of equipment financing, and interest savings related
to the ARS rescission, see below.
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 challenged 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
asserted that such Agreement was void or voidable due to a variety of defects.
Defendant ARS failed to respond to the complaint and on September 13, 1999, a
default judgment for rescission was entered by the court.
As a result of the rescission, the Company recorded debt forgiveness income
of $2,896,702 as an extraordinary item, net of tax of $1,919,000. Management
has also recorded a write off of patents which are no longer expected to
generate future cash flows under the current business plan. As a result,
certain items of income and expense reflected in the accompanying financial
statements can be expected not to recur in the future. Before the effect
of income tax, non-recurring income and expenses related to the rescinded
agreement for 1999 and 1998 were as follows:
1999 1998
Royalty (expense) $ (36,720) $ (61,205)
Amortization (expense) (115,236) (230,472)
Interest (expense) (200,000) (320,000)
Loss on patents (2,816,942) -
Extraordinary gain before tax 4,815,702 -
Total effect on income 1,646,804 (611,677)
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.
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ITEM 7. FINANCIAL STATEMENTS
The financial statements set forth in pages F-1 to F-14 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.
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 J. Denice 59 President, Director, Chief Executive Officer
Nicholas Litchin 73 Director
Walter G. Fuller 59 Director
Janice L. Welch 59 Secretary/Treasurer
Robert Neece 52 Director
Christopher M. Welch 31 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 J. Denice joined the Company as President and CEO in April of 1999.
Prior to 1999, Mr. Denice was employed by NBS Imaging Systems, Inc., serving
as President and General Manager of that Company from 1988 through 1994. NBS
was a leading supplier of Drivers Licensing Systems to the Motor Vehicle
Industry. Mr. Denice currently serves as Chairman of the Board of ITI.
Nicholas Litchin is a director of the Company. He was Chairman of the Board
of Directors from July 1998 to April 1999. 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. Mr. Litchin has been a retired investor
Since 1991.
Walter G. Fuller has been a Director of the Company and Image Technology since
March 12, 1997 and the formation of Image Technology in 1992, respectively.
He is 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 was a Director of the Company
and Image Technology until February of 1999. She has held the
Secretary/Treasurer position with the Company since March 12, 1997 and
with Image Technology since its formation on April 23, 1992.
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.
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 four 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.
11
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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, 1999:
Annual Compensation Long-term Compensation Awards
Restricted Options
Stock and Other
Name and Position Year Salary Bonus Awards Sar's Compensation
Nicholas Denice 1997 $ - $ - $ - $ - $ -
CEO, Director 1998 $ - $ - $ - $ - $ -
1999 $ 104,083 $ - $ - $ - $ -
John F. Grim (1) 1997 $ 125,000 $ - $ - $ - $ -
VP Marketing 1998 $ 125,000 $ - $ - $ - $ -
and Director 1999 $ 126,602 $ - $ - $ - $ (1)
(1) Options to purchase 180,000 shares of common stock were granted in
August 1999
(2) Mr. Grim was an officer and director at December 31, 1999 but is
no longer employed by the Company.
OPTION/SAR GRANTS DURING THE LAST FISCAL YEAR
Name Number of % of Total Options/SARS Exercise
Securities Granted to All Employees Price per Expiration
Underlying For the year 12/31/99 Share Date
Options
____________ __________ __________________________ __________ ___________
Nicholas Denice 60,000 $0.38 8/25/2002
CEO 60,000 11.8% $0.38 8/25/2003
60,000 $0.38 8/25/2004
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 12, 2000, 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 Percent of
Beneficial Owner Title of Class and of Record Class (5)
- ------------------ -------------- ------------------ ----------------
Nicholas Denice Common Stock 180,000(3) 1.6%
6353 Constitution Ave.
Ft. Wayne, IN 46804
Janice L. Welch(1) Common Stock 4,194,960 35.7%
c/o 1945 Camino Vida
Roble Suite O
Carlsbad, CA 92008
Walter G. Fuller Common Stock 2,904,880(4) 25.2%
217 E. Railroad
P.O. Box 299
Garrett, IN 46738
Nicholas Litchin(2) Common Stock 1,524,760(4) 13.2%
6353 Constitution Ave.
Ft. Wayne, IN 46804
Robert Neece Common Stock 458,000(4) 4.0%
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 9,182,680 79.7%
Directors as a Group
(5 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.
(3) Includes options to purchase 180,000 common shares under the
Company's incentive stock option plan
(4) Includes options to purchase 250,000 common shares under the
Company's incentive stock option plan
(5) Adjusted for the effect of 1,525,000 shares issuable upon exercise
of outstanding incentive stock options
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of September 1999, the Company entered into an agreement with ARS, a
related party, for the purchase of a patent for $130,000. For the year
ended December 31, 1999, $10,000 of this amount had been repaid, and $40,810
had been charged to interest expense. The remainder of the payable is due
in quarterly installments of $5,000, inclusive of interest of 6.61%.
From time to time, the Company has obtained temporary financing from its
directors and officers. A total of $135,000 and $118,126 was repaid at an
interest rate of 8% in 1999 and 1998. Interest expense recognized in 1999
and 1998 as payable to directors and officers totaled $1,314 and $16,609.
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, 1999 and 1998, principal amounts owed
to shareholders totaled $5,801 and $16,200, and accrued interest was $32
and $12,593. The amount of interest expense on these notes in 1999 and
1998 totaled $1,769 and $2,785.
The Company leases service vehicles from a company owned by a relative of one
of ITI's Directors. The lease calls for monthly payments of $2,233.
For the year ended December 31, 1999, the Company has two related party
receivables totaling $37,212. Both of these notes are non-recourse and
are secured by shares of stock of the Company.
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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, 1999
Statements of Operations for the years ended December 31, 1999
and 1998
Statements of Stockholders' Equity for the years ended December
31, 1999 and 1998
Statements of Cash Flows for the years ended December 31, 1999 and
1998
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).
4.3 Unit Warrant Agreement (1).
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 10-KSB for the
year ended December 31, 1996.
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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 Denice
Nicholas Denice, Chief Executive Officer
Date: April 14, 2000
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 Denice President, Chief Executive
Nicholas Denice Officer and Director April 14, 2000
By:/s/Nicholas Litchin Director April 14, 2000
Nicholas Litchin
By:/s/Janice L. Welch Secretary/Treasurer April 14, 2000
Janice L. Welch
By:/s/Walter G. Fuller Director April 14, 2000
Walter G. Fuller
By:/s/Robert Neece Director April 14, 2000
Robert Neece
By:/s/Christopher M. Welch Director April 14, 2000
Christopher M. Welch
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Index to Financial Statements
Page
Report of Comiskey & Company, P.C.
Independent Public Accountants F-1
Balance Sheet F-2
Statements of Loss and Accumulated Deficit F-3
Statement of Stockholder's Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 through F-14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying balance sheet of Intellectual Technology,
Inc. as of December 31, 1999, and the related statements of operations
cash flows, and stockholders' equity for each of the years ended December 31,
1999 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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, 1999, and the results of its operations, cash flows, and
changes in stockholders' equity for each of the years ended December 31, 1999
and 1998 in conformity with generally accepted accounting principles.
Denver, Colorado
February 24, 2000
PROFESSIONAL CORPORATION
F-1
<PAGE>
Intellectual Technology, Inc.
BALANCE SHEET
December 31, 1999
ASSETS
Current Assets
Cash and cash equivalents $ 505,723
Certificate of deposit 100,000
Accounts receivable 358,607
Inventory 351,399
Deferred tax asset 100,000
Prepaid expenses 80,238
----------
Total current assets 1,495,967
Property & Equipment
Contract equipment 5,997,854
Equipment - non-contract 32,796
Office equipment, furniture and improvements 19,413
----------
6,050,063
Less: Accumulated depreciation 4,510,361
----------
1,539,702
Other Assets
Patents, net of accumulated
amortization of $372,435 359,452
Deferred tax assets 83,000
Due from related party 37,212
Other non-current assets 74,588
----------
Total assets $3,589,921
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 188,419
Accrued expenses 88,640
Notes payable 1,679,473
Due to related party 20,076
Accrued interest payable 9,217
----------
Total current liabilities 1,985,825
Other Liabilities
Long-term debt, net of current portion 595,473
Due to related party - long term 146,536
----------
742,009
----------
Stockholders' Equity
Preferred stock, $0.00001 par value, 1,000,000 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 (324,263)
----------
862,087
----------
Total liabilities and stockholders' equity $3,589,921
==========
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
Intellectual Technology, Inc.
STATEMENTS OF LOSS AND ACCUMULATED DEFICIT
For the years ended December 31, 1999 and 1998
1999 1998
------------ ------------
REVENUES
Registration decals income $ 5,896,458 $ 5,198,174
License income 229,293 299,953
Equipment/material sales - 23,700
------------ ------------
Total revenues 6,125,751 5,521,827
COST OF REVENUES
Depreciation and
amortization 1,737,339 1,965,286
Insurance 17,614 19,886
Maintenance 683,664 599,378
Materials 1,100,482 511,392
Royalties 36,720 61,205
Property taxes 4,819 31,250
---------- ----------
Total cost of revenues 3,580,638 3,188,397
---------- ----------
Gross profit 2,545,113 2,333,430
OPERATING EXPENSES
Depreciation 28,119 26,126
Amortization of patent 331,301 279,422
Selling, general
& administrative expenses 1,176,990 1,094,337
Research & development 211,958 263,442
---------- ----------
1,748,368 1,663,327
---------- ----------
Income from operations 796,745 670,103
OTHER INCOME (EXPENSE)
Interest income 12,069 3,516
Impairment loss,
patents (2,816,942) -
Interest expense (398,014) (478,446)
Interest on patent purchase (200,810) (320,000)
---------- ----------
Loss before income taxes (2,606,952) (124,827)
Income tax (expense) benefit 2,061,282 (15,689)
---------- ----------
Income (loss) before
extraordinary item (545,670) (140,516)
Extraordinary gain, net
of income taxes of $1,919,000 2,896,702 -
---------- ----------
NET INCOME (LOSS) 2,351,032 (140,516)
========== ==========
Income (loss) per share: (Basic)
Income (loss) before
extraordinary
item $ (0.05) $ (0.01)
Extraordinary item,
net of tax $ 0.29 $ -
---------- ----------
Net income (loss) $ 0.24 $ (0.01)
========== ==========
Weighted average number
of shares outstanding 10,000,000 10,000,000
========== ==========
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
Intellectual Technology, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999 and 1998
Common Stock Additional
-----------------
Number paid-in Accumulated
of shares Amount capital deficit Totals
--------- ----- ----------- ------------ -------------
Balances as
of January
1, 1998 10,000,000 $ 100 $ 1,186,250 $ (2,534,779) $ (1,348,429)
Net loss - - - (140,516) (140,516)
---------- ----- ----------- ------------ -------------
Balances as
of December
31, 1998 10,000,000 100 1,186,250 (2,675,295) (1,488,945)
Net income - - - 2,351,032 2,351,032
---------- ----- ----------- ------------ -------------
Balances as
of December
31, 1999 10,000,000 $ 100 $ 1,186,250 $ (324,263) $ 862,087
========== ===== =========== ============ =============
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, 1999 and 1998
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,351,032 $ (140,516)
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities:
Amortization 332,560 295,907
Depreciation 1,764,199 1,974,927
Deferred tax credits (183,000) -
Effect of ARS Recission (1,998,760) -
Changes in components
of working capital:
Certificate of deposit (100,000) -
Accounts receivable (201,962) 160,893
Inventory (89,354) (141,897)
Prepaid expenses (61,052) 12,278
Notes receivable/employee advances (37,212) 15,500
Restricted cash - 21,202
Deposits and other assets 20,805 55,793
Accounts payable (304,183) 92,100
Accrued expenses and interest 147,136 364,719
----------- -----------
Net cash flows from
operating activities 1,640,209 2,710,906
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of non-contract equipment (14,922) (16,734)
Investment in contract costs
and equipment (674,687) (1,045,821)
----------- ----------
Net cash flows from
investing activities (689,609) (1,062,555)
CASH FLOWS FROM FINANCING ACTIVITIES
New borrowings 1,335,937 563,000
Debt repayments (1,823,571) (2,430,834)
Loan costs (142,000) -
----------- ----------
Net cash flows from
financing activities (629,634) (1,867,834)
----------- ----------
NET INCREASE (DECREASE) IN CASH 320,966 (219,483)
CASH AND CASH EQUIVALENTS, beginning of period 184,757 404,240
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 505,723 $ 184,757
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 351,871 $ 497,081
=========== ==========
Cash paid during the year for income taxes $ 17,854 $ 12,325
=========== ==========
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
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 in 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
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.
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, Maryland and 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 has been extended
through October, 2000. The lease requires ITI to provide the equipment and
media required to print 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.
Effective November 15, 1998, the Company entered into a Letter of Agreement
for Consultant Services with the South Dakota Department of Revenue for the
lease of ITI printing systems. This agreement commences April 1, 1999 and
ends March 31, 2004. The lease requires ITI to provide the equipment and
media required to print 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.
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 had also purchased, in 1996, the rights to a contract with the
state of New Hampshire to provide drivers' licenses. These amounts were
billed on a per transaction basis though September 30, 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-6
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1999
1. Description of Business and Summary of Significant Accounting
Policies (continued)
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 had been 17 years from issue. However, as of June
30, 1999, the lives of these patents were reduced to 16 months, which was the
remainder of the Indiana contract. The technology in these machines is
different than in any of the other machines used by the Company, and the
Company has no plans to continue to use the technology backed by the patent
in the future.
New Hampshire contract costs were amortized ratably over the term of the
Original contract which expired in January of 1999.
Certain costs to obtain debt financing have been deferred and are amortized
over the length of the loan using the effective interest rate method.
F-7
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1999
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, 1999 and 1998, revenue from registration
decals accounted for 96% and 99% of total revenues, which revenue consisted
of two contracts.
From time-to-time, the Company maintains cash balances in excess of FDIC
insured limits. The amount of such excess at December 31, 1999 was
approximately $508,000.
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.
The effect of outstanding options and warrants would be antidilutive and
consequently, diluted earnings per share have not been presented.
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.
2. Presentation as a Going Concern
The Company was in the development stage as defined by SFAS No. 7 until
November 1996, and incurred operating losses until the first quarter of
1998. At December 31, 1999, it has an accumulated deficit of $324,263
and a working capital deficit of $489,858. These conditions are primarily
as a result of losses incurred in the startup phase and during the initial
years of operations, during which the Company operated at reduced revenues
while the printer installations were accomplished.
Under the Company's current financing arrangement, receivables from certain
contracts have been assigned to the note holder. The amount of monthly cash
flow from the contracts is remitted net to the Company after debt service is
satisfied. Management projects that this arrangement will continue to
generate positive monthly cash flows through at least the third quarter of
2000, and that such cash flows will be sufficient to support operations and
the Company's sales effort for the coming year.
3. Related Party Transactions
Amounts charged to operations for royalty to a related party were $36,720 and
$61,205 for the years ended December 31, 1999 and 1998. The amount payable
at December 31, 1999 was $-0- (see Note 8).
From time to time, the Company has obtained temporary financing from its
directors and officers. A total of $135,000 and $118,126 was repaid at an
interest rate of 8% in 1999 and 1998. Interest expense recognized in 1999
and 1998 as payable to directors and officers totaled $1,314 and $0.
F-8
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1999
3. Related Party Transactions (continued)
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, 1999 and 1998, principal amounts owed to
shareholders totaled $5,801 and $16,200, and accrued interest was $32 and
$12,593. The amount of interest expense on these notes in 1999 and 1998
totaled $3,083 and $2,785.
The Company leases service vehicles from a company owned by a relative of one
of ITI's directors. The lease calls for monthly payments of $2,233.
As of September 1999, the Company entered into an agreement with ARS, a
related party, for the purchase of a patent for $130,000. For the year ended
December 31, 1999, $10,000 of this amount had been repaid, and $40,810 had
been charged to interest expense. The remainder of the payable is due in
quarterly installments of $5,000, inclusive of interest of 6.61%.
For the year ended December 31, 1999, the Company has two related party
receivables totaling $37,212. Both of these notes are non-recourse and are
secured by shares of stock of the Company.
4. Notes Payable and Long-term Debt
The Company is obligated under the following notes at December 31, 1999:
Short-term Long-term
9.35% Installment notes, secured by all printers,
SSTs, and miscellaneous equipment and the
assignment of accounts receivable, payable
monthly in installments of $134,695.
Matures December 2000. $ 1,537,376 $ -
9.5% Installment notes, secured by all printers,
SSTs, and miscellaneous equipment and the
assignment of accounts receivable, payable
monthly in installments of $17,680.
Matures April 2004. $ 142,097 $ 595,473
----------- -----------
Total notes payable $ 1,679,473 $ 595,473
=========== ===========
Scheduled note maturities debt over the next five years and in the aggregate
are as follows:
For the year ended
December 31, Amount
----------- ------
2000 $ 1,679,473
2001 157,600
2002 174,795
2003 193,865
Thereafter 69,213
F-9
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1999
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. During 1999, the Company relocated its corporate offices to Carlsbad,
California. The Company continues to be obligated under its former office
lease through 2001, and has sublet this space through the term of the
original lease at a rate of $2,102 per month.
Future minimum lease payments on non-cancelable operating leases over the
next five years are as follows:
For the year ended
December 31, Amount
----------- ------
2000 $ 95,697
2001 54,987
2002 6,050
Thereafter -
Rent expense for the years ended December 31, 1999 and 1998 was $88,370 and
$68,399, respectively, net of sublease income of $6,305 and $-0- in 1999 and
1998. The above lease payments exclude the effect of $44,138 in future
sublease income to be received in the years 2000 and 2001.
6. Income Taxes
The components of the provision for income taxes are as follows:
1999 1998
---- ----
Current income tax benefit $ 1,009,000 $ -
Reversal of valuation allowance 910,000 -
State and local income taxes currently
payable (40,718) (15,689)
Deferred tax credits 183,000 -
------------ ------------
Income tax (expense) benefit $ 2,061,282 $ (15,689)
============ ============
For the year ended December 31, 1999, and with regard to a transaction more
fully described in Note 8, the Company re-evaluated its likelihood of using
its net operating losses, and determined that it was more likely than not
that they would be used. As a result, the Company has recorded a deferred
tax asset for the year ended December 31, 1999.
The Company has federal net operating loss carryforwards totaling
approximately $184,000 which expire between 2012 and 2018 and $252,000 in
unamortized start up costs deductible for income tax purposes in 2000 and
2001. 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 Company also has
approximately $44,000 in Federal Credits for Increasing Research Activities
available to offset future taxable income and related tax. The following are
the components of the Company's deferred tax assets and liabilities:
F-10
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1999
6. Income Taxes (continued)
1999 1998
Non-benefited net operating loss
carryforwards $ 44,000 $ 910,000
Unamortized startup costs 93,000 -
Research and development credits 46,000 -
Valuation allowance - (910,000)
----------- -----------
Total deferred tax assets $ 183,000 $ -
=========== ===========
Deferred tax liabilities $ - $ -
=========== ===========
Reconciliation between statutory federal income tax rate and the effective
income tax rates based on loss before income taxes and extraordinary items:
1999 1998
---- ----
Statutory federal income tax rate 34.0% 34.0%
Federal income tax credits 1.3% 1.0%
State income taxes, net of federal
tax benefit 8.8 12.6
Valuation allowance 34.9 (35.0)
Effective income tax rates 79.1% (12.6)%
======= =======
7. Stockholders' Equity
Preferred Stock
At December 31, 1999, 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, 1999, a total of 20,000,000 shares of $0.00001 par value
common stock were authorized, and 10,000,000 were issued and outstanding.
Warrants
The Company has outstanding warrants to purchase common shares as follows:
Number Type Exercise Expiration
Of Warrants of Warrant Price Date
200,000 Class A $ 12.50/share 4/15/01
200,000 Class B $ 12.50/share 4/15/01
The warrants are callable at $0.0001 by the Board of Directors with 30 days
written notice. The warrants may only be exercised with a current
registration statement in effect.
F-11
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1999
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 pre-acquisition company,
Bridgestone, issued a total of 450,000,000 shares of 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.
acquired collectively a 90% interest in Bridgestone, with the remaining 10%
ownership retained by the original Bridgestone shareholders. Subsequent to
the acquisition, Bridgestone's sole officer and director resigned in favor
of persons appointed by the new majority shareholders.
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.
Stock Options
In a transaction more fully described in Note 9, the Company issued 1,525,000
stock options to purchase shares of stock in the Company at $0.38 per share.
Stockholders Equity and Comprehensive Income
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 changes and credits)
and its components as part of the basic financial statements. For the year
ended December 31, 1999, the Company's financial statements do not contain
any changes in equity, other than investments by and distributions to
shareholders, that are required to be reported separately in comprehensive
income.
8. Extraordinary Item
On September 13, 1999, ITI was awarded an entry of judgment against defendant
American Registration Systems, Inc. ("ARS"), rescinding the purchase and sale
agreement dated October 31, 1995, and its purported addendum thereto dated
March 11, 1997. As a result of this default judgment, the agreement, which
had required ITI to pay to ARS or its assignees $4,000,000, plus a $0.01 per
transaction royalty, was determined to be of no further force or effect.
The accompanying financial statements include an extraordinary gain of
$2,896,702, which represents the elimination of $4,693,335 in principal and
accrued interest and $122,367 in accrued royalties, net of an approximate tax
benefit of $1,919,000.
F-12
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1999
9. Stock Option Plan
On August 25, 1999, the shareholders and directors of Intellectual Technology,
Inc. approved a Stock Option Grant Plan consisting of a pool of 1,995,000
incentive stock options.
A summary of option activity is as follows (all values restated for stock
splits):
Weighted Weighted
Shares Average Average
Under Exercise Options Exercise
Option Price Exercisable Price
--------- -------- ----------- --------
December 31, 1998 - $ - - $ -
Options granted 1,525,000 0.38 600,000 0.38
Option exercised - -
--------- -------- ----------- --------
Options outstanding as of
December 31, 1999 1,525,000 $ 0.38 600,000 $ 0.38
All options have an exercise price of $0.38 per share.
All of the options granted expire at various times over a period of five years
from the date of grant and have the following vesting characteristics:
Number of options Vesting period Vested at December 31, 1999
600,000 Immediately 600,000
462,500 1 year -
462,500 2 years -
----------------- --------------
1,525,000 600,000
================= ==============
F-13
<PAGE>
INTELLECTUAL TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1999
9. Stock Option Plan (continued)
Pro Forma Disclosure
The Company applies Accounting Principles Board No. 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for its plan.
As such, no compensation costs were recorded as of the date of grant. The
Company considered the effects of recognizing compensation cost pursuant to
the provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, (SFAS No 123). Using the
Black-Scholes option pricing model, which takes into account the exercise
price of the options, expected life, current price of the underlying stock,
its expected volatility and dividends, and the risk-free interest rate, net
loss would have been increased to the pro forma amounts as follows for the
years ending December 31:
1999 1998
-------------------------- ---------------------------
As Pro As Pro
Reported Forma Reported Forma
----------- ------------ ----------- -----------
Net Income (Loss) $ 2,351,032 $ 2,268,547 $ (140,516) $ (140,516)
The average fair value of options granted during fiscal 1999 was $0.38. The
fair value of options is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: risk-free interest rate of 6.5 percent for fiscal 1999; expected
life of 3-5 years; dividend yield percentage of 0%; and volatility of 95% for
the year ended December 31, 1999.
F-14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 10KSB FOR THE YEAR ENDED DECEMBER 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 505723
<SECURITIES> 0
<RECEIVABLES> 358607
<ALLOWANCES> 0
<INVENTORY> 351399
<CURRENT-ASSETS> 1495967
<PP&E> 6050063
<DEPRECIATION> 4510361
<TOTAL-ASSETS> 3589921
<CURRENT-LIABILITIES> 1985825
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0
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<COMMON> 100
<OTHER-SE> 861987
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