-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qc7I32cfVfxxjC9794nqajo6c6NQb4sYmzWOzpyzd14AkJiT62RP78uf+gyzX5vO 3wLXerVtI87Yv+G8OQm+NQ== 0001013993-00-000029.txt : 20000417 0001013993-00-000029.hdr.sgml : 20000417 ACCESSION NUMBER: 0001013993-00-000029 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTELLECTUAL TECHNOLOGY INC CENTRAL INDEX KEY: 0000859914 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER TERMINALS [3575] IRS NUMBER: 841130227 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-29138 FILM NUMBER: 601469 BUSINESS ADDRESS: STREET 1: 10639 ROSELLE STREET STREET 2: SUITE B CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 619-552-00 MAIL ADDRESS: STREET 1: 303 EAST 17TH AVE STREET 2: STE 800 CITY: DENVER STATE: CO ZIP: 80203 FORMER COMPANY: FORMER CONFORMED NAME: BRIDGESTONE CORP DATE OF NAME CHANGE: 19930328 10KSB 1 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. 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 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. 3 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. 4 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. 5 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. 6 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. 7 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. 8 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. 9 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. 10 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 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. 12 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 13 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. 14 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. 15 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 16 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 EX-27 2
5 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. 12-MOS DEC-31-1999 DEC-31-1999 505723 0 358607 0 351399 1495967 6050063 4510361 3589921 1985825 0 0 0 100 861987 3589921 6125751 6125751 3580638 5329006 0 2816942 598824 (2606952) 0 0 0 2896702 0 2039145 0.24 0.24
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