10KSB/A 1 iti2001ksb.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB/A AMENDMENT NO. 2 X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2001 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) 1040 Joshua Way, Vista, CA 92083 (Address of Principal Executive Offices) (Zip Code) (760) 599-8080 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. [X] The Registrant's revenues for the fiscal year ended December 31, 2001 were $4,843,365. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of April 15, 2002 was $566,000. 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 15, 2002, the Registrant had outstanding 9,842,680 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 (SST's) which can be placed in locations remote from DMV offices. One of the ITI stand-alone printers was patented November 13, 1990. The Company purchased this patent on October 31, 1995. Other ITI stand-alone printers have been purchased from an outside vendor. The Company does not own the patents on these printers. The self-service terminal was patented on September 20, 1994. The Company purchased this patent in September 1999. 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 that 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. None of the Company's products or services requires government approval. The Company is not aware of any existing or probable government regulations that would affect its business. Marketing and Sales The primary market for the Company's printing systems and services consists of the Department of Motor Vehicles in each of the 50 U. S. states, the District of Columbia 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 with a one-year renewal option through October 2000 that was exercised. In May 2000, the Indiana contract was extended through October 31, 2002. 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. On April 1, 1999, ITI supplied the equipment and media to process 100% of the annual registrations in South Dakota. Effective January 1, 2001, the Company entered into a Subcontractor Agreement with a contractor for the State of Louisiana Department of Public Safety and Corrections Office of Motor Vehicles. In June 2001, ITI supplied the equipment and media to begin production of 100% of the mail in vehicle registrations in Louisiana. In September 2001, ITI supplied the equipment and media to begin production of these registrations issued at the State's branch locations. The installation of ITI's equipment and production of these registrations at private tag agencies is currently in process. For the year ended December 31, 2001, 98% of total revenues were derived from the above contracts and agreements. Manufacturing and Supply The Company uses subcontractors to manufacture and supply most components and subassemblies of ITI's printing system and to provide the required printing media. 3M Corporation of St. Paul, Minnesota, produces the decal used by the ITI printing system. The paper materials on which the Indiana and South Dakota registrations are printed are supplied by NCR and Moore North America (see "Business - The ITI printing system and Related Print Media"). NCR Corporation and Datamax Corporation supply thermal ribbon used in the printing process. The Company has identified alternative vendor sources for all materials and assemblies used in its products. The Company believes the use of outside 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 are only two major competitors 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. Research & Development For the years ended December 31, 2001 and 2000, the Company spent $96,000 and $244,000, respectively on research and development activities. None of these costs were borne directly by customers. Environmental laws The Company's cost of compliance with environmental laws (federal, state, local) is estimated to be insignificant. Employees The Company has eleven full-time employees and two part-time employees, excluding directors, of which two are in executive or administrative positions, four are in engineering, R&D or information technology, two are marketing personnel and five are maintenance personnel, The Company also retains three part-time marketing consultants and one business consultant. A union currently represents none of the Company's employees, and the Company believes that its relations with its employees are good. ITEM 2. PROPERTIES The Company occupies 5,948 square feet of office and light industrial space in Vista, California at a monthly rental of $4,700, subject to cost of living adjustments and maintenance expenses, through February 2007. The Company also leases approximately 1,875 square feet of office/warehouse space in Carmel, Indiana, through October 2002 at a monthly rental of $1,233 per month. The Company believes that these facilities are adequate to meet its anticipated needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings currently pending. 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, 2001. ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATEDSTOCKHOLDER MATTERS 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 FT Interactive Data. Quarter Ended High Bid Low Bid March 31, 2000 $ 0.4375 $ 0.1875 June 30, 2000 $ 0.375 $ 0.1875 September 2000 $ 0.3125 $ 0.22 December 2000 $ 0.3125 $ 0.0625 March 31, 2001 $ 0.65 $ 0.13 June 30, 2001 $ 0.51 $ 0.21 September 30, 2001 $ 0.24 $ 0.24 December 31, 2001 $ 0.40 $ 0.20 March 31, 2002 $ 0.51 $ 0.08 The quotations, which appear above, reflect inter-dealer prices, without retail mark-up, markdown, or commission, and reflect all stock splits. The Company has not paid any dividends on its common stock, and the Board of Directors of the Company presently intends to retain earnings, if any, for use in the Company's operations and to finance expansion of its business. The declaration and payment of dividends in the future, of which there can be no assurance, will be determined by the Board of Directors in light of conditions then existing, including the Company's earnings, financial condition, capital requirements, and other factors. As of April 13, 2002, the Company had approximately 67 shareholders of record, which does not include shareholders whose shares are held in street or nominee names. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. For ease in presenting the financial data, figures have been rounded to the nearest thousand. Liquidity and Capital Resources During the last two fiscal years, the Company has been able to utilize cash flows from operations to repay debt and fund a substantial portion of new investments in contract costs and equipment. In 2001, the Company's lines of credit were used to fund $215,000 of the investment in contract costs and equipment. In 2002, the Company expects to spend another $35,000 on contract equipment for contracts in effect in 2001. The Company has $700,000 in existing lines of credit of which $485,000 was available to borrow as of December 31, 2001. In June 2002, the Company expects to convert up to $400,000 of credit line debt to a 36-month installment loan as permitted under the existing borrowing agreement. The Company's remaining debt service consists of contract financing with a monthly payment of $17,680 ($212,000 per year) through April 2004 and a patent purchase payment of $5,000 per quarter ($20,000 per year) through March 2011. The following is a summary of the Company's cash flows from operating, investing, and financing activities: Year ended December 31, 2001 2000 Operating Activities $ 719,000 $ 2,062,000 Investing Activities (1,038,000) (351,000) Financing Activities 9,000 (1,700,000) Net effect on cash $ (310,000) $ 11,000 Cash flows provided by operations decreased from $2,062,000 in 2000 to $719,000, an decrease of $1,343,000 due to a combination of the following factors: (1) investment in inventory and accounts receivable resulting from a new subcontract- ($457,000); (2) decrease in gross profits before depreciation and loss provisions- ($1,370,000); (3) decrease in interest expense-$116,000; (4) utilization of deferred tax benefits-$142,000; (5) timing in the collection of accounts receivable-$123,000; and (6) other working capital changes netting to an increase in cash flows of $103,000. Cash used in investing activities increased from $351,000 to $1,038,000 primarily due to the investment in the Louisiana subcontract. Cash used in financing activities decreased from $1,700,000 in 2000, due to payoff of a significant portion of the Company's equipment financing in December 2000. Results of Operations For the year ended December 31, 2001 contract revenues decreased from $6,162,000 to $4,843,000, a decrease of $1,319,000. This decrease in revenue was primarily due to a price decrease on an existing contract ($1,617,000) which was partially offset by revenue from an additional contract ($292,000). Gross profit decreased from $2,442,000 (39.6% of sales) to $2,144,000 (44.3% of sales), a decrease of $298,000. Due to a change in management's estimates, $260,000 of a $310,000 contract loss provision accrued in 2000 was reversed in 2001. Considering the effect of the loss provision on a two- year comparison, gross profit actually decreased by $868,000. The was primarily due to effect of the aforementioned contract price decrease which was, in part, offset by lower depreciation ($613,000) and lower equipment and software maintenance costs ($188,000). The Company expects to maintain present profit margins. Operating expenses decreased 16.9% from $1,612,000 in 2000 to $1,339,000 in 2001, a decrease of $273,000 of which $185,000 was attributable to patent amortization. Selling, general and administrative expenses increased from $1,109,000 to $1,168,000, an increase of $59,000 or 5.3%. Research and development decreased from $244,000 (4% of sales) in 2000 to $96,000 (2% of sales), a decrease of $148,000. This decrease reflects the redirection of efforts of existing employees from research and development to product refinements and modifications of existing equipment and media. 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 $201,000 in 2000 to $85,000 in 2001. This reflects the pay down of equipment financing. 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. Critical Accounting Policies Financial Reporting Release No. 60, which was recently issued by the Securities and Exchange Commission ("SEC"), requests companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The SEC indicated that a critical accounting policy is one which is both important to the portrayal of the Company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are described in Note 1 to the Notes to the Financial Statements included in this Form 10-KSB. Although not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates, we have identified the policies below as critical to our business operations and understanding of our results of operations. Note that the preparation of our financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. Property, Equipment and Depreciation Contract costs and equipment have been capitalized, and include the manufactured cost of the printers and other support equipment, SST's, operating software, installation, freight, 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 terms including renewals. The amount of cost recovery (depreciation) charged to operations in the current period is based on management's estimates of future transactions. ITEM 7. FINANCIAL STATEMENTS The financial statements set forth in pages F-1 to F-12 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 Walter G. Fuller 60 Director, Chairman of the Board Nicholas Litchin 74 Director Bradford A. Morrow 47 Director Christopher M. Welch 33 Director Other Officers: Craig Litchin 46 President, Chief Operating Officer, Treasurer, Principal Financial Officer, Principal Accounting Officer George McGill 66 Vice President & Secretary Robert Neece 54 Former Director, Former Chief Executive Officer, Former Chairman of the Board, Former Assistant Secretary Family Relationships Craig Litchin is the son of Nicholas Litchin. Walter M. Fuller was once married to the maternal aunt of Christopher M. 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. 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 from March 12, 1997 to June 1998, and has been a director of the Company since the formation of Image Technology, Inc., a Nevada corporation and wholly owned subsidiary of the Company, ("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 was appointed Chairman of the Board and Chief Executive Officer of the Company in August of 2001. He is the President of M&S Steel Co., Inc., an Indiana corporation that is a supplier of structural steel to the construction industry. Christopher M. Welch was elected Director of the Company in February 1999. Mr. Welch was an agent with New York Life from 1995-2000. He attended graduate school during 2001. He is now employed as a staff accountant with Sound Image Inc., a private company in Escondido, CA. Bradford A. Morrow was elected Director in December 2000. He has been the Managing Director of Paradigm Capital LLC since the Fall of 1997 ("Paradigm"). Paradigm is involved in private placements, mergers and acquisitions and providing consulting services to emerging companies, primarily software and satellite based technologies. Craig Litchin has been President, Chief Operating Officer, Treasurer, Principal Financial Officer and Principal Accounting Officer of the Company since November 30, 2000. Mr. Litchin joined the Company as Vice President in July 1997. Prior to that, he served for eight years as Legal Counsel to the Bitove Corporation ("Bitove"). Bitove, a Canadian company, operated several different businesses throughout Canada. George McGill was appointed Vice-President and Secretary of the Company on August 30, 2000. He is an attorney in private practice in Cardiff, California and has advised the Company since its inception. Mr. McGill has been practicing law since 1961. Robert Neece was Chairman of the Board, Chief Executive Officer and Assistant Secretary until August 23, 2001. Mr. Neece resigned from the Board of Directors on October 12, 2001. Mr. Neece had 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 employed as an accountant with an emphasis in computer applications at a private company in Escondido, California. George McGill was appointed Secretary of the Corporation in December 2000. He is an attorney in private practice in Cardiff, California and has advised the Corporation since its inception. Bradford A. Morrow was elected Director in December 2000. He is Managing Director of Paradigm Capital LLC involved in private placements, mergers and acquisitions and consulting services to emerging companies, primarily software and satellite based technologies. 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. ITEM 10. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth information regarding compensation paid to the Company's Chief Executive Officer. No other executive officers of the Company received in excess of $100,000 of salary and bonus from the Company during the year ended December 31, 2001: Annual Compensation Long-term Compensation Awards Restricted Options Stock and Other Name and Position Year Salary Bonus Awards Sar's Compensation Walter Fuller 1999 $ 7,250 $ - - - $ - CEO, Director 2000 $ 1,750 $ - - - $ - 2001 $ - $ - - - $ - Robert Neece 1999 $ 750 $ - - - $ - Former 2000 $ 2,250 $ - - - $ - CEO, Director 2001 $ 10,000 $ - - - $ -
Compensation of Directors The Company has adopted a policy of paying directors $250 per meeting plus salary. Effective December 1, 2000, all directors except Mr. Neece received $500 per month salary. Mr. Neece received $1,000 per month salary and $250 per meeting until his resignation in October 2001. Employment Agreements Mr. Keith Winn entered into an employment agreement with the Company to serve as its Chief Technology Officer. This agreement became effective May 1, 2001 and has a term of one year. The agreement automatically renews annually subject to termination and severance clauses. The agreement provides for annual compensation of $150,000. Termination of Employment and Change of Control Arrangements None. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of April 15, 2002, 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 (6) ------------------ -------------- ------------------ -------------- Sandra K. Leatherman Common Stock 1,601,820 (8) 13.7% 3345 Fosca St. Carlsbad, CA 92009 Walter G. Fuller Common Stock 2,974,880(4) 25.4% 217 E. Railroad St. P.O. Box 299 Garrett, IN 46738 Nicholas Litchin(2) Common Stock 1,589,760(4) 13.6% 6401 Constitution Dr. Ft. Wayne, IN 46804 Robert Neece Common Stock 523,000(4) 4.5% c/o 303 East 17th Ave. Denver, Colorado 80202 Christopher M. Welch 920 Sycamore Avenue, #62 Vista, CA 92083 Common Stock 1,379,410(1)(9) 11.8% Kelly Manoccio 1027 Orchard Lane Broadview Heights, OH 44147 Common Stock 1,231,610 (9) 10.5% Craig Litchin c/o 1040 Joshua Way Vista, CA 92083 Common Stock 85,000(5) .7% George E. McGill 120 Birmingham, #240 Cardiff, CA 92007 Common Stock 439,920(4) 3.8% Bradford A. Morrow 9025 E. Jenan Dr. Scottsdale, AZ 85260 Common Stock 130,000(3) 1.1% All Officers and Common Stock 9,955,400 85% (6) Directors as a Group (5 persons) (1) Includes options to purchase 195,000 common shares under the Company's stock option plan (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 130,000 common shares under the Company's stock option plan (4) Includes options to purchase 315,000 common shares under the Company's stock option plan (5) Includes options to purchase 85,000 common shares under the Company's stock option plan (6) Adjusted for the effect of 1,882,500 shares issuable upon exercise of outstanding stock options (8) Includes 1,651,820 shares held as trustee of the J&S Trust (9) Includes 465,020 shares held as beneficial owner of the Janice Welch Trust ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS From April 2000 through January 2001, the Company rented office space for $650 a month from a company partly owned by Nicholas Litchin. For the years ended December 31, 2001 and 2000, the aggregate rent was $650 and $5,949. As of September 1999, the Company entered into an agreement with American Registration Systems, Inc., a company whose sole shareholder at the time was the late Chief Executive Officer of the Company, for the purchase of a patent for $130,000. For the years ended December 31, 2001 and 2000, installments of principal and interest of $20,000 and $25,000, respectively, were paid, including interest of $9,384 and $10,087, respectively. Future payments are due in quarterly installments of $5,000, inclusive of interest of 6.61%. During 2000, the Company leased five (5) service vehicles from a company owned by Kent Litchin, the son of Nicholas Litchin, an ITI Director. In 2000, the Company paid $28,136 in operating lease payments. During December 2000, the Company purchased the vehicles for $14,089. During 1999, the Company advanced $28,285 to a trust of the late Chief Executive Officer. The amount due including $3,602 imputed interest is estimated to be uncollectible and has been recorded as a "loss on uncollectible advance to affiliate." For the years ended December 31, 2001 and 2000, the Company recorded imputed interest income of $1,518 and $1,446, respectively. 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, 2001 Statements of Operations for the years ended December 31, 2001 and 2000 Statements of Stockholders' Equity for the years ended December 31, 2001 and 2000 Statements of Cash Flows for the years ended December 31, 2001 and 2000 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. 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/ Craig Litchin Craig Litchin, President and Chief Operating Officer Date: September 19, 2002 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/Craig Litchin President, Chief Operating Officer, Treasurer, Principal September 19, 2002 Craig Litchin Principal Financial Officer, Principal Accounting Officer By:/s/Nicholas Litchin Director September 19, 2002 Nicholas Litchin By:/s/George McGill Vice President, Secretary September 19, 2002 George McGill By:/s/Walter G. Fuller Chief Executive Officer, September 19, 2002 Chairman of the Board, Walter G. Fuller Director By:/s/Bradford Morrow Director September 19, 2002 Bradford Morrow By:/s/Christopher M. Welch Director September 19, 2002 Christopher M. Welch Index to Financial Statements Page Report of Comiskey & Company, P.C. Independent Public Accountants F-1 Balance Sheet F-2 Statements of Operations 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, 2001, and the related statements of operations, stockholders' equity, and cash flows for each of the years ended December 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management. 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, 2001, and the results of its operations, cash flows, and changes in stockholders' equity for each of the years ended December 31, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America. Denver, Colorado February 28, 2002 /s/ Comiskey & Company PROFESSIONAL CORPORATION Intellectual Technology, Inc. BALANCE SHEET December 31, 2001 ASSETS Current Assets Cash and cash equivalents $ 206,034 Accounts receivable 417,175 Inventory 734,331 Deferred income tax benefits 14,294 Prepaid income taxes 68,404 Prepaid expenses 110,176 ---------- Total current assets 1,550,414 Property & Equipment Contract equipment 7,209,618 Non-contract equipment - office, warehouse equipment, furniture and vehicles 75,011 ---------- 7,284,629 Less: Accumulated depreciation 5,912,288 ---------- 1,372,341 Other Assets Patents, trademark, and loan fee, net of accumulated amortization of $708,477 64,450 Deferred income tax benefits, net of current portion 16,245 Due from related party, net of allowance for doubtful account of $31,887 - Deposits 4,521 ---------- Total assets $3,007,971 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 392,580 Accrued expenses and interest 50,144 Income taxes payable 1,557 Accrued loss reserve 22,000 Notes payable 174,795 Lines of credit 214,600 Due to related party 11,335 ---------- Total current liabilities 867,011 Other Liabilities Long-term debt, net of current portion 263,078 Accrued loss, net of current portion 28,000 Due to related party - long term 123,947 ---------- 415,025 ---------- 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, 9,842,680shares issued and outstanding 98 Additional paid-in capital 1,154,452 Accumulated deficit 571,385 ---------- 1,725,935 ---------- Total liabilities and stockholders' equity $3,007,971 ========== The accompanying notes are an integral part of the financial statements. F-2 Intellectual Technology, Inc. STATEMENTS OF OPERATIONS For the years ended December 31, 2001 and 2000 2001 2000 ------------ ------------ REVENUES Registration decals income $ 4,695,304 $ 5,995,799 Other revenue 148,061 166,300 ------------ ------------ Total revenues 4,843,365 6,162,099 COST OF REVENUES Depreciation and Amortization - contract costs 416,667 969,005 Insurance 18,870 19,290 Maintenance 935,359 1,089,729 Materials 1,170,187 1,184,806 Cost of other revenue 98,435 64,782 Other contract expenses 193,408 - Impairment loss - equipment parts 92,699 - Provision (credit) for contract losses (266,263) 390,233 Property taxes 40,410 2,573 ---------- ---------- Total cost of revenues 2,699,782 3,720,418 ---------- ---------- Gross profit 2,143,583 2,441,681 OPERATING EXPENSES Depreciation 13,818 12,979 Amortization of patent 61,620 246,478 Selling, general & administrative expenses 1,167,886 1,109,239 Research & development 96,013 243,546 ---------- ---------- 1,339,337 1,612,242 ---------- ---------- Income from operations 804,246 829,469 OTHER INCOME (EXPENSE) Interest income 20,282 44,165 Loss on uncollectible advance to affiliate (31,887) - Interest expense (84,724) (200,555) ---------- ---------- Income before income taxes 707,917 673,049 Income tax expense 267,651 217,667 ---------- ---------- NET INCOME $ 440,266 $ 455,382 ========== ========== Income per share: (Basic) $ 0.04 $ 0.05 ========== ========== Income per share: (Diluted) $ 0.04 $ 0.05 ========== ========== Weighted average number of shares outstanding (Basic) 9,842,680 10,000,000 ========== ========== Weighted average number of shares outstanding (Diluted) 9,919,246 10,009,681 ========== ========== 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, 2001 and 2000 Common Stock Additional ----------------- Retained earnings Number paid-in (Accumulated of shares Amount capital deficit) Totals --------- ----- ----------- ------------ ------------- Balances as of January 1, 2000 10,000,000 $ 100 $ 1,186,250 $ (324,263) $ 862,087 Net income - - - 455,382 455,382 ---------- ----- ----------- ------------ ------------ Balances as of December 31, 2000 10,000,000 100 1,186,250 131,119 1,317,469 Stock redeemed for cash during year (157,320) (2) (31,798) - (31,800) Net income - - - 440,266 440,266 ---------- ----- ----------- ------------ ------------ Balances as of December 31, 2001 9,842,680 $ 98 $ 1,154,452 $ 571,385 $ 1,725,935 ========== ===== =========== ============ ============= 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, 2001 and 2000 2001 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 440,266 $ 455,382 Adjustments to reconcile net income to net cash flows from operating activities: Amortization of loan fees 10,798 46,784 Depreciation and amortization 492,115 1,228,462 Deferred income taxes 142,461 10,000 Increase (decrease) in loss reserves (260,000) 310,000 Impairment loss - equipment parts 92,699 - Contract equipment expensed as research, Development and demonstration - 42,500 Loss on uncollectible advance to affiliate 31,887 - Other adjustments 4,471 544 Decrease (increase) in current assets Certificate of deposit 128,677 (28,677) Accounts receivable (120,477) 60,652 Accounts receivable - related party 13,802 (12,546) Inventory (406,236) 23,304 Prepaid expenses 531 (15,869) Prepaid income taxes (44,704) (23,700) Increase (decrease) in current liabilities Accounts payable 199,766 4,395 Income taxes payable (14,286) 15,843 Accrued expenses and interest 7,644 (55,357) ----------- ----------- Net cash flows from operating activities 719,414 2,061,717 CASH FLOWS FROM INVESTING ACTIVITIES Investment in trademark (1,040) - Purchase of non-contract equipment (9,241) (26,509) Investment in contract costs and equipment (1,028,132) (324,470) ----------- ---------- Net cash flows from investing activities (1,038,413) (350,979) CASH FLOWS FROM FINANCING ACTIVITIES New borrowings 214,600 - Repayment by related party 8,774 - Debt repayments 168,218 (1,700,186) Redemption of common stock 31,800 - Loan costs 14,600 - ----------- ---------- Net cash flows from financing activities 8,758 (1,700,186) ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (310,241) 10,552 CASH AND CASH EQUIVALENTS, beginning of period 516,275 505,723 ----------- ---------- CASH AND CASH EQUIVALENTS, end of period $ 206,034 $ 516,275 =========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 69,550 $ 159,372 =========== ========== Cash paid during the year for income taxes $ 192,096 $ 241,640 =========== ========== The accompanying notes are an integral part of the financial statements. F-5 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2001 1. Summary of Significant Accounting Policies Description of Business Intellectual Technology, Inc. ("ITI," "the Company"), a Delaware corporation, is engaged in the design, manufacture, and sale or lease of printer systems and media for the automated printing of motor vehicle registration forms and license plate decals. The Company's printing systems are currently installed in the states of Indiana, Louisiana, and South Dakota. These printing systems are designed both as stand-alone units which are used in individual motor vehicle registration offices and mailrooms, and have been incorporated into self-service terminal ("SST") machines. Principles of Consolidation The accompanying financial statements include Intellectual Technology, Inc. and its wholly owned subsidiary, Image Technology, Inc, a Nevada Corporation. There are no inter-company transactions due to the inactivity of Image Technology, Inc. Property, Equipment and Depreciation Contract costs and equipment have been capitalized, and include the manufactured cost of the printers and other support equipment, SST's, operating software, installation, freight, 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 terms including renewals. The amount of cost recovery (depreciation) charged to operations in the current period is based on management's estimates of future transactions. Repairs and Maintenance Maintenance costs are expensed as incurred. All costs associated with maintenance contracts are prorated over the period of the maintenance contract. Inventory Inventory consists of media (paper products, ribbon, and decals) used to produce the motor vehicle registration forms and decals. Inventory is stated at the lower of cost or market on a first-in, first-out basis. Intangibles Patent costs are capitalized, and are amortized over the remaining useful lives of the patents, which originally had been 17 years from issue. However, as of June 30, 2000, the lives of these patents were reduced to 16 months, which was the expected remaining useful life, as determined by management. Certain loan fees to obtain debt financing have been deferred and are amortized over the length of the loan using the effective interest rate method. Use of Estimates The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from these estimates. F-6 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2001 1. Summary of Significant Accounting Policies (continued) Research and Development Research and development costs are expensed as incurred. Cash and Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an initial period of three months or less to be cash equivalents. Significant Concentrations For the year ended December 31, 2001, one customer accounted for 82%, and two other customers accounted for 16% of total revenues. From time-to-time, the Company maintains cash balances in excess of FDIC insured limits. The amount of such excess at December 31, 2001 was approximately $103,000. Earnings per Share Basic earnings per share are computed using the weighted average number of shares outstanding. Fully diluted earnings per share are computed using the treasury stock method as to potential dilutive securities. 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. Related Party Transactions From April 2000 through January 2001, the Company rented office space for $650 a month from a company whose significant ownership is also a related party. For the years ended December 31, 2001 and 2000, $650 and $5,949 was paid for rents and other reimbursable expenses. The Company leased service vehicles from a company owned by a relative of one of ITI's directors. The lease called for monthly payments of $2,233. During 2000, $28,136 in lease payments were made, and during December the Company purchased the remainder of the leases for $14,089. As of September 1999, the Company entered into an agreement with ARS, for the purchase of a patent for $130,000 plus accrued interest. For the years ended December 31, 2001 and 2000, $10,616 and $14,913 of this amount were repaid, and $9,384 and $10,087 were charged to interest expense, respectively. The remainder of the payable, $135,282 including accrued interest, is due in quarterly installments of $5,000, inclusive of interest of 6.61%. During 1999, the Company advanced $28,285 to a related party. The amount due including $3,602 including imputed interest is estimated to be uncollectible and has been recorded as a "loss on uncollectible advance to affiliate." For the years ended December 31, 2001 and 2000, the Company recorded imputed interest income of $1,518 and $1,446, respectively. F-7 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2001 3. Notes Payable and Long-term Debt The Company is obligated under the following notes at December 31, 2001: Short-term Long-term 10.4% Installment notes, secured by certain contract equipment and the assignment of certain accounts receivable. Principal and interest are payable in monthly installments of $17,680. Matures April 2004. $ 174,795 $ 263,078 Scheduled note maturities on debt over the next five years and in the aggregate are as follows: For the year ended December 31, Amount 2002 $ 174,795 2003 193,865 2004 69,213 Thereafter - Under the Company's current financing arrangement, receivables from one contract have been assigned to the note holder. The amount of monthly billing from the contract is remitted directly to the note holder. 4. Lines-of-Credit The Company has available a $300,000 line-of-credit with a bank secured by accounts receivable, equipment and general intangibles. The line bears interest at Prime plus two-percent (with a minimum interest rate of 7%) and Matures in December 2002. The balance on this line at December 31, 2001 was $206,300. The Company has available a $400,000 line-of-credit with a bank secured by accounts receivable, equipment and general intangibles. The line bears interest at Prime plus two-percent (with a minimum interest rate of 7%). This line-of-credit requires interest only payments through June 2002, at which time, any unpaid balance will convert to a three-year installment loan. The balance at December 31, 2001 was $8,300. 5. Leases As of December 31, 2001, the Company leases for its own use office space under non-cancelable operating leases expiring in the years 2000 to 2002. Effective March 2002, the Company entered into a new office lease expiring in February 2007. F-8 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2001 5. Leases (continued) Future minimum lease payments on non-cancelable operating leases over the next five years are as follows: For the year ended December 31, Amount 2002 $ 65,763 2003 57,900 2004 59,700 2005 61,000 2006 63,200 Thereafter 10,600 Rent expense for the years ended December 31, 2001and 2000 was $82,076 and $75,481, respectively, net of sublease income of $6,710 for 2001 and $25,474 for 2000. 6. Income Taxes The components of the provision for income taxes are as follows: 2001 2000 Current federal income tax expense $ 116,154 $ 155,000 State and local income taxes currently paid or payable 25,298 52,667 Flow through credits and other (12,279) - Deferred tax increase 138,478 10,000 Income tax expense $ 267,651 $ 217,667 The Company has $115,000 in unamortized startup costs deductible for income tax purposes in 2001 and $50,000 of projected contract losses deductible for income tax purposes in 2002, 2003, and 2004. The Company also has approximately $43,000 in California Credits for Increasing Research Activities available to offset future California taxable income and related tax. The following are the components of the Company's deferred tax assets and liabilities: 2001 2000 Unamortized startup costs $ - $ 43,000 Projected losses, depreciation allowances and miscellaneous 18,539 118,000 Research and development credits 43,000 39,000 Valuation allowance (31,000) (27,000) Total deferred tax assets $ 30,539 $ 173,000 Deferred tax liabilities $ - $ - F-9 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2001 6. Income Taxes (continued) Reconciliation between statutory federal income tax rate and the effective income tax rates based on income before income taxes and extraordinary items: 2001 2000 Statutory federal income tax rate 34.0% 34.0% Federal income tax credits and other adjustments 0.9% (9.5)% State income taxes, net of federal tax benefit 2.9% 7.8% Effective income tax rates 37.8% 32.3% 7. Stockholders' Equity Preferred Stock At December 31, 2001, 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, 2001, a total of 20,000,000 shares of $0.00001 par value common stock were authorized, and 9,842,680 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 4/17/02 200,000 Class B $12.50/share 4/17/02 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. 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. As a result of the transaction, the shareholders of Image Technology, Inc. acquired collectively a 90% interest in the reporting company, with the remaining 10% ownership retained by the original shareholders. 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 1,567,500 stock options to purchase shares of stock in the Company at $0.38 and $0.18 per share. F-10 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2001 7. Stockholder' Equity (continued) Stockholders Equity and 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, 2001, the Company's financial statements do not contain any changes in equity that are required to be reported separately in comprehensive income. 8. Stock Option Plan On December 8, 2000, the directors of Intellectual Technology, Inc. issued options under the 2000 Stock Option Plan ("2000 Plan") consisting of a pool of 2,500,000 incentive stock options and non-statutory stock options. This pool of share options will be reduced by the shares issued upon the exercise of the options issued under the 1999 Stock Option Grant Plan ("1999 Plan"). The 1999 Plan will remain in full effect until no options awarded under this plan remain outstanding. As of December 31, 2001, 5,000 non-qualified options issued under the 1999 Plan remain outstanding, 170,000 incentive stock options were forfeited and the remaining 1,350,000 incentive stock options outstanding as of December 31, 1999 have been voluntarily relinquished and reissued with substantially the same exercise features under the 2000 Plan. 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, 1999 1,525,000 $ 0.38 600,000 $ 0.38 Options granted 527,500 0.18 - 0.18 Previous options vesting - 0.38 377,500 0.38 Options forfeited (170,000) 0.38 - 0.38 Options exercised - - - - Options outstanding as of December 31, 2000 1,882,500 $ 0.32 977,500 $ 0.38 Options granted - - - - Previous options vesting - 0.38 442,500 0.38 Options forfeited - 0.34 - 0.38 Options exercised - - - - Options outstanding as of December 31, 2001 1,882,500 $ 0.32 1,420,000 $ 0.38 Options have exercise prices of $0.38 and $0.18 per share. F-11 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2001 8. Stock Option Plan (continued) All of the options granted expire at various times over a period of five years from the date of grant in the case of significant shareholders and five years from the date of vest for all others and have the following vesting characteristics: Number of options Vesting period Vested at December 31, 2001 1,420,000 Immediately 1,420,000 462,500 1 year - - 2 years - 1,882,500 1,420,000 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. Accordingly, no compensation costs were recorded for options issued at prices which reflect no intrinsic value at the grant or modification date. 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 income would have been decreased to the pro forma amounts as follows for the years ending December 31: 2001 2000 As Pro As Pro Reported Forma Reported Forma Net income $ 440,266 $ 440,266 $ 455,389 $ 400,506 Net income per share $ 0.04 $ 0.04 $ 0.05 $ 0.04 The average fair value of options granted during fiscal 2000 was $0.0558, no options were granted or modified in 2001. 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 7.0 percent for fiscal 2000; expected life of 602 days for the year ended December 31, 2000; dividend yield percentage of 0%; and volatility of 279% for the year ended December 31, 2000. 9. Reclassification of Prior Year Amounts Certain items on the statements of operations, and statements of cash flows have been reclassified to conform to current year classification. This reclassification has no effect on previously reported income. F-12