10KSB 1 intellectual10ksb123102.txt INTELLECTUAL TECHNOLOGY 10KSB, 12.31.02 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, 2002 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, 2002 were $6,316,957. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of April 11, 2003 was $885,000. 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 11, 2003, 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 PART I ITEM 1. DESCRIPTION OF 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 discussions with law enforcement officials, ITI believes that losses attributable to these problems are in the 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. Materials used in the preparation of vehicle registration or other forms are referred to as "media" (blank roll or sheet paper, decal and printer ribbon). This on-demand printing capability allows Departments of Motor Vehicles to 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 from stand-alone units in a printer server environment within a Department of Motor Vehicles ("DMV") office and from self-service terminals (SST's) that can be placed in locations remote from DMV offices. One of the ITI stand-alone printers was patented September 20, 1994. The self-service terminal was patented on November 13, 1990. The Company purchased both of these patents on October 31, 1995. 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. Other printing products and technologies For two of the Company's contracts, the Company purchased stand-alone printers from the manufacturer. The Company does not own the patents on these printers. These printers are also operated in a printer server environment. ITI furnishes blank paper stock with a blank decal affixed for the printing process. Whether the ITI printing system or other printing technology is employed depends upon the size of registration, the number of decals issued per transaction and the desired speed of printing. ITI also provides the software to integrate the printing system with the State's computer system. 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 markets 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. References of DMV officials of states where the Company has installed its products are supplied, along with an offer to demonstrate these 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 initial term of the Indiana Contract was for a period of three years. Several amendments have extended the contract through October 31, 2004. 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. This contract expires on March 31, 2004. 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 and in September 2001, branch installation began. In 2002, the installation of ITI's equipment statewide was completed. The Company expects this subcontractor agreement to be in effect at least through December 2004. In April 2002, the Company signed a contract with the State of Ohio to supply the equipment and media to begin production of 100% of the mail-in vehicle registrations. This contract expires June 30, 2003, but is subject to annual renewal by the State at the end of each contract year. In March 2002, the Company signed a contract, effective through June 30, 2007, with the State of New Hampshire to produce "Safe Boating Certificate Cards". The State reserves the right to terminate the contract for any reason by giving thirty days written notice. For the year ended December 31, 2002, 96% of ITI's total revenues were derived from the above contracts and agreements. Manufacturing and Supply The Company has used subcontractors to manufacture and supply most components and subassemblies of ITI's printing system. Other stand-alone printers are purchased from Datamax Corporation, the manufacturer. 3M Corporation produces the decal used by all printing systems. NCR CORPORATION, Moore North America and Data Papers supply the paper materials on which the registrations are printed. Dai Nippon IMS America through its distributor system supplies the thermal ribbon used in the printing process. The Company has identified alternative vendor sources for the print media. Competition The Company has identified the automation of vehicle registrations and registration decal printing as its primary market. Currently there are few 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. In addition to motor vehicle registrations, the Company believes its technology is suitable for other types of government issued registrations or certificates. An example of this is the New Hampshire contract mentioned above. The successful fulfillment of existing government contracts and resulting customer satisfaction may allow the Company a competitive advantage in these areas. Research & Development For the years ended December 31, 2002 and 2001, the Company spent approximately $199,000 and $96,000, 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 fourteen full-time employees and three part-time employees, excluding directors, of which four are in executive or administrative positions, five are in engineering, R&D or information technology, two are marketing personnel and six are maintenance personnel. The Company also retains four marketing consultants and one business consultant. No union currently represents any of the Company's employees, and the Company believes that its relations with its employees are good. REPORTS TO SECURITY HOLDERS The Company will send an annual report consisting of the form 10-KSB containing the annual audited financial statements with the notice of annual meeting and proxy statements. The Company is a "reporting company" as defined by the Securities Act of 1933. The Company files form 10-Q on a quarterly basis and form 10-KSB annually. The public may read and copy any materials filed by the Company with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company electronically files its reports with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov. The Company's web site is http://www.iti4dmv.com. ------------------ ---------------------- ITEM 2. PROPERTIES The Company occupies 5,948 square feet of office and light industrial space in Vista, California for administrative, customer support, engineering, equipment maintenance and research and development activities. The monthly rental is $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 for maintenance and customer support. The monthly rental is $1,233 per month through October 2004. The Company believes that these facilities are adequate to meet its anticipated needs for the foreseeable future. In the opinion of management, the Company's properties are adequately covered by insurance. ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings currently pending. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of shareholders on October 23, 2002, the following actions were taken: 1) Nicholas Litchin, Walter G. Fuller, Bradford A. Morrow and Christopher M. Welch were reelected to the Board of Directors. 2) Comiskey & Company P.C., of Denver, CO was ratified to serve as auditors of the Company for the year ended December 31, 2002. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The principal market for the Company's common stock is the Over the Counter Bulletin Board. 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 Quicken.com Quarter Ended High Bid Low Bid March 31, 2001 $ 0.65 $ 0.13 June 30, 2001 $ 0.51 $ 0.21 September 2001 $ 0.24 $ 0.24 December 2001 $ 0.40 $ 0.20 March 31, 2002 $ 0.51 $ 0.08 June 30, 2002 $ 0.20 $ 0.09 September 30, 2002 $ 0.25 $ 0.09 December 31, 2002 $ 0.09 $ 0.09 March 31, 2003 $ 0.09 $ 0.09 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 11, 2003, 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. Plan of Operation In 2003, the Company expects to continue to respond to "Requests For Proposal" from various government agencies. The Company anticipates that the capital requirements of any new contracts and existing debt service will be funded from present cash balances, future cash flows from operations or, if necessary, by borrowing from lenders, with which, the Company has existing or past relationships. The Company does not expect any significant capital requirements from existing contracts in 2003. The Company has committed additional resources in 2003 to complete the design (which began in 2002) and manufacture of prototypes of a next generation stand-alone printer. The Company will continue to engage in research and development of additional applications of its products in related areas and new product development and the testing of present products for potential new customers. The Company does not expect to purchase any other significant plant or equipment or make significant changes in the number of employees. 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 all new investment in contract costs and equipment. On May 15, 2002 the Company utilized a $400,000 line-of-credit with a bank to prepay the remaining balance of contract cost financing in the amount of $379,000. This line of credit was converted to a 36-month term loan with monthly payments of $12,370, including interest at 7%, through July 2005. This loan is secured by accounts receivable, equipment and general intangibles The Company has available a $300,000 line-of-credit with a bank secured by accounts receivable, equipment and general intangibles. The Company has utilized this credit line at various times in 2002 to meet short-term borrowing needs. However, as of December 31, 2002 and the date of this filing, there was no outstanding balance. The line bears interest at Prime plus two percent (with a minimum interest rate of 7%) and is subject to renewal in December 2003. The following is a summary of the Company's cash flows from operating, investing, and financing activities: Year ended December 31, 2002 2001 ---- ---- Operating Activities $ 908,000 $ 719,000 Investing Activities (274,000) (1,038,000) Financing Activities (322,000) 9,000 -------- ------- Net effect on cash $ 312,000 $ (310,000) ------- -------------- Cash flows provided by operations increased from $719,000 in 2001 to $908,000, an increase of $189,000 due primarily to a combination of the following factors: (1) increase in net profits before depreciation and other non-cash charges or credits-$226,000; (2) lower increased investment in inventory and accounts receivable in 2002 versus 2001 due to additional contracts-$107,000; and (3) higher utilization of deferred assets in 2001 to reduce income tax payments-($139,000). Cash used in investing activities decreased from $1,038,000 to $274,000 primarily due to the differences in investment in the Louisiana subcontract in 2001 and the Ohio and New Hampshire contracts in 2002. Cash used in financing activities in 2002 was $322,000 in 2002 as the Company continued to pay down long-term debt in excess of new borrowings. Results of Operations For the year ended December 31, 2002 contract revenues increased from $4,843,000 to $6,317,000, an increase of $1,474,000. This increase in revenue was primarily due to: (1) the installation phase of the Louisiana subcontract in 2001 versus almost a full year of operations in 2002-$864,000; (2) Additional revenue from the Ohio and New Hampshire contracts-$288,000; and (3) Additional revenue from sale of printer equipment-$209,000. Gross profit increased from $2,144,000 (44.3% of sales) to $2,327,000 (36.8% of sales), an increase of $183,000. Due to a change in management's estimates, $260,000 of a $310,000 contract loss provision accrued in 2000 was reversed in 2001 and $22,000 was reversed in 2002. Impairment losses from the write down of excess equipment parts were $93,000 in 2001 and $22,000 in 2002. Considering the effect of the contract loss provisions and impairment losses on a two-year comparison, gross profit would have increased by $357,000 in 2002 over 2001 and the gross profit percentage in 2001 would have been 40.7% rather than 44.3%. The Company expects that 2003 gross profit margins will improve as existing contracts mature. However, overall future gross margins are also dependent on the timing and magnitude of new contracts and the Company's ability to control media and maintenance costs for existing contracts. Operating expenses increased 26% from $1,339,000 in 2001 to $1,695,000 in 2002, an increase of $356,000. Selling, general and administrative expenses increased from $1,168,000 to $1,444,000, an increase of $276,000 or 24%. This is primarily due to: (1) Increase in payroll of $101,000 due the hiring of additional personnel, bonuses and changes in cost allocations of the payroll of existing personnel from R&D to product demonstration and support, (2) Increased use of outside consultants for the evaluation of new business, demonstration of the Company's products and project coordination of new contracts ($96,000); and (3) Increased marketing expenses for product demonstration, attending industry conferences and meeting with state officials-$51,000. Research and development increased from $96,000 (2% of sales) in 2001 to $199,000 (3.2% of sales), an increase of $103,000. The Company committed additional resources in 2002 to a next generation stand-alone printer and self-service terminal. The Company will continue to engage in research and development of additional applications of its products in related areas and new product development. The Company has $28,000 in loss reserves as of December 31, 2002 that were recognized in 2000. The Company is hopeful that, as in 2002, these anticipated losses will not materialize. The Company recorded $22,000 and $93,000 in impairment losses in 2002 and 2001, respectively for the loss in value of printer parts. These parts can be used both for the repair of existing printers and the manufacture of the next generation printer. The value of these parts as of December 31, 2002 is estimated to be $53,000. The Company may need to record additional impairment charges in 2003. The Company maintains on average, at least a three months' supply of media for each contract. The failure of a State to extend a contract or an early contract termination could result in the write-down of inventory left over at the end of the contract period or the write-off of the book value of contract costs and equipment. The Company has no knowledge at this time that these events will occur. If these events do occur, the Company believes that the transition period of replacing contractors will allow reduction of these losses. As of December 31, 2002, the book value of contract costs and equipment and inventory of contracts expiring in 2003 is $39,000 and $74,000, respectively. 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 that 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-13 of this report are incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company's principal independent auditors did not resign or decline to stand for reelection, nor were they dismissed during the Company's two most recent fiscal years. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Identification of Directors, Executive Officers, and Significant Employees The directors and executive officers of the Company, their ages, and their positions held in the Company are as follows: Name Age Position Walter G. Fuller 61 Director, Chairman of the Board Nicholas Litchin 74 Director Bradford A. Morrow 47 Director Christopher M. Welch 33 Director Other Officers: Craig Litchin 47 President, Chief Operating Officer, Treasurer, Principal Financial Officer, Principal Accounting Officer George McGill 67 Vice President & 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 since 1971. 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. 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, 2002: Annual Compensation Long-term Compensation Awards ------------------------ ---------------------------------- Restricted Options Director's Stock and Other Name and Position Year Fees Bonus Awards Sar's Compensation ----------------- ---- ---------- ----- ---------- ------- ------------ Walter Fuller 2000 $ 1,750 $ - - - $ - CEO, Director 2001 $ 7,250 $ - - - $ - 2002 $ 6,750 $ - - - $ - Compensation of Directors Until October 1, 2002, the Company had adopted a policy of paying directors $250 per meeting plus directors fees of $500 per month as employees. Effective October 1, 2002, all directors are treated as independent contractors, but receive the same remuneration. 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 had a term of one year. The agreement was renewed for an additional year on April 30, 2002 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 The table below sets forth the total number of shares of the Company's outstanding voting stock owned by beneficial owners owning more than 5% and 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) ------------------ -------------- ------------------ ------------ Beneficial owners owning more than 5% other than management ----------------------------------------------------------- Sandra K. Leatherman Common Stock 1,601,820 (8) 13.9% 3345 Fosca St. Carlsbad, CA 92009 Kelly Manoccio 1027 Orchard Lane Broadview Heights, OH 44147 Common Stock 1,231,610 (9) 10.7% Beneficial ownership of officers and directors ---------------------------------------------- Walter G. Fuller Common Stock 2,974,880(4) 25.7% 217 E. Railroad St. P.O. Box 299 Garrett, IN 46738 Nicholas Litchin Common Stock 1,589,760(2)(4) 13.8% 6401 Constitution Dr. Ft. Wayne, IN 46804 Christopher M. Welch 920 Sycamore Avenue, #62 Vista, CA 92083 Common Stock 1,379,410(1)(9) 11.9% 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 6,598,970 57.1% (6) Directors as a Group (6 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 1,717,500 shares issuable upon exercise of outstanding stock options plus 9,842,680 shares outstanding for a total of 11,560,180 shares. (8) Includes 1,601,820 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 None. 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, 2002 Statements of Operations for the years ended December 31, 2002 and 2001 Statements of Stockholders' Equity for the years ended December 31, 2002 and 2001 Statements of Cash Flows for the years ended December 31, 2002 and 2001 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). 21. Subsidiaries of Registrant. (3). 99.1 Certification of Chief Executive Officer and Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (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. ITEM 14. CONTROLS AND PROCEDURES Based on their evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-KSB, the principal financial officer of the Company has concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. 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, Chief Operating Officer and Principal Financial Officer Date: April 14, 2003 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 April 14, 2003 Craig Litchin Principal Financial Officer, Principal Accounting Officer By:/s/Nicholas Litchin Director April 14, 2003 Nicholas Litchin By:/s/George McGill Vice President, Secretary April 14, 2003 George McGill By:/s/Walter G. Fuller Chief Executive Officer, April 14, 2003 Chairman of the Board, Walter G. Fuller Director By:/s/Bradford Morrow Director April 14, 2003 Bradford Morrow By:/s/Christopher M. Welch Director April 14, 2003 Christopher M. Welch Certifications I, Craig Litchin, certify that: 1. I have reviewed this annual report on Form 10-KSB of Intellectual Technology, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 14, 2003 /s/ Craig Litchin Principal Executive Officer Principal Financial Officer 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-13 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- We have audited the accompanying balance sheet of Intellectual Technology, Inc. as of December 31, 2002, and the related statements of operations, stockholders' equity, and cash flows for each of the years ended December 31, 2002 and 2001. 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, 2002, and the results of its operations, cash flows, and changes in stockholders' equity for each of the years ended December 31, 2002 and 2001 in conformity with accounting principles generally accepted in the United States of America. Denver, Colorado February 28, 2003 PROFESSIONAL CORPORATION F-1
Intellectual Technology Inc. BALANCE SHEET December 31, 2002 ASSETS ------ Current Assets Cash and cash equivalents $ 518,220 Accounts receivable 457,225 Inventory 723,648 Deferred income tax benefits 4,977 Prepaid income taxes 4,681 Prepaid expenses 83,761 ---------------- Total current assets 1,792,512 Property and Equipment Contract equipment 7,426,294 Non-contract equipment - office, warehouse equipment, furniture and vehicles 103,628 ---------------- 7,529,922 Less: accumulated depreciation 6,535,957 ---------------- 993,965 Other Assets Patents trademark and loan fee, net of accumulated amortization of $715,747 19,334 Deferred income tax benefits, net of current portion 22,306 Due from related party, net allowance for doubtful account of $31,887 - Deposits 6,347 ---------------- Total assets $ 2,834,464 ================ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities Accounts payable $ 180,954 Accrued expenses and interest 67,205 Income taxes payable 7,154 Accrued loss reserve 22,000 Note payable 128,775 Due to related party 15,007 ---------------- Total current liabilities 421,095 Long-term Liabilities Note payable, net of current portion 210,425 Accrued loss reserve, net of current portion 5,788 Due to related party, net of current portion 111,844 ---------------- 328,057 ---------------- 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, 9,842,680 shares issued and outstanding 98 Additional paid-in capital 1,154,452 Retained earnings 930,762 ---------------- 2,085,312 ---------------- Total liabilities and stockholders' equity $ 2,834,464 ================
The accompanying notes are an integral part of the financial statements. F-2
Intellectual Technology Inc. STATEMENT OF OPERATIONS For the years ended December 31, 2002 and 2001 2002 2001 ---------------- ---------------- REVENUES Transaction fees $ 5,930,859 $ 4,695,304 Other revenue 386,098 148,061 ---------------- ---------------- Total revenues 6,316,957 4,843,365 COST OF REVENUES Depreciation and amortization - contract costs 611,426 416,677 Insurance 18,387 18,870 Maintenance 1,221,204 935,359 Materials 1,758,587 1,170,187 Costs of other revenue 270,330 98,435 Other contract expenses 49,009 193,408 Impairment loss - equipment parts 22,212 92,699 Reduction in provision for contract losses (22,212) (266,263) Property taxes 60,536 40,410 ---------------- ---------------- Total cost of revenues 3,989,479 2,699,782 ---------------- ---------------- Gross profit 2,327,478 2,143,583 OPERATING EXPENSES Depreciation 16,347 13,818 Amortization of patent 35,214 61,620 Selling, general and administrative expenses 1,444,148 1,167,886 Research and development 199,254 96,013 ---------------- ---------------- 1,694,963 1,339,337 ---------------- ---------------- Income from operations 632,515 804,246 OTHER INCOME (EXPENSE) Interest income 7,077 20,282 Loss on uncollectible advance to affiliate - (31,887) Interest expense (82,218) (84,724) ---------------- ---------------- Income before income taxes 557,374 707,917 Income tax expense 197,997 267,651 ---------------- ---------------- NET INCOME $ 359,377 $ 440,266 ================ ================ Income per share: (Basic) $ 0.04 $ 0.04 ================ ================ Income per share: (Diluted) $ 0.04 $ 0.04 ================ ================ Weighted average number of shares outstanding - basic 9,842,680 9,842,680 ================ ================ Weighted average number of shares outstanding - diluted 9,842,680 9,919,246 ================ ================
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, 2002 and 2001 Common Stock --------------------------- Additional Number paid-in Retained of shares Amount capital earnings Totals ------------ ------------ ------------ ------------ ------------ Balances as of January 1, 2001 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 Net income - - - 359,377 359,377 ------------ ------------ ------------ ------------ ------------ Balances as of December 31, 2002 9,842,680 $ 98 $ 1,154,452 $ 930,762 $ 2,085,312 ============ ============ ============ ============ ============
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, 2002 and 2001 2002 2001 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 359,377 $ 440,266 Adjustments to reconcile net income to net cash flows from operating activities Amortization of loan fees 12,056 10,798 Depreciation and amortization 662,987 492,115 Deferred income taxes 3,256 142,461 Decrease in loss reserves (22,212) (260,000) Impairment loss - equipment parts 22,212 92,699 Loss on uncollectible advance to affiliate - 31,887 Other adjustments (1,826) 4,471 Decrease (increase) in current assets Certificate deposit - 128,677 Accounts receivable (40,050) (120,477) Accounts receivable - related party - 13,802 Prepaid expenses and other current assets 26,414 531 Prepaid income taxes 63,723 (44,704) Inventory 10,683 (406,236) Increase (decrease) in current liabilities Accounts payable (211,626) 199,766 Accrued expenses and interest 17,061 7,644 Income taxes payable 5,597 (14,286) ---------------- ---------------- Net cash flows from operating activities 907,652 719,414 CASH FLOWS FROM INVESTING ACTIVITIES Investment in trademark (2,153) (1,040) Purchases of non-contract equipment (32,721) (9,241) Investment in contract costs and equipment (238,888) (1,028,132) ---------------- ---------------- Net cash flows from investing activities (273,762) (1,038,413) CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings 400,000 214,600 Debt repayments (721,704) (168,216) Repayment by related party - 8,774 Redemption of common stock - (31,800) Loan costs - (14,600) ---------------- ---------------- Net cash flows from financing activities (321,704) 8,758 ---------------- ---------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 312,186 (310,241) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 206,034 516,275 ---------------- ---------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 518,220 $ 206,034 ================ ================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 60,896 $ 69,550 ================ ================ Cash paid during the year for income taxes $ 137,311 $ 192,096 ================ ================
The accompanying notes are an integral part of the financial statements. F-5 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2002 1. Description of Business and 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, Ohio 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. ITI provides equipment, software, media, training and support for the operation of all installed systems. 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. Differences in actual transactions from those estimated by management could materially change the rate of cost recovery charged to operations. 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, 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. 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. Advertising Costs ----------------- Costs associated with advertising are expensed in the year incurred. F-6 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2002 1. Description of Business and Summary of Significant Accounting Policies --------------------------------------------------------------------------- (continued) ----------- 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, 2002, the lives of these patents were extended by 24 months, as determined by management, due to the extension of a related contract. Certain costs to obtain debt financing have been deferred and are amortized over the length of the loan using the straight line method. Research and Development ------------------------ Research and development costs are expensed as incurred, Cash and Equivalents -------------------- For purposes of the 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, 2002, transaction fees from three contracts accounted for 91% of total revenues. For the year ended December 31, 2001, transaction fees from three contracts accounted for 98% of total revenues. As of December 31, 2002, accounts receivable from three customers accounted for approximately 90% of accounts receivable. From time-to-time, the Company maintains cash balances in excess of FDIC insured limits. The amount of such excess at December 31, 2002 was approximately $461,000. 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. Working Capital --------------- At December 31, 2002, the working capital of the Company was $1,371,417 and the current ratio was 4.26 to 1. F-7 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2002 3. Related Party Transactions -------------------------- 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, 2002 and 2001, $8,431 and $10,616 of this amount were repaid, and $8,665 and $9,384 were charged to interest expense, respectively. The remainder of the payable, $126,851 plus accrued interest of $2,096, is due in quarterly installments of $5,000, inclusive of interest of 6.61%. For the year ended December 31, 2002, the Company has a related party receivable totaling $31,887, including interest of $3,602. As of December 31, 2002, this amount had been fully offset by an allowance for doubtful account. 4. Notes Payable and Long-term Debt -------------------------------- The Company converted a $400,000 line-of-credit into an installment note in June 2002. The Company is obligated under the following note at December 31, 2002: Short-term Long-term ---------- --------- Prime plus two percent (minimum of 7% at December 31, 2002). Secured by miscellaneous equipment and assignment of certain accounts receivable. Principal and interest are payable in monthly installments of $12,370. Matures June 2005, $ 128,775 $ 210,425 ========== ========= Scheduled note maturities on debt over the next five years and in the aggregate are as follows: For the year ended December 31, Amount ------------ ------ 2003 $ 128,775 2004 126,206 2005 84,219 ------------ $ 339,200 ============ 5. Line-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% (7% at December 31, 2002) and matures in December 2003. There was no outstanding balance on this line at December 31, 2002. F-8 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2002 6. Leases ------ As of December 31, 2002, the Company leases for its own use office space and office equipment under non-cancelable operating leases expiring in the years 2003 to 2007. Future minimum lease payment on non-cancelable operating leases over the next five years are as follows: For the year ended December 31, Amount ------------ ------ 2003 $ 88,999 2004 78,633 2005 62,650 2006 56,400 2007 9,400 Rent expense for the year ended December 31, 2002 was $88,229. Rent expense for the year ended December 31, 2001 was $85,574, net of sublease income of $6,710. 7. Income Taxes ------------ The components of the provision for income taxes are as follows: 2002 2001 ---- ---- Current federal income tax expense $ 171,418 $ 116,154 State and local income taxes currently paid or payable 39,898 25,298 Flow through credits and other (16,575) (12,279) Deferred tax increase 3,256 138,478 ----------- ----------- Income tax expense $ 197,997 $ 267,651 =========== =========== The Company has $27,788 of projected contract losses deductible for income tax purposes in 2003 and 2004. The Company also has approximately $50,000 in California Credits for Increasing Research Activities available to offset future California tax. The following are the components of the Company's deferred tax assets and liabilities: F-9 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2002 7. Income Taxes (continued) ------------------------ 2002 ---- Projected losses, depreciation, allowances and miscellaneous $ 15,283 Research and development credits 50,000 Valuation allowance - Research and development credits (38,000) ---------- Total deferred tax assets $ 27,283 ---------- Deferred tax liabilities $ - ========== Reconciliation between statutory federal income tax rate and the effective income tax rates based on income before income taxes and extraordinary items: 2002 2001 ---- ---- Statutory federal income tax rate 34.0% 34.0% Federal income tax credits and other adjustments (2.7%) 0.9% State income taxes, net of federal tax benefit 4.2% 2.9% --------- ------- Effective income tax rates 35.5% 37.8% ========= ======= 8. Stockholders' Equity -------------------- Preferred Stock --------------- At December 31, 2002, 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, 2002, 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 following warrants to purchase common shares expired April 17, 2002: Number Type Exercise of Warrants of Warrant Price ----------- ---------- ----- 200,000 Class A $ 12.50/share 200,000 Class B $ 12.50/share F-10 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2002 8. 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. 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 cumulative results of operations of Image Technology, Inc. prior to the acquisition and the cumulative and current results of 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. 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, 2002, the Company's financial statements do not contain any changes in equity that are required to be reported separately in comprehensive income. F-11 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2002 9. 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 stock options. This pool of 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, 2002, 5,000 non-qualified options issued under the 1999 plan remain outstanding. During the year ended December 31, 2001 170,000 stock options were forfeited and the remaining 1,350,000 stock options outstanding were 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, 2000 1,882,500 $ 0.32 977,500 $ 0.38 Options granted 150,000 0.25 - - Previous options vesting - - 442,500 0.38 Options forfeited - - - - Options exercised - - - - ---------- --------- ----------- --------- Options outstanding as of December 31, 2001 2,032,500 0.32 1,420,000 0.38 Options granted - - - - Previous options vesting - - 447,500 0.19 Options forfeited (315,000) 0.34 (250,000) 0.38 Options exercised - - - - ---------- --------- ----------- --------- Options outstanding as of December 31, 2002 1,717,500 $ 0.32 1,617,500 $ 0.33 ========== ========= =========== =========
Options have exercise prices of $0.38, $0.25 and $0.18. 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, 2002 ----------------- -------------- -------------------------- 1,170,000 Immediately 1,170,000 397,500 1 year 397,500 150,000 one third over each of 3 years 50,000 --------- --------- 1,717,500 1,617,500 ========= =========
F-12 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2002 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. 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: 2002 2001 -------------------------- -------------------------- As Pro As Pro Reported Forma Reported Forma ----------- ---------- ----------- ---------- Net income $ 359,377 $ 347,877 $ 440,266 $ 433,558 =========== ========== =========== ========== Net income per share $ 0.04 $ 0.04 $ 0.04 $ 0.04 =========== ========== =========== ========== The average fair value of options granted during fiscal 2001 was $0.23; no options were granted or modified in 2002. 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 2001; expected life of 1,825 days for the year ended December 31, 2001; dividend yield percentage of 0%; and volatility of 333% for the year ended December 31, 2001. F-13