10QSB 1 0001.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2000 Commission file number: 0-29138 INTELLECTUAL TECHNOLOGY, INC. (Exact name of small business issuer as specified in its charter) Delaware 84-1130227 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization ) 1945 Camino Vida Roble, Suite O, Carlsbad, California 92008 (Address of principal executive offices) (760) 929-9789 (Issuer's telephone number) Check whether the issuer (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 --- As of August 18, 2000, 10,000,000 shares of common stock, par value $0.00001 per share, were outstanding. Transitional Small Business Disclosure Format (check one): Yes --- No -X- INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheet, March 31, 2000 1 Statements of Operations and Accumulated Deficit (Unaudited) for the three and six month periods ended June 30, 2000 and 1999 2 Statements of Cash Flows (Unaudited) for the six months ended June 30, 2000 and 1999 3 Notes to financial statements 4 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 5-6 PART II. OTHER INFORMATION 7 Signatures 8 Intellectual Technology, Inc. Balance Sheet June 30, 2000 (unaudited) ASSETS Current Assets Cash and cash equivalents $ 530,115 Certificate of deposit 114,903 Accounts receivable 792,055 Inventory 272,938 Prepaid expenses 151,292 --------- Total current assets 1,861,303 Property & Equipment Contract equipment 6,264,217 Equipment - non-contract, office, furniture and improvements 56,049 --------- 6,320,266 Less: Accumulated depreciation 5,364,461 --------- 955,805 Other Assets Patents, net of accumulated amortization of $558,360 173,527 Due from related party 37,212 Other non-current assets 42,494 --------- Total assets $ 3,070,341 ========= LIABILITIES AND STOCKHOLERS' EQUITY Current Liabilities Accounts payable $ 134,172 Income taxes payable 20,096 Accrued expenses 61,311 Notes payable 936,231 Due to related party 10,273 Accrued interest payable 5,961 --------- Total current liabilities 1,168,044 Other Liabilities Long-term debt, net of current portion 518,712 Due to related party - long term 140,677 --------- 659,389 --------- Stockholders' Equity Preferred stock, $0.00001 par value, 10,000,000 shares authorized, no shares issued or outstanding - Common stock, $0.00001 par value, 20,000,000 shares authorized, 10,000,000 shares issued and outstanding 100 Additional paid-in capital 1,186,250 Accumulated earnings 56,558 --------- 1,242,908 --------- Total liabilities and stockholders' equity $ 3,070,341 ========= The accompanying notes are an integral part of the financial statements. 1 Intellectual Technology, Inc. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT (unaudited) For the quarter ended June 30, ---------------------- 2000 1999 ------------ ------------- REVENUES Sales $ 1,796,648 $ 1,714,234 COST OF REVENUES Depreciation and amortization 391,442 557,370 Material costs 387,805 280,113 Maintenance and other cost of sales 279,566 199,078 ------------ ------------- Total cost of revenues 1,058,813 1,036,561 ------------ ------------- Gross profit 737,835 677,673 OPERATING EXPENSES Selling, general and administrative 342,747 358,342 Research and development 22,352 17,089 Depreciation and amortization 80,597 75,842 ------------ ------------- Total operating expenses 445,696 451,273 ------------ ------------- Income from operations 292,139 226,400 OTHER INCOME (EXPENSE) Interest income 8,709 1,579 Interest expense (57,451) (169,198) ------------ ------------- Net income before income taxes 243,397 58,781 Income tax expense 84,382 - ------------ ------------- NET INCOME 158,565 58,781 Accumulated deficit Balance, beginning of period (102,007) (2,623,533) ------------ ------------- Balance, end of period $ 56,558 $ (2,564,752) ============ ============= INCOME PER SHARE - BASIC $ 0.02 $ 0.01 ============ ============= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 10,000,000 10,000,000 ============ ============= For the six months ended June 30, ---------------------- 2000 1999 ------------ ------------- REVENUES Sales $ 3,739,008 $ 3,511,089 COST OF REVENUES Depreciation and amortization 849,204 1,165,406 Material costs 736,463 532,608 Maintenance and other cost of sales 548,553 384,100 ------------ ------------- Total cost of revenues 2,134,220 2,082,114 ------------ ------------- Gross profit 1,604,788 1,428,975 OPERATING EXPENSES Selling, general and administrative 644,654 643,035 Research and development 51,052 139,353 Depreciation and amortization 190,821 151,993 ------------ ------------- Total operating expenses 886,527 934,381 ------------ ------------- Income from operations 718,261 494,594 OTHER INCOME (EXPENSE) Interest income 14,814 1,820 Interest expense (128,489) (374,411) ------------ ------------- Net income before income taxes 604,586 122,003 Income tax expense 223,765 11,460 ------------ ------------- NET INCOME 380,821 110,543 Accumulated deficit Balance, beginning of period (324,263) (2,675,295) ------------ ------------- Balance, end of period $ 56,558 $ (2,564,752) ============ ============= INCOME PER SHARE - BASIC $ 0.04 $ 0.01 ============ ============= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 10,000,000 10,000,000 ============ ============= The accompanying notes are an integral part of the financial statements. 2 Intellectual Technology, Inc. STATEMENTS OF CASH FLOWS (Unaudited) For the six months ended June 30, ---------------------- 2000 1999 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES $ 1,130,260 $ 719,576 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of non-contract equipment (3,840) (12,632) Investment in contract costs and equip. (266,363) (405,711) ------------ ------------- Net cash flows from investing activities (270,203) (418,343) CASH FLOWS FROM FINANCING ACTIVITES New borrowings - 1,295,935 Debt repayments (835,665) (970,132) Loan fees - (102,000) ------------ ------------- Net cash flows from financing activities (835,665) 223,803 ------------ ------------- NET INCREASE IN CASH 24,392 525,036 CASH AND CASH EQUIVALENTS, beginning of period 505,723 184,757 ------------ ------------- CASH AND CASH EQUIVALENTS, end of period $ 530,115 $ 709,793 ============ ============= The accompanying notes are an integral part of the financial statements. 3 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS June 30, 2000 (Unaudited) 1. Management's representation of interim financial information The accompanying financial statements have been prepared by Intellectual Technology, Inc. without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These financial statements include all of the adjustments which, in the opinion of management, as necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. These financial statements should be read in conjunction with the audited financial statements at December 31, 1999. 4 Item 2. 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. Plan of Operations The Company designs, manufactures, and leases systems for the automated preparation and dispensing of motor vehicle registration forms and license plate decals. Effective November 1, 1996, the Company commenced a lease contract with the State of Indiana. Prior to that date, the Company was engaged principally in research and development of its products and generated only limited operating revenues. Subsequently, the Company has entered into contracts to supply equipment and material to the State of Maryland, and has entered into a five year contract with South Dakota. Liquidity and Capital Resources The following is a summary of the Company's cash flows from operating, investing, and financing activities: Six months ended March 31, (rounded) 2000 1999 Operating Activities $ 1,130,000 $ 720,000 Investing Activities (270,000) (418,000) Financing Activities (836,000) 223,000 Net effect on cash $ 24,000 $ 525,000 Cash flows provided by operations increased from $720,000 in 1999 to $1,130,000, an increase of $410,000 due to (1) net increase in cash investment of $252,000 in 2000 versus 1999 due to the investment in 1999 related to the addition of another state contract; (2) net decrease in payment of accounts payable of $262,000 in 2000 versus 1999 primarily resulting from refinancing long term debt in 1999 and utilizing part of the proceeds to pay vendors; and, (3) other items netting to a decrease in cashflows of ($104,000). The Company is committed to spend another $100,000 by the end of the year to complete installation of contract equipment. Under the Company's current financing arrangement, receivables from all contracts have been assigned to the note holder. The amount of monthly cash flow from the contracts is remitted net to the Company after debt service is satisfied. Management projects that this arrangement will continue to generate positive monthly cash flows through at least the third quarter of 2000, and that such cash flows will be sufficient to support operations and the Company's sales effort for the coming year. In April 2000, the Company obtained a $100,000 line of credit at prime plus 2%. Any borrowings under this agreement will become due in April 2001. Remaining installments on a majority of the Company's equipment financing equipment financing extend through December, 2000. 5 Results of Operations For ease in presenting the financial data, figures have been rounded to the nearest thousand. For the six months ended June 30, 2000, contract revenues increased from $3,511,000 to $3,739,000, an increase of $228,000 or 6.5%. The increase was directly related to an additional state contract (3.7%), expiration of a contract (-4.1%), billings for contract related services (4.7%) and the additional number of transactions processed by ITI's equipment (2.2%). Gross profit increased 12.3% from $1,429,000 (40.7% of sales) to $1,605,000 (42.9% of sales) as a result of higher sales volume. The gross profit percentage increased due to: (1) decreased contract depreciation due to certain soft contract costs being amortized through an initial contract period that expired in October 1999(10.5%); (2) higher maintenance costs due to aging equipment and software changes, updates and enhancements (-5.5%); (3) reduction in property taxes as a result of state legislation and rescission of a royalty agreement(1.7%); and (4) higher material costs (-4.5%). Operating expenses decreased 5.1% from $934,000 in 1999 to $887,000 in 2000, a decrease of $47,000. Selling, general and administrative expenses increased from $643,000 to $645,000, an increase of $2,000 primarily due to (1) Lower general & administrative expenses ($7,000); (2) cost of living adjustments to payroll and new hires ($66,000); and (3) decreased marketing expenses related to efforts to obtain additional state contracts(-$57,000). Patent amortization increased from $152,000 in 1999 to $191,000, an increase of $39,000 in 2000 due to revaluation in the remaining useful lives of the patents offset by a rescission of patent purchase agreement. Research and development decreased from $139,000 in 1999 to $51,000 in 2000 because: (1) the Company spent more efforts in improving and adapting existing Company products to recent customer needs; and (2) research and development efforts were taken over by existing employees rather than subcontracting to outside vendors. 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 $374,000 in 1999 to $128,000 in 2000, a decrease of $246,000, reflecting the pay down of equipment financing and retirement to other debt, a savings of $91,000. Interest expense on a patent decreased by $155,000 due to the recission of a patent purchase agreement. 6 PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 3. Submission of Matters to a Vote of Security Holders None Item 5. Other Information The Company's President, Nick Denice, passed away during July of 2000. The Company expects to hold special elections to fill the vacancy created by his passing. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 - Financial Data Schedule, filed herewith electronically (b) Reports on Form 8-K None SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTELLECTUAL TECHNOLOGY, INC. By: /S/ Craig Litchin Acting Principal Financial Officer Date: August 18, 2000