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: September 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 November 17, 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, September 30, 2000 1 Statements of Operations and Accumulated Deficit (Unaudited) for the three and nine month periods ended September 30, 2000 and 1999 2 Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2000 and 1999 3 Notes to financial statements 4 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 5-7 PART II. OTHER INFORMATION 8 Signatures 9 Intellectual Technology, Inc. Balance Sheet September 30, 2000 (unaudited) ASSETS Current Assets Cash and cash equivalents $ 947,752 Certificate of deposit 126,731 Accounts receivable 781,955 Inventory 221,485 Prepaid expenses 93,028 --------- Total current assets 2,170,951 Property & Equipment Contract equipment 6,266,454 Equipment - non-contract, office, furniture and improvements 61,884 --------- 6,328,338 Less: Accumulated depreciation 5,446,349 --------- 881,989 Other Assets Patents, net of accumulated amortization of $603,508 128,379 Due from related parties 37,212 Other non-current assets 33,678 --------- Total assets $ 3,252,209 ========= LIABILITIES AND STOCKHOLERS' EQUITY Current Liabilities Accounts payable $ 120,505 Income taxes payable 230,043 Accrued expenses 80,317 Notes payable 551,443 Due to related party 10,443 Accrued interest payable 4,290 --------- Total current liabilities 997,041 Other Liabilities Long-term debt, net of current portion 478,816 Due to related party - long term 138,001 --------- 616,817 --------- 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 Retained earnings 452,001 --------- 1,638,351 --------- Total liabilities and stockholders' equity $ 3,252,209 ========= 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 September 30, ---------------------- 2000 1999 ------------ ------------- REVENUES Sales $ 1,726,123 $ 1,845,614 COST OF REVENUES Depreciation and amortization 79,115 592,820 Material costs 297,526 468,120 Maintenance and other cost of sales 295,769 206,151 ------------ ------------- Total cost of revenues 672,410 1,267,091 ------------ ------------- Gross profit 1,053,713 578,523 OPERATING EXPENSES Selling, general and administrative 267,193 299,025 Research and development 91,590 46,706 Depreciation and amortization 47,921 89,643 ------------ ------------- Total operating expenses 406,704 435,374 ------------ ------------- Income from operations 647,009 143,149 OTHER INCOME (EXPENSE) Interest income 11,838 3,739 Impairment loss, patents - (2,816,942) Interest expense (39,788) (101,299) Interest expense - patents (2,494) (369) ------------ ------------- Net income (loss) before income taxes 616,565 (2,771,722) Income tax (expense) benefit (221,122) 1,921,165 ------------ ------------- Net income (loss) before extraordinary item 395,443 (850,557) Extraordinary gain, net of income taxes of $1,926,000 - 2,889,702 ------------ ------------- NET INCOME 395,443 2,039,145 Retained earnings (Accumulated deficit) Balance, beginning of period 56,558 (2,564,752) ------------ ------------- Balance, end of period $ 452,001 $ (525,607) ============ ============= INCOME (LOSS) PER SHARE - BASIC Income (loss) per share before extraordinary item $ 0.04 $ (0.09) Extraordinary item, net of tax - 0.29 ------------ ------------- Net income per share $ 0.04 $ 0.20 ============ ============= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 10,000,000 10,000,000 ============ ============= For the nine months ended September 30, ---------------------- 2000 1999 ------------ ------------- REVENUES Sales $ 5,465,131 $ 5,356,703 COST OF REVENUES Depreciation and amortization 928,319 1,758,226 Material costs 1,033,989 1,000,728 Maintenance and other cost of sales 844,322 553,531 Royalties - 36,720 ------------ ------------- Total cost of revenues 2,806,630 3,349,205 ------------ ------------- Gross profit 2,658,501 2,007,498 OPERATING EXPENSES Selling, general and administrative 875,697 932,533 Research and development 178,792 195,587 Depreciation and amortization 238,742 241,636 ------------ ------------- Total operating expenses 1,293,231 1,369,756 ------------ ------------- Income from operations 1,365,270 637,742 OTHER INCOME (EXPENSE) Interest income 26,652 5,559 Impairment loss, patents - (2,816,942) Interest expense (163,137) (315,709) Interest expense - patents (7,634) (160,369) ------------ ------------- Net income (loss) before income taxes 1,221,151 (2,649,719) Income tax (expense) benefit (444,887) 1,909,705 ------------ ------------- Net income (loss) before extraordinary item 776,264 (740,014) Extraordinary gain, net of income taxes of $1,926,000 - 2,889,702 ------------ ------------- NET INCOME 776,264 2,149,688 Retained earnings (Accumulated deficit) Balance, beginning of period (324,263) (2,675,295) ------------ ------------- Balance, end of period $ 452,001 $ (525,607) ============ ============= INCOME (LOSS) PER SHARE - BASIC Income (loss) per share before extraordinary item $ 0.08 $ (0.07) Extraordinary item, net of tax - 0.29 ------------ ------------- Net income per share $ 0.08 $ 0.22 ============ ============= 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 nine months ended September 30, ---------------------- 2000 1999 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES $ 2,023,159 $ 1,250,391 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of non-contract equipment (9,675) (13,047) Investment in contract costs and equip. (308,599) (650,137) ------------ ------------- Net cash flows from investing activities (318,274) (663,184) CASH FLOWS FROM FINANCING ACTIVITES New borrowings - 1,335,936 Debt repayments (1,262,856) (1,378,105) Loan fees - (142,000) ------------ ------------- Net cash flows from financing activities (1,262,856) (184,169) ------------ ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 442,029 403,038 CASH AND CASH EQUIVALENTS, beginning of period 505,723 184,757 ------------ ------------- CASH AND CASH EQUIVALENTS, end of period $ 947,752 $ 587,795 ============ ============= The accompanying notes are an integral part of the financial statements. 3 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS September 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. Certain prior year amounts have been reclassified to conform to the current year presentation. 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 & background The Company (ITI) designs, manufactures, and leases systems for the automated preparation and dispensing of motor vehicle registration forms and license plate decals. ITI refers to the materials used in the preparation of the vehicle forms and decals as "media". Until 1996, ITI was principally engaged in research and development of its products and generated only limited operating revenues. In November 1996, the Company entered into a three-year lease agreement with the State of Indiana, to provide printer equipment and self-service terminals for production of the State's vehicle registrations. The revenue from this lease agreement is billed on a per transactions basis and includes the media, equipment maintenance and some software updates. This contract has been extended through October 2002. The self-service terminals (SST's) are fully automated and do not require State personnel to be present during the renewal process. Some of these SST's are located in shopping malls. ITI has also developed Customer Convenience Centers for use in the motor vehicle offices, which allow for automated transactions, but are attended by a State employee. ITI is presently negotiating for the sale or lease of this equipment. ITI also has an agreement to sell printers and media to the prime contractor for the State of Maryland motor vehicle offices, although this has not been a significant source of revenue. In March 1999, ITI entered into a five-year contract with South Dakota to supply printer equipment, equipment and software maintenance and media on a per transaction basis. During the quarter ended September 30, 2000, ITI entered into a fixed price contract, which expires in June 2003, with the State of Colorado to provide printer equipment, software and equipment maintenance, and media to produce the State's motor vehicle registrations. ITI does not expect to realize signifiant revenue from this contract until the first or second quarter of 2001. Through September 30, 1999, ITI earned revenue from the production of drivers' licenses in the State of New Hampshire. Results of Operations For ease in presenting the financial data, figures have been rounded to the nearest thousand. For the three months ended September 30, 2000, contract revenues decreased from $1,846,000 for the three months ended September 30, 1999, to $1,726,000, a decrease of $120,000 or 7%. This decrease in revenue is due primarily to the expiration of the New Hampshire contract in September 1999. For the nine months ended September 30, 2000, contract revenues increased from $5,357,000 to $5,465,000, an increase of $108,000 or 2%. The increase was directly related to an additional state contract (1.8%) being in effecct for an additional three months in 2000, expiration of a contract (-4.3%), additional billings for contract related services (2.8%) and the additional number of transactions processed by ITI's equipment (1.4%). Gross profit for the three month comparisons increased from $578,000 (31.4% of sales) to $1,053,000 (61.1% of sales) as a result of: (1) decreased contract depreciation due to changes in the contract equipment life; (2) partially offset by higher maintenance costs due to aging equipment and software changes, updates and enhancements; and (3) higher material costs in 1999 as a result of an increase in the media scrap allowance. Gross profit for the nine months ended September 30, 2000 increased 32.5% from $2,007,000 (37.5% of sales) to $2,659,000 (48.7% of sales) due to lower costs. The gross profit percentages increased primarily due to factors (1) and (2) above. ITI expects that gross profit margins will decline in 2001 as a result of increasingly competitive market conditions. 5 Operating expenses decreased 5.6% from $1,370,000 for the nine months ended September 30, 1999 to $1,293,000 in 2000, a decrease of $77,000. Selling, general and administrative expenses decreased from $933,000 to $876,000, a decrease of $57,000 primarily due to (1) lower general & administrative expenses due to cost savings in several areas ($18,000); and decreased marketing expenses and payroll due to a reduction in marketing personnel ($39,000). Patent amortization decreased from $84,000 for the nine months ended September 30, 1999 to $45,000 in 2000, a decrease of $39,000 due to revaluation in the remaining useful lives of the patents. Research and development expenses for the three and nine months ended September 30, 2000 were $91,000 and $178,000 representing 3.3% and 5.3% of sales, respectively. This compares to $46,000 and $195,000, representing 2.5% and 3.7% of sales for the corresponding periods in 1999. The increase in the third quarter was due to ITI's development of the new Customer Convenience Center. The decrease in the year to date amounts was a result of: (1) the Company spending more efforts in improving and adapting existing Company products to recent customer needs; and (2) research and development efforts being 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 income for the three and nine month periods ended September 30, 2000 was $11,000 and $26,000, respectively, compared to $3,000 and $5,000 for the corresponding periods in 1999 reflecting investment of higher cash balances in certificates of deposit. Interest expense decreased from $315,000 in 1999 to $163,000 in 2000, a decrease of $152,000, reflecting the pay down of equipment financing and retirement to other debt. Interest expense on a patent decreased by $153,000 due to the recission of a patent purchase agreement. Net income for the three and nine months ended September 30, 2000 was $395,000 and $776,000, respectively, compared to $2,039,000 and $2,149,000 for the corresponding periods in 1999. $1,999,000 of net income, including an extraordinary gain, in the three and nine month periods ended September 30, 1999 was due to the recission of a patent purchase agreement and write-down of the patents. Liquidity and Capital Resources Since 1996, the Company has primarily funded its operations through contract equipment financing. As of September 30, 2000, the Company had working capital of $1,173,000 versus a working capital deficit of $290,000 as of September 30, 1999. The following is a summary of the Company's cash flows from operating, investing, and financing activities: Nine months ended September 30, (rounded) 2000 1999 Operating Activities $ 2,023,000 $ 1,250,000 Investing Activities (318,000) (663,000) Financing Activities (1,263,000) (184,000) Net effect on cash $ 442,000 $ 403,000 6 Cash flows provided by operations increased from $1,250,000 in 1999 to $2,023,000, an increase of $773,000 due to: (1) timing in the collection of receivables ($651,000); (2) other changes in components of working capital netting to an increase in cash flows of $122,000. cash flows used in investing activities decreased from $663,000 in 1999 to $318,000 in 2000 as the Company neared the end of equipment installation for current contracts. Net cash used in financing activities increased from $184,000 in 1999 to $1,263,000 in 2000 due to paydown of debt since the Company refinanced long term debt in March 1999. Significant curent debt service is $135,000 per month at 9.35% interest through December 2000 and $18,000 per month at 10.4% interest through March 2004. Under the Compamy's current financing arrangement, receivables from all contracts have been assigned to the note holder. The amount of monthly cash flows from the contracts is remitted net to the Company after debt service is satisfied. The Company is committed to spend another $100,000 in the next twelve months to complete installation of equipment under current contracts. The Company anticipates that it will continue to invest in contract equipment as new contracts are obtained and that its existing cash balances and access to financing will be sufficient for at least the next twelve months. However, there can be no assurance that adequate financing will be available or at terms acceptable to the Company. 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. 7 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 8 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: November 20, 2000 9