10QSB 1 iti0303q.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: March 31, 2003 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) 1040 Joshua Way, Vista, CA 92083-7807 (Address of principal executive offices) (760) 599-8080 (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 May 14, 2003, 9,842,680 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 1. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheet, March 31, 2003 1 Statements of Operations and Retained Earnings (Unaudited) for the three month periods ended March 31, 2003 and 2002 2 Statements of Cash Flows (Unaudited) for the three month periods ended March 31, 2003 and 2002 3 Notes to financial statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 5-7 Item 3. Controls and Procedures 8 PART II. OTHER INFORMATION 9 Signatures 10 Certifications 11 Intellectual Technology, Inc. FINANCIAL STATEMENTS March 31, 2003 Intellectual Technology, Inc. BALANCE SHEET March 31, 2003 (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 824,694 Accounts receivable 883,290 Inventory 704,084 Prepaid expenses 103,554 Deferred income tax benefits 7,155 ----------- Total current assets 2,522,777 Property and Equipment Contract costs and equipment 7,426,445 Non-contract equipment - office and warehouse equipment, furniture and vehicles 115,684 ----------- 7,542,129 Less: accumulated depreciation 6,682,118 ----------- 860,011 Other Assets Patents, trademark and loan fee, net of accumulated amortization of $717,949 17,132 Deferred income tax benefits, net of current portion 15,929 Due from related party, net of allowance for doubtful account of $31,887 - Deposits 6,865 ----------- Total assets $ 3,422,714 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 209,556 Accrued expenses and interest 80,959 Income taxes payable 213,915 Accrued loss reserve 27,788 Current portion of long-term debt 131,064 Due to related party 18,159 ----------- Total current liabilities 681,441 Other Liabilities Long-term debt, net of current portion 176,780 Due to related party - long term 108,692 ----------- 285,472 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 1,301,251 ----------- 2,455,801 ----------- Total liabilities and stockholders' equity $ 3,422,714 =========== The accompanying notes are an integral part of the financial statements. 1 Intellectual Technology, Inc. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS For the three months ended March 31, ----------------------- 2003 2002 ----------- ----------- REVENUES Transaction fees $ 1,857,471 $ 1,619,028 Other revenue 7,328 380,985 ----------- ----------- Total revenues 1,864,799 2,000,013 COST OF REVENUES Materials 467,698 459,668 Cost of other revenue - 266,837 Depreciation and amortization - contract costs 140,999 186,355 Maintenance 243,361 278,970 Adjustment to contract losses previously recognized - (1,953) Other contract expenses - 1,830 Insurance 6,410 7,317 Property and sales taxes 12,551 9,426 ----------- ----------- Total cost of revenues 871,019 1,208,450 ----------- ----------- Gross profit 993,780 791,563 OPERATING EXPENSES Depreciation 5,162 2,937 Amortization of patent 2,202 15,405 Selling, general and administrative expenses 331,196 374,820 Research and development 53,019 53,658 ----------- ----------- Total operating expenses 391,579 446,820 ----------- ----------- Income from operations 602,201 344,743 OTHER INCOME (EXPENSE) Interest income 1,441 1,657 Interest expense (9,953) (23,234) ----------- ----------- Net income before income taxes 593,689 323,166 Income taxes 223,200 122,100 ----------- ----------- NET INCOME 370,489 201,066 Retained earnings, beginning of period 930,762 571,385 ----------- ----------- Retained earnings, end of period $ 1,301,251 $ 772,451 =========== =========== Income per share: (Basic and diluted) $ 0.04 $ 0.02 =========== =========== Wtd. average number of shares outstanding 9,842,680 9,842,680 =========== =========== The accompanying notes are an integral part of the financial statements. 2 Intellectual Technology, Inc. STATEMENTS OF CASH FLOWS (Unaudited) For the three months ended March 31, --------------------------------- 2003 2002 ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES $ 350,556 $ 115,756 CASH FLOWS FROM INVESTING ACTIVITIES Investment in trademark - (437) Increase in deposits (518) (4,700) Purchase of non-contract equipment (12,057) (11,754) Investment in contract costs and equipment (151) (58,257) ---------- ----------- Net cash flows from investing activities (12,726) (75,148) CASH FLOWS FROM FINANCING ACTIVITIES New borrowings - 175,000 Debt repayments (31,356) (44,782) ---------- ----------- Net cash flows from financing activities (31,356) 130,218 ---------- ----------- NET INCREASE IN CASH 306,474 170,826 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 518,220 206,034 ---------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 824,694 $ 376,860 ========== =========== The accompanying notes are an integral part of the financial statements. 3 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS March 31, 2003 (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, are 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, 2002. 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 and Background The Company (ITI) designs, manufactures, and leases systems for the automated preparation and dispensing of motor vehicle registration forms and license plate decals. Until 1996, ITI was principally engaged in research and development of its products and generated only limited operating revenues. Contracts In August 1996, ITI entered into an Equipment Lease, Support and Maintenance Agreement (the "Indiana Contract") with the Indiana Bureau of Motor Vehicle 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 three months ended March 31, 2003, 99% of ITI's total revenues were derived from the above contracts and agreements. 5 Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Results of Operations For ease in presenting the financial data, figures have been rounded to to the nearest thousand. For the three months ended March 31, 2003, transaction fee revenues increased from $1,619,000, to $1,858,000, an increase of $239,000 or 15%. This increase in revenue is primarily due to revenue from additional contracts. Other revenues decreased from $381,000 to $7,000, due to non- core revenue from the sale of printer equipment to other contractors in 2002 and the timing of supplemental contract billings. Other revenues are not necessarily representative of the Company's ongoing business operations. Total revenues decreased from $2,000,000 to $1,865,000. Historically, more transaction fees have been generated in the first three quarters of the Company's fiscal year. The first quarter typically is the highest (30% of the total) and the fourth quarter is the lowest (under 17% of the total). Gross profit for the three-month comparisons increased from $792,000 in 2002 (40% of sales) to $994,000 (53% of sales) in 2003, an increase of $202,000. The gross profit percentage increased due to lower depreciation allowances (longer useful lives) from contract extensions and lower material and maintenance costs. The Company expects future profit margins to somewhat decline due to the competitive bid environment, fixed contract prices and unanticipated costs. Operating expenses decreased $55,000 or 12% from $447,000 for the three months ended March 31, 2002, to $392,000 in 2003. This is primarily due to a decrease in pre-contract costs and marketing expenses of $80,000; partially offset by an increase in payroll of $26,000 due the hiring of two additional personnel. Research and development expenses for the three months ended March 31, 2003 and 2002 were $53,000 (2.8% of sales) and $54,000 (2.7% of sales), respectively. 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 $23,000 in 2002 to $10,000 in 2003, due to the refinancing and pay down of contract cost financing. 6 Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Liquidity and Capital Resources The Company has available a $300,000 line-of-credit with a bank secured by accounts receivable, equipment and general intangibles. The line bears interest at Prime plus two percent (with a minimum interest rate of 7%) and is subject to renewal in December 2003. In April 2003, the Company paid off contract cost financing in the amount of $308,000. The Company's remaining debt service consists of a patent purchase payment of $5,000 per quarter through March 2011. At this time, the Company expects no significant investment in contract costs and equipment in the next quarter. The following is a summary of the Company's cash flows from operating, investing, and financing activities: Three months ended March 31, (Rounded) 2003 2002 ---------- ----------- Operating activities $ 350,000 $ 116,000 Investing activities (13,000) (75,000) Financing activities (31,000) 130,000 ---------- ----------- Net effect on cash $ 306,000 $ 171,000 =========== =========== Cash flows provided by operations increased from $116,000 in 2002 to $350,000 in 2003, an increase of $234,000 due primarily to an increase in net income before depreciation and amortization of $113,000 and net decreases in accounts receivable. Cash flows used in investing activities decreased from $75,000 in 2002 to $13,000 in 2003 because the Company did not install any contract equipment in the March 2003 quarter. Net cash of $31,000 was used in financing activities in 2003 for debt service. In 2002, the Company borrowed $175,000 on its line of credit and expended $45,000 for debt service. 7 Item 3. - CONTROLS AND PROCEDURES The Company's Chief Executive Officer, also acting as Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15(d)-14(c) under the Securities Exchange Act of 1934, as amended) as of May 5, 2003, (the "Evaluation Date"), has concluded that, the Company's disclosure controls and procedures were effective to ensure the timely collection, evaluation and disclosure of information relating to the Company that would potentially be subject to disclosure under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date, including any corrective actions with regard to significant deficiencies and material weaknesses. 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 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. (b) Reports on Form 8-K None 9 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 --------------------------- Principal Financial Officer Date: May 14, 2003 10 Certifications I, Craig Litchin, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Intellectual Technology, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly 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 quarterly 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 quarterly 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: May 14, 2003 /s/ Craig Litchin Principal Executive Officer Principal Financial Officer 11