-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OnswjVX7gfwD8lTojXdwbK/mKkFNwgXqOjZqHgecCs9S9P+LvSpghTSSKUpPU6+g 0HNJHgpIgqlRzVnGgbjBpA== 0001013993-98-000071.txt : 19981123 0001013993-98-000071.hdr.sgml : 19981123 ACCESSION NUMBER: 0001013993-98-000071 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTELLECTUAL TECHNOLOGY INC CENTRAL INDEX KEY: 0000859914 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 841130227 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-29138 FILM NUMBER: 98756277 BUSINESS ADDRESS: STREET 1: 10639 ROSELLE STREET STREET 2: SUITE B CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 619-552-00 MAIL ADDRESS: STREET 1: 303 EAST 17TH AVE STREET 2: STE 800 CITY: DENVER STATE: CO ZIP: 80203 FORMER COMPANY: FORMER CONFORMED NAME: BRIDGESTONE CORP DATE OF NAME CHANGE: 19930328 10QSB 1 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, 1998 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 ) 10639 Roselle Street Suite B San Diego, CA 92121 (Address of principal executive offices) (619) 552-0001 (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 19, 1998, 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 I. Financial Statements Balance Sheet, September 30, 1998 3-4 Statements of Operations and Accumulated Deficit (Unaudited) for the three and nine month periods ended September 30, 1998 and 1997 5 Statements of Cash Flows (Unaudited) for the nine months ended September 30, 1998 and 1997 6 Notes to financial statements 7-8 Item 2 Management's Discussion and Analysis of Financial Position and Results of Operations 9-12 PART II. OTHER INFORMATION 13 Signatures 14 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Intellectual Technology, Inc. BALANCE SHEET September 30, 1998 (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 68,035 Accounts receivable 999,114 Inventory 79,408 Prepaid expenses 17,210 ----------- Total current assets 1,163,767 PROPERTY AND EQUIPMENT Vehicle registration equipment 5,024,161 Office and administrative equipment 82,707 ----------- 5,106,868 Accumulated depreciation 2,556,228 ----------- Total fixed assets, net 2,550,640 OTHER ASSETS Patent, net of accumulated amortization 3,450,604 Organization costs, net 1,363 Deposits 4,216 ----------- Total other assets 3,456,183 ----------- TOTAL ASSETS $ 7,170,590 =========== 3 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 458,963 Accrued liabilities 250,860 Notes payable - related parties 5,200 Current portion of long-term debt 2,646,469 Accrued interest 492,555 ----------- Total current liabilities 3,854,047 OTHER LIABILITIES Patent purchase payable 3,996,800 Long-term debt, net of current portion 474,236 ----------- 4,471,036 STOCKHOLDERS' EQUITY Preferred stock, $0.00001 par value; 10,000,000 shares authorized; no shares issued and outstanding - Common stock, $0.00001 par value; 20,000,000 shares authorized; 10,000,000 shares issued and outstanding at June 30, 1998. 100 Additional paid-in capital 1,186,250 Accumulated deficit (2,340,843) ----------- Total stockholders' equity (1,154,493) ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,150,590 =========== The accompanying notes are an integral part of the financial statements. 4 Intellectual Technology, Inc. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT (Unaudited) For the quarter ended For the nine months ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1998 1997 1998 1997 ---------- ---------- ----------- ----------- SALES $1,563,892 $ 959,757 $ 4,761,239 $ 2,321,000 COST OF SALES Materials cost 191,530 194,433 479,143 470,925 Depreciation and amortization 157,094 64,959 450,245 146,967 Maintenance, other cost of sales 532,429 352,568 1,726,001 696,941 ---------- --------- ---------- ----------- Total cost of sales 881,053 611,960 2,665,389 1,314,833 ---------- --------- ---------- ----------- GROSS PROFIT 682,839 347,797 2,105,850 1,006,167 OPERATING EXPENSES Selling, general & administrative 291,087 288,452 884,532 685,842 Research & development 17,068 9,045 148,809 29,142 Depreciation and amortization 75,189 88,339 236,911 250,374 ---------- --------- ---------- ----------- Total operating expenses 383,344 385,836 1,270,252 965,358 ---------- --------- ---------- ----------- Income (loss) from operations 299,495 (38,039) 835,598 40,809 OTHER (INCOME) EXPENSE Interest (406) (2,484) (2,877) (2,484) Interest expense and amortization of loan costs 192,746 225,755 626,375 541,563 ---------- --------- ---------- ----------- Total other expenses 192,340 223,271 623,498 539,079 ---------- --------- ---------- ----------- Net income (loss) before income taxes 107,155 (261,310) 212,100 (498,270) Income taxes 5,398 - 18,164 800 ---------- --------- ---------- ----------- NET INCOME (LOSS) 101,757 (261,310) 193,936 (499,070) Accumulated deficit Balance, beginning of period (2,442,600) (1,905,382) (2,534,779) (1,667,622) ---------- ---------- ---------- ----------- Balance, end of period (2,442,600) (2,166,692) (2,442,600) (2,166,692) ========== ========== ========== =========== NET INCOME (LOSS) PER SHARE 0.01 (0.03) 0.02 (0.05) ========== ========== ========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 10,000,000 10,000,000 10,000,000 9,743,590 ========== ========== ========== ===========
The accompanying notes are an integral part of the financial statements. 5 Intellectual Technology, Inc. STATEMENTS OF CASH FLOWS (Unaudited) For the nine months ended Sept. 30, 1998 1997 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES $ 1,802,176 $ (406,449) CASH FLOWS FROM INVESTING ACTIVITIES Investment in patents & other assets (3,805) (12,752) Investment in non-contract equipment (2,504) (8,014) Investment in contract costs & equipment (672,181) (1,406,808) ------------ ---------- Net cash used by investing activities (678,490) (1,427,574) CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions - 8,200 New borrowings 250,000 4,396,076 Repayment of debt (1,610,524) (785,265) Repayment of related party debt (99,367) (1,434,428) Loan costs - (66,500) ----------- ---------- Net cash provided (used) by financing activities (1,459,891) 2,118,083 ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (336,205) 284,060 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 404,240 5,608 ----------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 68,035 $ 289,668 ========= ========= The accompanying notes are an integral part of the financial statements. 6 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS September 30, 1998 (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, 1997. 2. Significant post year end financing During April 1998, the Company borrowed $250,000 to finance contract costs under the same terms and conditions as previous loans under its product financing arrangement. 3. Commitments and Contingencies Included in long-term liabilities is $3,996,800 payable to a related party. This obligation was recorded as part of ITI's acquisition of patents for digital imaging and automated form dispensing machines. The acquisition transaction was recorded pursuant to the Purchase and Sale Agreement dated October 31, 1995 ("the 1995 Agreement") between Image Technology, Inc., predecessor and wholly owned subsidiary of ITI, and American Registration Systems, Inc. ("ARS"), a company controlled by the late Mr. Christ M. Rousseff, former CEO of ITI. The carrying amount of these patents on the books of ITI at September 30, 1998, net of amortization, is $3,450,604. In addition to the related party obligation mentioned above, the agreement calls for a $0.01 per transaction royalty to be paid to the transferor of the patent. 7 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS September 30, 1998 (Unaudited) 3. Commitments and Contingencies, continued: Subsequent to the passing of Mr. Rousseff in July 1998, ITI's management became aware of facts and circumstances that cast doubt upon the enforceability of material portions of the Company's obligations under the 1995 Agreement, including (i) the amount of purchase obligation due and payable under the 1995 Agreement, and (ii) the amount recorded as the acquisition price of the patents on the books of ITI. Management is currently assessing the validity and enforceability of the 1995 Purchase and Sale Agreement. In addition, management is assessing the amount, if any, of the Company's ongoing liabilities in respect of the patents. A favorable resolution of these issues may not necessarily relieve the Company of all liability associated with the patents. Liabilities remaining after the resolution, therefore, may result in a material dimunition in any benefits that may follow from a favorable resolution, or may otherwise have a material adverse impact on the Company's financial position, the magnitude of which has not yet been determined. Management has determined that resolution of these issues will result in an adjustment to one or more of the following financial statement items: the related party payable, total liabilities, or the amount attributable to the patents as an asset on the Company's balance sheet. The accompanying financial statements do not include any adjustments which may be necessary as a result of the resolution of these matters. 8 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 in the forward looking statements. Background: ITI is a provider of real-time printing systems specifically designed for use by state departments of motor vehicles. These systems generate vehicle registrations and license plate decals as needed, eliminating the need to inventory and control such forms and decals. ITI's revenues are earned (i) on a per-transaction basis for equipment leased to states, (ii) from the sale of printers and components to other vendors within the industry, and (iii) from the sale of media and supplies to these vendors. ITI also earns a limited amount of revenue from the sale of drivers license photos. Results of Operations: The Company's revenues totaled $1,563,892 for the third quarter and $4,761,000 for the first nine months of 1998 as compared with $959,757 and $2,321,000 for the corresponding periods of the preceding year. The overall increase is primarily due to increased volume of vehicle registrations which generate per-transaction lease fees. The increase attributable to vehicle registration lease income was partially offset by the absence of equipment sales in 1998 as compared with $225,000 in 1997. Cost of sales totaled $881,053 for the third quarter and $2,655,389 for the first nine months of 1998 as compared with $611,960 and $1,314,833 for the quarter and nine months ended September 1997. Cost of sales consists of materials costs, cost recovery for leased equipment (depreciation), amortization of deferred costs, maintenance, and other direct costs of leasing and selling the company's products. While materials costs remained relatively steady, depreciation and amortization, which are charged to operations on a per-transaction basis, increased 148%. Maintenance and other costs increased 206%, also due primarily to the increased volume of transactions processed by the Company's equipment. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The factors described above resulted in a favorable impact on gross margin for the third quarter and first nine months of fiscal 1998. Selling, general and administrative expenses for the third quarter and nine months ended September 30, 1998 totaled $291,087 and $884,532, as compared with $ 288,452 and $685,842 for the corresponding periods of the preceding year. The year to date increase of $199,000 reflects increased marketing costs, as the Company stepped up its efforts to obtain additional state contracts, as well as additional payroll and related costs incurred in the first half of 1998, as the Company added employees and increased salaries for existing employees. Research and development expenses totaled $17,068 and $148,809 for the third quarter and first nine months of 1998, as compared with $9,045 and $29,142 for the same periods in 1997. The increase is attributable to the Company's continuing efforts to develop improvements to its existing printer systems, as well as the research and development of additional applications of its products in related areas. Net interest expense was $192,340 for the third quarter and $623,498 for the first nine months of fiscal 1998, compared with $223,271 and $539,079, respectively, for the corresponding periods in fiscal 1997. Interest expense year to date increased from 1997 to 1998 as a result of additional equipment financing and the amortization of loan fees during the latter part of 1997 and the first seven months of 1998. On a quarterly basis, interest expense is down, as loan balances are reduced through amortization. Income taxes for the third quarter and first nine months of 1998 totaled $5,398 and $18,194 respectively, as compared with $0 and $800 for the corresponding periods of 1997, representing primarily state income and franchise taxes. The Company has approximately $1.9 million in Federal net operating loss carryforwards available to reduce its future Federal income tax liability. These factors contributed to quarterly and year to date net income for 1998 of $101,757 and $193,936, as compared with losses in 1997 of $(261,310) for the quarter and $(499,070) for nine months. The Company anticipates a fourth quarter loss for 1998 based upon projected numbers of transactions for the period. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Liquidity and Capital Resources: Cash flows from operations totaled $1,802,176 for the first nine months of 1998, as compared with a deficit of $(406,449) for the same period in 1997. This increase is directly attributable to volume of transactions processed during the period. Cash used in investing activities totaled $678,490 in 1998 vs. $1,430,574 in 1997. This decline reflects a substantial reduction in cash outlay for vehicle registration equipment and installation costs as the Company's existing contractual commitments to provide equipment are satisfied. Financing cash flows for 1998 were $(1,459,891) vs. $2,118,083 in 1997. The net cash provided in 1997 is attributable to the consolidation of $2.2 million in existing debt and the acquisition of additional equipment through the issuance of approximately $4.4 million in secured borrowings. The Company's existing installment debt matures $2,646,469 by September 1999, and $474,236 thereafter. This debt is payable directly from cash flows generated by the Company's leased equipment. Other current liabilities include accounts payable, accruals and interest, which will be repaid from operations in the ordinary course of business. Included in long-term liabilities is $3,996,800 payable to a related party. This obligation was recorded as part of ITI's acquisition of patents for digital imaging and automated form dispensing machines. The acquisition transaction was recorded pursuant to the Purchase and Sale Agreement dated October 31, 1995 ("the 1995 Agreement") between Image Technology, Inc., predecessor and wholly owned subsidiary of ITI, and American Registration Systems, Inc. ("ARS"), a company controlled by the late Mr. Christ M. Rousseff, former CEO of ITI. The carrying amount of these patents on the books of ITI at September 30, 1998, net of amortization, is $3,450,604. In addition to the related party obligation mentioned above, the agreement calls for a $0.01 per transaction royalty to be paid to the transferor of the patent. Subsequent to the passing of Mr. Rousseff in July 1998, ITI's management became aware of facts and circumstances that cast doubt upon the enforceability of material portions of the Company's obligations under the 1995 Agreement, including (i) the amount of purchase obligation due and payable under the 1995 Agreement, and (ii) the amount recorded as the acquisition price of the patents on the books of ITI. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Management is currently assessing the validity and enforceability of the 1995 Purchase and Sale Agreement. In addition, management is assessing the amount, if any, of the Company's ongoing liabilities in respect of the patents. A favorable resolution of these issues may not necessarily relieve the Company of all liability associated with the patents. Liabilities remaining after the resolution, therefore, may result in a material dimunition in any benefits that may follow from a favorable resolution, or may otherwise have a material adverse impact on the Company's financial position, the magnitude of which has not yet been determined. Management has determined that resolution of these issues will result in an adjustment to one or more of the following financial statement items: the related party payable, total liabilities, or the amount attributable to the patents as an asset on the Company's balance sheet. 12 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) Exhibit 27 - Financial Data Schedule, filed herewith electronically (b) Reports on Form 8-K None 13 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. Date: November 20, 1998 INTELLECTUAL TECHNOLOGY, INC. BY: /S/ Janice L. Welch Secretary/Treasurer/Principal Financial Officer 14 EX-27 2
5 9-MOS DEC-31-1998 SEP-30-1998 68035 0 0 0 79408 1163767 5106868 2556228 7170590 3854047 4471036 0 0 100 (1154593) 7170590 4761239 4761239 2655389 2655389 0 0 626375 212100 18164 193936 0 0 0 193936 .02 .02
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