<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 1997
Commission file number 1-10790
INDUSTRIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2596252
(State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification Number
70 Cascade Blvd, Milford, CT 06460
(Address of Principal Executive Offices) (Zip Code)
(203) 876-1800
(Issuer's Telephone Number, including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d)of the Securities Exchange Act of 1934 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 / / No /X/.
As of December 31, 1997, the registrant had outstanding 5,766,798
shares of Common Stock, $.01 par value.
Transitional Small Business Disclosure Format.
Yes / / No /X/.
<PAGE> 2
INDEX
INDUSTRIAL TECHNOLOGIES, INC.
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3-5
Consolidated Balance Sheets,
December 31, 1997, and September 30, 1997 3
Consolidated Statements of Operations, Three
Months Ended December 31, 1997, and 1996 4
Consolidated Statements of Cash Flows, Three
Months Ended December 31, 1997, and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on 8-K 10
SIGNATURES 11
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 390,058 $ 104,115
Trade accounts receivable, less allowance for doubtful accounts
1998: $108,921; 1997: $105,921 1,163,147 722,549
Inventories 1,118,199 1,454,718
Prepaid expenses and other current assets 136,851 90,367
------------ ------------
Total current assets 2,808,255 2,371,749
Property and equipment, net 59,716 61,821
Deferred financing costs, less accumulated amortization
1998: $20,964; 1997: $16,452 33,088 37,600
Security deposits and other 115,270 116,340
------------ ------------
Total assets $ 3,016,329 $ 2,587,510
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 1,000,820 $ 961,231
Current portion of long-term debt 76,923 76,923
Current portion of capital lease obligation 7,968 7,968
Accounts payable 921,767 1,107,200
Accrued expenses 919,852 934,872
Warranty and installation costs 250,333 208,583
Deferred revenue and customer deposits 791,563 271,868
------------ ------------
Total current liabilities 3,969,226 3,568,645
Subordinated notes payable to stockholders 180,000 180,000
Long-term debt, less current maturities 403,846 423,077
Capital lease obligation, less current maturities 26,821 29,730
------------ ------------
Total liabilities 4,579,893 4,201,452
Stockholders' equity:
Common stock, $.01 par value. Authorized 14,000,000
shares; issued and outstanding 1998: 5,766,798 shares;
1997: 5,766,798 shares 57,667 57,667
Additional paid-in capital 13,120,397 13,120,397
Accumulated deficit (14,741,628) (14,792,006)
------------ ------------
Total stockholders' equity (1,563,564) (1,613,942)
------------ ------------
Total liabilities and stockholders' equity $ 3,016,329 $ 2,587,510
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these financial statements.
3
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INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
December 31, December 31,
1997 1996
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $ 1,562,149 $ 2,394,957
Cost of goods sold 975,411 1,274,430
----------- -----------
Gross profit 586,738 1,120,527
Operating expenses:
Selling 202,568 397,324
General and administrative 172,632 392,801
Engineering 113,005 197,700
Amortization of costs in excess of
net assets of business acquired 0 76,865
----------- -----------
Total operating expenses 488,205 1,064,690
----------- -----------
Operating income (loss) 98,533 55,837
----------- -----------
Interest income (expense), net (58,949) (39,059)
Other income (expense), net 10,794 0
----------- -----------
Total other income (expense) (48,155) (39,059)
----------- -----------
Net income (loss) $ 50,378 $ 16,778
=========== ===========
Income/ (loss) per share $ 0.01 $ 0.00
=========== ===========
Weighted average common shares outstanding 5,766,798 5,416,423
=========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these financial statements.
4
<PAGE> 5
INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
December 31, December 31,
1997 1996
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 50,378 $ 16,778
Adjustment to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation 2,105 1,445
Amortization of deferred financing costs 4,512 0
Amortization of costs in excess of net assets
of business acquired 0 76,865
Changes in assets and liabilities:
Increase in trade accounts receivable (440,598) (636,859)
Decrease in inventories 336,519 126,594
Increase in prepaid expenses and other current assets (45,414) (139,080)
(Decrease) increase in accounts payable (154,522) 189,042
(Decrease) increase in accrued expenses (15,020) 82,224
Increase in warranty and installation costs 41,750 47,056
Increase (decrease) in deferred revenue and
customer deposits 519,695 (131,914)
---------- ---------
Net cash provided by (used for) operating activities 299,405 (367,849)
---------- ---------
Cash flows from investing activities:
Other 0 (8,205)
---------- ---------
Net cash used for investing activities 0 (8,205)
---------- ---------
Cash flows from financing activities:
Net borrowings (payments) on revolving credit agreement 34,918 540,978
Payments on notes payable (26,240) 0
Payments on CDA loan (19,231) 0
Payments on capital leases payable (2,909) 0
Proceeds from issuance of common stock, net of costs 0 10,588
--------- ---------
Net cash provided by (used for) financing activities (13,462) 551,566
--------- ---------
Net increase in cash and cash equivalents 285,943 175,512
Cash and cash equivalents at beginning of period 104,115 298,630
--------- ---------
Cash and cash equivalents at end of period $ 390,058 $ 474,142
========= =========
Supplemental disclosures of cash flow information
Cash paid during period for:
Interest $ 54,412 $ 35,307
========= =========
Supplemental disclosures of cash flow information
Accounts payable converted to notes payable $ 30,911 $ 0
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these financial statements.
5
<PAGE> 6
INDUSTRIAL TECHNOLOGIES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. NATURE OF BUSINESS
Industrial Technologies, Inc. and subsidiary (the "Company" or "INTI")
designs, assembles and markets automated surface inspection systems,
electro-optical sensors and other laser-based equipment, and industrial
computers and related products. The Company's surface inspection division's
customers include web process manufacturers of paper, plastics, film
photosensitive materials, steel, aluminum, glass, non-wovens and rubber
products. The Company's industrial computer division offers a full line of
industrial-strength processors, displays and peripherals to a variety of
customers. The Company sells its products throughout the United States and
internationally, primarily in Europe and the Far East.
Note 2. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all necessary, normal and recurring adjustments
which are required to present fairly the financial position of the Company and
its subsidiary as of December 31, 1997, and the results of operations and cash
flows for the three months ended December 31, 1997. Certain information and
footnote disclosures normally included in the annual financial statements, which
are prepared in accordance with generally accepted accounting principles, have
been condensed or omitted. Accordingly, the Company believes that although the
disclosures are adequate to make the information presented not misleading, these
financial statements should be read in conjunction with the annual financial
statements of the Company and notes thereto, contained in the Company's Form
10-KSB for the fiscal year ended September 30, 1997. The results of operations
for the three month period ended December 31, 1997 are not necessarily
indicative of those that may be expected for the full fiscal year.
Note 3. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain
officers. The agreements are for terms ranging from one year to five years and
provide for a base salary and certain benefits which are specified in each of
the agreements. Each of the agreements also provide for severance pay for
termination under certain circumstances which are defined in the agreements. The
minimum annual commitments under the agreements are fiscal 1998: $155,917; and
fiscal 1999: $36,250.
INTI's wholly owned subsidiary, Intec Corp., is currently working with
the Department of Environmental Protection of the State of Connecticut (CT-DEP)
to review, and to clear, all adverse findings with respect to the
Tetrachloroethylene Analysis performed in May 1992. This analysis was performed
in conjunction with the CT-DEP Property Transfer Program. A follow-up analysis
was made as recently as December 1997. Although the levels of the contaminant
have decreased, they still remain above acceptable levels. Appropriate methods
are being and will be employed to lower these levels. Tests will continue until
compliance levels have been met. The Company has spent approximately $35,000 to
date. The Company believes the resolution of this matter will not have a
material impact on the financial position, results of operations or cash flows
of the Company.
Note 4. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Raw materials and subassemblies net of revenues $ 894,560 $1,228,853
Work in process 167,729 225,865
Finished goods 55,910 0
---------- ----------
$1,118,199 $1,454,718
========== ==========
</TABLE>
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING INFORMATION
The statements in this Quarterly report on Form 10-QSB that are not historical
fact constitute "forward-looking statements." Said forward-looking statements
involve risks and uncertainties which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
These forward-looking statements are identified by their use of forms of such
terms and phrases as "expects," "intends," "goals," "estimates," "projects,"
"plans," "anticipates," "should," "future," "believes," and "scheduled".
Variables which may cause differences include, but are not limited to, the
following: lack of adequate capital due to the inability to make timely
deliveries, the lack of prompt payment by large customers, the inability to
negotiate reasonable payment terms with creditors and a demand for payment under
the Company's revolving loan agreement; an unexpected increase in remediation
costs associated with environmental compliance; general economic and business
conditions; competition; success of operating initiatives; operating costs;
advertising and promotional efforts; the existence or absence of adverse
publicity; changes in business strategy or development plans; the ability to
retain management; business abilities and judgment of personnel; availability of
qualified personnel; labor and employee benefit costs; availability and costs of
raw materials and supplies; and changes in, or failure to comply with,
government regulations. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this filing will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and expectations of the Company will be achieved.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1997 Compared to Three Months Ended December 31,
1996
The Company had net sales for the three months ended December 31, 1997
(the "current quarter") of $1,562,149, compared to $2,394,957 for the three
months ended December 31, 1996 (the "prior year quarter"). The decrease of
$832,808 primarily reflects the greater number of inspection systems sold in the
prior year quarter versus the current quarter due to the reduced backlog at the
beginning of the current quarter.
The Company generated gross profits of $586,738 (37.6% of net sales)
for the current quarter compared to gross profits of $1,120,527 (46.8% of net
sales) for the prior year quarter. The 47.6% decrease in amount and
approximately 10 point decrease in gross profit percentage relate to decreased
sales and product and market mix. Product mix has a direct effect on cost and
market mix has a direct effect on selling price; therefore, the combination
effects gross profit. Gross profit was affected primarily by increased sales in
Asia and Europe. In Asia, margins have decreased as a result of the economic
climate and will remain low until the economy becomes stronger. European sales
increased for the lower priced and lower margin System 3000 and Webscan systems,
thus lowering the gross margin. The mix in product sales for Europe is not
considered likely to continue for the long term. During the current quarter, a
system was shipped that had a recognizable revenue value equal to its lower of
cost or market value, which also affected the gross profit percentage
significantly.
Selling, general and administrative expenses for the current quarter
were $375,200 (24.0% of net sales) compared to $790,125 (33.0% of net sales) for
the prior year quarter. The decrease in expense is due primarily to decreased
legal and professional expenses plus the reduction of personnel in the selling
and general and administrative functional areas. The decrease in expense to net
sales percentage is primarily a result of the decrease in expenses, which more
than offset decreased net sales.
Engineering expenses for the current quarter were $113,005 (7.2% of net
sales) compared to the prior year quarter of $197,700 (8.3% of net sales). The
Company was able to reduce expenses to this functional area without sacrificing
software and product development. Reductions came in the form of overhead, minor
personnel changes, and the reduction of outside consultant use.
7
<PAGE> 8
Costs in excess of net assets of business acquired was carried as an
intangible asset on the balance sheet and was being amortized over 15 years.
After review by management, the balance was charged against operations for the
year ended September 30, 1997 and no amounts will be amortized thereafter.
The Company had net interest expense of $58,949 (3.8% of net sales) for
the current quarter compared to $39,059 (1.6% of net sales) in the prior year
quarter. This increase of $19,890 is due primarily to interest on money borrowed
in May 1997 in conjunction with the New Term Loan described below.
Other income in the amount of $10,794 in the current quarter is largely
due to foreign exchange gains.
The net income of $50,378 in the current quarter compared to net income
of $16,778 in the prior year quarter. No amortization, lower engineering costs
and decreased selling, general and administrative expense all contributed to the
increase in net income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity at December 31, 1997,
consisted of $390,058 of cash plus the borrowing power under the Company's
revolving loan, demand loan and security agreement entered November 1, 1996 (the
"Loan Agreement") which provides a maximum borrowing of $1,500,000 at an annual
interest rate of 4% over the prime interest rate as published in the Wall Street
Journal. The loan matures on October 31, 1999, unless sooner terminated at the
option of the lender, at which time all amounts outstanding will be due and
payable. At December 31, 1997 , the Company had borrowed $839,189 under the Loan
Agreement and $660,811 of additional borrowings would have been available if
there had been additional eligible accounts receivable. The revolving loan
requires interest to be paid monthly and has a maximum borrowing base of: the
lesser of $1,500,000 or the aggregate of (1) 80% of the Company's eligible
domestic accounts receivable, (2) 80% of the Company's eligible accounts
receivable covered by irrevocable letters of credit, (3) the lesser of 80% of
the Company's European eligible open accounts receivable or $500,000, and (4) a
$500,000 demand loan, which is payable in installments of principal of
approximately $16,700. The August, September and October, 1997 installments have
been deferred by the lender to September 1, 1999.
On May 28, 1997, the Company entered into a letter agreement (the
"Amendment Letter") modifying the Loan Agreement. The Amendment Letter modifies
the Loan Agreement such that the total principal amount permitted to be
outstanding may not exceed $2,000,000. Pursuant to the Loan Agreement as amended
by the Amendment Letter, additional credit was extended to the company in the
amount of $500,000 (the "New Term Loan"). Interest at a rate of 6% per annum
above the prime rate on a floating basis is due and payable monthly. Principal
is payable in quarterly installments of $19,231 commencing on December 1, 1997
through February 1, 2004. The Company is not in compliance with the covenant
that pertains to the timely submission of financial statements. The Loan
Agreement and the New Term Loan are secured by a first priority security
interest in all of the Company's personal property. Simultaneous with the
closing of the New Term Loan, the Connecticut Development Authority purchased a
100% participation interest in the New Term Loan.
The Company requires additional capital to finance continuing
operations, make enhancements to and expansion of its manufacturing capacity in
accordance with its business strategy, and for working capital for inventory and
accounts receivable. The Company is seeking such funds through strategic
alliances, merger and acquisition efforts as well as through public or private
debt and equity. Without such future financing, the Company's ability to finance
its operations and growth will be severely limited.
At January 12, 1998, the Company's backlog of customer orders was
approximately $2,571,000 compared to approximately $2,717,000 at January 13,
1997. The Company is seeking to increase its backlog in future quarters through
an increase in the rate of new proposals, although there can be no assurance
that such proposals will result in orders. The Company's ability to fulfill
these orders is largely dependent upon the Company's ability to maintain its
borrowing capacity and improve its liquidity.
CAPITAL EXPENDITURES
The Company does not have any material commitments for capital
expenditures at this time.
8
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EFFECT OF INFLATION
The Company believes that inflation has not had a material effect on
its results of operations or financial condition during the last two fiscal
years. The Company has not entered long-term contracts with its customers or
suppliers and has generally been able to pass along increased costs encurred by
it.
9
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed herewith:
27 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter ended
December 31, 1997.
10
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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.
INDUSTRIAL TECHNOLOGIES, INC.
Date: July 28, 1998 By: /s/ Gerald W. Stewart
-------------------------------------------------
Gerald W. Stewart, Chief Executive Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 390,058
<SECURITIES> 0
<RECEIVABLES> 1,272,068
<ALLOWANCES> 108,921
<INVENTORY> 1,118,199
<CURRENT-ASSETS> 2,808,255
<PP&E> 1,029,812
<DEPRECIATION> 970,096
<TOTAL-ASSETS> 3,016,329
<CURRENT-LIABILITIES> 3,969,226
<BONDS> 610,667
0
0
<COMMON> 57,667
<OTHER-SE> (1,621,231)
<TOTAL-LIABILITY-AND-EQUITY> 3,016,329
<SALES> 1,562,149
<TOTAL-REVENUES> 1,562,149
<CGS> 975,411
<TOTAL-COSTS> 1,463,616
<OTHER-EXPENSES> 48,155
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,949
<INCOME-PRETAX> 50,378
<INCOME-TAX> 0
<INCOME-CONTINUING> 50,378
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,378
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
