<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 March 31, 1998
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 March 31, 1998, 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.
<TABLE>
<CAPTION>
Page No.
--------
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited) 3-5
Consolidated Balance Sheets,
March 31, 1998, and September 30, 1997 3
Consolidated Statements of Operations, Three
Months and Six Months Ended March 31, 1998, and 1997 4
Consolidated Statements of Cash Flows, Six
Months Ended March 31, 1998, and 1997 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
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
------------ ------------
(Unaudited) (Audited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 206,506 $ 104,115
Trade accounts receivable, less allowance for doubtful accounts
1998: $111,921; 1997:$105,921 1,014,685 722,549
Inventories 1,282,645 1,454,718
Prepaid expenses and other current assets 108,618 90,367
------------ ------------
Total current assets 2,612,454 2,371,749
Property and equipment, net 57,392 61,821
Deferred financing costs, less accumulated amortization
1998: $25,476; 1997:$16,452 28,576 37,600
Security deposits and other 112,342 116,340
------------ ------------
Total assets $ 2,810,764 $ 2,587,510
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 1,031,556 $ 961,231
Current portion of long-term debt 76,923 76,923
Current portion of capital lease obligation 7,968 7,968
Accounts payable 990,983 1,107,200
Accrued expenses 756,190 934,872
Warranty and installation costs 252,916 208,583
Deferred revenue and customer deposits 726,250 271,868
------------ ------------
Total current liabilities 3,842,786 3,568,645
Subordinated notes payable to stockholders 180,000 180,000
Long-term debt, less current maturities 384,615 423,077
Capital lease obligation, less current maturities 24,179 29,730
------------ ------------
Total liabilities 4,431,580 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 (14,798,880) (14,792,006)
------------ ------------
Total stockholders' equity (1,620,816) (1,613,942)
------------ ------------
Total liabilities and stockholders' equity $ 2,810,764 $ 2,587,510
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
3
<PAGE> 4
INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------------------------------------------
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 1,299,281 $ 1,787,253 $ 2,861,430 $ 4,182,210
Cost of goods sold 785,333 1,025,318 1,760,744 2,299,748
----------- ----------- ----------- -----------
Gross profit 513,948 761,935 1,100,686 1,882,462
Operating expenses:
Selling 197,364 342,695 399,932 740,018
General and administrative 182,809 402,129 355,441 772,106
Engineering 134,705 133,036 247,710 330,737
Amortization of costs in excess of
net assets of business acquired 0 76,865 0 153,731
----------- ----------- ----------- -----------
Total operating expenses 514,878 954,725 1,003,083 1,996,592
----------- ----------- ----------- -----------
Operating income (loss) (930) (192,790) 97,603 (114,130)
----------- ----------- ----------- -----------
Interest income (expense), net (57,013) (36,689) (115,962) (75,748)
Other income (expense), net 691 35,579 11,485 12,756
----------- ----------- ----------- -----------
Total other income (expense) (56,322) (1,110) (104,477) (62,992)
----------- ----------- ----------- -----------
Net income (loss) $ (57,252) $ (193,900) $ (6,874) $ (177,122)
=========== =========== =========== ===========
Income/ (loss) per share $ (.01) $ (.04) $ (.00) $ (.03)
=========== =========== =========== ===========
Weighted average common shares outstanding 5,766,798 5,486,937 5,766,798 5,459,225
=========== =========== =========== ===========
</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>
Six Months Ended
--------------------------
March 31, March 31,
1998 1997
--------- ---------
(Unaudited) (Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (6,874) $(177,122)
Adjustment to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation 4,429 2,797
Amortization of deferred financing costs 9,024 0
Amortization of costs in excess of net assets
of business acquired 0 153,731
Changes in assets and liabilities:
Increase in trade accounts receivable (292,136) (754,199)
(Decrease) increase in inventories 172,073 (87,265)
Increase in prepaid expenses and other current (14,253) (111,244)
assets
(Decrease) increase in accounts payable (85,306) 136,724
(Decrease) increase in accrued expenses (3,682) 79,424
Increase in warranty and installation costs 44,333 9,139
Increase (decrease) in deferred revenue
and customer deposits 454,382 (92,224)
--------- ---------
Net cash provided by (used for) operating 281,990 (840,239)
activities
--------- ---------
Cash flows from investing activities:
Other 0 (39,951)
--------- ---------
Net cash used for investing activities 0 (39,951)
--------- ---------
Cash flows from financing activities:
Net borrowings (payments) on revolving credit (57,582) 914,882
agreement
Payments on notes payable (78,004) 0
Payments on CDA loan (38,462) 0
Payments on capital leases payable (5,551) 0
Proceeds from issuance of common stock, net of costs 0 17,738
--------- ---------
Net cash provided by (used for) financing (179,599) 932,620
activities
--------- ---------
Net increase in cash and cash equivalents 102,391 52,430
Cash and cash equivalents at beginning of period 104,115 298,630
========= =========
Cash and cash equivalents at end of period $ 206,506 $ 351,060
========= =========
Supplemental disclosures of cash flow information
Cash paid during period for:
Interest $ 106,987 $ 75,748
========= =========
Supplemental disclosures of cash flow information
Accounts payable converted to notes payable $ 30,911 $ 0
========= =========
Accrued expenses converted to notes payable $ 175,000 $ 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 March 31, 1998, and the results of operations and cash
flows for the three months and six months ended March 31, 1998, and March 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 and six month
periods ended March 31, 1998 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>
March 31, 1998 September 30, 1997
-------------- ------------------
<S> <C> <C>
Raw materials and subassemblies net of revenues $ 835,874 $1,228,853
Work in process 270,903 225,865
Finished goods 175,868 0
---------- ----------
$1,282,645 $1,454,718
========== ==========
</TABLE>
6
<PAGE> 7
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 March 31, 1998 Compared to Three Months Ended March 31, 1997
The Company had net sales for the three months ended March 31, 1998
(the "current quarter") of $1,299,281, compared to $1,787,253 for the three
months ended March 31, 1997 (the "prior year quarter"). The decrease of $487,972
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 $513,948 (39.6% of net sales)
for the current quarter compared to gross profits of $761,935 (42.6% of net
sales) for the prior year quarter. The 32.5% decrease in amount and
approximately 3 point decrease in gross profit percentage relate to 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 them.
Selling, general and administrative expenses for the current quarter
were $380,173 (29.3% of net sales) compared to $744,824 (41.7% 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 $134,705 (10.4% of
net sales) compared to the prior year quarter of $133,036 (7.4% of net sales).
Engineering provides applications support as well as the development of product
enhancements. In the prior year quarter, the Company capitalized approximately
$40,000 of costs which were subsequently reversed by the Company at the end of
the prior year. Thus, comparable engineering expenses for the prior year quarter
were approximately $173,036 (9.7% of net sales).
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 $57,013 (4.4% of net sales) for
the current quarter compared to $36,689 (2.1% of net sales) in the prior year
quarter. This increase of $20,324 is due primarily to interest on money borrowed
in May 1997 in conjunction with the New Term Loan described below.
Other income net of other expense for the current quarter of $691
compares to other income of $35,579 for the prior quarter. Most of this income
is the net result of favorable foreign currency exchange.
The net loss of $57,252 in the current quarter compared to a net loss
of $193,900 in the prior year quarter. No amortization and decreased selling,
general and administrative expense all contributed to decreasing the quarterly
loss.
Six Months Ended March 31, 1998 Compared to Six Months Ended March 31, 1997
The Company had net sales for the six months ended March 31, 1998 (the
"current half year") of $2,861,430, compared to $4,182,210 for the six months
ended March 31, 1997 (the "prior half year"). The decrease of $1,320,780
primarily reflects the greater number of inspection systems sold in the prior
half year versus the current half year due to the reduced backlog at the
beginning of the period.
The Company generated gross profits of $1,100,686 (38.5% of net sales)
for the current half year compared to gross profits of $1,882,462 (45.0% of net
sales) for the prior half year. The 41.5 % decrease in amount and approximately
6.5 point decrease in gross profit percentage relate to 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.
Selling, general and administrative expenses for the current half year
were $755,373 (26.4% of net sales) compared to $1,512,124 (36.2% of net sales)
for the prior half year. 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 half year were $247,710 (8.7% of
net sales) compared to the prior half year of $330,737 (7.9% 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. In the prior
half year, the Company capitalized approximately $40,000 of costs previously
expensed which were subsequently reversed by the Company at the end of the
prior year. Thus, comparable engineering expenses for the prior half year were
approximately $370,737 (8.9% of net sales).
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 $115,962 (4.1% of net sales)
for the current half year compared to $75,748 (1.8% of net sales) in the prior
half year. This increase of $40,214 is due primarily to interest on money
borrowed in May 1997 in conjunction with the New Term Loan described below.
Other income net of other expense for the current half year of $11,485
compares to other income of $12,756 for the prior half year. Most of this income
is the net result of favorable foreign currency exchange for both periods.
The net loss of $6,874 in the current half year compares to a net loss
of $177,122 in the prior half year. No amortization and decreased selling,
general and administrative and engineering expense all contributed to a decrease
in the overall loss.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity at March 31, 1998, consisted
of $206,506 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 March 31, 1998, the Company had borrowed $745,954 under the Loan
Agreement and $754,046 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 April 6, 1998, the Company's backlog of customer orders was
approximately $3,908,000 compared to approximately $1,724,000 at March 31, 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
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 into long-term contracts with its customers
or suppliers and has generally been able to pass along increased costs encurred
by it.
9
<PAGE> 10
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 March 31, 1998.
10
<PAGE> 11
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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 206,506
<SECURITIES> 0
<RECEIVABLES> 1,126,606
<ALLOWANCES> 111,921
<INVENTORY> 1,282,645
<CURRENT-ASSETS> 2,612,454
<PP&E> 1,029,812
<DEPRECIATION> 972,420
<TOTAL-ASSETS> 2,810,764
<CURRENT-LIABILITIES> 3,842,786
<BONDS> 588,794
0
0
<COMMON> 57,667
<OTHER-SE> (1,678,483)
<TOTAL-LIABILITY-AND-EQUITY> 2,810,764
<SALES> 2,861,430
<TOTAL-REVENUES> 2,861,430
<CGS> 1,760,744
<TOTAL-COSTS> 2,763,827
<OTHER-EXPENSES> 104,477
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,962
<INCOME-PRETAX> (6,874)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,874)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,874)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
