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-
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Intellectual Technology, Inc.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
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
========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 68035
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 79408
<CURRENT-ASSETS> 1163767
<PP&E> 5106868
<DEPRECIATION> 2556228
<TOTAL-ASSETS> 7170590
<CURRENT-LIABILITIES> 3854047
<BONDS> 4471036
0
0
<COMMON> 100
<OTHER-SE> (1154593)
<TOTAL-LIABILITY-AND-EQUITY> 7170590
<SALES> 4761239
<TOTAL-REVENUES> 4761239
<CGS> 2655389
<TOTAL-COSTS> 2655389
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 626375
<INCOME-PRETAX> 212100
<INCOME-TAX> 18164
<INCOME-CONTINUING> 193936
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 193936
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
