<PAGE>
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, 1998
Commission file number: 33-33092-D
INTELLECTUAL TECHNOLOGY, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1130227
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 May 14, 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-
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INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
Balance Sheet, March 31, 1998 3
Statements of Operations and
Accumulated Deficit (Unaudited)
for the three months ended
March 31, 1998 4
Statements of Cash Flows (Unaudited)
for the three months
ended March 31, 1998 and 1997 5
Notes to financial statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operations 7-8
PART II. OTHER INFORMATION 8
Signatures 9
2
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Intellectual Technology, Inc.
BALANCE SHEET
March 31, 1998
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 411,148
Accounts receivable 613,358
Deposits 62,167
Inventory 109,221
Prepaid expenses 66,926
----------
Total current assets 1,262,820
PROPERTY AND EQUIPMENT
Contract equipment 4,567,373
Office equipment 23,471
Equipment - non contract 58,613
--------
4,649,457
Accumulated depreciation 1,475,630
-------
Total property and equipment 3,173,827
OTHER ASSETS
Patent, net of accumulated amortization 3,587,859
of $677,294
Organization costs, net of amortization 1,567
of $483
Deposits 12,940
---------
Total other assets 3,602,366
---------
TOTAL ASSETS $ 8,039,013
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 786,449
Accrued expenses 247,473
Notes payable - related parties 55,466
Notes payable - other 38,000
Current portion of long term debt 2,330,598
Accrued interest 325,971
-----------
Total current liabilities 3,783,957
OTHER LIABILITIES
Long term debt (net of current portion) 1,505,970
Due to related party 3,998,000
----------
Total other liabilities 5,503,970
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 100
Additional paid-in capital 1,186,250
Accumulated deficit (2,435,264)
----------
Total stockholders' equity (1,248,914)
---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 8,039,013
=========
The accompanying notes are an integral part of the financial statements.
3
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Intellectual Technology, Inc.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
For the three months
ended March 31,
1998 1997
Sales, net $ 1,729,709 $ 612,996
Cost of sales 966,310 308,719
---------- --------
Gross profit 763,399 304,277
OPERATING EXPENSES
Selling, general and
administrative 286,265 135,521
Research and development 58,529 7,853
Other operating expenses 91,146 80,398
------- -------
Total operating expenses 435,940 223,772
------- -------
Income from operations 327,459 80,505
NON-OPERATING INCOME AND EXPENSES
Interest income (1,014) -
Interest expense, including
amortization of loan fees 223,075 138,361
--------- --------
Total non-operating expenses 222,061 138,361
Net income (loss) before
income tax 105,398 (57,856)
Income taxes 5,883 -
-------- --------
NET INCOME (LOSS) 99,515 (57,856)
Accumulated deficit
Balance, beginning of period (2,534,779) (1,667,622)
---------- ----------
Balance, end of period $(2,435,264) $(1,725,478)
========== ==========
NET INCOME (LOSS) PER SHARE $ 0.01 $ (NIL)
======= =======
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 10,000,000 9,007,746
========= =========
The accompanying notes are an integral part of the financial statements.
4
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Intellectual Technology, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months
ended March 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES $ 969,170 $(488,632)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patent costs (1,260) (161)
Purchase of non-contract
equipment (1,880) -
Investment on contract costs and
equipment (304,560) (217,714)
------- -------
Net cash used by
investing activities (307,700) (217,875)
CASH FLOWS FROM FINANCING ACTIVITIES
Additional paid in capital - 6,900
New borrowings - 975,000
Repayment of debt (654,562) (211,964)
Loan costs - (61,500)
-------- -------
Net cash provided (used) by
financing activities (654,562) 708,436
-------- -------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 6,908 1,929
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 404,240 5,608
-------- -------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $411,148 $ 7,537
======= =======
The accompanying notes are an integral part of the financial statements.
5
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Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
March 31, 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, are necessary to a fair presentation of financial
position and results of operations. All such adjustments are of a normal
and recurring nature.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION 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.
The Company's revenues through March 31, 1998 have been generated from (1)
lease of printers and self service terminals for the automated preparation and
dispensing of motor vihicle registration forms and license plate declas for the
State of Indiana; and (2) lease of printer equipment for the automated prepara-
tion and dispensing of drivers' licenses for the State of New Hampshire.
During the quarter ended March 31, 1997, the Company had installed cumulatively
96 stand alone printers and I self service terminal. As of March 31, 1998 the
Company had installed comulatively 275 stand alone printers and 17 self service
terminals. As a result, revenues from the Indiana contract increased from
$506,000 to $1,660,000 and gross profit increased from $304,000 to $763,000.
Cost of revenues, as a percentage of sales increased from 50% to 54%. The
increase in cost percentage was due mainly to a price decrease as a result of
the State of Indiana leasing more equipment.
Selling expenses, general and administrative expenses increased from $135,000
to $286,000, an increase of $151,000 or 111%. Payroll accounted for $114,000
of this increase due to two new executive employees, raises and higher employee
insurance. Legal and accounting increased $20,000 due to the merger with
Bridgestone, Corp. a public company, in March 1997 and the cost of complying
with SEC requirements.
Research and development costs increased from $8,000 to $58,000 as a
result of development of a new printer. The Company expects to spend another
$370,000 in R & D costs for the remainder of the calendar year. The
Company will engage in research and development of additional applications of
its products in related areas such as driver records and license extensions,
voter registrations, tax payments, electronic benefit vouchers, hunting and
fishing licenses, and similar areas.
Interest expense increased from $138,000 to $223,000 reflecting the increased
financing of the equipment leased to the State of Indiana.
The net income of $100,000 for the three months ended March 31, 1998 represents
a $158,000 improvement from the 1997 first quarter net loss of $58,000.
March 31, 1998 is the first quarter in the Company's history that was
profitable. This is a result of the Company pricessing virtually all of the
State of Indiana's motor vehicle registrations for the first quarter of 1998.
The Company's equipment was used to process 1,954,000 transactions in the first
quarter 1998 and it is anticipated that another 4,000,000 transactions will
be processed for the remainder of the year as follows:
2nd quarter 1,600,000
3rd quarter 1,700,000
4th quarter 700,000
To date the Company has invested $4.6 million in the Indiana contract equipment
and expects to spend another $1.1 million by the end of the calendar year
primarily for the installation of the remaining 19 self service terminals. The
Company anticipates that existing financing sources will continue to be
available to fund its capital expenditures.
For the remainder of the calendar year, the company will focus its efforts on:
Completing the installation of the remaining self service terminals in Indiana
Expanding the Company's sales and marketing staff and increasing its
marketing efforts to obtain contracts for the sale and/or lease of its equip-
ment to additional jurisdictions.
Obtaining the equity capital necessary to pay off the debt associated with
patent acquisitions and cure working capital deficiencies.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow privided by operations was $969,000 for the first quarter 1998
versus $488,000 used by operations in the first quarter 1997, an improvement
of $1,457,000. All of the cash used by operations in the first quarter 1997
was the result of the financing of contract costs and the reduction of
accounts payable related to those costs.
The Company is financing the Indiana contract costs over the initial contract
term which expires October 31, 1999 and the net cash flow after debt service
will not be sufficient to meet its operating expenses. The Company will have to
secure other forms of debt or equity financing to meet its cash flow needs.
Since the Company anticipates that the Indiana contract will be renewed at that
time for at least another one year term, management believes that other sources
of financing will be available especially if the company secures contracts with
other states.
No new borrowings for the first quarter 1998 occurred versus $975,000 in new
borrowings in first quarter 1997. The Company expects to borrow ar least
$1,200,000 for the remainder of the year to finance the balance of the contract
equipment costs. Current debt service is $240 thousand per month at 13.05%
interest through November 1999.
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
8
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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.
Date: May 15, 1998 INTELLECTUAL TECHNOLOGY, INC.
BY: /S/ Christ M. Rousseff
Chairman, Chief Executive Officer
9
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENTS OF LOSS AND ACCUMULATED DEFICIT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH 10QSB FOR THE QUARTER ENDED MARCH 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 411,148
<SECURITIES> 0
<RECEIVABLES> 613,358
<ALLOWANCES> 0
<INVENTORY> 109,221
<CURRENT-ASSETS> 1,262,820
<PP&E> 4,649,457
<DEPRECIATION> 1,475,630
<TOTAL-ASSETS> 8,039,013
<CURRENT-LIABILITIES> 3,783,957
<BONDS> 3,998,000
0
0
<COMMON> 100
<OTHER-SE> (1,249,014)
<TOTAL-LIABILITY-AND-EQUITY> 8,039,013
<SALES> 1,729,709
<TOTAL-REVENUES> 1,730,723
<CGS> 966,310
<TOTAL-COSTS> 1,625,325
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223,075
<INCOME-PRETAX> 105,395
<INCOME-TAX> 99,515
<INCOME-CONTINUING> 99,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,515
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
