<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: June 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
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 August 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-
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INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
Balance Sheet, June 30, 1998 3
Statements of Operations and
Accumulated Deficit (Unaudited)
for the three and six month periods ended
June 30, 1998 and 1997 4
Statements of Cash Flows (Unaudited)
for the six months
ended June 30, 1998 and 1997 5
Notes to financial statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operations 7-9
PART II. OTHER INFORMATION 10
Signatures 11
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Intellectual Technology, Inc.
BALANCE SHEET
June 30, 1998
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 185,488
Accounts receivable 524,037
Inventory 108,023
Prepaid expenses 60,314
----------
Total current assets 877,862
PROPERTY AND EQUIPMENT
Vehicle registration equipment 4,689,991
Office and administrative equipment 82,707
---------
4,772,698
Accumulated depreciation 2,017,994
---------
Total fixed assets, net 2,754,704
OTHER ASSETS
Patent, net of accumulated amortization 3,519,541
Organization costs, net 1,465
Deposits 12,240
---------
Total other assets 3,533,246
---------
TOTAL ASSETS $ 7,165,812
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 237,066
Accrued liabilities 241,923
Notes payable - related parties 47,276
Current portion of long-term debt 2,552,638
Accrued interest 407,838
-----------
Total current liabilities 3,486,741
OTHER LIABILITIES
Patent purchase payable 3,997,000
Long-term debt, net of current portion 938,321
-----------
4,935,321
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 (2,442,600)
---------
Total stockholders' equity (1,256,250)
---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 7,165,812
=========
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)
<TABLE>
<S> <C> <C> <C> <C>
For the quarter ended For the six months ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
--------- --------- ---------- ---------
SALES $1,467,638 $ 748,247 $ 3,197,347 $1,361,243
COST OF SALES
Materials cost 131,749 186,737 287,613 276,492
Depreciation and
amortization 536,560 170,973 1,193,572 344,373
Maintenance, other
cost of sales 139,717 36,444 293,151 82,008
--------- -------- --------- ---------
Total cost of
sales 808,026 394,154 1,774,336 702,873
--------- -------- ---------- ---------
GROSS PROFIT 659,612 354,093 1,423,011 658,370
OPERATING EXPENSES
Selling, general &
administrative 301,332 256,190 593,445 397,390
Research & development 73,212 12,244 131,741 20,097
Depreciation and
amortization 76,424 87,316 161,722 162,035
--------- -------- --------- --------
450,968 355,750 886,908 579,522
--------- -------- --------- --------
Income (loss)
from operations 208,644 (1,657) 536,103 78,848
OTHER (INCOME) EXPENSE
Interest (1,457) - (2,471) -
Interest expense and
amortization of
loan costs 210,554 177,447 433,629 315,808
--------- -------- --------- --------
209,097 177,447 431,158 315,808
--------- -------- --------- --------
Net income (loss)
before income taxes (453) (179,104) 104,945 (236,960)
Income taxes 6,883 800 12,766 800
--------- -------- --------- --------
NET INCOME (LOSS) (7,336) (179,904) 92,179 (237,760)
Accumulated deficit
Balance, beginning of
period (2,435,264) (1,725,478) (2,534,779) (1,667,622)
--------- --------- --------- ---------
Balance, end of period (2,442,600) (1,905,382) (2,442,600) (1,905,382)
========= ========= ========= =========
NET INCOME
(LOSS) PER SHARE (NIL) (0.02) 0.01 (0.03)
========= ========== ========== =========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 10,000,000 10,000,000 10,000,000 9,007,746
========== ========== ========== =========
</TABLE>
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 six months
ended June 30,
1998 1997
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES $ 1,172,584 $ (936,713)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patents & other assets (3,460) (8,812)
Investment in non-contract equipment (2,504) (4,129)
Investment in contract costs & equipment (338,011) (486,428)
-------- --------
Net cash used by
investing activities (343,975) (499,369)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions - 3,000
New borrowings 250,000 3,619,390
Repayment of debt (1,297,361) (586,812)
Repayment of related party debt - (1,376,495)
Loan costs - (66,500)
--------- ---------
Net cash provided (used) by
financing activities (1,047,361) 1,592,583
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (218,752) 156,501
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 404,240 5,608
-------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 185,488 $ 162,109
========= =========
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
June 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,
are 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.
6
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Item 2. 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 June 30, 1998 have been generated from:
(1) lease of printers and self service terminals for the automated preparation
and dispensing of motor vehicle registration forms and license plate decals; and
(2) lease of printer equipment for the automated preparation and dispensing of
drivers' licenses.
For the quarter ended June 30, total revenue increased from $748,000 in 1997
to $1,468,000 in 1998. For the six months ended June 30, total revenue
increased from $1,361,000 in 1997 to $3,197,000 in 1998, an increase of 135%.
For the quarter ended June 30, gross profit increased from $354,000 in 1997 to
$660,000 in 1998. For the six months ended June 30, gross profit increased from
$658,000 in 1997 to $1,423,000 in 1998, and increase of 116%.
Selling, general and administrative expenses for the six months ended June 30
increased from $397,000 in 1997 to $593,000 in 1998, an increase of $196,000
or 49%. Payroll increased from $250,000 to $393,000 due to new employees,
raises and higher employee insurance. Marketing expenses increased from
$61,000 to $95,000 as the Company increased its efforts to obtain more
contracts. General and administrative expenses for the second quarter of 1998
were $301,000 versus $292,000 for the first quarter of 1998, an increase of 3%.
Research and development cost increased from $20,000 in 1997 to $132,000 in
1998 as a result of development of new products. The Company expects to spend
another $260,000 in research and development 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.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATION (continued)
Interest expense increased from $316,000 in 1997 to $434,000 in 1998 reflecting
increased equipment financing.
Net income of $92,000 for the six months ended June 30, 1998 represents a
$330,000 improvement from 1997 and the loss of $7,000 for the quarter is a
$173,000 improvement from the second quarter of 1997 loss of $180,000. This is
a result of the Company processing virtually all of the State of Indiana's
motor vehicle registrations for the first half of 1998. The Company's
equipment was used to process 3,590,000 transactions in the first half of 1998
versus 824,000 in the first six months of 1997 and it is anticipated that
another 2,400,000 will be processed for the remainder of the year as follows:
3rd quarter 1,700,000
4th quarter 700,000
For the remainder of the calendar year, the Company will focus its efforts on:
Completing the installation of the remaining 19 self service terminals
in Indiana.
Expanding its sales and marketing efforts to obtain contracts for the
sale and/or lease of its equipment to additional jurisdictions.
Obtaining the equity capital necessary to pay off the debt associated
with patent acquisitions and cure working capital deficiencies.
New product development.
Extension of the Indiana contract.
The Company currently has 11 full time employees and one part time employee, of
which three are in administration, two in marketing, and seven in operations /
R&D. The company may further expand its marketing and operating personnel in
1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operations was $1,172,000 for the six months ended June
30, 1998 versus $936,000 used by operations in the six months ended June 30,
1997, an improvement of 2,108,000. All of the cash used by operations in the
first six months of 1997 was the result of the financing of contract costs and
the reduction of accounts payable related to those costs.
8
<PAGE>
The Company is financing the Indiana contract costs over the initial contract
term which expires October 31, 1999 and the net cash flows 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.
Management believes that other sources of financing will be available
especially if the Company obtains contracts with other states.
During the second quarter of 1998, the Company borrowed $250,000 to finance
contract costs. The Company expects to borrow at least $1,000,000 through the
second quarter of 1999 to finance additional equipment costs. In addition, the
Company has committed to spend and needs to obtain financing of $1,100,000 for
new printer equipment for use in other states. Current debt service is
$241,000 per month at 13.05% interest through November 30, 1999.
9
<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
10
<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: August 19, 1998 INTELLECTUAL TECHNOLOGY, INC.
BY: /S/ Janice L. Welch
Secretary/Treasurer/Principal
Financial Officer
11
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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 JUNE 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 185488
<SECURITIES> 0
<RECEIVABLES> 524037
<ALLOWANCES> 0
<INVENTORY> 108023
<CURRENT-ASSETS> 877862
<PP&E> 4772698
<DEPRECIATION> (2017994)
<TOTAL-ASSETS> 71658126
<CURRENT-LIABILITIES> 3486741
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> (1256350)
<TOTAL-LIABILITY-AND-EQUITY> 7165812
<SALES> 1467638
<TOTAL-REVENUES> 1467638
<CGS> 808026
<TOTAL-COSTS> 1258994
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 210554
<INCOME-PRETAX> (453)
<INCOME-TAX> 6883
<INCOME-CONTINUING> (7336)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7336)
<EPS-PRIMARY> (.001)
<EPS-DILUTED> (.001)
</TABLE>
