<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, 1999
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.)
1945 Camino Vida Roble, Suite O, Carlsbad, California 92008
(Address of principal executive offices)
(760) 929-9789
(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 1, 1999, 10,000,001 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 1. Financial Statements
Balance Sheet, March 31, 1999 3
Statements of Operations and
Accumulated Deficit (Unaudited)
for the three months ended
March 31, 1999 and 1998 4
Statements of Cash Flows (Unaudited)
for the three months
ended March 31, 1999 and 1998 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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Intellectual Technology, Inc.
BALANCE SHEET
March 31, 1999
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 59,941
Accounts receivable 1,336,716
Inventory 446,702
Prepaid expenses 43,037
----------
Total current assets 1,886,396
PROPERTY AND EQUIPMENT
Contract equipment 5,699,641
Equipment - non contract, office,
furniture and improvements 101,516
----------
5,801,157
Accumulated depreciation 3,418,040
----------
Total property and equipment 2,383,117
OTHER ASSETS
Patents and organization costs, net of
accumulated amortization of $959,331 3,408,652
Deposits 7,051
----------
Total other assets 3,415,703
----------
TOTAL ASSETS $ 7,685,216
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 843,987
Accrued expenses 346,359
Notes payable 2,006,452
Notes payable - related parties 105,200
Due to related party 4,000,000
Accrued interest payable 648,250
----------
Total current liabilities 7,950,248
OTHER LIABILITIES
Long term debt (net of current portion) 1,172,151
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; 10,000,001 shares issued and
outstanding 100
Additional paid-in capital 1,186,250
Accumulated deficit (2,623,533)
----------
Total stockholders' equity (1,437,183)
----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 7,685,216
==========
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,
----------------------
1999 1998
------------ -------------
REVENUES
Sales, net $ 1,796,855 $ 1,729,709
COST OF REVENUES
Depreciation and amortization 608,036 657,012
Material costs 252,495 155,865
Maintenance and other cost of sales 185,022 153,433
------------ -------------
Total cost of revenues 1,045,553 966,310
------------ -------------
Gross profit 751,302 763,399
OPERATING EXPENSES
Selling, general and administrative 301,153 297,997
Research and development 117,264 58,529
Depreciation and amortization 76,151 85,297
------------ -------------
Total operating expenses 494,568 441,823
------------ -------------
Income from operations 256,734 321,576
OTHER INCOME (EXPENSE)
Interest income 241 1,014
Interest expense (205,213) (223,075)
------------ -------------
Net income before income taxes 51,762 99,515
Income taxes - -
------------ -------------
NET INCOME 51,762 99,515
Accumulated deficit
Balance, beginning of period (2,675,295) (2,534,779)
------------ -------------
Balance, end of period $ (2,623,533) $ (2,435,264)
============ =============
INCOME PER SHARE - BASIC $ 0.01 $ 0.01
============ =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 10,000,001 10,000,001
============ =============
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,
----------------------
1999 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES $ (187,237) $ 969,170
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patents and
other intangibles - (1,260)
Purchase of non-contract equipment (6,617) (1,880)
Investment in contract costs and equipment (355,045) (304,560)
------------ -------------
Net cash used by
investing activities (361,662) (307,700)
CASH FLOWS FROM FINANCING ACTIVITES
New borrowings 974,630 -
Debt repayments (448,547) (654,562)
Loan fees (102,000) -
------------ -------------
Net cash provided (used) by
financing activities 424,083 (654,562)
------------ -------------
NET INCREASE (DECREASE) IN CASH (124,816) 6,908
CASH AND CASH EQUIVALENTS,
beginning of period 184,757 404,240
------------ -------------
CASH AND CASH EQUIVALENTS,
end of period $ 59,941 $ 411,148
============ =============
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, 1999
(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, 1998.
2. Significant first quarter financing
- ---------------------------------------
In the first quarter of 1999, the Company refinanced $1,956,000 in
installment debt previously maturing in November of 1999, plus interest and
loan fees through December of 2000 at a rate of 9.35%. The new debt is secured
by leased equipment and calls for monthly installments of $134,695.
In the first quarter of 1999, the Company incurred $230,000 in additional
equipment financing at 9.5% through June of 1999. This amount is expected to
be refinanced on a long term basis.
3. Commitments and Contingencies
- ---------------------------------
Proposed Rescission of ARS Purchase and Sale Agreement
On January 27, 1999, the Company filed a complaint with the Superior
Court of the State of California for the County of San Diego case number 727654
against American Registration Systems, Inc. ("ARS") and co-defendants, thereby
recording a complaint for rescission of a 1995 Purchase and Sale
Agreement between the Company and ARS. The suit challenges the validity of
certain material representations made by ARS and its affiliates at the time of
the Company's entering into the Purchase and Sale Agreement, and asserts
that such agreement was void or voidable due to a variety of defects. To date
ARS has filed no response to the complaint.
The Purchase and Sale Agreement which the Company seeks to rescind
provides that the Company shall pay to ARS or its assigns $4,000,000, plus a
$0.01 per transaction royalty. Judgement in favor of the Company would result
in the cancellation of approximately $4,700,000 of currently outstanding
indebtedness.
6
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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.
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 venders within the industry, and (iii)
from the sale of media and supplies to these vendors. ITI also earns revenue
from the sale of drivers license photos.
Results of Operations
The Company's revenues through March 31, 1999 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.
Contract revenues increased from $1,729 thousand to $1,797 thousand. Gross
profit decreased from $763 thousand to $751 thousand. Cost of revenues, as a
percentage of sales increased from 56% to 58%, primarily due to increases in
materials and maintenance required to support the Company's contracts. The
Company anticipates that present profit margins will be maintained for the
remainder of fiscal 1999.
Selling, general and administrative expenses for the three months ended March
31 increased from $298,000 in 1998 to $301,000 in 1999. Although this
increase is negligible, the Company expects that these expenses will increase
for the remainder of the year due to anticipated increases in personnel and
related costs.
Research and development cost increased from $59,000 in 1998 to $117,000 in
1999 as a result of development of new products. The Company expects to
spend another $200,000 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>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS (continued)
Results of Operations (continued)
Interest expense decreased from $223,000 in 1998 to $205,000 in 1999
reflecting the pay down of equipment financing.
Net income of $52,000 for the three months ended March 31, 1999 represents a
$47,000 decrease from 1998 income of $99,000.
Liquidity and Capital Resources
Cash flow used in operations was $187,000 for the three months ended March
31, 1999 versus $969,000 provided by operations in the three months ended
March 31, 1998. Differences in the timing in the collection of receivables
and the payment of payables accounted for the decrease.
The Company has refinanced its equipment loans and extended the repayment
period from November 1999 through December 2000. However, the Company from
time to time has used its cash flow from operations after debt service to
develop and purchase new printer equipment. Unless the Company secures other
forms of debt or equity financing, its cash flows may not be sufficient to meet
its operating expenses. Management believes that other sources of financing
will be available especially if the Company secures contracts with other
states.
Significant current debt service is $135,000 per month at 9.35% interest
through December 2000. And $530,000 in interim financing due June 1999, is
expected to be refinanced through April 2004 at an installment amount of
approximately $17,000 per month at 9.5% interest.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
Contingencies
Reference is made to the proposed recissions of a patent purchase agreement
discussed in Note 8 of the Notes to Financial Statements in the Company's
Annual Report on Form 10-KSB, and recapped below. No material developments
occurred since the filing of Form 10-KSB on April 14, 1999. Based upon
amounts outstanding as of March 31, 1999, a favorable resolution of this
matter will have the following effects (exclusive of settlement costs, if
any) on the financial statements of the Company:
Decrease in Other Assets 3,285,787
Decrease in Current Liabilities 4,718,470
Increase in Equity 1,432,683
Expenses included in these financial statements related to this matter which
would be eliminated by a favorable resolution of this matter are as follows:
March 31, 1999 March 31, 1998
Cost of Sales - royalty expense $ 19,541 $ 19,488
Interest expense 80,000 80,000
Amortization - patent 70,518 69,568
-------------- --------------
Total $ 170,059 $ 169,056
============== ==============
9
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 27, 1999, the Company filed a complaint with the Superior Court of
the State of California for the County of San Diego case number 727654
against American Registration Systems, Inc. ("ARS") and co-defendents,
thereby recording a complaint for rescission of a 1995 Purchase and Sale
Agreement between the Company and ARS. The suit challenges the validity of
certain material representations made by ARS and its affiliates at the time
of the Company's entering into the Purchase and Sale Agreement, and asserts
that such agreement was void or voidable due to a variety of defects.
To date, ARS has filed no response to the complaint.
The Purchase and Sale Agreement which the Company seeks to rescind provides
that the Company shall pay to ARS or its assigns $4,000,000, plus a $0.01 per
transaction royalty. Judgement in favor of the Company would result in the
cancellation of approximately $4,700,000 of currently outstanding
indebtedness.
Item 5. Other Information
Effect of Inflation and Foreign Currency Exchange
The Company has not experienced material unfavorable effects on its results
of operations as a result of foreign currency fluctuations or domestic
inflation.
Year 2000 Issue
The Company's management has conducted an assessment of the impact of the
Year 2000 issue on its products and operations. Management believes that all
of the Company's products and internal operating systems are currently Year
2000 compliant. The Company is also in the process of ascertaining whether
strategic vendor relationships will be affected by Y2K, and projects that
this assessment will be complete in the third quarter of 1999. The Company
has been unable to ascertain whether its governmental customers will be year
2000 compliant. In the event that one or more of the Company's customers
experiences a computer system disruption caused by the year 2000 issue, the
Company could experience significant loss of revenues until such time as Y2K
remediation is accomplished by the customer. The Company will have no
control over such remediation efforts or their duration.
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
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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.
INTELLECTUAL TECHNOLOGY, INC.
By: /s/ Janice L. Welch
----------------------
Principal Financial Officer
Date: May 18, 1999
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 MARCH 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 59,941
<SECURITIES> 0
<RECEIVABLES> 1,336,716
<ALLOWANCES> 0
<INVENTORY> 446,702
<CURRENT-ASSETS> 1,886,396
<PP&E> 5,801,157
<DEPRECIATION> 3,418,040
<TOTAL-ASSETS> 7,685,216
<CURRENT-LIABILITIES> 7,950,248
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> (1,437,283)
<TOTAL-LIABILITY-AND-EQUITY> 7,685,216
<SALES> 1,796,855
<TOTAL-REVENUES> 1,797,096
<CGS> 1,045,553
<TOTAL-COSTS> 1,745,334
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 205,213
<INCOME-PRETAX> 51,762
<INCOME-TAX> 51,762
<INCOME-CONTINUING> 51,762
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,762
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
