<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, 1999
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 )
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 August 13, 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, June 30, 1999 3
Statements of Operations and Accumulated Deficit
(Unaudited) for the three and six month periods ended
June 30, 1999 and 1998 4
Statements of Cash Flows (Unaudited) for the six
month period ended June 30, 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
June 30, 1999
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $709,793
Accounts receivable 672,430
Inventory 332,823
Loans to stockholders 15,600
Prepaid expenses 25,516
----------
Total current assets 1,756,162
Property & Equipment
Contract equipment 5,750,307
Equipment - non-contract, office, furniture and improvements 107,571
----------
5,857,878
Less: Accumulated depreciation 3,981,291
----------
1,876,587
Other Assets
Patents and organization costs, net of
accumulated amortization of $959,331 3,323,866
Deposits 7,051
----------
Total assets $6,963,666
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $165,805
Accrued expenses 366,252
Notes payable 1,644,558
Notes payable - related party 10,692
Due to related party 4,000,000
Accrued interest payable 726,488
----------
Total current liabilities 6,913,795
Other Liabilities
Long-term debt, net of current portion 1,428,273
----------
Stockholders' Equity
Preferred stock, $0.00001 par value, 10,000,000 shares
authorized, no shares issued or 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 (2,564,752)
----------
(1,378,402)
----------
$6,963,666
==========
The accompanying notes are an integral part of the financial statements.
3
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Intellectual Technology, Inc.
STATEMENTS OF LOSS AND ACCUMULATED DEFICIT
(Unaudited)
For the quarter For the six months
ended June 30, ended June 30,
------------------ ------------------
1999 1998 1999 1998
------------------ ------------------
REVENUES
Sales $1,714,234 $1,467,638 $3,511,089 $3,197,347
COST OF REVENUES
Depreciation and
amortization 557,370 536,560 1,165,406 1,193,572
Material costs 280,113 131,749 532,608 287,613
Maintenance and other
cost of sales 199,078 139,717 384,100 293,151
---------- ---------- ---------- ----------
Total cost of revenues 1,036,561 808,026 2,082,114 1,774,336
---------- ---------- ---------- ----------
Gross profit 677,673 659,612 1,428,975 1,423,011
OPERATING EXPENSES
Selling, general
& administrative 358,342 308,215 659,495 606,211
Research & development 17,089 73,212 134,353 131,741
Depreciation and
amortization 75,842 76,424 151,993 161,722
---------- ---------- ---------- ----------
451,273 457,851 945,841 899,674
---------- ---------- ---------- ----------
Income from operations 226,400 201,761 483,134 523,337
OTHER INCOME (EXPENSE)
Interest income 1,579 1,457 1,820 2,471
Interest expense (169,198) (210,554) (374,411) (433,629)
---------- ---------- ---------- ----------
Income before
income taxes 58,781 (7,336) 110,543 92,179
Income tax expense - - - -
---------- ---------- ---------- ----------
NET INCOME 58,781 (7,336) 110,543 92,179
Accumulated deficit
Balance, beginning
of period (2,623,533) (2,435,264) (2,675,295) (2,534,779)
---------- ---------- ---------- ----------
Balance, end
of period $(2,564,752) $(2,442,600) $(2,564,752) $(2,442,600)
========== ========== ========== ==========
Income per share
- basic $ 0.01 $ (0.00) $ 0.01 $ 0.01
========== ========== ========== ==========
Wtd. average shares
outstanding 10,000,001 10,000,001 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 June 30,
---------------------------
1999 1998
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES $ 719,576 $1,172,584
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patents and other
intangibles - (3,460)
Purchase of non-contract equipment (12,632) (2,504)
Investment in contract costs
and equipment (405,711) (338,011)
----------- -----------
Net cash used by investing activities (418,343) (343,975)
CASH FLOWS FROM FINANCING ACTIVITIES
New borrowings 1,295,935 250,000
Debt repayments (970,132) (1,297,361)
Loan fees (102,000) -
----------- -----------
Net cash provided (used) by
financing activities 223,803 (1,047,361)
----------- -----------
NET INCREASE (DECREASE) IN CASH 525,036 (218,752)
CASH AND CASH EQUIVALENTS, beginning of period 184,757 404,240
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 709,793 $ 185,488
=========== ===========
The accompanying notes are an integral part of the financial statements.
5
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Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
June 30, 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, 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, 1998.
2. Significant second quarter financing
During the second quarter of 1999, the Company incurred $286,000 in
additional equipment financing at 9.5% through September 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 $4,800,000 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 June 30, 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.
For the quarter ended June 30, 1999, contract revenues increased to
$1,714,234, a 17% increase over revenues of $1,467,638 earned during the
second quarter of 1998. Likewise, six month revenues in 1999 totaled
$3,511,089, an increase of 10% over $3,197,347 earned during the first
six months of 1998. The increase was directly related to the number of
transactions processed by the Company's equipment.
The Company's gross profit margin declined to 40% in the current quarter
from 45% in the second quarter of 1998. Gross profit was 41% for the first
six months of 1999, as compared with 45% for the same period in 1998. The
decline in gross margins is primarily due to increases in the cost of
materials and maintenance required to support the Company's contracts.
Operating expenses, totaling $451,273 for the current quarter, were down
1% from $457,851 incurred in the second quarter of 1998. A $50,000
increase in selling, general and administrative costs for the quarter was
offset by a reduction in research and development expenditures of $56,000.
For the six months ended June 30, 1999, operating expenses increased $46,000
over the same period in 1998, primarily due to increased personnel and
related costs.
7
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS (continued)
Results of Operations (continued)
Research and development cost decreased in the current quarter to $17,089
from $73,212 incurred in the second quarter of 1998. Cumulative year to
date research and development expenditures totaled $134,353 at June 30,
1999 as compared with $131,741 for the first six months of 1998. The
Company is committed to spend another $50,000 in research and development
costs for the remainder of the calendar year, although this amount could
substantially increase at the discretion of management. The Company will
engage in research and development of additional applications of its
products in related areas.
Interest expense decreased to $374,411 for the first six months of 1999
from $433,629 for a corresponding period in 1998, reflecting the pay down
of equipment financing.
As a result of these changes, net income totaled $110,543 for the six
months ended June 30, 1999, as compared with $92,179 for the same period
in 1998, an increase of 20%.
Liquidity and Capital Resources
Cash flow provided by operations was $719,576 for the six months ended
June 30, 1999 versus $1,172,584 provided by operations in the six months
ended June 30, 1998. The decrease in cash flow is due primarily to an
increased investment in inventory and receivables as a result of adding
another state contract.
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. $765,000 in interim financing due September 1999
is expected to be refinanced through February, 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 June 30, 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 3,216,219
Decrease in Current Liabilities 4,815,702
Increase in Equity 1,599,483
Expenses included in these financial statements related to this matter which
would be eliminated by a favorable resolution of this matter are as follows:
Six months June 30, Three months June 30,
------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
Cost of Sales - royalties $ 36,720 $ 35,900 $ 17,232 $ 16,359
Interest expense 160,000 160,000 80,000 80,000
Amortization - patent 139,136 139,136 69,568 69,568
--------- --------- --------- ---------
Total $ 335,856 $ 335,036 $ 166,800 $ 165,927
========= ========= ========= =========
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-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.
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 $4,800,000 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:
Principal Financial Officer
Date: August 13, 1999
11
<PAGE>
<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, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 709,793
<SECURITIES> 0
<RECEIVABLES> 672,430
<ALLOWANCES> 0
<INVENTORY> 332,823
<CURRENT-ASSETS> 1,756,162
<PP&E> 5,857,878
<DEPRECIATION> 3,981,291
<TOTAL-ASSETS> 6,963,666
<CURRENT-LIABILITIES> 6,913,795
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> (1,378,502)
<TOTAL-LIABILITY-AND-EQUITY> 6,963,666
<SALES> 1,714,234
<TOTAL-REVENUES> 1,715,813
<CGS> 1,036,561
<TOTAL-COSTS> 1,657,032
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169,198
<INCOME-PRETAX> 58,781
<INCOME-TAX> 58,781
<INCOME-CONTINUING> 58,781
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,781
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
