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, 2000
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 18, 2000, 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 1. Financial Statements
Balance Sheet, March 31, 2000 1
Statements of Operations and Accumulated Deficit
(Unaudited) for the three and six month periods
ended June 30, 2000 and 1999 2
Statements of Cash Flows (Unaudited) for the six
months ended June 30, 2000 and 1999 3
Notes to financial statements 4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 5-6
PART II. OTHER INFORMATION 7
Signatures 8
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Intellectual Technology, Inc.
Balance Sheet
June 30, 2000
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 530,115
Certificate of deposit 114,903
Accounts receivable 792,055
Inventory 272,938
Prepaid expenses 151,292
---------
Total current assets 1,861,303
Property & Equipment
Contract equipment 6,264,217
Equipment - non-contract, office, furniture and
improvements 56,049
---------
6,320,266
Less: Accumulated depreciation 5,364,461
---------
955,805
Other Assets
Patents, net of accumulated amortization
of $558,360 173,527
Due from related party 37,212
Other non-current assets 42,494
---------
Total assets $ 3,070,341
=========
LIABILITIES AND STOCKHOLERS' EQUITY
Current Liabilities
Accounts payable $ 134,172
Income taxes payable 20,096
Accrued expenses 61,311
Notes payable 936,231
Due to related party 10,273
Accrued interest payable 5,961
---------
Total current liabilities 1,168,044
Other Liabilities
Long-term debt, net of current portion 518,712
Due to related party - long term 140,677
---------
659,389
---------
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, 10,000,000 shares issued and outstanding 100
Additional paid-in capital 1,186,250
Accumulated earnings 56,558
---------
1,242,908
---------
Total liabilities and stockholders' equity $ 3,070,341
=========
The accompanying notes are an integral part of the financial statements.
1
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Intellectual Technology, Inc.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(unaudited)
For the quarter
ended June 30,
----------------------
2000 1999
------------ -------------
REVENUES
Sales $ 1,796,648 $ 1,714,234
COST OF REVENUES
Depreciation and amortization 391,442 557,370
Material costs 387,805 280,113
Maintenance and other cost of sales 279,566 199,078
------------ -------------
Total cost of revenues 1,058,813 1,036,561
------------ -------------
Gross profit 737,835 677,673
OPERATING EXPENSES
Selling, general and administrative 342,747 358,342
Research and development 22,352 17,089
Depreciation and amortization 80,597 75,842
------------ -------------
Total operating expenses 445,696 451,273
------------ -------------
Income from operations 292,139 226,400
OTHER INCOME (EXPENSE)
Interest income 8,709 1,579
Interest expense (57,451) (169,198)
------------ -------------
Net income before income taxes 243,397 58,781
Income tax expense 84,382 -
------------ -------------
NET INCOME 158,565 58,781
Accumulated deficit
Balance, beginning of period (102,007) (2,623,533)
------------ -------------
Balance, end of period $ 56,558 $ (2,564,752)
============ =============
INCOME PER SHARE - BASIC $ 0.02 $ 0.01
============ =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 10,000,000 10,000,000
============ =============
For the six months
ended June 30,
----------------------
2000 1999
------------ -------------
REVENUES
Sales $ 3,739,008 $ 3,511,089
COST OF REVENUES
Depreciation and amortization 849,204 1,165,406
Material costs 736,463 532,608
Maintenance and other cost of sales 548,553 384,100
------------ -------------
Total cost of revenues 2,134,220 2,082,114
------------ -------------
Gross profit 1,604,788 1,428,975
OPERATING EXPENSES
Selling, general and administrative 644,654 643,035
Research and development 51,052 139,353
Depreciation and amortization 190,821 151,993
------------ -------------
Total operating expenses 886,527 934,381
------------ -------------
Income from operations 718,261 494,594
OTHER INCOME (EXPENSE)
Interest income 14,814 1,820
Interest expense (128,489) (374,411)
------------ -------------
Net income before income taxes 604,586 122,003
Income tax expense 223,765 11,460
------------ -------------
NET INCOME 380,821 110,543
Accumulated deficit
Balance, beginning of period (324,263) (2,675,295)
------------ -------------
Balance, end of period $ 56,558 $ (2,564,752)
============ =============
INCOME PER SHARE - BASIC $ 0.04 $ 0.01
============ =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 10,000,000 10,000,000
============ =============
The accompanying notes are an integral part of the financial statements.
2
Intellectual Technology, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months
ended June 30,
----------------------
2000 1999
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES $ 1,130,260 $ 719,576
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of non-contract equipment (3,840) (12,632)
Investment in contract costs and equip. (266,363) (405,711)
------------ -------------
Net cash flows from
investing activities (270,203) (418,343)
CASH FLOWS FROM FINANCING ACTIVITES
New borrowings - 1,295,935
Debt repayments (835,665) (970,132)
Loan fees - (102,000)
------------ -------------
Net cash flows from
financing activities (835,665) 223,803
------------ -------------
NET INCREASE IN CASH 24,392 525,036
CASH AND CASH EQUIVALENTS,
beginning of period 505,723 184,757
------------ -------------
CASH AND CASH EQUIVALENTS,
end of period $ 530,115 $ 709,793
============ =============
The accompanying notes are an integral part of the financial statements.
3
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Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
(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, 1999.
4
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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.
Plan of Operations
The Company designs, manufactures, and leases systems for the automated
preparation and dispensing of motor vehicle registration forms and license
plate decals.
Effective November 1, 1996, the Company commenced a lease contract with the
State of Indiana. Prior to that date, the Company was engaged principally in
research and development of its products and generated only limited operating
revenues. Subsequently, the Company has entered into contracts to supply
equipment and material to the State of Maryland, and has entered into a five
year contract with South Dakota.
Liquidity and Capital Resources
The following is a summary of the Company's cash flows from operating,
investing, and financing activities:
Six months ended March 31,
(rounded)
2000 1999
Operating Activities $ 1,130,000 $ 720,000
Investing Activities (270,000) (418,000)
Financing Activities (836,000) 223,000
Net effect on cash $ 24,000 $ 525,000
Cash flows provided by operations increased from $720,000 in 1999 to
$1,130,000, an increase of $410,000 due to (1) net increase in cash
investment of $252,000 in 2000 versus 1999 due to the investment in 1999
related to the addition of another state contract; (2) net decrease in
payment of accounts payable of $262,000 in 2000 versus 1999 primarily
resulting from refinancing long term debt in 1999 and utilizing part of the
proceeds to pay vendors; and, (3) other items netting to a decrease in
cashflows of ($104,000).
The Company is committed to spend another $100,000 by the end of the year
to complete installation of contract equipment. Under the Company's current
financing arrangement, receivables from all contracts have been assigned to
the note holder. The amount of monthly cash flow from the contracts is
remitted net to the Company after debt service is satisfied. Management
projects that this arrangement will continue to generate positive monthly
cash flows through at least the third quarter of 2000, and that such cash
flows will be sufficient to support operations and the Company's sales
effort for the coming year.
In April 2000, the Company obtained a $100,000 line of credit at prime
plus 2%. Any borrowings under this agreement will become due in April 2001.
Remaining installments on a majority of the Company's equipment financing
equipment financing extend through December, 2000.
5
<PAGE>
Results of Operations
For ease in presenting the financial data, figures have been rounded to
the nearest thousand.
For the six months ended June 30, 2000, contract revenues increased from
$3,511,000 to $3,739,000, an increase of $228,000 or 6.5%. The increase
was directly related to an additional state contract (3.7%), expiration of
a contract (-4.1%), billings for contract related services (4.7%) and the
additional number of transactions processed by ITI's equipment (2.2%).
Gross profit increased 12.3% from $1,429,000 (40.7% of sales) to $1,605,000
(42.9% of sales) as a result of higher sales volume. The gross profit
percentage increased due to: (1) decreased contract depreciation due to
certain soft contract costs being amortized through an initial contract
period that expired in October 1999(10.5%); (2) higher maintenance costs
due to aging equipment and software changes, updates and enhancements
(-5.5%); (3) reduction in property taxes as a result of state legislation
and rescission of a royalty agreement(1.7%); and (4) higher material costs
(-4.5%).
Operating expenses decreased 5.1% from $934,000 in 1999 to $887,000 in 2000,
a decrease of $47,000. Selling, general and administrative expenses increased
from $643,000 to $645,000, an increase of $2,000 primarily due to (1) Lower
general & administrative expenses ($7,000); (2) cost of living adjustments to
payroll and new hires ($66,000); and (3) decreased marketing expenses related
to efforts to obtain additional state contracts(-$57,000). Patent
amortization increased from $152,000 in 1999 to $191,000, an increase of
$39,000 in 2000 due to revaluation in the remaining useful lives of the
patents offset by a rescission of patent purchase agreement. Research and
development decreased from $139,000 in 1999 to $51,000 in 2000 because:
(1) the Company spent more efforts in improving and adapting existing Company
products to recent customer needs; and (2) research and development efforts
were taken over by existing employees rather than subcontracting to outside
vendors. The Company will continue to engage in research and development of
additional applications of its products in related areas and new product
development.
Interest expense decreased from $374,000 in 1999 to $128,000 in 2000, a
decrease of $246,000, reflecting the pay down of equipment financing and
retirement to other debt, a savings of $91,000. Interest expense on a patent
decreased by $155,000 due to the recission of a patent purchase agreement.
6
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 3. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The Company's President, Nick Denice, passed away during July of 2000.
The Company expects to hold special elections to fill the vacancy
created by his passing.
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
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/ Craig Litchin
Acting Principal Financial Officer
Date: August 18, 2000
