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: September 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 November 17, 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, September 30, 2000 1
Statements of Operations and Accumulated Deficit
(Unaudited) for the three and nine month periods
ended September 30, 2000 and 1999 2
Statements of Cash Flows (Unaudited) for the nine
months ended September 30, 2000 and 1999 3
Notes to financial statements 4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 5-7
PART II. OTHER INFORMATION 8
Signatures 9
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Intellectual Technology, Inc.
Balance Sheet
September 30, 2000
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 947,752
Certificate of deposit 126,731
Accounts receivable 781,955
Inventory 221,485
Prepaid expenses 93,028
---------
Total current assets 2,170,951
Property & Equipment
Contract equipment 6,266,454
Equipment - non-contract, office, furniture and
improvements 61,884
---------
6,328,338
Less: Accumulated depreciation 5,446,349
---------
881,989
Other Assets
Patents, net of accumulated amortization
of $603,508 128,379
Due from related parties 37,212
Other non-current assets 33,678
---------
Total assets $ 3,252,209
=========
LIABILITIES AND STOCKHOLERS' EQUITY
Current Liabilities
Accounts payable $ 120,505
Income taxes payable 230,043
Accrued expenses 80,317
Notes payable 551,443
Due to related party 10,443
Accrued interest payable 4,290
---------
Total current liabilities 997,041
Other Liabilities
Long-term debt, net of current portion 478,816
Due to related party - long term 138,001
---------
616,817
---------
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
Retained earnings 452,001
---------
1,638,351
---------
Total liabilities and stockholders' equity $ 3,252,209
=========
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 September 30,
----------------------
2000 1999
------------ -------------
REVENUES
Sales $ 1,726,123 $ 1,845,614
COST OF REVENUES
Depreciation and amortization 79,115 592,820
Material costs 297,526 468,120
Maintenance and other cost of sales 295,769 206,151
------------ -------------
Total cost of revenues 672,410 1,267,091
------------ -------------
Gross profit 1,053,713 578,523
OPERATING EXPENSES
Selling, general and administrative 267,193 299,025
Research and development 91,590 46,706
Depreciation and amortization 47,921 89,643
------------ -------------
Total operating expenses 406,704 435,374
------------ -------------
Income from operations 647,009 143,149
OTHER INCOME (EXPENSE)
Interest income 11,838 3,739
Impairment loss,
patents - (2,816,942)
Interest expense (39,788) (101,299)
Interest expense - patents (2,494) (369)
------------ -------------
Net income (loss) before
income taxes 616,565 (2,771,722)
Income tax (expense) benefit (221,122) 1,921,165
------------ -------------
Net income (loss) before
extraordinary item 395,443 (850,557)
Extraordinary gain, net of
income taxes of $1,926,000 - 2,889,702
------------ -------------
NET INCOME 395,443 2,039,145
Retained earnings (Accumulated deficit)
Balance, beginning of period 56,558 (2,564,752)
------------ -------------
Balance, end of period $ 452,001 $ (525,607)
============ =============
INCOME (LOSS) PER SHARE - BASIC
Income (loss) per share before
extraordinary item $ 0.04 $ (0.09)
Extraordinary item, net of tax - 0.29
------------ -------------
Net income per share $ 0.04 $ 0.20
============ =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 10,000,000 10,000,000
============ =============
For the nine months
ended September 30,
----------------------
2000 1999
------------ -------------
REVENUES
Sales $ 5,465,131 $ 5,356,703
COST OF REVENUES
Depreciation and amortization 928,319 1,758,226
Material costs 1,033,989 1,000,728
Maintenance and other cost of sales 844,322 553,531
Royalties - 36,720
------------ -------------
Total cost of revenues 2,806,630 3,349,205
------------ -------------
Gross profit 2,658,501 2,007,498
OPERATING EXPENSES
Selling, general and administrative 875,697 932,533
Research and development 178,792 195,587
Depreciation and amortization 238,742 241,636
------------ -------------
Total operating expenses 1,293,231 1,369,756
------------ -------------
Income from operations 1,365,270 637,742
OTHER INCOME (EXPENSE)
Interest income 26,652 5,559
Impairment loss,
patents - (2,816,942)
Interest expense (163,137) (315,709)
Interest expense - patents (7,634) (160,369)
------------ -------------
Net income (loss) before
income taxes 1,221,151 (2,649,719)
Income tax (expense) benefit (444,887) 1,909,705
------------ -------------
Net income (loss) before
extraordinary item 776,264 (740,014)
Extraordinary gain, net of
income taxes of $1,926,000 - 2,889,702
------------ -------------
NET INCOME 776,264 2,149,688
Retained earnings (Accumulated deficit)
Balance, beginning of period (324,263) (2,675,295)
------------ -------------
Balance, end of period $ 452,001 $ (525,607)
============ =============
INCOME (LOSS) PER SHARE - BASIC
Income (loss) per share before
extraordinary item $ 0.08 $ (0.07)
Extraordinary item, net of tax - 0.29
------------ -------------
Net income per share $ 0.08 $ 0.22
============ =============
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 nine months
ended September 30,
----------------------
2000 1999
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES $ 2,023,159 $ 1,250,391
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of non-contract equipment (9,675) (13,047)
Investment in contract costs and equip. (308,599) (650,137)
------------ -------------
Net cash flows from
investing activities (318,274) (663,184)
CASH FLOWS FROM FINANCING ACTIVITES
New borrowings - 1,335,936
Debt repayments (1,262,856) (1,378,105)
Loan fees - (142,000)
------------ -------------
Net cash flows from
financing activities (1,262,856) (184,169)
------------ -------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 442,029 403,038
CASH AND CASH EQUIVALENTS,
beginning of period 505,723 184,757
------------ -------------
CASH AND CASH EQUIVALENTS,
end of period $ 947,752 $ 587,795
============ =============
The accompanying notes are an integral part of the financial statements.
3
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Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
September 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.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
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 & background
The Company (ITI) designs, manufactures, and leases systems for the automated
preparation and dispensing of motor vehicle registration forms and license
plate decals. ITI refers to the materials used in the preparation of the
vehicle forms and decals as "media". Until 1996, ITI was principally engaged
in research and development of its products and generated only limited
operating revenues. In November 1996, the Company entered into a three-year
lease agreement with the State of Indiana, to provide printer equipment and
self-service terminals for production of the State's vehicle registrations.
The revenue from this lease agreement is billed on a per transactions basis
and includes the media, equipment maintenance and some software updates.
This contract has been extended through October 2002. The self-service
terminals (SST's) are fully automated and do not require State personnel to
be present during the renewal process. Some of these SST's are located in
shopping malls. ITI has also developed Customer Convenience Centers for use
in the motor vehicle offices, which allow for automated transactions, but are
attended by a State employee. ITI is presently negotiating for the sale or
lease of this equipment. ITI also has an agreement to sell printers and media
to the prime contractor for the State of Maryland motor vehicle offices,
although this has not been a significant source of revenue. In March 1999,
ITI entered into a five-year contract with South Dakota to supply printer
equipment, equipment and software maintenance and media on a per transaction
basis. During the quarter ended September 30, 2000, ITI entered into a fixed
price contract, which expires in June 2003, with the State of Colorado to
provide printer equipment, software and equipment maintenance, and media to
produce the State's motor vehicle registrations. ITI does not expect to realize
signifiant revenue from this contract until the first or second quarter of 2001.
Through September 30, 1999, ITI earned revenue from the production of drivers'
licenses in the State of New Hampshire.
Results of Operations
For ease in presenting the financial data, figures have been rounded to the
nearest thousand.
For the three months ended September 30, 2000, contract revenues decreased
from $1,846,000 for the three months ended September 30, 1999, to $1,726,000,
a decrease of $120,000 or 7%. This decrease in revenue is due primarily to the
expiration of the New Hampshire contract in September 1999. For the nine
months ended September 30, 2000, contract revenues increased from $5,357,000
to $5,465,000, an increase of $108,000 or 2%. The increase was directly
related to an additional state contract (1.8%) being in effecct for an
additional three months in 2000, expiration of a contract (-4.3%), additional
billings for contract related services (2.8%) and the additional number of
transactions processed by ITI's equipment (1.4%).
Gross profit for the three month comparisons increased from $578,000 (31.4%
of sales) to $1,053,000 (61.1% of sales) as a result of: (1) decreased contract
depreciation due to changes in the contract equipment life; (2) partially
offset by higher maintenance costs due to aging equipment and software
changes, updates and enhancements; and (3) higher material costs in 1999 as a
result of an increase in the media scrap allowance.
Gross profit for the nine months ended September 30, 2000 increased 32.5% from
$2,007,000 (37.5% of sales) to $2,659,000 (48.7% of sales) due to lower costs.
The gross profit percentages increased primarily due to factors (1) and (2)
above. ITI expects that gross profit margins will decline in 2001 as a result
of increasingly competitive market conditions.
5
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Operating expenses decreased 5.6% from $1,370,000 for the nine months ended
September 30, 1999 to $1,293,000 in 2000, a decrease of $77,000. Selling,
general and administrative expenses decreased from $933,000 to $876,000, a
decrease of $57,000 primarily due to (1) lower general & administrative
expenses due to cost savings in several areas ($18,000); and decreased
marketing expenses and payroll due to a reduction in marketing personnel
($39,000). Patent amortization decreased from $84,000 for the nine months
ended September 30, 1999 to $45,000 in 2000, a decrease of $39,000 due to
revaluation in the remaining useful lives of the patents. Research and
development expenses for the three and nine months ended September 30, 2000
were $91,000 and $178,000 representing 3.3% and 5.3% of sales, respectively.
This compares to $46,000 and $195,000, representing 2.5% and 3.7% of sales
for the corresponding periods in 1999. The increase in the third quarter was
due to ITI's development of the new Customer Convenience Center. The
decrease in the year to date amounts was a result of: (1) the Company spending
more efforts in improving and adapting existing Company products to recent
customer needs; and (2) research and development efforts being 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 income for the three and nine month periods ended September 30, 2000
was $11,000 and $26,000, respectively, compared to $3,000 and $5,000 for the
corresponding periods in 1999 reflecting investment of higher cash balances in
certificates of deposit.
Interest expense decreased from $315,000 in 1999 to $163,000 in 2000, a
decrease of $152,000, reflecting the pay down of equipment financing and
retirement to other debt. Interest expense on a patent decreased by $153,000
due to the recission of a patent purchase agreement.
Net income for the three and nine months ended September 30, 2000 was $395,000
and $776,000, respectively, compared to $2,039,000 and $2,149,000 for the
corresponding periods in 1999. $1,999,000 of net income, including an
extraordinary gain, in the three and nine month periods ended September 30,
1999 was due to the recission of a patent purchase agreement and write-down of
the patents.
Liquidity and Capital Resources
Since 1996, the Company has primarily funded its operations through contract
equipment financing. As of September 30, 2000, the Company had working capital
of $1,173,000 versus a working capital deficit of $290,000 as of September 30,
1999.
The following is a summary of the Company's cash flows from operating,
investing, and financing activities:
Nine months ended September 30,
(rounded)
2000 1999
Operating Activities $ 2,023,000 $ 1,250,000
Investing Activities (318,000) (663,000)
Financing Activities (1,263,000) (184,000)
Net effect on cash $ 442,000 $ 403,000
6
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Cash flows provided by operations increased from $1,250,000 in 1999 to
$2,023,000, an increase of $773,000 due to: (1) timing in the collection
of receivables ($651,000); (2) other changes in components of working
capital netting to an increase in cash flows of $122,000. cash flows used
in investing activities decreased from $663,000 in 1999 to $318,000 in 2000
as the Company neared the end of equipment installation for current contracts.
Net cash used in financing activities increased from $184,000 in 1999 to
$1,263,000 in 2000 due to paydown of debt since the Company refinanced long
term debt in March 1999. Significant curent debt service is $135,000 per
month at 9.35% interest through December 2000 and $18,000 per month at 10.4%
interest through March 2004. Under the Compamy's current financing
arrangement, receivables from all contracts have been assigned to the note
holder. The amount of monthly cash flows from the contracts is remitted net
to the Company after debt service is satisfied.
The Company is committed to spend another $100,000 in the next twelve months
to complete installation of equipment under current contracts. The Company
anticipates that it will continue to invest in contract equipment as new
contracts are obtained and that its existing cash balances and access to
financing will be sufficient for at least the next twelve months. However,
there can be no assurance that adequate financing will be available or at
terms acceptable to the Company. 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.
7
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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
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.
INTELLECTUAL TECHNOLOGY, INC.
By: /S/ Craig Litchin
Acting Principal Financial Officer
Date: November 20, 2000
9
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