1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1998 Commission file number 1-10790 INDUSTRIAL TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 04-2596252 (State or other jurisdiction of I.R.S. Employer incorporation or organization Identification Number 70 Cascade Blvd, Milford, CT 06460 (Address of Principal Executive Offices) (Zip Code) (203) 876-1800 (Issuer's Telephone Number, including Area Code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 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 No X . As of March 31, 1998, the registrant had outstanding 5,766,798 shares of Common Stock, $.01 par value. Transitional Small Business Disclosure Format. Yes No X . 2 INDEX INDUSTRIAL TECHNOLOGIES, INC. Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3-5 Consolidated Balance Sheets, March 31, 1998, and September 30, 1997 3 Consolidated Statements of Operations, Three Months and Six Months Ended March 31, 1998, and 1997 4 Consolidated Statements of Cash Flows, Six Months Ended March 31, 1998, and 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on 8-K 10 SIGNATURES 11 2 3 PART I - FINANCIAL INFORMATION INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ITEM 1. FINANCIAL STATEMENTS March 31, September 30, 1998 1997 ------------ ------------ (Unaudited) (Audited) Current assets: Cash and cash equivalents $ 206,506 $ 104,115 Trade accounts receivable, less allowance for doubtful accounts 1998: $111,921; 1997:$105,921 1,014,685 722,549 Inventories 1,282,645 1,454,718 Prepaid expenses and other current assets 108,618 90,367 ------------ ------------ Total current assets 2,612,454 2,371,749 Property and equipment, net 57,392 61,821 Deferred financing costs, less accumulated amortization 1998: $25,476; 1997:$16,452 28,576 37,600 Security deposits and other 112,342 116,340 ------------ ------------ Total assets $ 2,810,764 $ 2,587,510 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Notes payable $ 1,031,556 $ 961,231 Current portion of long-term debt 76,923 76,923 Current portion of capital lease obligation 7,968 7,968 Accounts payable 990,983 1,107,200 Accrued expenses 756,190 934,872 Warranty and installation costs 252,916 208,583 Deferred revenue and customer deposits 726,250 271,868 ------------ ------------ Total current liabilities 3,842,786 3,568,645 Subordinated notes payable to stockholders 180,000 180,000 Long-term debt, less current maturities 384,615 423,077 Capital lease obligation, less current maturities 24,179 29,730 ------------ ------------ Total liabilities 4,431,580 4,201,452 Stockholders' equity: Common stock, $.01 par value. Authorized 14,000,000 shares; issued and outstanding 1998: 5,766,798 shares; 1997: 5,766,798 shares 57,667 57,667 Additional paid-in capital 13,120,397 13,120,397 Accumulated deficit (14,798,880) (14,792,006) ------------ ------------ Total stockholders' equity (1,620,816) (1,613,942) ------------ ------------ Total liabilities and stockholders' equity $ 2,810,764 $ 2,587,510 ============ ============ The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 3 4 INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended Six Months Ended -------------------------------------------------------------------- March 31, March 31, March 31, March 31, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net sales $ 1,299,281 $ 1,787,253 $ 2,861,430 $ 4,182,210 Cost of goods sold 785,333 1,025,318 1,760,744 2,299,748 ----------- ----------- ----------- ----------- Gross profit 513,948 761,935 1,100,686 1,882,462 Operating expenses: Selling 197,364 342,695 399,932 740,018 General and administrative 182,809 402,129 355,441 772,106 Engineering 134,705 133,036 247,710 330,737 Amortization of costs in excess of net assets of business acquired 0 76,865 0 153,731 ----------- ----------- ----------- ----------- Total operating expenses 514,878 954,725 1,003,083 1,996,592 ----------- ----------- ----------- ----------- Operating income (loss) (930) (192,790) 97,603 (114,130) ----------- ----------- ----------- ----------- Interest income (expense), net (57,013) (36,689) (115,962) (75,748) Other income (expense), net 691 35,579 11,485 12,756 ----------- ----------- ----------- ----------- Total other income (expense) (56,322) (1,110) (104,477) (62,992) ----------- ----------- ----------- ----------- Net income (loss) $ (57,252) $ (193,900) $ (6,874) $ (177,122) =========== =========== =========== =========== Income/ (loss) per share $ (.01) $ (.04) $ (.00) $ (.03) =========== =========== =========== =========== Weighted average common shares outstanding 5,766,798 5,486,937 5,766,798 5,459,225 =========== =========== =========== =========== The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 4 5 INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS Six Months Ended -------------------------- March 31, March 31, 1998 1997 --------- --------- (Unaudited) (Unaudited) Cash flows from operating activities: Net loss $ (6,874) $(177,122) Adjustment to reconcile net income to net cash provided by (used for) operating activities: Depreciation 4,429 2,797 Amortization of deferred financing costs 9,024 0 Amortization of costs in excess of net assets of business acquired 0 153,731 Changes in assets and liabilities: Increase in trade accounts receivable (292,136) (754,199) (Decrease) increase in inventories 172,073 (87,265) Increase in prepaid expenses and other current (14,253) (111,244) assets (Decrease) increase in accounts payable (85,306) 136,724 (Decrease) increase in accrued expenses (3,682) 79,424 Increase in warranty and installation costs 44,333 9,139 Increase (decrease) in deferred revenue and customer deposits 454,382 (92,224) --------- --------- Net cash provided by (used for) operating 281,990 (840,239) activities --------- --------- Cash flows from investing activities: Other 0 (39,951) --------- --------- Net cash used for investing activities 0 (39,951) --------- --------- Cash flows from financing activities: Net borrowings (payments) on revolving credit (57,582) 914,882 agreement Payments on notes payable (78,004) 0 Payments on CDA loan (38,462) 0 Payments on capital leases payable (5,551) 0 Proceeds from issuance of common stock, net of costs 0 17,738 --------- --------- Net cash provided by (used for) financing (179,599) 932,620 activities --------- --------- Net increase in cash and cash equivalents 102,391 52,430 Cash and cash equivalents at beginning of period 104,115 298,630 ========= ========= Cash and cash equivalents at end of period $ 206,506 $ 351,060 ========= ========= Supplemental disclosures of cash flow information Cash paid during period for: Interest $ 106,987 $ 75,748 ========= ========= Supplemental disclosures of cash flow information Accounts payable converted to notes payable $ 30,911 $ 0 ========= ========= Accrued expenses converted to notes payable $ 175,000 $ 0 ========= ========= The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 5 6 INDUSTRIAL TECHNOLOGIES, INC., AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. NATURE OF BUSINESS Industrial Technologies, Inc. and subsidiary (the "Company" or "INTI") designs, assembles and markets automated surface inspection systems, electro-optical sensors and other laser-based equipment, and industrial computers and related products. The Company's surface inspection division's customers include web process manufacturers of paper, plastics, film photosensitive materials, steel, aluminum, glass, non-wovens and rubber products. The Company's industrial computer division offers a full line of industrial-strength processors, displays and peripherals to a variety of customers. The Company sells its products throughout the United States and internationally, primarily in Europe and the Far East. Note 2. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements reflect all necessary, normal and recurring adjustments which are required to present fairly the financial position of the Company and its subsidiary as of March 31, 1998, and the results of operations and cash flows for the three months and six months ended March 31, 1998, and March 31, 1997. Certain information and footnote disclosures normally included in the annual financial statements, which are prepared in accordance with generally accepted accounting principles, have been condensed or omitted. Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the annual financial statements of the Company and notes thereto, contained in the Company's Form 10-KSB for the fiscal year ended September 30, 1997. The results of operations for the three month and six month periods ended March 31, 1998 are not necessarily indicative of those that may be expected for the full fiscal year. Note 3. COMMITMENTS AND CONTINGENCIES The Company has entered into employment agreements with certain officers. The agreements are for terms ranging from one year to five years and provide for a base salary and certain benefits which are specified in each of the agreements. Each of the agreements also provide for severance pay for termination under certain circumstances which are defined in the agreements. The minimum annual commitments under the agreements are fiscal 1998: $155,917; and fiscal 1999: $36,250. INTI's wholly owned subsidiary, Intec Corp., is currently working with the Department of Environmental Protection of the State of Connecticut (CT-DEP) to review, and to clear, all adverse findings with respect to the Tetrachloroethylene Analysis performed in May 1992. This analysis was performed in conjunction with the CT-DEP Property Transfer Program. A follow-up analysis was made as recently as December 1997. Although the levels of the contaminant have decreased, they still remain above acceptable levels. Appropriate methods are being and will be employed to lower these levels. Tests will continue until compliance levels have been met. The Company has spent approximately $35,000 to date. The Company believes the resolution of this matter will not have a material impact on the financial position, results of operations or cash flows of the Company. Note 4. INVENTORIES The components of inventories are as follows: March 31, 1998 September 30, 1997 -------------- ------------------ Raw materials and subassemblies net of revenues $ 835,874 $1,228,853 Work in process 270,903 225,865 Finished goods 175,868 0 ---------- ---------- $1,282,645 $1,454,718 ========== ========== 6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING INFORMATION The statements in this Quarterly report on Form 10-QSB that are not historical fact constitute "forward-looking statements." Said forward-looking statements involve risks and uncertainties which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are identified by their use of forms of such terms and phrases as "expects," "intends," "goals," "estimates," "projects," "plans," "anticipates," "should," "future," "believes," and "scheduled". Variables which may cause differences include, but are not limited to, the following: lack of adequate capital due to the inability to make timely deliveries, the lack of prompt payment by large customers, the inability to negotiate reasonable payment terms with creditors and a demand for payment under the Company's revolving loan agreement; an unexpected increase in remediation costs associated with environmental compliance; general economic and business conditions; competition; success of operating initiatives; operating costs; advertising and promotional efforts; the existence or absence of adverse publicity; changes in business strategy or development plans; the ability to retain management; business abilities and judgment of personnel; availability of qualified personnel; labor and employee benefit costs; availability and costs of raw materials and supplies; and changes in, or failure to comply with, government regulations. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this filing will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and expectations of the Company will be achieved. RESULTS OF OPERATIONS Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 The Company had net sales for the three months ended March 31, 1998 (the "current quarter") of $1,299,281, compared to $1,787,253 for the three months ended March 31, 1997 (the "prior year quarter"). The decrease of $487,972 primarily reflects the greater number of inspection systems sold in the prior year quarter versus the current quarter due to the reduced backlog at the beginning of the current quarter. The Company generated gross profits of $513,948 (39.6% of net sales) for the current quarter compared to gross profits of $761,935 (42.6% of net sales) for the prior year quarter. The 32.5% decrease in amount and approximately 3 point decrease in gross profit percentage relate to product and market mix. Product mix has a direct effect on cost and market mix has a direct effect on selling price; therefore, the combination effects gross profit. Gross profit was affected primarily by increased sales in Asia and Europe. In Asia, margins have decreased as a result of the economic climate and will remain low until the economy becomes stronger. European sales increased for the lower priced and lower margin System 3000 and Webscan systems, thus lowering the gross margin. The mix in product sales for Europe is not considered likely to continue for the long them. Selling, general and administrative expenses for the current quarter were $380,173 (29.3% of net sales) compared to $744,824 (41.7% of net sales) for the prior year quarter. The decrease in expense is due primarily to decreased legal and professional expenses plus the reduction of personnel in the selling and general and administrative functional areas. The decrease in expense to net sales percentage is primarily a result of the decrease in expenses, which more than offset decreased net sales. Engineering expenses for the current quarter were $134,705 (10.4% of net sales) compared to the prior year quarter of $133,036 (7.4% of net sales). Engineering provides applications support as well as the development of product enhancements. In the prior year quarter, the Company capitalized approximately $40,000 of costs which were subsequently reversed by the Company at the end of the prior year. Thus, comparable engineering expenses for the prior year quarter were approximately $173,036 (9.7% of net sales). 7 8 Costs in excess of net assets of business acquired was carried as an intangible asset on the balance sheet and was being amortized over 15 years. After review by management, the balance was charged against operations for the year ended September 30, 1997 and no amounts will be amortized thereafter. The Company had net interest expense of $57,013 (4.4% of net sales) for the current quarter compared to $36,689 (2.1% of net sales) in the prior year quarter. This increase of $20,324 is due primarily to interest on money borrowed in May 1997 in conjunction with the New Term Loan described below. Other income net of other expense for the current quarter of $691 compares to other income of $35,579 for the prior quarter. Most of this income is the net result of favorable foreign currency exchange. The net loss of $57,252 in the current quarter compared to a net loss of $193,900 in the prior year quarter. No amortization and decreased selling, general and administrative expense all contributed to decreasing the quarterly loss. Six Months Ended March 31, 1998 Compared to Six Months Ended March 31, 1997 The Company had net sales for the six months ended March 31, 1998 (the "current half year") of $2,861,430, compared to $4,182,210 for the six months ended March 31, 1997 (the "prior half year"). The decrease of $1,320,780 primarily reflects the greater number of inspection systems sold in the prior half year versus the current half year due to the reduced backlog at the beginning of the period. The Company generated gross profits of $1,100,686 (38.5% of net sales) for the current half year compared to gross profits of $1,882,462 (45.0% of net sales) for the prior half year. The 41.5 % decrease in amount and approximately 6.5 point decrease in gross profit percentage relate to product and market mix. Product mix has a direct effect on cost and market mix has a direct effect on selling price; therefore, the combination effects gross profit. Gross profit was affected primarily by increased sales in Asia and Europe. In Asia, margins have decreased as a result of the economic climate and will remain low until the economy becomes stronger. European sales increased for the lower priced and lower margin System 3000 and Webscan systems, thus lowering the gross margin. The mix in product sales for Europe is not considered likely to continue for the long term. Selling, general and administrative expenses for the current half year were $755,373 (26.4% of net sales) compared to $1,512,124 (36.2% of net sales) for the prior half year. The decrease in expense is due primarily to decreased legal and professional expenses plus the reduction of personnel in the selling and general and administrative functional areas. The decrease in expense to net sales percentage is primarily a result of the decrease in expenses, which more than offset decreased net sales. Engineering expenses for the current half year were $247,710 (8.7% of net sales) compared to the prior half year of $330,737 (7.9% of net sales). The Company was able to reduce expenses to this functional area without sacrificing software and product development. Reductions came in the form of overhead, minor personnel changes, and the reduction of outside consultant use. In the prior half year, the Company capitalized approximately $40,000 of costs previously expensed which were subsequently reversed by the Company at the end of the prior year. Thus, comparable engineering expenses for the prior half year were approximately $370,737 (8.9% of net sales). Costs in excess of net assets of business acquired was carried as an intangible asset on the balance sheet and was being amortized over 15 years. After review by management, the balance was charged against operations for the year ended September 30, 1997 and no amounts will be amortized thereafter. The Company had net interest expense of $115,962 (4.1% of net sales) for the current half year compared to $75,748 (1.8% of net sales) in the prior half year. This increase of $40,214 is due primarily to interest on money borrowed in May 1997 in conjunction with the New Term Loan described below. Other income net of other expense for the current half year of $11,485 compares to other income of $12,756 for the prior half year. Most of this income is the net result of favorable foreign currency exchange for both periods. The net loss of $6,874 in the current half year compares to a net loss of $177,122 in the prior half year. No amortization and decreased selling, general and administrative and engineering expense all contributed to a decrease in the overall loss. 8 9 LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of liquidity at March 31, 1998, consisted of $206,506 of cash plus the borrowing power under the Company's revolving loan, demand loan and security agreement entered November 1, 1996 (the "Loan Agreement") which provides a maximum borrowing of $1,500,000 at an annual interest rate of 4% over the prime interest rate as published in the Wall Street Journal. The loan matures on October 31, 1999, unless sooner terminated at the option of the lender, at which time all amounts outstanding will be due and payable. At March 31, 1998, the Company had borrowed $745,954 under the Loan Agreement and $754,046 of additional borrowings would have been available if there had been additional eligible accounts receivable. The revolving loan requires interest to be paid monthly and has a maximum borrowing base of: the lesser of $1,500,000 or the aggregate of (1) 80% of the Company's eligible domestic accounts receivable, (2) 80% of the Company's eligible accounts receivable covered by irrevocable letters of credit, (3) the lesser of 80% of the Company's European eligible open accounts receivable or $500,000, and (4) a $500,000 demand loan, which is payable in installments of principal of approximately $16,700. The August, September and October, 1997 installments have been deferred by the lender to September 1, 1999. On May 28, 1997, the Company entered into a letter agreement (the "Amendment Letter") modifying the Loan Agreement. The Amendment Letter modifies the Loan Agreement such that the total principal amount permitted to be outstanding may not exceed $2,000,000. Pursuant to the Loan Agreement as amended by the Amendment Letter, additional credit was extended to the company in the amount of $500,000 (the "New Term Loan"). Interest at a rate of 6% per annum above the prime rate on a floating basis is due and payable monthly. Principal is payable in quarterly installments of $19,231 commencing on December 1, 1997 through February 1, 2004. The Company is not in compliance with the covenant that pertains to the timely submission of financial statements. The Loan Agreement and the New Term Loan are secured by a first priority security interest in all of the Company's personal property. Simultaneous with the closing of the New Term Loan, the Connecticut Development Authority purchased a 100% participation interest in the New Term Loan. The Company requires additional capital to finance continuing operations, make enhancements to and expansion of its manufacturing capacity in accordance with its business strategy, and for working capital for inventory and accounts receivable. The Company is seeking such funds through strategic alliances, merger and acquisition efforts as well as through public or private debt and equity. Without such future financing, the Company's ability to finance its operations and growth will be severely limited. At April 6, 1998, the Company's backlog of customer orders was approximately $3,908,000 compared to approximately $1,724,000 at March 31, 1997. The Company is seeking to increase its backlog in future quarters through an increase in the rate of new proposals, although there can be no assurance that such proposals will result in orders. The Company's ability to fulfill these orders is largely dependent upon the Company's ability to maintain its borrowing capacity and improve its liquidity. CAPITAL EXPENDITURES The Company does not have any material commitments for capital expenditures at this time EFFECT OF INFLATION The Company believes that inflation has not had a material effect on its results of operations or financial condition during the last two fiscal years. The Company has not entered into long-term contracts with its customers or suppliers and has generally been able to pass along increased costs encurred by it. 9 10 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The following exhibits are filed herewith: 27 Financial Data Schedule (b) There were no reports on Form 8-K filed during the quarter ended March 31, 1998. 10 11 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. INDUSTRIAL TECHNOLOGIES, INC. Date: July 28, 1998 By: /s/ Gerald W. Stewart ------------------------------------ Gerald W. Stewart, Chief Executive Officer 11