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, 2001
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 12, 2001, 9,842,681 shares of common stock, par value $0.00001
per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes --- No -X-
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet, September 30, 2001 1
Statements of Operations (Unaudited) for the
three and nine month periods ended
September 30, 2001 and 2000 2-3
Statements of Cash Flows (Unaudited) for the nine
months ended September 30, 2001 and 2000 4
Notes to financial statements 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-7
PART II. OTHER INFORMATION 8
Signatures 9
Intellectual Technology, Inc.
Balance Sheet
September 30, 2001
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 471,111
Accounts receivable 571,674
Inventory 570,292
Deferred tax asset 53,479
Prepaid expenses 70,958
-------
Total current assets 1,737,514
Property & Equipment
Contract equipment 7,217,662
Equipment - non-contract, office, furniture and
improvements 78,293
---------
7,295,955
Less: Accumulated depreciation 5,822,813
---------
1,473,142
Other Assets
Patents, net of
accumulated amortization 84,391
Deferred tax asset 60,690
Due from related parties 30,298
Other non-current assets 2,419
---------
Total assets $ 3,388,454
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 495,837
Income taxes payable 30,689
Accrued expenses and reserves 131,777
Note payable 370,328
Due to related party 11,151
---------
Total current liabilities 1,039,782
Other Liabilities
Long-term debt, net of current portion 308,488
Accrued loss reserve, net of current portion 181,591
Due to related party - long term 126,851
---------
616,930
---------
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, 9,842,681 shares issued and outstanding 98
Additional paid-in capital 1,154,452
Retained earnings 577,192
---------
1,731,742
---------
Total liabilities and stockholders' equity $ 3,388,454
=========
The accompanying notes are an integral part of the financial statements.
1
Intellectual Technology, Inc.
STATEMENTS OF OPERATIONS
(unaudited)
For the quarter
ended September 30,
----------------------
2001 2000
------------ -------------
REVENUES
Sales, net $ 1,366,796 $ 1,726,123
COST OF REVENUES
Depreciation and amortization 141,484 79,115
Material costs 371,298 297,526
Maintenance and other 390,150 295,769
------------ -------------
Total cost of revenues 902,932 672,410
------------ -------------
Gross profit 463,864 1,053,713
OPERATING EXPENSES
Selling, general and administrative 295,287 267,193
Research and development 22,123 91,590
Depreciation and amortization 18,875 47,921
------------ -------------
Total operating expenses 336,285 406,704
------------ -------------
Income from operations 127,579 647,009
OTHER INCOME (EXPENSE)
Interest income 4,079 11,838
Interest expense (20,734) (42,282)
------------ -------------
Net income before income taxes 110,924 616,565
Income tax expense 43,586 221,122
------------ -------------
NET INCOME 67,338 395,443
Retained earnings (Accumulated deficit)
Balance, beginning of period 509,854 56,558
------------ -------------
Balance, end of period $ 577,192 $ 452,001
============ =============
INCOME PER SHARE - BASIC $ 0.01 $ 0.04
============ =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 10,000,000 10,000,000
============ =============
The accompanying notes are an integral part of the financial statements.
2
Intellectual Technology, Inc.
STATEMENTS OF OPERATIONS
(unaudited)
For the nine months
ended September 30,
----------------------
2001 2000
------------ -------------
REVENUES
Sales, net $ 4,041,292 $ 5,465,131
COST OF REVENUES
Depreciation and amortization 323,140 928,319
Material costs 1,057,245 1,033,989
Maintenance and other 860,020 844,322
------------ -------------
Total cost of revenues 2,240,405 2,806,630
------------ -------------
Gross profit 1,800,887 2,658,501
OPERATING EXPENSES
Selling, general and administrative 882,183 875,697
Research and development 84,102 178,792
Depreciation and amortization 56,150 238,742
------------ -------------
Total operating expenses 1,022,435 1,293,231
------------ -------------
Income from operations 778,452 1,365,270
OTHER INCOME (EXPENSE)
Interest income 16,322 26,652
Interest expense (63,208) (170,771)
------------ -------------
Net income before income taxes 731,566 1,221,151
Income tax expense 285,493 444,887
------------ -------------
NET INCOME 446,073 776,264
Retained earnings (Accumulated deficit)
Balance, beginning of period 131,119 (324,263)
------------ -------------
Balance, end of period $ 577,192 $ 452,001
============ =============
INCOME PER SHARE - BASIC $ 0.04 $ 0.08
============ =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 10,000,000 10,000,000
============ =============
The accompanying notes are an integral part of the financial statements.
3
Intellectual Technology, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months
ended September 30,
----------------------
2001 2000
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES $ 844,820 $ 2,023,159
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in pending patents (3,230) -
Purchase of non-contract equipment (6,974) (9,675)
Investment in contract costs and equipment (932,201) (308,599)
------------ -------------
Net cash flows from
investing activities (942,405) (318,274)
CASH FLOWS FROM FINANCING ACTIVITES
New borrowings 200,000 -
Repayment by related party 8,774 -
Debt repayments (124,553) (1,262,856)
Redemption of common stock (31,800) -
------------ -------------
Net cash flows from
financing activities 52,421 (1,262,856)
------------ -------------
NET INCREASE IN CASH (45,164) 442,029
CASH AND CASH EQUIVALENTS,
beginning of period 516,275 505,723
------------ -------------
CASH AND CASH EQUIVALENTS,
end of period $ 471,111 $ 947,752
============ =============
The accompanying notes are an integral part of the financial statements.
4
Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
(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, 2000.
5
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 and 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. 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. 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 March 31, 2001, ITI entered into a subcontractor agreement
as part of a contract with the State of Louisiana to provide printer
equipment, software and equipment maintenance, and media to produce the
State's motor vehicle registrations.
Results of Operations
For ease in presenting the financial data, figures have been rounded to
the nearest thousand.
For the nine months ended September 30, 2001, contract revenues decreased
from $5,465,000, to $4,041,000, a decrease of $1,424,000 or 26%. This
decrease in revenue is due primarily to a transaction price decrease in a
contract.
6
Item 2. (cont.)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Gross profit for the nine month comparisons decreased from $2,659,000 in
2000 (48.6% of sales) to $1,801,000 (44.6% of sales) in 2001 as a result
of the aforementioned price decrease. The gross profit percentage also
decreased due to the low transaction volume and initial non-recurring
costs experienced during the installation stage of the Louisiana
contract.
Operating expenses decreased $271,000 or 21% from $1,293,000 for the nine
months ended September 30, 2000, to $1,022,000 in 2001. This is
primarily due to: (1) Depreciation and amortization decreased $183,000
for the nine months ended September 30, due to re-evaluation of the
remaining useful lives of the Company's patents; and (2) Research and
development expenses for the nine months ended September 30, 2001 and
2000 were $84,000 (2.1% of sales) and $179,000 (3.2% of sales), a
decrease of $95,000. This decrease from last year reflects the
redirection of efforts of existing employees from research and
development to product refinements and modifications of equipment for
existing contracts. 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 $171,000 in 2000 to $63,000 in 2001, a decrease
of $108,000, reflecting the pay down of equipment financing.
7
Item 2. (cont.)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Liquidity and Capital Resources
During the year ended December 31, 2000, the Company was able to use cash flow
from operations to substantially reduce long term debt. Certain equipment
financing with a monthly payment of $134,695 was fully paid off in December
2000. For the nine months ended September 30, 2001, the Company has used cash
flows from operations to fund the investment in contract costs and equipment.
During the quarter ended September 30, 2001, the Company borrowed $200,000
under a revolving credit line, which bears interest at the prime rate plus 2%.
The loan is secured by all of the Company's assets and is due April 25, 2002.
The Company's remaining debt service consists of contract financing with a
monthly payment of $17,680 ($212,000) per year) through April 2004 and a patent
purchase payment of $5,000 per quarter ($20,000 per year) through March 2011.
In the next twelve months, the Company expects to spend $210,000 on contract
costs and equipment and to fund its debt and capital requirements from
internally generated cash flows. However, due to seasonal business cycles and
the Polaroid matter mentioned below, the Company may experience temporary cash
shortages. The Company anticipates that lenders with whom the Company has
established relationships can finance these cash shortages.
The following is a summary of the Company's cash flows from operating,
investing, and financing activities:
Nine months ended September 30,
(Rounded)
2001 2000
Operating activities $ 845,000 $ 2,023,000
Investing activities (942,000) (318,000)
Financing activities 52,000 (1,263,000)
Net effect on cash $ (45,000) $ 442,000
Cash flows provided by operations decreased from $2,023,000 in 2000 to $845,000,
a decrease of $1,178,000 due primarily to a decrease in net income before
depreciation of $1,150,000. Cash flows used in investing activities increased
from $318,000 in 2000 to $942,000 in 2001 primarily due to a new contract. Net
cash used in financing activities decreased from $1,263,000 as a result of the
payoff of significant debt service in December 2000. Under the Company's
current financing arrangement, certain contract receivables have been assigned
to the note holder. The amount of monthly cash flows from a contract is
remitted net to the Company after debt service is satisfied.
The Company supplies motor vehicle registrations and license plate decals as a
subcontractor for Polaroid Corporation ("Polaroid"). On October 11, 2001,
Polaroid filed for protection from creditors under Chapter 11, in the Federal
Bankruptcy Court. Polaroid filed a motion requesting court approval for the
sale of substantially all of the assets of their "I.D." business to PIDS
Holdings, Inc. or a qualified higher bidder at an auction. The successful
bidder may assume certain executory contracts, including the subcontractor
agreement with ITI. The hearing on this cure motion is scheduled for December
3, 2001. ITI is hopeful that the proposed asset sale will cure any defaults
under its subcontractor agreement. As of September 30, 2001, the accompanying
financial statements include billed and accrued accounts receivable in the
amount of $106,802. No provision has been made in the accompanying financial
statements for potential losses that may occur under this subcontract.
8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
9
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
Principal Financial Officer
Date: November 14, 2001