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, 2002
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)
1040 Joshua Way, Vista, CA 92083-7807
(Address of principal executive offices)
(760) 599-8080
(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 12, 2002, 9,842,680 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 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet, June 30, 2002 1
Statements of Operations and Retained Earnings
(Unaudited) for the three month and six month periods
ended June 30, 2002 and 2001 2
Statements of Cash Flows (Unaudited) for the six
month periods ended June 30, 2002 and 2001 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
Intellectual Technology, Inc.
FINANCIAL STATEMENTS
June 30, 2002
Intellectual Technology, Inc.
BALANCE SHEET
June 30, 2002
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 162,014
Accounts receivable 874,055
Inventory 679,396
Prepaid expenses 78,289
Deferred income tax benefits 6,974
-----------
Total current assets 1,800,728
Property and Equipment
Contract costs and equipment 7,402,167
Non-contract equipment - office and warehouse
equipment, furniture and vehicles 97,745
-----------
7,499,912
Less: accumulated depreciation 6,298,213
-----------
1,201,699
Other Assets
Patents, trademark and loan fee, net of accumulated
amortization of $711,343 22,413
Deferred income tax benefits, net of current portion 14,465
Due from related party, net of allowance for doubtful
account of $31,887 -
Deposits 6,435
-----------
Total assets $ 3,045,740
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 426,919
Accrued expenses and interest 48,873
Income taxes payable 37,914
Accrued loss reserve 22,000
Current portion of long-term debt 124,380
Due to related party 11,713
-----------
Total current liabilities 671,799
Other Liabilities
Long-term debt, net of current portion 275,620
Accrued loss reserve, net of current portion 21,251
Due to related party - long term 117,994
-----------
414,865
Stockholders' Equity
Preferred stock, $0.00001 par value, 1,000,000 shares
authorized, no shares issued or outstanding -
Common stock, $0.00001 par value, 20,000,000 shares
authorized, 9,842,680 shares issued and outstanding 98
Additional paid-in capital 1,154,452
Retained earnings 804,526
-----------
1,959,076
-----------
Total liabilities and stockholders' equity $ 3,045,740
===========
The accompanying notes are an integral part of the financial statements.
1
Intellectual Technology, Inc.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the three months For the six months
ended June 30, ended June 30,
----------------------- -----------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUES
Registration decals income $ 1,611,428 $ 1,261,704 $ 3,505,491 $ 2,597,911
Other revenue - 35 105,950 76,585
----------- ----------- ----------- -----------
Total revenues 1,611,428 1,261,739 3,611,441 2,674,496
COST OF REVENUES
Materials 469,123 330,423 1,120,828 639,247
Cost of other revenue - - 74,800 46,700
Depreciation and amortization
- contract costs 193,227 108,820 379,582 181,656
Maintenance 373,446 216,219 652,414 466,926
Adjustment to contract losses
previously recognized (4,796) (8,023) (6,749) (16,430)
Other contract expenses 18,640 36,642 20,470 36,642
Insurance 3,610 4,188 10,927 7,840
Property and sales taxes 10,621 300 20,047 600
----------- ----------- ----------- -----------
Total cost of revenues 1,063,871 688,569 2,272,319 1,363,181
----------- ----------- ----------- -----------
Gross profit 547,557 573,170 1,339,122 1,311,315
OPERATING EXPENSES
Depreciation 3,406 3,059 6,343 6,465
Amortization of patent 15,405 15,405 30,810 30,810
Selling, general and
administrative expenses 380,057 264,153 754,880 561,188
Research and development 73,051 44,663 126,708 61,979
----------- ----------- ----------- -----------
Total operating expenses 471,919 327,280 918,741 660,442
----------- ----------- ----------- -----------
Income from operations 75,638 245,890 420,381 650,873
OTHER INCOME (EXPENSE)
Interest income 1,491 6,120 3,148 12,243
Interest expense (36,928) (21,686) (60,162) (42,474)
----------- ----------- ----------- -----------
Net income before income
taxes 40,201 230,324 363,367 620,642
Income taxes 8,126 89,007 130,226 241,907
----------- ----------- ----------- -----------
NET INCOME 32,075 141,317 233,141 378,735
Retained earnings,
beginning of period 772,451 368,537 571,385 131,119
----------- ----------- ----------- -----------
Retained earnings,
end of period $ 804,526 $ 509,854 $ 804,526 $ 509,854
=========== =========== =========== ===========
Income per share: (Basic
and diluted) $ 0.00 $ 0.01 $ 0.02 $ 0.04
=========== =========== =========== ===========
Wtd. average number of
shares outstanding 9,842,680 9,923,711 9,842,680 9,923.711
=========== =========== =========== ===========
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,
---------------------------------
2002 2001
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES $ 432,054 $ 1,074,408
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in trademark (829) -
Increase in deposits (1,914) -
Purchase of non-contract equipment (22,734) (5,070)
Investment in contract costs and
equipment (192,549) (807,379)
---------- -----------
Net cash flows from investing
activities (218,026) (812,449)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment by related party - 8,774
New borrowings 400,000 -
Debt repayments (658,048) (81,981)
Redemption of common stock - (31,800)
---------- -----------
Net cash flows from financing
activities (258,048) (105,007)
---------- -----------
NET INCREASE (DECREASE) IN CASH (44,020) 156,952
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 206,034 516,275
---------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 162,014 $ 673,227
========== ===========
The accompanying notes are an integral part of the financial statements.
3
Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(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, are
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, 2001.
2. Long-term Debt
--------------
On June 21, 2002, the Company converted a revolving line of credit
with a bank totaling $400,000 to a 36-month term loan bearing
interest at prime rate plus two percent (6.75% at June 30, 2002).
This loan is secured by accounts receivable, equipment and general
intangibles.
4
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. Until 1996, ITI was principally
engaged in research and development of its products and generated
only limited operating revenues.
In August 1996, ITI entered into an Equipment Lease, Support and
Maintenance Agreement with the State of Indiana to supply
the equipment and media (materials used in the preparation of vehicle
registration forms) to process the State's vehicle registrations. The
term of the Indiana Contract was for a period of three years with
a one-year renewal option through October 2000 that was exercised.
In May 2000, the Indiana contract was extended through October
31, 2002.
In the fourth quarter of 1998, the Company entered into a five-year
Agreement (effective April 1, 1999) with the State of South Dakota to
implement ITI's printing system. Commencing on April 1, 1999, ITI
supplied the equipment and media to process 100% of the annual vehicle
and boat registrations in South Dakota.
Effective January 1, 2001, the Company entered into a Subcontractor
Agreement with a contractor for the State of Louisiana Department of
Public Safety and Corrections Office of Motor Vehicles. In June 2001,
ITI supplied the equipment and media to begin production of 100% of
the mail-in vehicle registrations in Louisiana. In September 2001, ITI
supplied the equipment and media to begin production of these
registrations issued at the State's branch locations.
For the six months ended June 30, 2002, 92% of total revenues were
derived from the above contracts and agreements.
In March 2002, the Company signed a contract, effective through
June 30, 2003, with the State of New Hampshire to produce "Safe
Boating Certificate Cards." The State reserves the right to extend
this contract each year for up to an additional four years and can
also terminate the contract for any reason by giving thirty days
written notice. The gross revenue from this contract is expected
to be $65,000 in the first contract year and $32,000 annually
thereafter. No revenue is expected from this contract until the third
quarter of 2002.
In April 2002, the Company signed a contract with the State of Ohio to
supply the equipment and media to begin production of 100% of the
mail-in vehicle registrations. The gross revenue from this contract is
expected to be between $500,000 and $700,000 annually. No revenue is
expected from this contract until the third quarter of 2002.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Results of Operations
For ease in presenting the financial data, figures have been rounded
to the nearest thousand.
For the six months ended June 30th, contract revenues increased from
$2,674,000 in 2001, to $3,611,000 in 2002, an increase of $937,000 or
35%. This increase in revenue is primarily due to revenue from an
additional contract and other revenue from the sale of printer
equipment to other contractors.
Gross profit for the six months ended June 30, 2001 and 2002 were
$1,311,000 (49% of sales) and $1,339,000 (37% of sales), respectively.
The gross profit percentage decreased due to lower profit margins from
new business as well as higher depreciation allowances due to
increased changes in capital cost estimates. The Company expects
profit margins to continue to decline due to the competitive bid
environment, fixed contract prices and unanticipated costs.
Operating expenses increased $259,000 or 39% from $660,000 for the six
months ended June 30, 2001, to $919,000 in 2002. This is primarily
due to: (1) Increase in payroll of $57,000 due to the hiring of
additional personnel and changes in cost allocations of the payroll of
existing personnel from research and development to product
demonstration and support, (2) Increased use of outside consultants
for the evaluation of new business and demonstration of the Company's
products and project coordination of new contracts ($90,000); and
(3) Increase in the amount of $65,000 for research and development.
Research and development expenses for the six months ended June 30,
2002 and 2001 were $127,000 (3.5% of sales) and $62,000 (2.3% of
sales), respectively. The Company will continue to engage in research
and development of additional applications of its products in related
areas and new product development. The Company expects future
operating expenses to increase, in comparison with 2001, due to
relocation of the Company's corporation headquarters to a larger
facility, continued use of outside consultants, planned efforts to
redesign the Company's products and expand research and development in
new products.
Interest expense increased from $43,000 in 2001 to $60,000 in 2002, as
lower interest costs due to the pay down of contract cost financing
were offset by the use of bank credit lines and the related loan costs
thereof. In addition, the Company refinanced existing contract
equipment loans at lower interest rates, but incurred a prepayment
penalty and expensing of unamortized loan costs totaling, $21,000.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Liquidity and Capital Resources
On May 15, 2002, the Company utilized a $400,000 line of credit with a
bank to prepay the remaining balance of contract cost financing in the
amount of $379,000. This line of credit was converted to a 36-month
term loan with monthly payments of $12,370, including interest at
Prime plus two percent (6.75% at June 30, 2002), through June 2005.
This loan is secured by accounts receivable, equipment and general
intangibles.
The Company has available a $300,000 line of credit with a bank
secured by accounts receivable, equipment and general intangibles.
The Company has utilized this credit line at various times in 2002 to
meet short-term borrowing needs. However, as of June 30, 2002, there
was no outstanding balance. The line bears interest at Prime plus two
percent (with a minimum interest rate of 7%) and is subject to renewal
in December 2002.
The Company's remaining debt service consists of a patent purchase
payment of $5,000 per quarter through March 2011.
The Company expects to spend a minimum of $85,000 on contract costs
and equipment in the next two quarters for existing contracts which
will be funded from internally generated cash flows and, if
necessary, by borrowings from lenders with whom the Company has
established relationships.
The following is a summary of the Company's cash flows from operating,
investing, and financing activities:
Six months ended June 30,
(Rounded)
2002 2001
---------- -----------
Operating activities $ 432,000 $ 1,074,000
Investing activities (218,000) (812,000)
Financing activities (258,000) (105,000)
---------- -----------
Net effect on cash $ (44,000) $ 157,000
=========== ===========
Cash flows provided by operations decreased from $1,074,000 in 2001 to
$432,000 in 2002, a decrease of $642,000 due primarily to variations
in accounts receivable, inventories and accounts payable (net effect
on cash of $567,000) and the redemption of a certificate of deposit in
2001 ($129,000). This was partially offset by an increase in net
income before depreciation of $68,000. Cash flows used in investing
activities decreased from $812,000 in 2001 to $218,000 in 2002 due to
the installation phase of the Louisiana contract in 2001. Net cash of
$105,000 was used in financing activities in 2001 and $258,000 in 2002
to pay existing debt service. In 2002, the Company borrowed $400,000
on its line of credit and converted it to permanent financing as
mentioned above.
7
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
8
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: August 12, 2002
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:
Principal Financial Officer
Date: August 12, 2002
9