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, 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 November 13, 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, September 30, 2002 1
Statements of Operations and Retained Earnings
(Unaudited) for the three month and nine month periods
ended September 30, 2002 and 2001 2
Statements of Cash Flows (Unaudited) for the nine
month periods ended September 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
Item 3. Controls and Procedures 8
PART II. OTHER INFORMATION 9
Signatures 10
Certifications 11-12
Intellectual Technology, Inc.
FINANCIAL STATEMENTS
September 30, 2002
Intellectual Technology, Inc.
BALANCE SHEET
September 30, 2002
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 556,672
Accounts receivable 766,125
Inventory 809,204
Prepaid expenses 73,158
Deferred income tax benefits 6,500
-----------
Total current assets 2,211,659
Property and Equipment
Contract costs and equipment 7,431,252
Non-contract equipment - office and warehouse
equipment, furniture and vehicles 101,971
-----------
7,533,223
Less: accumulated depreciation 6,412,333
-----------
1,120,890
Other Assets
Patents, trademark and loan fee, net of accumulated
amortization of $713,545 21,379
Deferred income tax benefits, net of current portion 16,039
Due from related party, net of allowance for doubtful
account of $31,887 -
Deposits 6,435
-----------
Total assets $ 3,376,402
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 380,700
Accrued expenses and interest 62,869
Income taxes payable 187,759
Accrued loss reserve 22,000
Current portion of long-term debt 126,569
Due to related party 11,906
-----------
Total current liabilities 791,803
Other Liabilities
Long-term debt, net of current portion 243,303
Accrued loss reserve, net of current portion 18,972
Due to related party - long term 114,944
-----------
377,219
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 1,052,830
-----------
2,207,380
-----------
Total liabilities and stockholders' equity $ 3,376,402
===========
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 nine months
ended September 30, ended September 30,
----------------------- -----------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUES
Registration decals income $ 1,725,240 $ 1,366,796 $ 4,955,696 $ 3,910,115
Other revenue - - 380,985 131,177
----------- ----------- ----------- -----------
Total revenues 1,725,240 1,366,796 5,336,681 4,041,292
COST OF REVENUES
Materials 494,480 371,298 1,423,271 972,578
Cost of other revenue - - 266,837 84,667
Depreciation and amortization
- contract costs 110,143 141,484 489,725 323,140
Maintenance 318,016 275,620 970,429 716,839
Adjustment to contract losses
previously recognized (2,280) (15,979) (9,028) (32,409)
Other contract expenses 1,592 99,426 22,062 136,067
Insurance 2,188 4,620 13,115 12,460
Property and sales taxes 14,489 26,463 34,536 27,063
----------- ----------- ----------- -----------
Total cost of revenues 938,628 902,932 3,210,947 2,240,405
----------- ----------- ----------- -----------
Gross profit 786,612 463,864 2,125,734 1,800,887
OPERATING EXPENSES
Depreciation 3,977 3,470 10,320 9,935
Amortization of patent 2,202 15,405 33,012 46,215
Selling, general and
administrative expenses 341,055 295,287 1,095,935 882,183
Research and development 22,997 22,123 149,706 84,102
----------- ----------- ----------- -----------
Total operating expenses 370,231 336,285 1,288,973 1,022,435
----------- ----------- ----------- -----------
Income from operations 416,381 127,579 836,761 778,452
OTHER INCOME (EXPENSE)
Interest income 1,936, 4,079 5,084 16,322
Interest expense (11,310) (20,734) (71,471) (63,208)
----------- ----------- ----------- -----------
Net income before income
taxes 407,007 110,924 770,374 731,566
Income taxes 158,703 43,586 288,929 285,493
----------- ----------- ----------- -----------
NET INCOME 248,304 67,338 481,445 446,073
Retained earnings,
beginning of period 804,526 509,854 571,385 131,119
----------- ----------- ----------- -----------
Retained earnings,
end of period $ 1,052,830 $ 577,192 $ 1,052,830 $ 577,192
=========== =========== =========== ===========
Income per share: (Basic
and diluted) $ 0.03 $ 0.01 $ 0.05 $ 0.04
=========== =========== =========== ===========
Wtd. average number of
shares outstanding 9,842,680 9,842,680 9,842,680 9,869,353
=========== =========== =========== ===========
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,
---------------------------------
2002 2001
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES $ 894,176 $ 844,820
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in trademark (1,997) (3,230)
Increase in deposits (1,914) -
Purchase of non-contract equipment (26,960) (6,974)
Investment in contract costs and
equipment (221,634) (932,201)
---------- -----------
Net cash flows from investing
activities (252,505) (942,405)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment by related party - 8,774
New borrowings 400,000 200,000
Debt repayments (691,033) (124,553)
Redemption of common stock - (31,800)
---------- -----------
Net cash flows from financing
activities (291,033) 52,421
---------- -----------
NET INCREASE (DECREASE) IN CASH 350,638 (45,164)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 206,034 516,275
---------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 556,672 $ 471,111
========== ===========
The accompanying notes are an integral part of the financial statements.
3
Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
September 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.
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 an initial period of three years
with extensions through October 2002. In October 2002, the Indiana
contract was extended through October 31, 2004.
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 nine months ended September 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, 2007, with the State of New Hampshire to produce "Safe
Boating Certificate Cards." The State reserves the right to terminate
the contract for any reason by giving thirty days written notice.
The gross revenue from this contract is expected to be $32,000 annually
and was $27,000 for the quarter ended September 30, 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 and was $105,000
for the quarter ended September 30, 2002.
5
Item 2 - 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 nine months ended September 30th, contract revenues increased from
$4,041,000 in 2001, to $5,337,000 in 2002, an increase of $1,296,000 or
32%. This increase in revenue is primarily due to the Louisiana contract
achieving full transaction volume in 2002, revenue from additional contracts
and other revenue from the sale of printer equipment to other contractors.
Gross profit for the nine months ended September 30, 2001 and 2002 were
$1,801,000 (45% of sales) and $2,126,000 (32% 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 does not
expect profit margins from current contracts to continue to decline.
Operating expenses increased $267,000 or 26% from $1,022,000 for the nine
months ended September 30, 2001, to $1,289,000 in 2002. This is primarily
due to: (1) Increase in payroll of $76,000 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 ($93,000); and
(3) Increase in research and development ($66,000). Research and
development expenses for the nine months ended September 30, 2002 and
2001 were $150,000 (2.8% of sales) and $84,000 (2.1% 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 continue to increase, in
comparison with 2001, due to relocation of the Company's corporation
headquarters to a larger facility, upgrade of the Company's computer system,
continued use of outside consultants, increased demonstration of the Company's
products and planned efforts to redesign the Company's products and expand
research and development in new products.
Interest expense increased from $63,000 in 2001 to $71,000 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
Item 2 - 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 September 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 September 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.
At this time, the Company expects no significant investment in
Contract costs and equipment in the next quarter.
The following is a summary of the Company's cash flows from operating,
investing, and financing activities:
Nine months ended September 30,
(Rounded)
2002 2001
---------- -----------
Operating activities $ 894,000 $ 845,000
Investing activities (252,000) (942,000)
Financing activities (291,000) 52,000
---------- -----------
Net effect on cash $ 351,000 $ (45,000)
=========== ===========
Cash flows provided by operations decreased from $845,000 in 2001 to
$894,000 in 2002, an increase of $49,000 due primarily to an increase
in net income before depreciation of $251,000. This was partially offset
by variations in accounts receivable, inventories and accounts payable
(net decrease in cash of $73,000) and the redemption of a certificate of
deposit in 2001 (which increased cash by $129,000 in 2001). Cash flows
used in investing activities decreased from $942,000 in 2001 to $253,000
in 2002 due to the installation phase of the Louisiana contract in 2001.
Net cash of $52,000 was provided by financing activities in 2001 primarily
due to additional borrowing of $200,000 less debt repayment of $125,000.
Net cash used in financing activities was $291,000 in 2002 of which
$215,000 was used to payoff the Company's line of credit and the remainder
to pay down long-term debt. In 2002, the Company borrowed $400,000
on its line of credit and converted it to permanent financing as
mentioned above.
7
Item 3. - CONTROLS AND PROCEDURES
The Company's Chief Executive Officer, also acting as Chief Financial
Officer, after evaluating the effectiveness of the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under
the Securities Exchange Act of 1934, as amended) as of November 12, 2002,
(the "Evaluation Date"), has concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures were effective to ensure the
timely collection, evaluation and disclosure of information relating to
the Company that would potentially be subject to disclosure under the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect the
internal controls subsequent to the Evaluation Date.
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
99.1 Certification of Chief Executive Officer and Chief
Financial Officer of the Company, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(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 13, 2002
9
Certifications
I, Craig Litchin, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Intellectual
Technology, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Craig Litchin
Principal Executive Officer
Principal Financial Officer