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, 1997
Commission file number: 0-29138
INTELLECTUAL TECHNOLOGY, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1130227
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10639 Roselle Street Suite B San Diego, CA 92121
(Address of principal executive offices)
(619) 552-0001
(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 14, 1997, 1997, 10,000,000 shares of common stock, par value
$0.0005 per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes --- No -X-
</page>
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
Balance Sheet, September 30, 1997 3
Statements of Operations and
Accumulated Deficit (Unaudited)
for the three and nine month periods ended
September 30, 1997 and 1996 4
Statements of Cash Flows (Unaudited)
for the nine months
ended September 30, 1997 and 1996 5
Notes to financial statements 6-7
Item 2. Management's Discussion and Analysis or
Plan of Operations 8-10
PART II. OTHER INFORMATION 11
Signatures 12
2
</page>
Intellectual Technology, Inc.
BALANCE SHEET
September 30, 1997
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 286,668
Accounts receivable 359,296
Inventory 115,900
Prepaid expenses 58,891
----------
Total current assets 820,755
PROPERTY AND EQUIPMENT
Vehicle registration equipment 3,727,618
Office and administrative equipment 68,740
--------
3,796,358
Accumulated depreciation (602,160)
-------
Total fixed assets, net 3,194,198
OTHER ASSETS
Patents, net 3,723,219
Organization costs, net 1,831
New Hampshire contract acquisition costs, net 43,030
Deferred loan fees 14,917
Deferred NCR contract costs, net 305,525
---------
Total other assets 4,088,522
---------
TOTAL ASSETS $ 8,103,475
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 743,308
Accrued liabilities 229,980
Note payable 1,512,092
Notes payable - related parties 132,476
Accrued interest payable 174,735
-----------
Total current liabilities 2,792,591
OTHER LIABILITIES
Due to related party (net of discount) 3,999,200
Long-term debt 2,286,826
-----------
Total long-term liabilities 6,286,026
STOCKHOLDERS' EQUITY
Preferred stock, $0.00001 par value; 20,000,000 shares
authorized; no shares issued and outstanding -
Common stock, $0.0005 par value; 500,000,000
shares authorized; 10,000,000 shares issued and
outstanding at March 31, 1997. 5,000
Additional paid-in capital 1,186,550
Accumulated deficit (2,166,692)
---------
Total stockholders' equity (975,142)
---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 8,103,475
=========
The accompanying notes are an integral part of the financial statements.
3
</page>
Intellectual Technology, Inc.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
For the quarter ended For the nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
--------- --------- ---------- --------
SALES
Indiana Contract $ 863,603 $ - $ 1,869,266 $ -
New Hampshire contract 78,854 - 227,123 -
Maryland contract 17,300 - 224,611 -
--------- -------- ---------- --------
Total Sales 959,757 - 2,321,000 -
COST OF SALES
Material cost 194,433 - 470,925 -
Maintenance 64,959 - 146,867 -
Depreciation and
Amortization 352,568 - 696,941 -
--------- -------- ---------- --------
Total cost of sales 611,960 - 1,314,833 -
OPERATING EXPENSES
Marketing 61,508 41,816 122,881 72,747
General &
Administrative 226,944 63,447 562,961 156,011
Research & development 9,045 5,248 29,142 29,086
Interest expense 223,271 56,629 539,079 167,427
Depreciation and
Amortization 88,339 70,007 250,374 209,316
--------- -------- --------- --------
Total expenses 609,104 237,147 1,504,437 634,857
--------- -------- --------- --------
Loss from operations (261,310) (237,147) (498,270) (634,857)
Income taxes - - 800 800
--------- -------- --------- --------
NET LOSS (261,310) (237,147) (499,070) (635,657)
Accumulated deficit
Balance, beginning of
period (1,905,382) (1,100,120) (1,667,622) (701,610)
--------- --------- --------- ---------
Balance, end of period (2,166,692) (1,337,267) (2,166,692) (1,337,267)
========= ========= ========= =========
NET LOSS PER SHARE (0.03) (0.03) (0.05) (0.07)
========= ========= ========== =========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 10,000,000 9,000,000 9,743,590 9,000,000
========== ========= ========= =========
The accompanying notes are an integral part of the financial statements.
4
</page>
Intellectual Technology, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months
ended September 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES $ (406,449) $ (274,161)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patents and other assets (12,752) (2,893)
Investment in non-contract equipment (8,014) (2,094)
Investment in vehicle registration
equipment, software, and installation (1,409,808) (2,615,527)
--------- ---------
Net cash used by
investing activities (1,430,574) (2,620,514)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 8,200 252,684
Short term payables subsequently
refinanced - 2,516,355
New borrowings 4,396,076 200,000 Repayment of
debt (785,265) -
Repayment of related party debt (1,434,428) (7,787)
Loan fees paid (66,500) -
--------- -------
Net cash provided by financing
activities 2,118,083 2,961,252
--------- ---------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 281,060 66,577
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 5,608 2,906
---------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 286,668 $ 69,483
========= =======
The accompanying notes are an integral part of the financial statements
5
</page>
Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(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.
2. Significant accounting policies
A complete summary of significant accounting policies may be found in the
Company's audited financial statements for the year ended December 31, 1996
which were filed as part of the Company's Form 8-K dated March 12, 1997, and
subsequent amendments. The accompanying financial statements should be read in
connection with these reports.
Development Stage Activities
Since its inception in 1992 until the fourth quarter of 1996, the Company as in
the development stage and had been engaged primarily in the design, development
and promotion of systems for the automated preparation and dispensing of motor
vehicle registration forms. The Company had no revenue until December 1996.
Operations
Intellectual Technology, Inc. ("the Company") is engaged in the design,
manufacture, leasing and sale of equipment that automates the preparation and
dispensing of motor vehicle registration forms and license plate decals through
self service terminals (SST's) and stand alone printers ("printers"). This
printer produces a registration with a decal in real time utilizing a thermal
ribbon.
Effective November 1, 1996, ITI entered into an Equipment Lease, Support, and
Maintenance Agreement ("the Indiana Contract") with the Indiana Bureau of Motor
Vehicles Commission (the BMVC") which provides for the BMVC to lease from ITI
both SST's and printers. ITI is to install a total of 36 SST's and 291
printers. All of this equipment will be owned by ITI.
Revenue Recognition
The Indiana contract is priced on a per transaction basis with the Company
receiving between $0.85 and $1.22 for each registration. This fee includes
equipment lease and maintenance, media and management support. The contract
extends for the three year period ending October 31, 1999, subject to an option
to renew on the part of the BMVC for an additional year on the same terms and
conditions. Billings are on an actual transaction basis, with no specified
minimum transaction volume. The Indiana contract contains a Funding
Cancellation Clause which provides that the BMVC's obligations under the
contract will cease in the event that state funds are not appropriated or
otherwise available. Billings under the Indiana Contract are prepared monthly
by about the 15th of the following month under net 30 terms. The BMVC has been
paying within these terms. The Company is unaware of any factors that may
adversely affect the timing of payments from the BMVC.
There is relatively little uncertainty about future transaction levels as the
demographics of the State of Indiana were considered when pricing the contract.
Once all of the printers are in place, they will be the sole source of motor
vehicle registrations and renewals in the State of Indiana.
ITI also receives revenue from the lease of other equipment to the State of New
Hampshire for the dispensing of drivers' licenses. This contract expires on
March 31, 1998, subject to renewal.
ITI also receives revenue from the sale of printers and printer media to NCR in
connection with NCR's contract with the State of Maryland to provide SST's for
motor vehicle registration renewals.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
Certain statements contained in this report, including statements concerning
the Company's future cash and financing requirements, and other statements
containws herein regarding matters that are not historical facts, are forward
looking statements; actual results may differ materially from those
anticipated.
Capitalized Contract Costs
Capitalized costs of the Indiana contract include the manufactured cost of the
printers, freight and installation charges. ITI entered into a subcontractor
agreement with NCR ("the NCR Agreement") for the initial stage of the Indiana
Contract wherein the Company is responsible for the printers, printing media
(tag stock, thermal ribbon and decals), facilities management, printer
installation, billing and self-service terminal provisioning aspects of the
Indiana Contract. NCR is to provide the self-service terminals and
installation thereof, software development, hardware and software maintenance
and program management through October 31, 1999. The Company will pay NCR
approximately $1,800,000 for its participation in the initial phase of the
Indiana Contract (consisting of NCR subcontractor services to 11 SST's and 96
printers. The Company will be billed separately for NCR services with respect
to the additional 25 SST's and 195 printers requested by the BMVC.
The Company estimates that the capitalized contract cost will total $5.8
million. Of this total, $550,000 in program management provided by NCR and
$670,000 in installation costs are being depreciated on a per transaction basis
based upon management's estimated transaction volume from November 1, 1996
through October 31, 1999 (the contract end date).
The remaining contract cost representing the hardware and software are being
depreciated on a per transaction basis based upon management's estimated
transaction volume from November 1, 1996 through October 31, 2000 (the option
year).
The Company has no reason to believe that the BMVC will not exercise its option
to renew for the fourth year. There can be no guarantee, however, that
technological advances between now and October 31, 1999 will not occur and
effectively render the Indiana equipment obsolete. In the event that ITI
determines that the marketability of its equipment has become impaired due to
obsolescence, it will be necessary for the Company to seek out alternative
markets for its equipment, or sustain a loss from this obsolescence. Management
is currently unaware of any developments in the industry which would indicate
that the Company's technology may become obsolete within the next four years.
Of the 5.8% million in contract costs to be depreciated, all but $1.4 million
will be depreciated by the end of the lease term without extensions. The cost
to re-engineer the equipment for use in another jurisdiction is estimated at
$.5 million. In considering the propriety of a four year life, management
estimates that the fair market value of the equipment will approximate the book
value at the end of three years.
Non Capitalized Contract Costs
Non capitalized contract costs include media, contract management, equipment
maintenance and network costs all of which are charged to operations as
incurred.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION 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.
Liquidity and Capital Resources
The Company's principal sources of capital are borrowings from third party
investors, and internally generated cash flows.
Operating cash flows are primarily derived from the per transaction fee earned
from the Company's contract with the State of Indiana. In this the initial
year of the Indiana contract, the Company experienced cash flow deficits during
installation, as the State was gradually automated with ITI equipment. As of
the end of the third quarter of 1997, 273 of 291 stand alone printers had been
installed and were operational.
The majority of motor vehicle registrations in the State of Indiana are
concentrated within the first 10 months of the calendar year. Consequently,
ITI's cash flows for the fourth quarter are expected to be negative. However,
total actual transactions for the first year of this contract continue to
exceed management projections.
For the quarter ended September 30, 1997: (1) the Company's investment in
vehicle registration equipment and installation costs was $923,000, of which,
$782,000 was financed by secured third party financing at 13.045%, repayable
through November 1999; (2) Repayment of this third party financing totaled
$198,000; (3) Repayment of related party financing totaled $58,000; and (4)
Cash flows from operating activities were $530,000. The third quarter 1997 was
the first quarter in the Company's history that positive cash flows were
generated from operations.
Since the beginning of 1997, the Company has invested a total of $1.4 million
in vehicle registration equipment to support the Indiana contract. It has
incurred new borrowings of approximately $4.4 million, with which it repaid
outstanding debt to related parties of $1.4 million, and debt owed to unrelated
parties of $785,000. Approximately $406,000 was used in support of operating
activities. As a result, cash increased $281,000 during the nine month period
ended September 30, 1997. The Company anticipates that it will spend another
$1,700,000 in capital outlays to complete the installation of the equipment
called for in the Indiana contract. The Company has received a commitment from
a third party lender to finance the balance of the capital contract costs and
this lender may finance part of the maintenance and media costs of the
contract.
Debt service on the third party financing is $100,000 per month which increases
to $138,000 per month in December 1997.
The Company continues to seek equity financing to cure working capital
deficiencies and to pay off $3,999,200 for the purchase of Company patents plus
accrued interest ($133,000 at September 30, 1997). These amounts plus
additional accrued interest at 8% is due by May 1, 1998 to a corporation which
is 49% owned by a current officer of ITI. The Company anticipates, in the
event that funds are not available to retire this debt as of May 1, 1998, that
the due date will be extended.
Results of Operations
For the nine months ended September 30, 1997, over 80% of the Company's
revenues were generated from the Indiana contract. As of September 30, 1997, a
total of 273 printers and 5 SST's had been installed and were operational. For
the remainder of the calendar year, ITI will be concentrating on the completion
of its installation of the remaining 18 printers and 31 SST's. The Company has
also presented proposals to various other states for the lease of the Company's
printer equipment.
ITI has received orders from NCR for the State of Maryland for another 17
printers and continues to sell media to NCR for use by the State of Maryland.
The contract with the State of New Hampshire expires in March 1998. Revenue
and gross profit from this contract for the nine months ended September 30 1997
were $227,000 for $33,000, respectively. The Company has received a request by
the State of New Hampshire to renew this contract for an additional year.
As of September 1, 1997, the Company terminated the portion of the
subcontractor agreement with NCR that called for NCR to provide maintenance
services for the printer equipment in Indiana. The Company has brought the
maintenance function in house and has hired employees, leased vehicles and has
leased an office/warehouse facility in Indiana. In the opinion of management,
no adverse effect will result from this event.
During the quarter ended September 30, 1997 and in accordance with the contract
provisions relating to the contractual matrix for the number of printers
ordered and when they were ordered, the fee per transaction that ITI receives
from the State of Indiana decreased from $1.22 to $.885. This had the effect
of decreasing profit margins. For the quarter ended September 30, 1997: (1)
ITI had a gross profit from the Indiana contract of $324,000 on sales of
$863,000 compared to $264,000 and $499,000, respectively, for the previous
quarter; (2) ITI had a gross profit from the State of Maryland of $13,000 on
sales of $17,000 compared to $72,000 and $174,000, respectively, for the
previous quarter; (3) Overall gross profit was $348,000 on sales of $960,000
compared to $354,000 and $748,000, respectively, for the previous quarter.
Of $1,314,833 in cost of sales incurred since January 1, 1997, $611,960 was
incurred during the third quarter. This primarily attributable to increased
depreciation expense, which is charged to operations on a per transaction
basis. Third quarter transactions represented 52% of all 1997 transactions.
</page>
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) Exhibit 27 - Financial Data Schedule, filed herewith electronically"
(b) Reports on Form 8-K None
11
</page>
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.
Date: November 14, 1997 INTELLECTUAL TECHNOLOGY, INC.
BY: /S/ Janice L. Welch
Secretary/Treasurer/Principal
Financial Officer
12
</page>