U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended April 1, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to _________ Commission File Number 1-13628 INTELLIGENT CONTROLS, INC. (Exact name of small business issuer as specified in its charter) Maine 01-0354107 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 74 Industrial Park Road, Saco, Maine 04072 (Address of principal executive offices) (207) 283-0156 (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 [ ] There were 4,739,399 shares of Common Stock of the issuer outstanding as of April 30, 2000. Transitional Small Business Disclosure Format: Yes [ ] No [X] PART I ITEM 1. FINANCIAL STATEMENTS Unaudited financial statements of the Intelligent Controls, Inc. (the "Company" or "INCON") appear after the signature page hereto, and are incorporated herein by reference. These financial statements include all adjustments that, in the opinion of management, are necessary in order to make the financial statements not misleading. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations for Three Months Ended April 1, 2000: For the three months ended April 1, 2000, sales decreased 43% to $2,498,317 compared to sales of $4,409,063 in the first three months of 1999. The decrease in revenue was primarily caused by a continued slowdown in sales of the Company's Fuel Management Systems (FMS) products. Sales of FMS products decreased 55%, to $1,765,797, for the first quarter of 2000 as compared to the first quarter of 1999. The decrease is believed to reflect an overall reduction in petroleum equipment purchases, particularly sales through distributors. Sales for the first quarter of 1999 were very strong following record new orders during the second half of 1998. This late 1998 activity was spurred by increased demand from customers seeking to install automatic leak detection systems to meet the EPA-mandated December 22, 1998 compliance deadline. Sales of power utility/predictive maintenance instruments increased 60% to $732,520 for the first three months of 2000 as compared the first three months of 1999. A sale of $150,000 to one customer contributed to this first quarter growth. The Company believes that electrical deregulation and growth in demand have led power utilities to recognize the advantages of remote monitoring of their power transmission and distribution infrastructure, utilizing the Company's circuit breaker monitors and load tap position indication products. Gross margins declined to 49% in the first quarter of 2000 as compared to 56% for the first quarter of 1999. The decline in gross margin was primarily due to the reduction in sales volume resulting in production inefficiencies. Although the Company has taken steps to control overhead spending and has adjusted overall manufacturing expenses to better align with lower manufacturing volumes, inefficiencies have still adversely affected gross margin. Operating expenses decreased 26%, or approximately $435,000, in the first quarter of 2000 as compared to the same period in 1999. Approximately one- half of the decrease results from lower sales commissions on reduced sales volume. Administrative and sales/marketing expenses also declined by 28%, while investment in research and development was 23% higher than in the first quarter of 1999. Net income decreased from $505,057 in the first three months of 1999, to $28,906 in the first three months of 2000. The decrease was primarily due to decreased sales volumes and lower gross margin contribution. Reductions in SG & A and manufacturing spending enabled the Company to remain slightly profitable despite declining sales. The Company also continues to have low debt and significant interest income from its strong cash balance, which contributed $58,000 to pretax profits. Liquidity and Capital Resources at April 1, 2000: As of April 1, 2000 the Company had $4,594,044 in cash and 100% availability on its $3,500,000 line of credit. The Company expects that current resources will be sufficient to finance the Company's operating needs for at least the next 12 months. Year 2000 Issues Year 2000 (Y2K) issues arise from the inability of some computer-based systems to properly recognize and process dates after December 31, 1999. The Company has not had to spend any additional money on Y2K compliance in the first quarter of 2000. The total cost of the Company's Y2K compliance effort has been approximately $80,000. The Company does not expect to incur any significant additional costs to address Y2K issues beyond what has already been incurred. Forward-Looking Statements The "Management's Discussion and Analysis" section of this report contains forward-looking statements, as defined in Section 21E of the Securities Exchange Act of 1934. Examples of such statements in this report include those relating to estimates of future market demand and trends regarding Petroleum and Power Utility/Predictive Maintenance products, future adequacy of the Company's capital resources, and expected costs of Y2K compliance efforts. The Company cautions investors that numerous factors could cause actual results and business conditions to differ materially from those reflected in such forward-looking statements including, but not limited to, the following: unanticipated shifts in market demand for FMS products or Power Utility/Predictive Maintenance products, owing to competition, regulatory changes, or changes in the overall economy; competitive pressures on sales margins for INCON products; unanticipated warranty costs from existing products or newly introduced products; unexpected costs associated with Y2K issues; and risks attendant to expansion of the Company's business through increased investment in product development, increased marketing and sales efforts, and future acquisitions. PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K An index of the exhibits filed with this report appears below, and is incorporated herein by reference. No reports on Form 8-K were filed during the prior fiscal quarter. SIGNATURES In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTELLIGENT CONTROLS, INC. Date: May 15, 2000 By: /s/ Andrew B. Clement ------------------------------- Andrew B. Clement, Controller (on behalf of the Company and as principal financial officer) INTELLIGENT CONTROLS, INC. BALANCE SHEETS As of April 1, 2000 and December 31, 1999 (unaudited) 2000 1999 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents $ 4,594,044 $ 4,980,805 Accounts receivable, net of allowances of $122,000 in 2000 and $105,000 in 1999 1,807,240 1,488,414 Inventories (Note 4) 1,053,036 1,054,625 Prepaid expenses and other current assets 95,501 89,976 Income taxes receivable 82,648 105,292 Deferred income taxes 209,799 209,799 ---------------------------- Total current assets 7,842,268 7,928,911 Property and equipment, net (Note 3) 700,768 753,604 Other assets 36,528 36,033 ---------------------------- Total assets $ 8,579,564 $ 8,718,548 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 387,359 $ 461,560 Accrued expenses 531,953 585,424 Current portion of long-term debt 133,189 160,872 ---------------------------- Total current liabilities 1,052,501 1,207,856 Long-term debt, net of current portion 12,535 Deferred income taxes 49,709 49,709 Commitments Stockholders' equity: Common stock, no par value; 8,000,000 shares authorized 5,061,123 shares issued at April 1, 2000 and at December 31, 1999 7,606,818 7,585,534 Retained earnings 1,966,180 1,937,274 Receivable from stockholder (1,484,988) (1,463,704) Treasury stock, 321,724 shares at April 1, 2000 and at December 31, 1999 (610,656) (610,656) ---------------------------- Total stockholders' equity 7,477,354 7,448,448 ---------------------------- Total liabilities and stockholders' equity $ 8,579,564 $ 8,718,548 ============================ The accompanying notes are an integral part of the financial statements F-1 INTELLIGENT CONTROLS, INC. STATEMENTS OF INCOME (unaudited) For the Three Month Periods Ended April 1, 2000 and March 27, 1999 2000 1999 ---- ---- Net sales $2,498,317 $4,409,063 Cost of sales 1,266,886 1,947,442 -------------------------- Gross profit 1,231,431 2,461,621 Operating expenses: Selling, general and administrative 894,320 1,391,160 Research and development 328,889 266,801 -------------------------- 1,223,209 1,657,961 -------------------------- Operating income 8,222 803,660 Other income (expense) Interest Income 58,600 65,109 Other (expense) (18,416) (26,712) -------------------------- 40,184 38,397 -------------------------- Income before income tax expense 48,406 842,057 Income tax expense 19,500 337,000 -------------------------- Net income $ 28,906 $ 505,057 ========================== Net income per share basic and diluted (Note 2) $ 0.01 $ 0.10 ========================== Weighted average common shares outstanding (Note 2) 4,739,399 4,928,637 ========================== Weighted average common and common equivalent shares outstanding (Note 2) 4,751,040 4,964,192 ========================== The accompanying notes are an integral part of the financial statements F-2 INTELLIGENT CONTROLS, INC. STATEMENTS OF CASH FLOWS (unaudited) For the Three Month Periods Ended April 1, 2000 and March 27, 1999 2000 1999 ---- ---- Cash flows from operating activities: Net income $ 28,906 $ 505,057 Adjustments to reconcile net income to net cash (Used) provided by operating activities: Depreciation and amortization 82,241 61,108 Interest on receivable to stockholder (21,284) (18,354) Loss on disposal of property plant & equipment 398 Changes in assets and liabilities: Accounts receivable, net (318,826) 461,990 Inventories 1,589 (249,482) Prepaid expenses and other current assets (5,525) (3,967) Income tax receivable 22,644 Income tax payable (78,152) Accounts payable and accrued expenses (127,672) (219,228) Other assets (495) (902) -------------------------- Net cash (used) provided by operating activities (338,422) 458,468 -------------------------- Cash flows from investing activities: Capital expenditures (29,405) (45,295) -------------------------- Net cash used by investing activities (29,405) (45,295) -------------------------- Cash flows from financing activities: Repayment of long-term debt (40,218) (40,218) Issuance of common stock, net 21,284 454 Acquisition of treasury stock (55,229) -------------------------- Net cash used by financing activities (18,934) (94,993) -------------------------- Net increase (decrease) in cash (386,761) 318,180 Cash and cash equivalents at beginning of period 4,980,805 4,202,084 -------------------------- Cash and cash equivalents at end of period $4,594,044 $4,520,264 ========================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 3,487 $ 6,226 Income taxes $ 415,152 The accompanying notes are an integral part of the financial statements F-3 INTELLIGENT CONTROLS, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. General The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not to be misleading. In the opinion of management, the amounts shown reflect all adjustments necessary to present fairly the financial position and results of operations for the periods presented. All such adjustments are of a normal recurring nature. The year-end balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. It is suggested that the financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-KSB for the fiscal year ended December 31, 1999. 2. Earnings Per Common Share Basic earnings per share of common stock have been determined by dividing net earnings by the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings per share reflect the potential dilution that would occur if existing stock options were exercised. Following is a reconciliation of the dual presentations of earnings per share for the periods presented. Net Income Common Shares Earnings (Numerator) (Denominator) Per Share ----------- ------------- --------- Three Months Ended April 1, 2000 - -------------------------------- Basic earnings per share $ 28,906 4,739,399 $0.01 Dilutive potential shares 11,641 ----------------------------------------- Diluted earnings per share $ 28,906 4,751,040 $0.01 ========================================= Three Months Ended March 27, 1999 - --------------------------------- Basic earnings per share $505,057 4,928,637 $ .10 Dilutive potential shares 35,555 ----------------------------------------- Diluted earnings per share $505,057 4,964,192 $ .10 ========================================= F-4 3. Property and Equipment Property and equipment at cost as of April 1, 2000 and December 31, 1999 consisted of the following: (Unaudited) 2000 1999 ----------- ---- Leasehold improvements $ 154,344 $ 154,344 Equipment 1,290,320 1,269,015 Computer software 196,178 187,144 Furniture and fixtures 191,636 191,637 Construction in progress 15,428 16,361 -------------------------- 1,847,906 1,818,501 Less accumulated depreciation and amortization 1,147,138 1,064,897 -------------------------- $ 700,768 $ 753,604 ========================== 4. Inventories Inventories as of April 1, 2000 and December 31, 1999 consisted of the following: (Unaudited) 2000 1999 ---------- ---- Raw Material $ 576,281 $ 549,801 Work in Progress 131,060 155,853 Finished Goods 345,695 348,971 -------------------------- $1,053,036 $1,054,625 ========================== 5. Legal Proceedings On April 21, 1999 the Company received notice of the filing of an action entitled Omega Environmental, Inc. v. INCON International, Inc. in United States Bankruptcy Court for the Western District of Washington. The action was brought by Omega Environmental, Inc. for avoidance and recovery of approximately $60,000 of payments that Omega had made to the Company for INCON products, as alleged preferential transfers. The Company is contesting the validity of this claim. Q&E LLC (a convenience store/retail petroleum operator) has filed suit against the Company and PEMCO Service Company, Inc. for damages allegedly arising in connection with a petroleum spill. The damages claimed are $1,000,000. The Company's insurance carrier has assumed defense of the claim, and is in the process of evaluating the claim. 6. New Accounting Pronouncements In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "SAB 101" "Revenue Recognition in Financial Statements". SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principals to revenue recognition in financial statements. The Company is required to adopt SAB 101 in the second quarter of 2000. Management does not expect the adoption of SAB 101 to have a material effect on the Company's financial condition or results of operations. F-5 Index to Exhibits Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule