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 March 31, 2001 [ ] 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 March 31, 2001. 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 March 31, 2001: For the quarter ended March 31, 2001, sales decreased 12% to $2,206,307 compared to sales of $2,498,317 for the first quarter of 2000. The decrease was primarily due to lower sales of the Company's Power Reliability Systems (PRS) products. Sales of the Company's Fuel Management Systems (FMS) products decreased 4% to $1,701,730 in the first quarter of 2001 as compared to, $1,765,797 for the same period in 2000. Sales in the petroleum equipment market continue to be adversely influenced by general weakness in capital spending among petroleum retailers. The Company has seen growing success marketing to large end-use customers such as large convenience store chains and supermarkets that sell gasoline. These customers continue to represent a larger and larger part of the Company's FMS sales revenue, as more of these users designate INCON as an approved provider of their fuel management systems. Sales of PRS equipment for the first quarter of 2001 were down 31%, to $504,577, as compared to $732,520 for the first quarter of 2000. Overall basic demand for PRS products was similar in the first quarter of 2001 as the same period in 2000. However, in the first quarter of 2000 the Company shipped $150,000 to a single customer. Despite this reduction in sales for the quarter, the Company believes that electrical deregulation and growth in demand are factors that encourage power utilities to employ remote monitoring of their power transmission and distribution infrastructure, resulting in increased demand over the past two years for the Company's circuit breaker monitors and load tap position indication products. Gross margins were 52% in the first quarter of 2001, as compared to 49% for the first quarter of 2000. Strong gross margins are the result of the Company's continued efforts to control overhead spending and align manufacturing expenses to volumes. Overall operating expenses of $1,235,254 during the first three months of 2001 were similar to spending levels during the same period in 2000. The Company continues to invest in Sales/Marketing and Research and Development in amounts consistent with prior periods. Net income decreased from $28,906 in the first three months of 2000, to a net loss of $26,876 in the first three months of 2001. The decrease in net profits was attributable to the combination of lower sales volume and stable operating expenses, with higher gross margins and lower commissions and warranty expense partially offsetting the negative effect of lower sales. The Company currently has no debt. Interest income of $73,940 contributed to pretax profits. Liquidity and Capital Resources at March 31, 2001: As of March 31, 2001 the Company had $4,897,708 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. 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/FMS and Power Utility/PRS products and future adequacy of the Company's capital resources. 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/PRS products, owing to competition, regulatory changes, or changes in the overall economy; competitive pressures on sales margins for INCON products; or unanticipated warranty costs. PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K No exhibits are filed with this report. 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, 2001 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 March 31, 2001 and December 31, 2000 (unaudited) 2001 2000 ----------- ---- ASSETS Current Assets: Cash and cash equivalents $4,897,708 $5,182,325 Accounts receivable, net of allowances of $148,000 in 2001 and $137,500 in 2000 1,690,969 1,755,483 Inventories (Note 4) 1,419,240 1,124,969 Prepaid expenses and other current assets 100,042 79,457 Income taxes receivable 14,237 - Deferred income taxes 196,574 196,574 -------------------------- Total current assets 8,318,770 8,338,808 Property and equipment, net (Note 3) 545,371 568,144 Other assets 41,618 40,440 -------------------------- Total assets $8,905,759 $8,947,392 ========================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 553,435 $ 554,745 Accrued expenses 466,756 467,668 Current portion of long-term debt - 12,535 -------------------------- Total current liabilities 1,020,191 1,034,948 Deferred income taxes 28,725 28,725 Commitments and contingencies Stockholders' equity : Common stock, no par value; 8,000,000 shares authorized, 5,061,123 shares issued at March 31, 2001 and at December 31, 2000 7,691,931 7,670,207 Retained earnings 2,345,669 2,372,545 Receivable from stockholder (1,570,101) (1,548,377) Treasury stock at cost, 321,724 shares at March 31, 2001 and at December 31, 2000 (610,656) (610,656) -------------------------- Total stockholders' equity 7,856,843 7,883,719 -------------------------- Total liabilities and stockholders' equity $8,905,759 $8,947,392 ========================== The accompanying notes are an integral part of the financial statements INTELLIGENT CONTROLS, INC. STATEMENTS OF OPERATIONS (unaudited) For the Three Month Periods Ended March 31, 2001 and April 1, 2000 2001 2000 ---- ---- Net sales $2,206,307 $2,498,317 Cost of sales 1,065,699 1,266,886 -------------------------- Gross profit 1,140,608 1,231,431 -------------------------- Operating expenses: Selling, general and administrative 922,470 894,320 Research and development 312,784 328,889 -------------------------- 1,235,254 1,223,209 -------------------------- Operating income (loss) (94,646) 8,222 Other income (expense): Interest income, net 73,940 58,600 Other expense (20,470) (18,416) -------------------------- 53,470 40,184 -------------------------- Income (loss) before income taxes (41,176) 48,406 Income tax expense (benefit) (14,300) 19,500 -------------------------- Net income (loss) $ (26,876) $ 28,906 ========================== Net income (loss) per share basic (Note 2) $ (0.01) $ 0.01 Net income (loss) per share diluted (Note 2) $ (0.01) $ 0.01 Weighted average common shares outstanding (Note 2) 4,739,399 4,739,399 ========================== Weighted average common and common equivalent shares outstanding (Note 2) 4,739,399 4,751,040 ========================== The accompanying notes are an integral part of the financial statements INTELLIGENT CONTROLS, INC. STATEMENTS OF CASH FLOWS (unaudited) For the Three Month Periods Ended March 31, 2001 and April 1, 2000 2001 2000 ---- ---- Cash flows from operating activities: Net income (loss) $ (26,876) $ 28,906 Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization 67,119 82,241 Changes in assets and liabilities: Accounts receivable, net 64,514 (318,826) Inventories (294,271) 1,589 Prepaid expenses and other current assets (20,585) (5,525) Income tax receivable (14,237) 22,644 Other assets (1,178) (495) Accounts payable and accrued expenses (2,222) (127,672) --------------------------- Net cash used by operating activities (227,736) (317,138) --------------------------- Cash flows from investing activities: Capital expenditures (44,346) (29,405) --------------------------- Net cash used for investing activities (44,346) (29,405) --------------------------- Cash flows from financing activities: Repayment of long-term debt (12,535) (40,218) --------------------------- Net cash used for financing activities (12,535) (40,218) --------------------------- Net decrease in cash (284,617) (386,761) Cash and cash equivalents at beginning of period 5,182,325 4,980,805 --------------------------- Cash and cash equivalents at end of period $4,897,708 $4,594,044 =========================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ - $ 3,487 Income taxes $ - $ - Non-cash investing and financing activities Interest on stockholder receivable $ 21,724 $ 21,284 The accompanying notes are an integral part of the financial statements 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, 2000. 2. Earnings (Loss) Per Common Share Basic earnings per share of common stock have been determined by dividing net income or loss by the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings per share for the three months ended April 1, 2000 reflect the potential dilution that would occur if existing stock options were exercised. The exercise of such options was anti-dilutive for the three months ended March 31, 2001. Following is a reconciliation of the dual presentations of earnings per share for the periods presented. Net Income(loss) Common Shares Earnings(loss) (Numerator) (Denominator) Per Share ---------------- ------------- -------------- Three Months Ended March 31, 2001 Basic loss per share $(26,876) 4,739,399 $(0.01) ====== Dilutive potential shares - -------------------------- Diluted loss per share $(26,876) 4,739,399 $(0.01) ======================================== 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 ======================================== 3. Properties and Equipment Property and equipment at cost as of March 31, 2001 and December 31, 2000 consisted of the following: 2001 2000 ---- ---- Leasehold improvements $ 154,344 $ 154,344 Equipment 1,283,125 1,269,134 Computer software 204,134 199,969 Furniture and fixtures 192,092 191,637 Construction in progress 54,577 28,842 -------------------------- 1,888,272 1,843,926 Less accumulated depreciation and amortization 1,342,901 1,275,782 -------------------------- $ 545,371 $ 568,144 ========================== 4. Inventories Inventories as of March 31, 2001 and December 31, 2000 consisted of the following: 2001 2000 ---- ---- Raw Material $ 932,873 $ 717,558 Work in Progress 278,925 272,420 Finished Goods 207,442 134,991 -------------------------- $1,419,240 $1,124,969 ========================== 5. Legal Proceedings In April 1999 the Company received notice of the filing of an action entitled Omega Environmental, Inc. v. INCON International, Inc. in U.S. Bankruptcy Court for the Western District of Washington. The action was brought 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. In June 1999 the owner and operator of a convenience/gasoline store (Q&E LLC) filed a complaint in Illinois Circuit Court (Sangamon County) against INCON and Pemco Service Co., seeking damages arising from a gasoline spill and the alleged failure of an electronic line leak detector manufactured by INCON and installed by Pemco. The complaint seeks just over $900,000 in damages. INCON's insurance carrier has assumed defense of the matter, which is still in the pre-trial phase. In April 2000 the Company commenced an arbitration against Practical Tank Management and a related-party guarantor of payment (FFP Partners, LP) to collect approximately $62,193, as the unpaid balance for INCON probes and other automatic tank gauge equipment sold to PTM. The arbitration is being held in Portland, under administration by the American Arbitration Association. In their answer, the defendants and an affiliate asserted counterclaims against the Company for an amount stated to be in excess of $5 million, including lost business opportunity and other damages. In a January 2001 deposition, PTM's President stated an intention to pursue damages of approximately $15 million, of which he said that more than $12 million was attributable to lost business opportunity. The proceeding is in the discovery phase. The arbitration hearing currently is scheduled for July 2001. The Company is actively pursuing its claim against PTM and FFPLP, and Company management has stated its intention to vigorously oppose the counterclaims.