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, 2002
[ ] 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, 2002.
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 the Three Months Ended March 31, 2002:
For the three months ended March 31, 2002, sales increased 14.4% to
$2,522,888, compared to sales of $2,206,307 for the same period in 2001.
The Company had higher sales in both Fuel Management Systems (FMS) and Power
Reliability Systems (PRS).
FMS sales for the first three months of 2001 were $1,843,073, an increase of
8.3% over FMS sales of $1,701,730 for the same period in 2001. The Company
continues to see growing success marketing to large end-use customers such
as convenience store chains and supermarkets that sell gasoline. These
customers represent an increasingly large part of the Company's FMS sales
revenue as more and more designate INCON as an approved supplier.
PRS sales for the first three months of 2002 increased 34.7% to $679,815, as
compared to $504,577 for the same period in 2001. The increase in sales is
primarily attributable to shipping the first half of a major OEM contract,
as well as two other large orders.
Gross margins were 54.9% for the first three months of 2002, as compared to
51.7% for the same period in 2001. The improvement in gross margins was
primarily the result of a favorable product mix, including a greater
percentage of overall sales coming from PRS revenues, which are generally
more profitable, along with a favorable mix of higher margin FMS products.
Gross margins were also positively influenced by direct labor efficiency
improvements and reduced overhead spending.
Overall operating expenses fell by 1% to $1,223,221 for the first three
months of 2002, as compared to $1,235,254 for the first three months of
2001. The higher expenses in 2001 were largely attributable to legal
expenses associated with a major arbitration case completed in January 2002.
Expenditures on sales/marketing and product development are consistent with
prior periods, as a percentage of revenues.
Earnings increased from a net loss of $26,876 for the first three months of
2001 to net income of $104,895 for the same period in 2002. The increase in
profitability was due to increased sales volume and gross margins and to
some extent reduced operating expenses. Interest income contributed $24,694
to pretax profits.
Liquidity and Capital Resources at March 31, 2002:
The Company continues to have no debt. As of March 31, 2002 the Company had
$5,120,141 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.
As previously reported, the Company has entered into a merger agreement
under which INCON would become a wholly-owned subsidiary of Franklin
Electric Co., Inc. See Part II, Item 5, Other Information, below.
2
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 sales of FMS products to convenience store chains and
supermarkets, and the 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 INCON's products owing
to competition, regulatory changes, or changes in the overall economy;
competitive pressures on sales margins for INCON products; or unanticipated
warranty costs.
3
PART II
ITEM 1. LEGAL PROCEEDINGS
A description of legal proceedings is found in Note 5 to the financial
statements, and is incorporated herein by reference.
ITEM 5. OTHER INFORMATION
The Company announced April 25, 2002 that it has entered into a merger
agreement with Franklin Electric Co., Inc. Under the proposed transaction,
INCON would become a wholly-owned subsidiary of Franklin and INCON
shareholders would receive $3.95 per share, in cash, for all outstanding
INCON stock. The merger is subject to INCON shareholder approval and to the
satisfaction or waiver of other specified conditions, as set forth in the
merger agreement.
There can be no assurance that all conditions to the merger will be
satisfied, or that the merger will ultimately be consummated on the terms
set forth in the merger agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
An index of the exhibits filed with this report appears after the financial
statements below, and is incorporated herein by reference.
No reports on Form 8-K were filed during the prior fiscal quarter. On April
25, 2002, the Company filed a Form 8-K report regarding its announcement of
a merger agreement. See Item 5, Other Information, above.
4
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, 2002 By: /s/ Andrew B. Clement
------------------------------------
Andrew B. Clement, Controller
(on behalf of the Company and as
principal financial officer)
5
INTELLIGENT CONTROLS, INC.
BALANCE SHEETS
As of March 31, 2002 and December 31, 2001
Unaudited
2002 2001
--------- ----
<s> <c> <c>
ASSETS
Current Assets:
Cash and cash equivalents $5,120,141 $5,329,126
Accounts receivable, net of allowances of
$87,000 in 2002 and $85,000 in 2001 1,879,506 1,564,247
Inventories 1,113,593 1,379,677
Prepaid expenses and other current assets 203,077 112,722
Income taxes receivable 48,247 118,247
Deferred income taxes 433,879 433,879
--------------------------
Total current assets 8,798,443 8,937,898
Property and equipment, net 363,790 409,275
Other assets 46,010 45,153
--------------------------
Total assets $9,208,243 $9,392,326
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 442,329 $ 598,289
Accrued expenses 1,048,475 1,181,493
--------------------------
Total current liabilities 1,490,804 1,779,782
Deferred income taxes 10,470 10,470
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 8,000,000 shares
authorized, 5,061,123 shares issued 7,781,270 7,758,310
Retained earnings 2,195,795 2,090,900
Receivable from stockholder (1,659,440) (1,636,480)
Treasury stock at cost, 321,724 shares (610,656) (610,656)
--------------------------
Total stockholders' equity 7,706,969 7,602,074
--------------------------
Total liabilities and stockholders' equity $9,208,243 $9,392,326
==========================
The accompanying notes are an integral part of the financial statements
F-1
INTELLIGENT CONTROLS, INC.
STATEMENTS OF OPERATIONS (Unaudited)
For the Three Month Periods Ended March 31, 2002 and March 31, 2001
2002 2001
---- ----
<s> <c> <c>
Net sales $2,522,888 $2,206,307
Cost of sales 1,137,869 1,065,699
--------------------------
Gross profit 1,385,019 1,140,608
Operating expenses:
Selling, general and administrative 936,215 922,470
Research and development 287,006 312,784
--------------------------
1,223,221 1,235,254
--------------------------
Operating income (loss) 161,798 (94,646)
Other income (expense):
Interest income, net 24,694 73,940
Other expense (11,597) (20,470)
--------------------------
13,097 53,470
--------------------------
Income (loss) before income taxes 174,895 (41,176)
Income tax expense (benefit) 70,000 (14,300)
--------------------------
Net income (loss) $ 104,895 $ (26,876)
==========================
Net income (loss) per share basic $ 0.02 $ (0.01)
Net income (loss) per share diluted $ 0.02 $ (0.01)
Weighted average common shares outstanding 4,739,399 4,739,399
==========================
Weighted average common and
common equivalent shares outstanding 4,740,890 4,739,399
==========================
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 March 31, 2002 and 2001
2002 2001
---- ----
<s> <c> <c>
Cash flows from operating activities:
Net income (loss) $ 104,895 $ (26,876)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 59,061 67,119
Changes in assets and liabilities:
Accounts receivable, net (315,259) 64,514
Inventories 266,084 (294,271)
Prepaid expenses and other current assets (90,355) (20,585)
Income taxes receivable 70,000 (14,237)
Other assets (857) (1,178)
Accounts payable and accrued expenses (288,978) (2,222)
--------------------------
Net cash used by operating activities (195,409) (227,736)
Cash flows from investing activities:
Capital expenditures (13,576) (44,346)
Cash flows from financing activities:
Repayment of long-term debt - (12,535)
--------------------------
Net decrease in cash (208,985) (284,617)
Cash and cash equivalents at beginning
of period 5,329,126 5,182,325
--------------------------
Cash and cash equivalents at end of period $5,120,141 $4,897,708
==========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - $ -
Income taxes $ - $ -
Non-cash investing and financing activities
Interest on stockholder receivable $ 22,960 $ 21,724
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, 2001.
2. Earnings Per Common Share
Basic earnings per share of common stock have been determined by
dividing net income 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. 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 Common Earnings (Loss)
Income (Loss) Shares Per
(Numerator) (Denominator) Share
------------- ------------- ---------------
<s> <c> <c> <c>
Three Months Ended March 31, 2002
- ---------------------------------
Basic earnings per share $104,895 4,739,399 $ 0.02
======
Dilutive potential shares - 1,491
-------------------------
Diluted earnings per share $104,895 4,740,890 $ 0.02
=========================================
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)
=========================================
F-4
3. Property and Equipment
Property and equipment at cost as of March 31, 2002 and December 31,
2001 consisted of the following:
2002 2001
---- ----
<s> <c> <c>
Leasehold improvements $ 165,553 $ 165,553
Equipment 1,344,851 1,334,980
Computer software 219,937 217,307
Furniture and fixtures 227,587 226,512
--------------------------
1,957,928 1,944,352
Less accumulated depreciation and amortization 1,594,138 1,535,077
--------------------------
$ 363,790 $ 409,275
==========================
4. Inventories
Inventories as of March 31, 2002 and December 31, 2001 consisted of
the following:
2002 2001
---- ----
<s> <c> <c>
Raw Material $ 584,597 $ 812,962
Work in Progress 260,977 278,754
Finished Goods 268,019 287,961
--------------------------
$1,113,593 $1,379,677
==========================
5. Legal Proceedings
In April 2000 the Company commenced an arbitration against Practical
Tank Management (PTM) 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. As part
of the arbitration proceeding, PTM and related entities brought various
claims against the Company for more than $15,000,000 in alleged damages. In
February 2002, the arbitration panel handed down its decision in this
matter. The arbitrators awarded the sum of $446,402 against the Company,
plus prejudgment interest of $55,893. By its terms, the arbitrators' ruling
extinguishes all other claims of PTM and its affiliates and business allies.
The Company accrued $502,295 in 2001 to recognize the cost of this award.
This amount was paid in April, 2002.
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
$1,000,000 in damages, and each defendant has filed a cross-claim against
the other in respect thereof. INCON's insurance carrier has assumed defense
of the matter, which is still in the pre-trial phase.
F-5
6. Subsequent Event
On April 25, 2002, the Company entered into a definitive merger
agreement with Franklin Electric Co., Inc., of Blufton, IN. Under the
proposed transaction, INCON would become a wholly-owned subsidiary of
Franklin and INCON shareholders would receive $3.95 per share, approximately
$18 million in total, in cash, for all outstanding INCON stock. The
agreement also contains provisions related to, among other matters, payment
for merger contingent employee bonuses and cancellation and/or net exercise
of existing stock options. The merger is subject to INCON shareholder
approval and to the satisfaction or waiver of other specified conditions, as
set forth in the merger agreement. The transaction is scheduled to close
late in the second or early in the third quarters of 2002.
F-6
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
10.1 Agreement and Plan of Merger, dated as of April 25, 2002,
among the Company, Franklin Electric Co., Inc., and FEI
Corporation
10.2 Voting Agreement and Amendment to Stockholders Agreement,
dated as of April 25, 2002, among Franklin Electric Co.,
Inc., Ampersand 1995 Limited Partnership, Ampersand 1995
Companion Fund Limited Partnership, Roger E. Brooks, Alan
Lukas, Paul E. Lukas, and certain related parties