CONFORMED COPY
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 28, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
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 4,944,837 shares of Common Stock of the issuer outstanding as
of April 30, 1998.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I
ITEM 1. FINANCIAL STATEMENTS.
Unaudited financial statements of the Company appear beginning at page F-1
below, and are incorporated herein by reference. These financial
statements include all adjustments which, 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 28, 1998:
For the three months ended March 28, 1998, sales increased 16% to $3.54
million compared to sales in the first quarter of 1997 of $3.03 million.
Sales in the petroleum market grew by 21% due to continued strong EPA
compliance demand as well as strong new construction activity. In March
1998 and February 1997 the Company made large partial shipments of a $1.8
million order from Chinese Petroleum in Taiwan. Approximately $590,000 of
shipments were included in both the first quarter 1998 and 1997
respectively. The March 1998 shipment was the final shipment to Chinese
Petroleum. Sales to a single OEM customer of a digital probe were $180,000
lower than the first quarter of 1997. Shipments have been deferred to permit
for a design enhancement that will improve the product's reliability and
ease of installation. Shipments are expected resume in the near future.
Sales of Power Utilities products were down 22% in the first quarter of
1998 as compared to the first quarter of 1997. Deferred shipments of the
Optimizer are the primary reason for this downturn. The Optimizer circuit
breaker monitoring product has been recalled for software upgrades and
resulting new orders have not shipped pending the completion of this change.
A newer version model, the Optimizer Plus, is in final design testing and
should be introduced in the later part of 1998.
Gross margins improved significantly, increasing from 35.1% in the first
quarter of 1997 to 43.7% for the same period of 1998. This improvement in
margins was due to reduced warranty costs, improved manufacturing efficiency
resulting from higher volume, and lower material costs. Margins in both
quarters were adversely affected by shipments of the Chinese Petroleum
order. Due to its size and commercial importance for long term position in
Asia, the Chinese Petroleum order was negotiated at special pricing levels.
Operating expenses were up 36% in the first three months of 1998 over the
same months in 1997. This increase was primarily due to additional
investment in the sales and marketing area, as well as, several one time
legal and administrative expenses, and increased R & D expenses.
Net income for the first quarter of 1998 was $36,972 as compared to a net
loss of ($30,804) for the same period in 1997. The turnaround in
profitability was primarily due to higher sales volume and the resulting
higher margins.
Liquidity and Capital Resources at March 28, 1998:
As of March 28, 1998 the Company had $2.6 million available to be borrowed
on its $3.5 million dollar line of credit. The Company expects that
current resources will be sufficient to finance the Company's operating
needs through the end of 1998.
Subsequent Events:
The Company has recently completed a series of transactions that resulted
in a substantial increase in its capital. Capital was increased on May 1,
1998 through a $5,325,001 purchase of Common Stock at $3.25 per share by
two investment funds affiliated with Ampersand Ventures, in Wellesley,
Massachusetts. Capital was further increased on May 6, 1998 by a $250,000
purchase of Common Stock at $3.25 per share by Roger E. Brooks, the
Company's new President and Chief Executive Officer, as part of a
restricted stock arrangement with him.
The Company intends to apply this capital to (i) fund the Company's recent
tender offer to repurchase 475,000 shares of Common Stock from existing
shareholders at $3.25 per share ($1,543,750), (ii) pay costs associated
with the Ampersand transaction and the tender offer (estimated at
$250,000), (iii) repay approximately $1 million of existing indebtedness,
(iv) fund $650,000 of litigation expense in settling a certain lawsuit by
a former executive, of which all but $40,000 will be paid to repurchase
Common Stock and options from the executive at a price equivalent to the
recent tender offer price (see "Legal Proceedings," below), and (v) fund
plans for expanding its business, through increased marketing efforts,
continued development of new products, and other means.
PART II
ITEM 1. LEGAL PROCEEDINGS
As previously reported, the Company is a defendant in a wrongful
termination action brought against it in July 1996 by John D. Knight, a
former executive. In April 1998 the Company reached a tentative
settlement by which it has agreed to (i) pay Mr. Knight $40,000 of
additional severance compensation, (ii) repurchase 100,000 option shares
from him at a net price of $3.25 per share minus the underlying option
exercise price of $1.25 per share, and (iii) cancel additional stock
options for 148,240 shares at a net price of $3.25 per share minus the
underlying option exercise price of $.50 per share. Mr. Knight originally
received the stock options from the Company in 1987. The per share price
to be paid to Mr. Knight equals the price of the Company's recent tender
offer to repurchase 475,000 shares of Common Stock from existing
shareholders. See "Management's Discussion and Analysis -- Subsequent
Events," above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held April 30, 1998. At the
meeting the following matters were voted upon by shareholders. All
matters were approved as indicated:
1. To fix the number of directors at five and to elect Alan Lukas, George
E. Hissong, Paul F. Walsh, Charles D. Yie, and Roger E. Brooks to the
Board of Directors.
Withheld
Authority
For For Total
--------- --------- ---------
Alan Lukas 2,791,165 2,446 2,793,611
George E. Hissong 2,791,165 2,446 2,793,611
Paul F. Walsh 2,783,065 10,546 2,793,611
Charles D. Yie 2,783,065 10,546 2,793,611
Roger E. Brooks 2,791,165 2,446 2,793,611
2. To ratify the appointment of Coopers & Lybrand as independent
accountants to the Company for the year ending December 26, 1998.
For Against Abstain Broker non-vote
--------- ------- ------- ---------------
2,730,061 61,750 1,800 0
3. To amend the Articles of Incorporation to increase the authorized
common stock from 5,000,000 shares to 8,000,000 shares.
For Against Abstain Broker non-vote
--------- ------- ------- ---------------
2,777,865 13,346 2,400 0
4. To amend the Articles of Incorporation to provide that Section 910 of
the Maine Business Corporation Act shall not apply to the Company.
Section 910 provides special appraisal and sale rights to minority
shareholders of publicly held Maine corporations in which a person or
group acquires more than 25% voting power. By its terms, Section 910
allows the corporation to opt out of the statute through a shareholder
vote.
For Against Abstain Broker non-vote
--------- ------- ------- ---------------
2,282,671 15,786 6,125 489,029
5. To amend the Articles of Incorporation to permit the Company to
repurchase shares from unreserved and unrestricted capital surplus.
For Against Abstain Broker non-vote
--------- ------- ------- ---------------
2,292,292 4,426 800 496,093
6. To approve the proposed 1998 Employee Stock Option Plan.
For Against Abstain Broker non-vote
--------- ------- ------- ---------------
2,281,292 12,526 3,700 496,793
7. To approve a proposed restricted stock arrangement with Roger E.
Brooks.
For Against Abstain Broker non-vote
--------- ------- ------- ---------------
2,763,711 18,156 4,680 7,064
ITEM 5. OTHER INFORMATION
On May 1, 1998, the Company consummated a sale of 1,638,462 shares of
Common Stock at $3.25 per share to two investment funds affiliated with
Ampersand Ventures. The stock purchase was $325,000 greater than
originally reported, reflecting an amendment of the Investment Agreement
at the time of closing.
On May 6, 1998, the Company consummated a sale of 486,923 shares of Common
Stock at $3.25 per share to Roger E. Brooks, pursuant to a restricted
stock arrangement approved by vote of the shareholders at the Annual
Meeting of Shareholders on April 30, 1998. The consideration for this
stock was paid in the form a $1,332,500 promissory note and $250,000 in
cash from Mr. Brooks.
On March 30, 1998, the Company commenced a tender offer to repurchase up
to 475,000 shares of Common Stock at $3.25 per share from existing
shareholders. A total of 967,028 shares were tendered to the Company
prior to expiration of the tender offered on May 1, 1998. Payment for
475,000 shares was made by the Company commencing on May 11, 1998; the
balance of the tendered shares are being returned to shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
An index of the exhibits filed with this report appears beginning at page
E-1 below, and is incorporated herein by reference.
No reports on Form 8-K were filed by the Company during the fiscal quarter
ended March 28, 1998.
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.
By: /s/ ANDREW B. CLEMENT
-----------------------------------
Andrew B. Clement, Controller
(on behalf of the Company and as
principal financial officer)
Date: May 12, 1998
Index to Exhibits
Exhibit No. Description
- - ----------- -----------
10.1 Investment Agreement, dated March 26, 1998 among the Company,
Ampersand Specialty Materials and Chemicals III Limited
Partnership, Ampersand Specialty Materials and Chemicals
III Companion Fund Limited Partnership, and Roger E.
Brooks; incorporated by reference to Exhibit 99.c(1) to the
Company's Schedule 13E-4 Issuer Tender Offer Statement
filed on March 30, 1998
10.1A Amendment No. 1 to Investment Agreement, dated as of May 1,
1998, among the Company, Ampersand Specialty Materials and
Chemicals III Limited Partnership, Ampersand Specialty
Materials and Chemicals III Companion Fund Limited
Partnership, and Roger E. Brooks
10.2 Stockholders Agreement, dated as of May 1, 1998, among the
Company, Ampersand Specialty Materials and Chemicals III
Limited Partnership, Ampersand Specialty Materials and
Chemicals III Companion Fund Limited Partnership, Roger E.
Brooks, Alan Lukas, Paul E. Lukas, and certain related
parties; incorporated by reference to Exhibit 99.c(2) to
the Company's Schedule 13E-4 Issuer Tender Offer Statement
filed on March 30, 1998
10.3 Employment Agreement between the Company and Roger E. Brooks
10.3A Employee Stock Restriction Agreement between the Company and
Roger E. Brooks and related promissory note, pledge
agreement and form of 83(b) election
10.4 1998 Employee Stock Option Plan
10.5 Lease Extension Agreement, executed March 27, 1998 with Apollo
Development Corp.
10.6 Addendum to Lease, executed April 28, 1998 with BJB
Associates; Letter dated April 3, 1998 from BJB Associates
regarding reimbursement of utility cost by landlord
27 Financial Data Schedule
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
INTELLIGENT CONTROLS, INC.
We have reviewed the accompanying balance sheet of Intelligent Controls,
Inc., as of March 28, 1998 and the related statements of income and cash
flows for the three month periods ended March 28, 1998 and March 31, 1997.
These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding financial statements taken as a whole. Accordingly, we do not
express such an opinion. We previously audited and expressed an
unqualified opinion on the Company's consolidated financial statements for
the year ended December 27, 1997 (not presented herein). In our opinion,
the information set forth in the accompanying balance sheet as of December
27, 1997, is fairly stated in all materials respects, in relation to the
statement of financial position from which it has been derived.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
- - ----------------------------------
Portland, Maine
April 17, 1998
INTELLIGENT CONTROLS, INC.
BALANCE SHEETS
ASSETS
------
(unaudited)
March 28 December 27
1998 1997
----------- -----------
Current Assets:
Cash and cash equivalents $ 300 $ 300
Accounts receivable, net of allowance for doubtful accounts
of $ 68,000 in 1998 and $60,000 in 1997 2,880,769 2,200,062
Inventories 1,605,832 1,854,328
Prepaid expenses and other 224,632 257,704
Income taxes receivable 94,449 119,099
Deferred income taxes 192,464 192,464
-------------------------
Total current assets 4,998,446 4,623,957
Property, Plant, and Equipment, net 846,864 856,581
Other assets 27,960 27,176
-------------------------
$5,873,270 $5,507,714
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Non-interest bearing overdraft $ 369,352 $ 67,259
Note payable - bank 924,509 754,366
Accounts payable 396,016 769,097
Accrued expenses 769,014 520,709
Current portion of long-term debt 194,700 194,700
-------------------------
Total current liabilities 2,653,591 2,306,131
Long-term debt, net of current portion 324,003 372,401
Deferred taxes 67,295 67,295
Stockholders' Equity
Common stock, no par value; 5,000,000 shares authorized;
3,306,375 issued at March 28, 1998 and 3,274,306 at
December 27,1997 2,359,201 2,293,841
Retained earnings 505,018 468,046
Less:
Shareholder note receivable (23,338)
Treasury stock, 5,128 shares at cost (12,500)
-------------------------
2,828,381 2,761,887
-------------------------
$5,873,270 $5,507,714
=========================
See accompanying notes.
INTELLIGENT CONTROLS, INC.
STATEMENTS OF INCOME
Three Months Ended
--------------------------
(unaudited) (unaudited)
March 28 March 31
1998 1997
----------- -----------
Net sales $ 3,537,314 $ 3,033,663
Cost of sales 1,992,464 1,967,482
--------------------------
1,544,850 1,066,181
Operating expenses:
Selling, general and administrative 1,191,186 833,583
Research and development 245,161 217,538
--------------------------
1,436,347 1,051,121
--------------------------
Operating income 108,503 15,060
Other expense:
Interest expense (17,024) (52,818)
Other expense (29,857) (13,006)
--------------------------
(46,881) (65,824)
--------------------------
Income (loss) before income tax 61,622 (50,764)
Income tax (expense) benefit (24,650) 19,960
--------------------------
Net income (loss) $ 36,972 $ (30,804)
==========================
Net income (loss) per share basic and diluted: $ .01 $ (.01)
==========================
Weighted average number of common shares outstanding 3,289,336 3,301,000
==========================
Weighted average common and common equivalent shares
outstanding 3,423,531 3,301,000
==========================
See accompanying notes.
INTELLIGENT CONTROLS, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended
--------------------------
(unaudited) (unaudited)
March 28 March 31
1998 1997
----------- -----------
Cash flows from operating activities
Net Income $ 36,972 $ (30,804)
Adjustments to reconcile net income to net cash
(used by) provided by operating activities:
Depreciation and amortization 64,212 56,205
Deferred taxes -- (19,960)
Changes in assets and liabilities:
Accounts receivable (680,707) (200,229)
Inventories 248,496 558,177
Prepaid expenses and other 33,072 51,889
Income taxes receivable 24,650 --
Accounts payable and accrued expenses (124,776) (252,881)
Other (784) (1,178)
-------------------------
Net cash (used by) provided by operating activities (398,865) 161,219
Cash flows from investing activities:
Purchases of equipment and leasehold improvements, net (54,495) (47,615)
-------------------------
Net cash (used) by investing activities (54,495) (47,615)
Cash flows from financing activities:
Increase in non-interest bearing overdraft 302,093
Net borrowings on note payable - bank 170,143 124,384
Repayment of long-term debt (48,398) (47,660)
Issuance of common stock 65,360 --
Acquisition of treasury stock (12,500) --
Increase in shareholder note receivable (23,338)
Decrease In restricted cash -- (199,120)
Decrease in deposit from shareholder -- 199,120
-------------------------
Net cash provided (used) by financing activities 453,360 76,724
Net increase (decrease) in cash 0 190,328
Cash and cash equivalents at beginning of year 300 133,690
-------------------------
Cash and cash equivalents at end of period $ 300 $ 324,018
=========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 29,857 $ 52,818
=========================
Income taxes $ -- $ --
=========================
See accompanying notes.
INTELLIGENT CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. The consolidated 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
condensed balance sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted
accounting principles.
Certain reclassifications have been made to the December 27, 1997
financial statements to conform with the March 28, 1998 presentations.
It is suggested that the financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's
10-KSB.
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
----------- ------------- ---------
March 28, 1998
--------------
Basic earnings per share $ 36,972 3,289,336 $ 0.01
Dilutive potential shares -- 134,195 ======
-------------------------
Diluted earnings per share $ 36,972 3,423,531 $ 0.01
======================================
March 31, 1997
--------------
Basic earnings per share $(30,804) 3,301,000 $(0.01)
Dilutive potential shares -- -- ======
-------------------------
Diluted earnings per share $(30,804) 3,301,000 $(0.01)
======================================
3. Property, Plant, and Equipment
------------------------------
Property, plant, and equipment, at cost,
(Unaudited)
March 28 December 27
1998 1997
---------- -----------
Leasehold improvements $ 111,983 $ 111,983
Equipment 1,164,086 1,139,210
Computer software 184,179 154,560
Furniture and Fixtures 104,312 104,312
------------------------
1,564,560 1,510,065
Less accumulated depreciation and amortization (717,696) (653,484)
------------------------
$ 846,864 $ 856,581
========================
4. Inventories consisted of the following at March 28, 1998 and December 27,
1997.
(Unaudited) (Audited)
March 28 December 27
1998 1997
----------- -----------
Raw Material $ 978,509 $1,214,749
Work in Progress 240,806 229,824
Finished Goods 333,260 356,974
Other 53,257 52,781
-------------------------
$1,605,832 $1,854,328
=========================
5. New Accounting Pronouncements
-----------------------------
In June 1997, the Financial Accounting Standards Board issue Statement of
Financial Accounting Standards (SFAS) No. 130 - Reporting Comprehensive
Income, which requires the separate reporting of all changes to
shareholders' equity, and SFAS No. 131 - Disclosures about Segments of an
Enterprise and Related Information, which revises existing guidelines
about the level of financial disclosure of a company's operations. Both
statements are effective for financial statements issued for fiscal years
beginning after December 15, 1997. The Company has determined that the
new standard will not necessitate any changes to existing financial
reporting.
6. Subsequent Events
-----------------
Subsequent to year end, the Company completed a series of transactions
that resulted in a substantial increase in its capital. On May 1, 1998,
the Company received $5,325,000 through the sale of stock to two
investment funds affiliated with Ampersand Ventures. In addition the
Company received $250,000 through the sale of stock to Roger Brooks on
May 6, 1998. Roger Brooks is the Company's new President and Chief
Executive Officer and the sale was part of a restricted stock arrangement
with him.
In April 1998, the Company reached a tentative settlement agreement with
John Knight, a former executive who has brought a wrongful termination
action against the Company. The agreement calls for the Company to pay
Mr. Knight $40,000 in additional severance compensation, to repurchase
100,000 options from him at a price of $3.25 per share less the
underlying exercise price of $1.25 per share, and cancel 148,240 stock
options at a net price of $3.25 per share less the underlying option
exercise price of $.50 per share.