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 June 27, 1998
[ ] 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 5,056,760 shares of Common Stock of the issuer outstanding as of
July 31, 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 Six Months Ended June 27, 1998:
For the six months ended June 27, 1998, sales grew 12% to $6.9 million as
compared to $6.2 million for the same period in 1997.
The Petroleum segment grew 16% in the first half of 1998 to $6.3 million, up
from $5.4 million for the first six months of 1997. The ongoing sales
growth in this market continues to be caused by strong new construction
activity and the EPA compliance requirement which has a deadline of December
22, 1998. Sales of a new generation of automatic tank gauges, the TS-
1001/2001, during the first half of 1998, have been received well in the
marketplace. Digital probe sales to a major OEM customer began to improve
in the second quarter, due to recently resumed shipments after completion of
design improvement. Sales to that customer are still $245,000 lower for the
year than during the first six months of 1997, with $180,000 of the decline
coming in the first quarter of 1998. Overall revenues for the first half of
1998 and 1997 were favorably affected by approximately $590,000 of shipments
in each of March 1998 and February 1997 under the recently completed China
Petroleum order.
Sales in the Power Utilities segment were down 20% for the first six months
of 1998. Sales continue to be adversely affected by deferred shipments of
the Optimizer product which is undergoing a software upgrade. Shipments of
upgraded units have subsequently begun in July.
Gross margins for the first half of 1998 were 46.4% as compared to 40.0% for
the same period in 1997. Purchased material cost reductions, manufacturing
volume efficiencies, and reduced warranty scrap were the major components of
this performance improvement.
Operating expenses were 52.2% of sales for the first half of 1998, as
compared to 35.5% for the same period in 1997. Operating expenses in the
second quarter of 1998 were significantly affected by added costs from
settling two lawsuits.
* The settlement of a 1996 lawsuit by John Knight (a former executive)
involved the repurchase of $607,660 in stock and options from him, on
terms equivalent to the recent tender offer to all Company
shareholders. Under generally accepted accounting principles, the
repurchase of stock and options from Mr. Knight must be expensed,
whereas the repurchase of stock from shareholders through the tender
offer is accounted for as an adjustment to shareholders' equity. The
settlement also involved the payment of an additional $40,000 to Mr.
Knight, by way of additional severance compensation.
* A tentative settlement of a patent infringement claim by Hasstech will
require INCON to pay Hasstech $100,000 in subsequent quarters. The
entire $100,000 has been accrued as an expense in the second quarter
of 1998.
(See "Legal Proceedings" below). Without the effect of these settlement
costs, operating expenses for the first six months of 1998 would be 41.4% of
sales. In addition to these settlement costs, operating expenses for 1998
grew from increased spending in marketing and sales, R & D, and corporate
management as compared to the first half of 1997. Expenses in 1998 have
also included approximately $50,000 in increased legal expense indirectly
related to an investment by Ampersand Ventures in the Company, and
approximately $80,000 of legal expense incurred in defending against the
Hasstech litigation.
The net loss for the first six months of 1998 was ($389,278) as compared to
net income of $91,205 for the same months in 1997. The onetime legal
charges for settling two lawsuits were the reason for the loss during this
otherwise profitable six month period. Income from operations, before legal
settlement costs, was $241,146 for the quarter ended June 27, 1998 and
$349,649 for the first half of 1998 as compared to $263,187 for the second
quarter of 1997 and $278,246 for the first half of 1997.
Liquidity and Capital Resources at June 27, 1998:
As of June 27, 1998 the Company had $2.5 million in cash and 100%
availability on its $3.5 million 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.
Capital was increased by nearly $5.6 million in May 1998 through (i) a
$5,325,001 purchase of Common Stock at $3.25 per share by two investment
funds affiliated with Ampersand Ventures, in Wellesley, Massachusetts and
(ii) 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 used more than $3.3 million of 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 ($143,974),
(iii) repay approximately $1 million of existing indebtedness, and (iv) fund
approximately $650,000 of litigation expense in settling the Knight lawsuit.
The Company plans to use the remaining capital primarily to help fund plans
for expanding its business, through increased marketing efforts, continued
development of new products, international expansion, and other means.
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company settled, in May, a long-standing legal dispute with John Knight,
a former executive who was terminated in June 1996. Mr. Knight alleged that
the Company owed him $287,100 in unpaid bonus payments over a six and one-
half year period under his 1986 Employment Agreement, plus $574,200 in
punitive damages. Mr. Knight had also challenged the Company's refusal to
allow his post-termination exercise of certain stock options for 248,240
shares.
The parties agreed to dismiss the lawsuit in return for a $40,000 payment by
the Company to Knight, plus an additional payment equivalent to a repurchase
of the 248,240 shares from him at $3.25 per share, minus the aggregate
exercise price for his options. The $3.25 per share is the same price the
Company offered to other shareholders in its recently completed tender
offer. As part of the terms, the Company acknowledged that Mr. Knight
validly exercised certain of his stock options.
The Company reached a tentative agreement, in early July, with Hasstech
which had brought suit in October 1997 claiming that INCON's line leak
detector infringed a certain Hasstech patent. A settlement reached in
mediation, and recorded in the court records, calls for an agreement between
the parties whereby INCON will pay Hasstech $100,000, part in September 1998
and the balance in the first quarter of 1999. In addition, the Company has
potential small ongoing payments in the event of sales to a specific market
segment, within which the Company is not currently active. Both parties
agreed to this settlement to avoid the expenditure of additional time,
effort and money required in a protracted litigation.
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.
On May 27, 1998, the Company filed a report on Form 8-K regarding settlement
of the Knight litigation. See "Legal Proceedings" above.
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
Date: August 11, 1998 principal financial officer)
Index to Exhibits
Exhibit No. Description
- ----------- -----------
10.1 Settlement Agreement and Mutual Release, dated May 13, 1998,
with John Knight; incorporated herein by reference to
Exhibit 99.1 to the Company's report on Form 8-K filed on
May 27, 1998.
10.2 Employment Agreement dated as of May 1, 1998 with Alan Lukas
27 Financial Data Schedule
REPORT OF INDEPENDENT ACCOUNTANTS
July 24, 1998
To the Board of Directors and Shareholders of
INTELLIGENT CONTROLS, INC.
We have reviewed the accompanying balance sheet of Intelligent Controls, Inc.,
as of June 27, 1998 and the related statements of income and cash flows for the
three and six month periods ended June 27, 1998 and June 30, 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 PricewaterhouseCoopers L.L.P.
- -----------------------------------
INTELLIGENT CONTROLS, INC.
BALANCE SHEETS
ASSETS
------
(unaudited)
June 27 December 27
1998 1997
Current Assets:
Cash and cash equivalents $ 2,498,482 $ 300
Accounts receivable, net of allowance for doubtful
accounts of $84,459 in 1998 and $60,000 in 1997 2,644,480 2,200,062
Inventories 1,711,601 1,854,328
Prepaid expenses and other 162,298 257,704
Income taxes receivable 198,717 119,099
Deferred income taxes 192,464 192,464
-------------------------
Total current assets 7,408,042 4,623,957
Property, Plant, and Equipment, net 852,980 856,581
Other Assets 29,139 27,176
-------------------------
$ 8,290,161 $5,507,714
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Non-interest bearing overdraft 67,259
Note payable - bank 754,366
Accounts payable 600,090 769,097
Accrued expenses 908,242 520,709
Current portion long-term debt 138,200 194,700
-------------------------
Total current liabilities 1,646,532 2,306,131
Long-term debt, net of current portion 276,515 372,401
Deferred taxes 67,295 67,295
Stockholders equity:
Common Stock, no par value; 8,000,000 shares 7,578,979 2,293,841
authorized; 5,056,760 issued at June 27, 1998
and 3,274,306 issued at December 27, 1997
Retained Earnings 78,768 468,046
Less:
Shareholder note receivable (1,345,428)
Treasury Stock, 105,128 shares (12,500)
-------------------------
6,299,819 2,761,887
-------------------------
$ 8,290,161 $5,507,714
=========================
See accompanying notes.
INTELLIGENT CONTROLS, INC.
STATEMENTS OF INCOME (unaudited)
Three Months Ended Six Months Ended
June 27 June 30 June 27 June 30
1998 1997 1998 1997
Net sales $3,382,173 $3,164,323 $6,919,489 $6,197,986
Cost of sales 1,715,342 1,752,845 3,707,807 3,720,327
----------------------------------------------------
1,666,831 1,411,478 3,211,682 2,477,659
Operating expenses:
Selling, general and administrative 1,208,619 964,366 2,399,805 1,797,949
Research and development 217,066 183,926 462,228 401,464
Legal settlement charges 747,660 0 747,660 0
----------------------------------------------------
2,173,345 1,148,292 3,609,693 2,199,413
Operating income (loss) (506,514) 263,186 (398,011) 278,246
Other income (expense)
Interest (expense) (22,604) (48,390) (52,461) (101,208)
Other income (expense) 6,802 (17,319) (10,222) (30,325)
----------------------------------------------------
(15,802) (65,709) (62,683) (131,533)
Income (loss) before income tax (522,316) 197,478 (460,694) 146,714
Income tax (expense) benefit 96,066 (75,469) 71,416 (55,509)
----------------------------------------------------
Net income (loss) $ (426,250) $ 122,009 $ (389,278) $ 91,205
====================================================
Net income (loss) per share
basic and diluted $ (0.10) $ 0.04 $ (0.10) $ 0.03
Weighted average number of
common shares outstanding 4,386,547 3,435,191 3,835,378 3,435,191
Weighted average common and
common equivalent shares outstanding 4,437,719 3,435,191 3,912,133 3,435,191
See accompanying notes.
INTELLIGENT CONTROLS, INC.
STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended
June 27 June 30
1998 1997
Cash flows from operating activities:
Net income (loss) $ (389,278) $ 91,205
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 127,150 114,947
Changes in assets and liabilities
Accounts receivable (444,418) (141,665)
Inventories 142,727 555,009
Prepaid expenses and other current assets 95,406 83,960
Income tax receivable (79,618) 55,509
Accounts payable and accrued expenses 218,526 (229,175)
Other (1,963) (2,356)
-------------------------
Net cash created (used) by operating activities (331,468) 527,434
-------------------------
Cash flows from investing activities:
Purchases of property, plant, & equipment (132,844) (107,969)
Disposal of property, plant, & equipment 9,295
-------------------------
Net cash used by investing activities (123,549) (107,969)
Cash flows from financing activities:
Decrease in non-interest bearing overdraft (67,259)
Repayment of note payable (754,366) (387,326)
Issuance of long-term debt 61,503
Repayment of long-term debt (152,386)
Issuance of common stock, net 5,285,138 3,099
Acquisition of treasury stock (12,500)
Increase in shareholder note receivable (1,345,428)
Decrease in restricted cash balances (199,120)
Decrease in liability to shareholder 199,120
-------------------------
Net cash provided (used) by financing activities 2,953,199 (322,724)
-------------------------
Net increase in cash 2,498,182 96,741
Cash and cash equivalents at beginning of year 300 133,690
-------------------------
Cash and cash equivalents at end of period $ 2,498,482 $ 230,431
=========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 52,461 $ 101,208
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 June 27, 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. The effect of exercising
existing stock options is not taken into account where the results
would be anti-dilutive (i.e. in periods with net losses). 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
----------- ------------- ---------
Quarter Ended June 27, 1998
---------------------------
Basic earnings per share $(426,248) 4,386,547 $(0.10)
======
Dilutive potential shares 0
--------------------------
Diluted earnings per share $(426,248) 4,386,547 $(0.10)
=======================================
Six Months Ended June 27, 1998
------------------------------
Basic earnings per share $(389,276) 3,835,378 $(0.10)
======
Dilutive potential shares 0
--------------------------
Diluted earnings per share $(389,276) 3,835,378 $(0.10)
=======================================
Quarter Ended June 30, 1997
---------------------------
Basic earnings per share $ 122,009 3,435,191 $ 0.04
======
Dilutive potential shares 0
--------------------------
Diluted earnings per share $ 122,009 3,435,191 $ 0.04
=======================================
Six Months Ended June 30, 1997
------------------------------
Basic earnings per share $ 91,205 3,435,191 $ 0.03
======
Dilutive potential shares 0
--------------------------
Diluted earnings per share $ 91,205 3,435,191 $ 0.03
=======================================
3. Property, Plant, and Equipment
------------------------------
Property, plant, and equipment, at cost,
(Unaudited)
June 27, December 27
1998 1997
Leasehold improvements $ 147,172 $ 111,983
Equipment 1,202,239 1,139,210
Computer software 179,891 154,560
Furniture and Fixtures 104,312 104,312
-------------------------
1,633,614 1,510,065
Less accumulated depreciation and amortization (780,634) (653,484)
-------------------------
$ 852,980 $ 856,581
=========================
4. Inventories consisted of the following at June 27, 1998 and December
27, 1997.
(Unaudited)
June 27 December 27
1998 1997
Raw Material $1,129,999 $1,214,749
Work in Progress 216,123 229,824
Finished Goods 305,536 356,974
Other 59,943 52,781
-------------------------
$1,711,601 $1,854,328
=========================
5. New Accounting Pronouncements
-----------------------------
In June 1997, the Financial Accounting Standards Board issued 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
- -- Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
including certain derivatives embedded in other contracts, and for hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. The statement is effective January 1, 2000. The
Company has not yet determined what effect, if any, the statement will have
on the financial statements.
6. Litigation
----------
In May 1998, the Company settled a lawsuit with a former executive who had
filed suit alleging that the Company owed him $287,100 in unpaid bonus
payments over a six and one-half year period under his 1986 Employment
Agreement, plus $574,200 in punitive damages. The plaintiff also challenged
the Company's refusal to allow his post-termination exercise of certain
stock options for 248,240 shares. The case was settled by allowing the
plaintiff to exercise some of his options followed by a $647,660 cash
payment to the plaintiff, $607,660 to purchase back 100,000 shares and all
of his outstanding options, as well as $40,000 as additional severance. The
entire amount was expensed in the second quarter 1998.
The Company reached a tentative agreement, in early July, with Hasstech
which had brought suit in October 1997 claiming that INCON's line leak
detector infringed a certain Hasstech patent. A settlement reached in
mediation, and recorded in the court records, calls for an agreement between
the parties whereby INCON will pay Hasstech $100,000, part in September 1998
and the balance in the first quarter of 1999. The entire $100,000 obligation
was recognized as an operating expense in the second quarter of 1998.
7. Stockholders' Equity
--------------------
On May 1, 1998, the Company received $5,325,001 of proceeds from the sale of
1,638,462 shares of common stock to two investment funds affiliated with
Ampersand Ventures. In addition, on May 6, 1998, the company sold an
additional 486,923 shares of common stock as part of a restricted stock
arrangement with he new President and Chief Executive Officer. Proceeds on
this sale amounted to $250,000 cash and the acceptance of a $1,332,500
promissory note.
On May 1, 1998, the Company completed a tender offer to existing
shareholders, whereby the Company repurchased and canceled 475,000 shares of
common stock for approximately $1,544,000.