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 26, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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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 5,061,123 shares of Common Stock of the issuer outstanding as of
July 31,1999.
Transitional Small Business Disclosure Format: Yes No X
----- -----
PART I
ITEM 1. FINANCIAL STATEMENTS
Unaudited financial statements of the Company appear after the Index to
Exhibits, 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 Six Months Ended June 26, 1999:
For the six months ended June 26, 1999, sales increased 10% to $7,641,489
compared to sales in the first half of 1998 of $6,919,489.
Sales of fuel management systems (FMS) grew 8% for the first half of 1999,
as compared to the same period in 1998. The increase largely reflects 1999
shipments of a record backlog carried through year-end 1998. As previously
reported, the robust business of the second half of 1998 came from strong
new construction activity, a successful new product (the 1001/2001
automatic tank gauge), and increased demand from customers seeking to
install automatic leak detection systems to meet the EPA-mandated December
22, 1998 compliance deadline. New 1999 bookings for the FMS product line
have slowed to a level more in line with the industry experience in 1996
and 1997.
Sales of power utility/predictive maintenance products increased by 35% for
the first six months of 1999, as compared to the first six months of 1998.
A significant portion of the shipments in the first half of 1999 was from
year-end 1998 backlog. New bookings were 5% higher in the first half of
1999, than the first half of 1998.
Gross margins improved to 54% in the first half of 1999, as compared to 46%
for the same period in 1998. The improvement in gross margin is
attributable to material purchase price reductions, gains in manufacturing
efficiency, and a favorable product mix. Margins for the first half of 1998
were adversely affected by a $592,000 shipment to Chinese Petroleum, at
reduced margin; even without the effect of the Chinese Petroleum shipment,
gross margins showed significant improvement.
Operating expenses increased 5.8% overall in the first six months of 1999,
compared to the same period in 1998. This increase was primarily due to
additional investments in sales, marketing, product development, and the
hiring of new executives.
Net earnings increased from a net loss of ($389,278) in the first half of
1998, to a net income of $714,906 in the first half of 1999. The 1998 net
loss resulted from a second quarter $747,660 charge to earnings for two
legal settlements. The key operational reasons for the increase in
profitability were stronger gross margins and greater sales volume. As the
result of a strong cash balance and reduced debt as compared to 1998, the
Company earned significant interest income and had very small interest
expense. The combined effect of these working capital changes created an
increase to pretax income of $181,386.
Liquidity and Capital Resources at June 26, 1999:
As of June 26, 1999 the Company had $4.97 million in cash and 100%
availability 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 for at least the next 12 months.
Year 2000 Issues
- ----------------
Except as stated below, the Company's Y2K compliance status remains
essentially unchanged from that reported in our Form 10-KSB for the fiscal
year ended December 26, 1998.
The total cost of the Company's Y2K compliance efforts through June 26,
1999 is estimated at $18,000. The aggregate projected costs for 1999
(including costs incurred in the first half) are $36,000.
This discussion of Y2K issues contains forward-looking statements, as
defined in Section 21E of the Securities Exchange Act of 1934. The Company
cautions investors that numerous factors could cause actual results to
differ materially from those reflected in such forward-looking statements
including, but not limited to, the following: unanticipated problems with
IT systems that vendors have represented as Y2K compliant; unanticipated
customer or distributor resistance to INCON plans for addressing Y2K issues
on the Model TS-1001/2001 ATGs; or unanticipated problems in the field with
installed INCON products believed to be Y2K compliant.
PART II
ITEM 1. 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 currently
contesting the validity of this claim.
On June 28, 1999 the Company was served notice that it was named as a co-
defendant in a suit brought by Q&E LLC, a convenience store/retail
petroleum operator, against PEMCO Service Company, Inc. and Intelligent
Controls, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held June 10, 1999. 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 re-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 4,522,027 2,744 4,524,771
George E. Hissong 4,522,027 2,744 4,524,771
Paul F. Walsh 4,522,027 2,744 4,524,771
Charles D. Yie 4,522,027 2,744 4,524,771
Roger E. Brooks 4,522,027 2,744 4,524,771
2. To ratify the re-appointment of PricewaterhouseCoopers, LLP as
independent accountants to the Company for the fiscal year ending December
25, 1999.
For Against Abstain Broker non-vote
--- ------- ------- ---------------
4,494,444 27,583 2,744 0
3. To approve an amendment to the 1993 Director Stock Option which
increased to 200,000 shares the total amount of common stock that may be
issued under the Plan.
For Against Abstain Broker non-vote
--- ------- ------- ---------------
4,484,459 24,722 15,590 0
ITEM 5. OTHER INFORMATION
During the first half of 1999 the Company released its System Sentinel
Software, Versions 1.0.and Version 1.1. This Windows based client/server
software allows operators of multiple petroleum distribution facilities to
remotely poll fuel inventory levels as well as monitor tanks for leaks,
either locally or at a central location.
An ISO 9001 quality review of the Company was completed in March 1999. NTS
(National Testing Service), the outside auditing organization who performed
the review, recommended certification to ISO 9001. This certification was
officially granted on May 4, 1999 and is in effect for a three-year period.
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: August 10, 1999 By: /s/ Andrew B. Clement
--------------------------------
Andrew B. Clement, Controller
(on behalf of the Company and as
principal financial officer)
Index to Exhibits
Exhibit No. Description
- ----------- -----------
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 June 26, 1999, and the related statements of income for each of
the three-month and six-month periods ended June 26, 1999 and June 27, 1998
and the statement of cash flows for the six-month periods ended June 26,
1999 and June 27, 1998. 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
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying interim financial statements for them to
be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing
standards, the balance sheet as of December 26, 1998, and the related
statement of income, and of cash flows for the year then ended (not
presented herein), and in our report dated February 5, 1999 we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed balance sheet as of
June 26, 1999, is fairly stated in all material respects in relation to the
balance sheet from which it has been derived.
/s PricewaterhouseCoopers LLP
- ------------------------------
Portland, Maine
July 9, 1999
INTELLIGENT CONTROLS, INC.
BALANCE SHEETS
ASSETS
------
(unaudited)
June 26 December 26
1999 1998
----------- -----------
Current assets:
Cash and cash equivalents $ 4,967,970 $ 4,202,084
Accounts receivable, net of allowance of $218,000 in 1999 and
$170,000 in 1998 2,095,727 3,253,477
Inventories (Note 4) 1,403,747 1,320,913
Prepaid expenses and other 76,996 127,425
Deferred income taxes 343,520 343,520
---------------------------
Total current assets 8,887,960 9,247,419
Property and equipment, net (Note 3) 844,592 889,748
Other assets 33,691 31,611
---------------------------
$ 9,766,243 $10,168,778
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Income taxes payable $ 257,297 $ 299,269
Accounts payable 696,921 1,007,400
Accrued expenses 747,361 1,144,682
Current portion of long-term debt 160,872 194,000
---------------------------
Total current liabilities 1,862,451 2,645,351
Long-term debt, net of current portion 92,971 140,279
Deferred taxes 76,740 76,740
Stockholders' equity:
Common stock, no par value; 8,000,000 shares authorized;
5,061,123 issued in 1999 and 5,060,760 in 1998 7,585,534 7,585,080
Retained earnings 1,854,102 1,139,196
Receivable from stockholder (1,416,492) (1,376,728)
Treasury stock, 199,517 shares in 1999 and
115,951 shares in 1998 (289,063) (41,140)
---------------------------
7,734,081 7,306,408
---------------------------
$ 9,766,243 $10,168,778
===========================
The accompanying notes are an integral part of the financial statements
INTELLIGENT CONTROLS, INC.
STATEMENTS OF INCOME (unaudited)
Three Months Ended Six Months Ended
--------------------------- ----------------------------
June 26 June 27 June 26 June 27
1999 1998 1999 1998
------- ------- ------- -------
Net sales $ 3,232,426 $ 3,382,173 $ 7,641,489 $ 6,919,489
Cost of sales 1,566,587 1,715,342 3,514,029 3,707,807
------------------------------------------------------------
1,665,839 1,666,831 4,127,460 3,211,682
Operating expenses:
Selling, general and administrative 1,104,595 1,208,619 2,495,755 2,399,805
Research and development 265,956 217,066 532,757 462,228
Legal settlement charges - 747,660 - 747,660
------------------------------------------------------------
1,370,551 2,173,345 3,028,512 3,609,693
Operating income 295,288 (506,514) 1,098,948 (398,011)
Other income (expense):
Interest income (expense) 78,900 (7,519) 144,010 (37,376)
Other expense (23,239) (8,283) (49,952) (25,307)
------------------------------------------------------------
55,662 (15,802) 94,059 (62,683)
Income before income tax expense 350,950 (522,316) 1,193,007 (460,694)
Income tax expense 141,100 96,066 478,100 71,416
------------------------------------------------------------
Net income (loss) $ 209,849 $ (426,250) $ 714,906 $ (389,278)
============================================================
Net income (loss) per share basic: $ .04 $ (0.10) $ .15 $ (0.10)
Net income (loss) per share diluted: $ .04 $ (0.10) $ .14 $ (0.10)
Weighted average number of
Common shares outstanding 4,892,072 4,386,547 4,910,354 3,835,378
Weighted average common and
Common equivalent shares outstanding 4,950,493 4,437,719 4,957,252 3,912,133
The accompanying notes are an integral part of the financial statements
INTELLIGENT CONTROLS, INC.
STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended
---------------------------
June 26 June 27
1999 1998
------- -------
Cash flows from operating activities:
Net income $ 714,906 $ (389,278)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 141,191 127,150
Changes in assets and liabilities:
Accounts receivable 1,157,750 (444,418)
Inventories (82,834) 142,727
Prepaid expenses and other current assets 50,429 95,406
Income taxes payable (41,972) -
Income taxes receivable - (79,618)
Accounts payable and accrued expenses (707,800) 218,526
Other assets (2,080) (1,963)
--------------------------
Net cash provided (used) by operating activities 1,229,590 (331,468)
Cash flows from investing activities:
Purchases of equipment and leasehold
improvements, net (96,035) (132,844)
Disposal of equipment - 9,295
--------------------------
Net cash (used) by investing activities (96,035) (123,549)
Cash flows from financing activities:
Decrease in non-interest bearing overdraft - (67,259)
Repayment of note payable - (754,366)
Repayment of long-term debt (80,436) (152,386)
Issuance of common stock 454 5,285,138
Acquisition of treasury stock (247,923) (12,500)
Increase in receivable from stockholder (39,764) (1,345,428)
--------------------------
Net cash (used) provided by financing activities (367,669) 2,953,199
--------------------------
Net increase in cash and cash equivalents 765,886 2,498,182
Cash and cash equivalents at beginning of year 4,202,084 300
--------------------------
Cash and cash equivalents at end of period $4,967,970 $ 2,498,482
==========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 11,784 $ 52,461
==========================
Income taxes $ 320,000 $ -
==========================
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 26, 1998.
Certain reclassifications have been made to the 1998 financial
statements to conform to the 1999 presentation.
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
----------- ------------- ---------
Quarter Ended June 26, 1999
---------------------------
Basic earnings per share $ 209,849 4,892,072 $ 0.04
Dilutive potential shares - 58,421 ======
--------------------------
Diluted earnings per share $ 209,850 4,950,493 $ 0.04
========================================
Six Months Ended June 26, 1999
------------------------------
Basic earnings per share $ 714,906 4,910,354 $ 0.15
Dilutive potential shares - 46,898 ======
--------------------------
Diluted earnings per share $ 714,906 4,957,252 $ 0.14
========================================
Quarter Ended June 27, 1998
---------------------------
Basic earnings per share $(426,250) 4,386,547 $(0.10)
Dilutive potential shares - ======
--------------------------
Diluted earnings per share $(426,248) 4,386,547 $(0.10)
========================================
Six Months Ended June 27, 1998
------------------------------
Basic earnings per share $(389,278) 3,835,378 $(0.10)
Dilutive potential shares - - ======
--------------------------
Diluted earnings per share $(389,276) 3,835,378 $(0.10)
========================================
3. Property, Plant, and Equipment
------------------------------
Property, plant, and equipment, at cost:
(Unaudited)
June 26 December 26
1999 1998
----------- -----------
Leasehold improvements $ 154,344 $ 109,512
Equipment 1,272,008 1,217,932
Computer software 187,844 169,176
Furniture and fixtures 178,659 102,874
Construction in progress 8,487 105,813
--------------------------
1,801,342 1,705,307
Less accumulated depreciation and amortization 956,750 815,559
--------------------------
$ 844,592 $ 889,748
==========================
4. Inventories
Inventories consisted of the following:
(Unaudited)
June 26 December 26
1999 1998
----------- -----------
Raw Material $ 884,746 $ 960,552
Work in Progress 278,030 167,512
Finished Goods 235,971 187,849
Other 5,000 5,000
--------------------------
$1,403,747 $1,320,913
==========================
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 currently contesting the
validity of this claim.
On June 28, 1999 the Company was served notice that it was named as
a co-defendant in a suit brought by Q&E LLC, a convenience
store/retail petroleum operator, against PEMCO Service Company, Inc.
and Intelligent Controls, 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.