U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 CONFORMED COPY
---------------------------------------
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934. For the transition period from ______________ to ______________
Commission File No.
1-13628
INTELLIGENT CONTROLS, INC.
(Name of small business issuer 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) (Zip code)
Issuer's telephone number: (207) 283-0156
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, American Stock Exchange
no par value
Securities registered under Section 12(g) of the Exchange Act: None
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
--- ---
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.[X]
Issuer's revenues for its most recent fiscal year: $9,891,000
The aggregate market value of the voting stock held by non-affiliates as of
March 16, 1997 was $4,143,600.
There were 3,242,394 shares of Common Stock of the issuer outstanding as of
March 16, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Proxy Statement for the 1997 Annual Meeting of Shareholders (to
be filed by April 30, 1997).
Transitional Small Business Disclosure Format: Yes No X
--- ---
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Intelligent Controls Inc. ("INCON" or the "Company") is a Maine corporation
founded in 1978. Primarily, INCON develops, manufactures, and sells
electronic measurement systems to the petroleum and power utility
industries. The table below shows sales for these product lines over the
past three years.
NET SALES BY PRODUCT LINE
(Dollars In Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
Total % of Total % of Total % of
Sales Sales Sales Sales Sales Sales
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Petroleum (ATG):
OEMs $ 557 6% $ 264 3% $ 372 5%
End Users 7,881 79% 7,856 84% 5,617 78%
Utility and Other
Power Utility 1,198 12% 912 10% 939 13%
General Instrument 255 3% 244 3% 267 4%
-----------------------------------------------------
TOTAL NET SALES $9,891 100% $9,276 100% $5,602 100%
</TABLE>
Petroleum Equipment Segment
INCON manufactures a line of electronic instruments for use in retail
gasoline stations and similar locations where petroleum fuels or chemicals
are stored in underground storage tanks ("USTs") and above ground storage
tanks ("ASTs"). The product line includes automatic tank gauges, dedicated
leak detectors, liquid level sensors, line leak detectors, and various
accessories, all of which are used to meet UST monitoring regulations
promulgated by the U.S. Environmental Protection Agency (the "EPA"), and to
provide information for the station owner to manage his inventory and
business. The manufacturing process for these and other INCON products
consists of light mechanical and electronic assembly.
In the petroleum equipment segment, INCON's primary products are its
automatic tank gauge systems, which consist of wall-mounted electronic tank
gauge consoles, tank-mounted liquid level sensors, leak sensors, and
associated accessories. These systems provide very accurate measurement of
inventory (gasoline or other liquid) in a UST or AST. INCON's tank gauges
also perform leak tests to determine whether product is leaking from the
tank. ATG systems can also monitor a wide variety of leak detection sensors
which may be located between the walls of double wall tanks, in sumps, under
dispensers, or in other locations where leaking product may collect.
In 1995 INCON began field testing a new product for detecting leaks in
pipes. The Company's electronic Line Leak Detector ("LLD") monitors the
pressurized piping between the tank-mounted submersible pump (located in the
tank) and the dispenser (gas pump) in service stations and similar
facilities. The product is designed to meet pipeline monitoring
requirements imposed by EPA regulations. The LLD can interface with the ATG
or stand alone. In 1996 the product went through a number of design changes
and an extensive beta test program. The product is now in full release.
INCON also offers dedicated leak detection ("DLD") consoles. These devices
are similar to the ATG console, except that they do not measure inventory
levels. Instead, these devices monitor leak detection sensors only, and
provide certain kinds of customers with an inexpensive alternative for
achieving regulatory compliance.
In addition to the ATG consoles, line leak detectors and liquid level
sensors, INCON offers a wide variety of accessories, software, and leak
detection sensors. These provide the ability to expand the systems for
special applications, allow the systems to sense leaks in many different
locations, and simplify installation. Some of these products are assembled
by the Company, although many are made by outside vendors to INCON's
specifications.
In September 1994 INCON began producing its own liquid level sensor. INCON's
liquid level sensors are based on magnetostrictive position measurement
technology which is widely accepted in the industry. The in-house
manufacturing of liquid level sensors gives INCON increased control over
this important component and has significantly reduced the overall cost of
this component to the Company. In most cases, each UST or AST requires a
liquid level sensor. INCON's ATG consoles will support from one to eight
liquid level sensors.
Under a private label contract, INCON manufactures a Digital Liquid Level
Sensor ("DLP"). This device integrates microcomputer functions of the
automatic tank gauge console into the tank mounted liquid level sensor. The
microprocessor in the DLP interprets the signals from the level and
temperature sensing systems and transmits the processed data to a remote
computer or other device. Data from many sensors are transmitted over a
common cable in a manner similar to a computer local on a network. This
product eliminates the need for the ATG console, and allows the ATG
information to be read directly by personal computers, cash registers, point
of sale equipment, or fuel management systems, whether remotely or at the
site.
The demand for ATGs, DLDs, and LLDs domestically has been bolstered by
regulations promulgated by the Environmental Protection Agency and, in some
cases, by state environmental regulators. Present EPA regulations require
new UST systems to meet certain performance standards and all USTs (new or
old) to be monitored for leakage. In addition to more sophisticated
techniques (such as automatic tank gauging), EPA regulations currently
permit the use of inventory reconciliation and manual (dip stick) testing as
a means of leak detection. Although simpler and less expensive, these
methods do not provide for accurate inventory measurement and control.
Moreover, EPA leak detection requirements will become more stringent. After
December 22, 1998, inventory reconciliation and manual testing will be
permissible only (i) during the first ten years after a tank is newly
installed or upgraded in accordance with EPA performance standards or (ii)
in the case of small tanks having less than 550 gallons of capacity. In
addition all tanks must meet EPA performance standards by 1998. Management
anticipates that the 1998 upgrade deadline and restriction of reconciliation
and manual testing will favorably affect the market for ATGs, DLDs, and LLDs
through 1998 and beyond.
Internationally, many countries have environmental laws similar to the
United States and the demand for ATGs, DLDs and LLDs is expected to grow in
these countries. In 1996, INCON received a $2 million dollar order to supply
tank gauge systems to Taiwan.
Power Utility and General Instrument Segment
INCON's Power Utility and General Instrument Lines consist of electronic
instruments for measurement and control in power utilities and general
industrial applications. Typical customers include large publicly owned
electric power utilities, municipal utilities, and manufacturing customers.
The power utility product line includes two instruments used in power
utility substations, the Model 1250, and the Optimizer[TRADEMARK]. These
products offer automated control and data collection for electrical
substations. Two other power utility products, the Model 1255 and Model
1810, are offered for use in automating hydroelectric generating plants.
The Model 1250 Tap Position Monitor is used on large high-voltage
transformers. These transformers are typically equipped with "tap changers"
which regulate the voltage on the power utility transmission and
distribution grid. The voltage is adjusted by switching to any one of
approximately 32 "voltage taps." The Model 1250 allows the utility to
monitor which tap has been selected from a central monitoring facility
through their "system control and data acquisition" system (SCADA). The
utility can then establish interactive control over the tap selection
equipment through the same SCADA system and can thereby adjust and regulate
the voltage being produced by the transformer. This product is sold directly
to the manufacturers of transformers and is mounted on most new transformers
sold.
The Optimizer is a microprocessor-based monitoring device used to predict
life and to schedule preventive maintenance for high voltage circuit
breakers used by electric power utilities. It measures the energy
dissipated by the contacts in large circuit breakers as they operate. The
Optimizer product can help power utilities reduce the cost of breaker
maintenance and avoid service interruptions. The product was fully released
in 1996 and is being marketed both domestically and internationally.
Based on data from Electrical World Magazine, the Company's management
estimates that there are approximately 400,000 power utility circuit
breakers in the United States. Compared to the present industry standard of
periodically disassembling the breaker, inspecting it, and replacing key
parts, the Optimizer offers the advantage of actually measuring the stress
to which the circuit breaker has been subjected to and better predicting
when it needs maintenance. This information allows the utility to extend
the interval between preventive maintenance operations thereby significantly
reducing the cost of circuit breaker maintenance. Based on industry
technical meetings and meetings with power utility executives, INCON
management believes power utilities in recent years have increased their
level of investment in monitoring equipment in order to control maintenance
costs.
Competition
The petroleum equipment business is very competitive. The Company's
products compete with similar products from other manufacturers in the
industry. In addition to INCON, there are at least four other significant
suppliers of automatic tank gauge systems, one of whom is believed to have
approximately a 50% market share. These suppliers generally are larger and
have greater resources than the Company. In addition, there are at least
ten other minor suppliers of ATGs.
INCON has a strong competitive position in the power utility business for
its particular product niche. The Company is the only supplier of
programmable tap position monitoring systems in the United States, and
competes only with older technologies. The competing products tend to be
somewhat lower in price, but are more difficult to install, are not
programmable, and have more parts that are subject to wear and replacement.
There are many types of transformers and tap changers in service in the
United States today that operate with the Model 1250, and the 1250's
programmability gives it a major advantage over non-programmable products.
INCON owns exclusive rights to the U.S. patent on the Optimizer technology.
Rising interest in the concept of circuit breaker monitoring has resulted in
several competing products being offered by other companies. However,
competing products tend to have fewer features and are more costly.
Raw Materials
In most of its products, INCON tries to utilize off-the-shelf electronic
components which are readily available from more than one distributor.
However, there are some products which are designed around a particular
manufacturer, such as in the use of microprocessor chips and printers. If
one of these manufacturers were to suddenly cease production of a key
component, the Company might need to find an alternate source or redesign
the product.
Stainless steel and brass are the major components in two of the Company's
products. Both of these commodities can fluctuate greatly in price due to
supply and demand, thereby affecting the Company's future earnings.
Intellectual Property
INCON markets its petroleum equipment products under the registered
trademark "Tank Sentinel".
INCON holds two patents for its electrical instruments and has filed a
patent on its LLD product. The Company has copyrights for certain software.
INCON's key software is highly technical and would be difficult to copy.
The Company has numerous trade secrets with regard to methods of detecting
leaks in tanks and pipelines. Among these are the INCON's volumetric tank
leak testing algorithm, its continuous automatic leak detection algorithm,
and its method of detecting leaks in pressurized piping. Similarly, INCON's
process for producing the magnetostrictive wire required by the liquid level
sensor is a Company secret.
General
In 1996 no single customer accounted for more than 10% of the Company's
business.
As of March 7, 1997 the Company employed 74 employees, including 10 in sales
and marketing, 11 in research and development, 9 in administration, and 44
in manufacturing. All but 4 of these employees are full time.
The Company markets its products through networks of independent sales
representatives. The Company also makes some of its sales on a direct
basis, particularly in the case of products sold to OEMs.
INCON continuously invests in the development of new products and new
applications for existing products. During 1994, 1995, and 1996, the
expenditures relating to the development of new products and improvements to
existing products were approximately $465,000, $965,000, and $983,000,
respectively.
Government Regulation
The automatic tank gauge product line is used in service stations and
requires listing by Underwriters Laboratory (UL) in the United States and by
the Canadian Standards Association (CSA) in Canada. All major portions of
the Tank Sentinel[REGISTERED TRADEMARK]ATG product line, including line leak
detectors, are presently listed by UL and CSA.
The Tank Sentinel[REGISTERED TRADEMARK]ATG products perform leak detection
in accordance with EPA regulation 40 CFR Part 280, Subpart D. To prove
compliance with the federal and state regulations for monthly leak
detection, the ATG system and line leak detectors must be tested by an
independent laboratory in accordance with EPA regulations and certified to
meet the EPA performance requirements. The INCON TS-1000 system, TS-2000
system and TS-LLD have been tested by Ken Wilcox Associates of Blue Springs,
Missouri.
The Tank Sentinel[REGISTERED TRADEMARK]ATG products also meet the much more
stringent standard for tank tightness. To prove compliance with the federal
and state regulations for tank tightness tests, the ATG system must be
tested by an independent laboratory in accordance with EPA/530/UST-90/006
and certified to meet the EPA performance requirements. The INCON TS-1000
and TS-2000 systems have been tested by Ken Wilcox Associates. In Canada
the TS-1000 system, TS-2000 and TS-LLD are certified by Underwriters
Laboratory of Canada in accordance with ULC/ORD-C58.12-1992, "Leak Detection
Devices (Volumetric Type) For Underground Flammable Liquid Storage Tanks".
This standard is very similar to EPA/530/UST-90/006.
With regard to INCON's own operations, the cost of compliance with federal,
state, and local environmental laws does not materially affect the Company's
financial condition.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases two modern 13,000 square foot facilities in an industrial
park in Saco, Maine. These buildings contain INCON's manufacturing
facilities, and one building also contains its executive offices. One
building is leased from a corporation owned in part by the Company's two
principal shareholders, Alan and Paul Lukas. The other building is leased
from an unrelated third party. The leases on both buildings expire in
August 1997 and include options to purchase at the then fair market value,
subject to certain minimum purchase prices. The Company is currently
evaluating whether to lease the current facilities another year or lease a
larger building in the same industrial park. The Company believes it will
renew these leases or lease alternate facilities, without any material
adverse affect on operations in 1997.
The Company also operates a small sales office in Norwell, Massachusetts
(south of Boston). This office is not material to the Company's business.
The Company maintains no other direct or indirect investments in real estate
and has no current intentions to do so.
ITEM 3. LEGAL PROCEEDINGS.
On July 26, 1996 the Company received notice of the filing of an action
entitled John D. Knight v. Intelligent Controls, Inc. in Maine Superior
Court, Cumberland County. The action was brought by Mr. Knight, a former
director and executive officer of INCON whose employment had recently been
terminated by the Company. Mr. Knight alleges that he is owed $287,100 in
unpaid bonus payments over a six and a half year period under his original
Employment Agreement dated as of December 29, 1986. The complaint further
alleges that he is entitled to $574,200 in statutory punitive damages, plus
attorneys' fees and costs. The Company believes that the bonus arrangements
called for in the 1986 agreement have been superseded from year to year by
other annual bonus arrangements approved by the Board of Directors' of which
Mr. Knight was a voting member, and that all bonus payments due to Mr.
Knight were paid each year in accordance with the substitute arrangements.
The Company has filed an answer denying all material allegations. The
Company's management intends to defend vigorously against this claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the shareholders of the Company during the
fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On February 15, 1995 the Company's common stock was accepted for listing and
began trading on the Emerging Company Marketplace of the American Stock
Exchange. The trading symbol for INCON common stock is ITC.
Prior to listing on the Emerging Company Marketplace, there was no trading
market for the Company's common stock on any exchange or organized over-the-
counter market. The high-low prices for the Company's stock for the last
four quarters were as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Quarter Ended March 31, 1996 $4 5/8 $3 3/4
Quarter Ended June 30, 1996 $4 1/4 $2 7/8
Quarter Ended September 30, 1996 $2 7/8 $1 7/8
Quarter Ended December 31, 1996 $2 7/8 $1 3/4
</TABLE>
As of March 16, 1997 the Company had approximately 487 shareholders of
record.
It has been INCON's policy to reinvest all earnings in the business, and the
Company has never paid dividends on its Common Stock. Also, under credit
agreements with its bank, the Company may not declare or pay dividends to
shareholders without the prior consent of the bank.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
1996 Compared to 1995
- ---------------------
Net sales totaled $9.9 million in 1996, an increase of $614,000 from 1995.
The increase in sales was primarily a result of an increase in utility
business and petroleum sales to OEM customers.
Petroleum Segment sales in 1996 increased 5% to $8.5 million from $8.1
million for the comparable period in 1995. The growth was attributable to an
increase in sales to key accounts. The lateness of new products and problems
uncovered with the Company's liquid level sensor contributed to the slow
down in growth in the first half of 1996. The release of the line leak
detector and improvements made to the liquid level sensor resulted in an
18% sales growth in the second half of 1996 compared to the same period in
1995.
The Utility Segment grew 27% to $1.4 million from $1.1 million in 1995. The
growth in sales was attributable to the release of the Optimizer circuit
breaker monitor and the increased investment in sales and marketing. In 1996
the Company shipped approximately $300,000 of Optimizer's compared to none
in 1995. These were mostly evaluation units since utilities budget their
spending in the prior year. The performance of these units has been
favorable and the Company has received commitments for 1997.
Gross margins in 1996 were adversely affected by the mix of product sold and
an increases in scrap. This resulted in margins falling from 47% in 1995 to
41% in 1996. The problems uncovered with the liquid level sensor and write-
off of material associated with the line leak detector beta test program
resulted in the increase in returned product and scrap. Also, in 1996 a
greater portion of the sales were to key accounts which due to the size of
the orders, they receive special pricing. This results in lower margins,
offset however by decreased commission paid.
Operating expenses increased $470,000 in 1996 from 1995. This was a result
of higher warranty costs, increased investment in product development and
expenses associated with certain terminations of employment. Further, the
funding of losses and increase in inventories resulted in higher borrowing
and a $93,000 increase in interest costs. The increase in operating expenses
and interest costs and lower margins contributed to a loss of $420,100 in
1996 compared to net income of $181,000 in 1995.
1995 Compared to 1994
- ---------------------
In 1995 net sales increased 29% to $9.3 million from $7.2 million in 1994.
The Automatic Tank Gauge business grew 35% to $8.1 million from $6 million
in 1994, while sales to the Power Utility and General Instrument business
decreased to $1.1 million in 1995 from $1.2 million in 1994.
The growth in the Automatic Tank Gauge segment was attributable to increased
market penetration and sales to key accounts. Examples of key accounts are
large oil companies, trucking companies and convenience store chains. These
types of accounts tend to place orders for at least a hundred tank gauge
systems at a time. In 1995 sales to key accounts were $1.8 million or 22% of
total Automatic Tank Gauge sales. The Company is continuing to expand its
distribution base in North America and in the fourth quarter of 1995 entered
into an international marketing agreement in order to distribute its product
throughout the world.
The weak sales in the Power Utility and General Instrument business resulted
from a focus on developing new products and a decrease in sales of the 1250
tap position monitor in the United States. The growth in the United States
market for the 1250 has slowed and the Company is now looking toward the
international market for this product. In 1995 the Company developed its new
Optimizer circuit breaker monitor which is now in beta testing with a
planned release for general shipment in the second quarter of 1996.
In 1995 gross margins increased to 47.1% from 44.5% in 1994. The increase in
the gross margin was attributable to increased production volume, which
lowered the per unit fixed cost, and full production of the Company's own
liquid level sensor, which was being purchased from an outside source in
1994. In-house production of the liquid sensor and better buying helped
reduce material prices to 36% of sales in 1995 from 43% in 1994.
The growth in sales and margins did not result in a growth in net income. In
1995 the Company more then doubled its investment in product development to
$965,000 from $464,000 in 1994. The increase was necessary to complete the
line leak detector, the Optimizer and the digital probe. The Company also
experienced software problems which required it to accelerate the investment
in software development. Delays in releasing new products and software
problems carried into the field and resulted in an increase in warranty
costs. The increase in warranty costs along with a $660,000 increase in
selling expenses, attributable to higher commissions due to the increased
sales, resulted in the $905,000 increase in SG&A. As a result of the
increased investment in product development and warranty expense, net income
decreased to $181,000 in 1995 from $293,000 in 1994.
Liquidity and Capital Resources
- -------------------------------
In 1995 the Company utilized its working capital line of credit to fund the
growth in inventories and accounts receivable. The current ratio (current
assets divided by current liabilities) decreased to 2.0 from 2.6 in 1994.
The decrease in the current ratio was attributable to a buildup in
inventories and a slight increase in the aging of the accounts receivable.
The increase in inventories was attributable to delays in introducing new
products and to growth in sales. At the end of 1995 the Company had $137,000
available to be borrowed on its working capital line of credit and had
utilized all available funds on the $500,000 equipment revolver.
In January of 1996, the Company changed banking relationships and increased
the working capital line of credit to $3 million dollars from $1.5 million
in 1995 and secured an acquisition line of credit of $4 million to be used
for acquisitions. As of December 31, 1996 the Company had $984,000 available
to be borrowed on the working capital line of credit. In 1996 the Company
utilized borrowings on its working capital line of credit and a slow down in
payments to suppliers. The increase in inventories was attributable to a
buildup of material for a large order for a company in Taiwan and increased
line leak detector inventory required to cover new orders of that product.
Both of these were shipped in the first quarter of 1997. The slower payments
to suppliers was temporary and was paid down in the first quarter of 1997.
This did not affect our ability to continue to have open credit with our
suppliers. A total of $204,000 in capital additions was funded with the
equipment revolver.
The Company feels that current funds and existing lines of credit will fund
operations for the foreseeable future.
ITEM 7. FINANCIAL STATEMENTS.
Audited financial statements of the Company appear beginning at page F-1
below, and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in and disagreements with accountants on accounting
and financial disclosures in 1996.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Certain information with respect to the executive officers of the Company is
set forth below. All other information required by this Item is
incorporated herein by reference to the Company's definitive proxy statement
for the 1997 Annual Meeting of Shareholders, which is to be filed by April
30, 1996.
Under the bylaws of the Company, all executive officers hold office until
the next Annual Meeting of Directors and until their successors are chosen
and have qualified, or until their earlier resignation or removal from
office.
There are no family relationships among any executive officers or directors.
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Positions with Company
- ---- --- ----------------------
<S> <C> <C>
Alan Lukas 46 Chief Executive Officer, Director, and Chairman
of the Board
Kenneth J. Burek 37 Vice President of Finance
</TABLE>
Alan Lukas founded INCON in 1978. Previously he had held positions as
Project Engineer at GenRad (1972-1973), Applications Engineer at Analog
Devices, Inc. (1973), Product Marketing Manager at Teledyne Philbrick
(1974), and Engineering Manager at Process Development Corp., Division of
Honeycomb Systems (1975-1978). From 1975 to 1978, Mr. Lukas served on the
Board of Directors of ImmunoSystems Inc. of Scarborough, Maine, a firm
engaged in the detection of hazardous substances in the environment. He
currently serves on the Board of Directors and Executive Committee of the
Center for Technology Transfer in Portland, Maine, and is a member of the
Advisory Board of the School of Engineering Science at the University of
Southern Maine. He has been a director of INCON since 1978.
Mr. Burek joined INCON in January 1993. Previously he was Corporate
Controller of Atlantic Antibodies, a division of Bausch and Lomb, from 1985
to 1987, and Corporate Controller at the Hews Company from 1988 to 1992.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference to
the Company's definitive proxy statement for the 1997 Annual Meeting of
Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference to
the Company's definitive proxy statement for the 1997 Annual Meeting of
Shareholders.
ITEM 12. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference to
the Company's definitive proxy statement for the 1997 Annual Meeting of
Shareholders.
ITEM 13. 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 December 31, 1996.
SIGNATURES
In accordance with Section 13 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/ Kenneth J. Burek
---------------------------
Kenneth J. Burek, Vice President
of Finance (principal financial officer)
Date: March 28, 1997
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on
the dates indicated.
/s/ Alan Lukas Date: March 28, 1997
- -----------------------------------
Alan Lukas, President, Chief
Executive Officer and Director
/s/ Kenneth J. Burek Date: March 28, 1997
- -----------------------------------
Kenneth J. Burek, Vice President
of Finance (principal accounting
officer, principal financial officer)
/s/ Paul F. Walsh Date: March 28, 1997
- -----------------------------------
Paul F. Walsh, Director
/s/ Charlton H. Ames Date: March 28, 1997
- -----------------------------------
Charlton H. Ames, Director
/s/ George E. Hissong Date: March 28, 1997
- -----------------------------------
George E. Hissong, Director
/s/ Nathaniel V. Henshaw Date: March 28, 1997
- -----------------------------------
Nathaniel V. Henshaw, Director
Index to Exhibits
-----------------
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
<S> <C> <C>
3(i) Articles of Incorporation; incorporated by reference
to Exhibit 2.1 of the Registrant's Form 1-A, filed
June 19, 1993, as amended, SEC File No. 24B-3429
("Registrant's Form 1-A")
3(ii) Bylaws, as currently in effect, incorporated by
reference to exeibit 3 (ii) of the Registrant's Form
1995 10K-SB filed March 29, 1996, SEC File no. 1-13628
4 See Exhibits 3(i) and 3(2)
10.1 Technology Transfer Agreement and License Agreement,
dated January 17, 1991, with Control Engineers, Inc.;
incorporated by reference to Exhibit 6.1 of the
Registrant's Form 1-A
10.2 Agreement, executed March 6 and 7, 1991, with Power
Solutions, Inc.; incorporated by reference to Exhibit
6.2 of the Registrant's Form 1-A
10.3 Lease Agreement, dated as of April 11, 1991;
incorporated by reference to Exhibit 6.4 of the
Registrant's Form 1-A
10.4 Lease Agreement, dated June 21, 1994; incorporated by
reference to Exibit 10.4 of the Rigistrant's Form
10-KSB for the fiscal year ended December 31, 1994
10.5 Employment Agreement, dated as of December 29, 1986,
with John Knight, a former executive officer;
incorporated by reference to Exibit 6.9 of the
Registrant's Form 1-A
Note: Compensatory plans and management contracts are filed as
Exhibits 10.6 through 10.11 below.
10.6 1984 Incentive Stock Option Plan; incorporated by
reference to Exhibit 6.5 of the Registrant's Form 1-A
10.6A Amendment No. 1 to 1984 Incentive Stock Option Plan;
incorporated by reference to Exhibit 10.5A of the
Registrant's Form 10-SB
10.6B Amendment No. 2 to the 1984 Incentive Stock Option
Plan
10.7 Advisory Board Stock Option Plan; incorporated by
reference to Exhibit 6.6 of the Registrant's Form 1-A
10.8 1993 Director Stock Option Plan; incorporated by
reference to Exhibit 6.6 of the Registrant's Form 1-A
10.9 1994 Employee Stock Purchase Plan; amended and
restated as of January 1, 1996
10.10 Employment Agreement, dated as of March 1, 1991, with
Richard P. Trask; incorporated by reference to
Exhibit 6.10 of the Registrant's Form 1-A
10.11 Form of Confidentiality and Nondisclosure Agreement;
incorporated by reference to Exhibit 6.11 of the
Registrant's Form 1-A
21 Subsidiaries of the Registrant; incorporated by
reference to Exhibit 21 of the Registrant's Form 1-A
27 Article 5, Financial Data Schedule
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
INTELLIGENT CONTROLS, INC.
We have audited the accompanying balance sheets of Intelligent controls,
Inc., as December 31, 1996 and 1995, and the related statements of income,
stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 1996 and 1995 financial statements referred to above
present fairly, in all material respects, the financial position of
Intelligent Controls, Inc., as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
- -----------------------------------
Portland, Maine
January 31, 1997
INTELLIGENT CONTROLS, INC.
BALANCE SHEETS
December 31, 1996 and 1995
ASSETS
------
(Notes 4 and 5)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 133,690 $ 225,518
Accounts receivable, net of allowance for doubtful
accounts of $60,000 in 1996 and $29,495 in 1995 1,960,979 1,952,846
Inventories (Note 2) 2,863,335 2,242,516
Prepaid expenses and other 312,837 296,321
Income tax receivable 160,000 -
Deferred income taxes (Note 6) 210,000 126,300
-------------------------
Total current assets 5,640,841 4,843,501
Property and equipment, net (Note 3) 851,081 858,752
Other assets 19,979 13,825
Restricted cash (Note 10) 199,120 -
-------------------------
$6,711,021 $5,716,078
=========================
LIABILITIES AND STOCKHOLDERS EQUITY
-----------------------------------
Current liabilities:
Note payable - bank (Note 4) $2,015,862 $1,362,647
Accounts payable 881,349 446,840
Accrued expenses 673,767 443,366
Accrued income taxes payable - 51,068
Current portion of long-term debt (Note 5) 191,700 160,500
-------------------------
Total current liabilities 3,762,678 2,464,421
Long-term debt, net of current portion (Note 5) 409,967 535,677
Deferred taxes (Note 6) 58,450 45,750
Deposit from stockholder (Note 10) 199,120 -
-------------------------
Commitments (Note 8)
Stockholders' equity (Note 7):
Common stock, no par value; 5,000,000 shares authorized;
3,238,952 shares issued in 1996 and 3,215,590 in 1995 2,252,041 2,221,352
Retained earnings 33,071 453,184
Treasury stock, 2,153 shares at cost (4,306) (4,306)
-------------------------
Total stockholders' equity 2,280,806 2,670,230
-------------------------
$6,711,021 $5,716,078
=========================
</TABLE>
The accompanying notes are an integral part of the Financial Statements
INTELLIGENT CONTROLS, INC.
STATEMENTS OF INCOME
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net sales $9,890,728 $9,276,576
Cost of sales 5,836,720 4,910,567
-------------------------
Gross profit 4,054,008 4,366,009
Operating expenses:
Selling, general and administrative 3,511,273 3,060,189
Research and development 983,261 964,621
-------------------------
4,494,534 4,024,810
-------------------------
Operating income (loss) (440,526) 341,199
Other income (expense):
Interest expense (186,734) (93,332)
Other income (expense) (23,853) 31,292
-------------------------
(210,587) (62,040)
-------------------------
Income (loss) before income tax expense (benefit) (651,113) 279,159
Income tax expense (benefit) (Note 6) (231,000) 98,650
-------------------------
Net income (loss) (420,113) 180,509
=========================
Net income (loss) per share $ (.13) $ .05
=========================
Weighted average and fully diluted common
and common equivalent shares outstanding 3,231,058 3,504,815
=========================
</TABLE>
The accompanying notes are an integral part of the Financial Statements
INTELLIGENT CONTROLS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Total
Common Stock Retained Treasury Stockholders'
Shares Amount Earnings Stock Equity
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, January 1 1995 3,185,096 $2,196,312 $272,675 $(12,684) $2,456,303
Exercise of stock options
(Note 8) 30,250 19,842 19,842
Issuance of common stock 244 1,009 1,009
Sale of 4,189 treasury
shares 4,189 8,378 12,567
Net income - - 180,509 - 180,509
---------------------------------------------------------------
Balances, December 31, 1995 3,215,590 2,221,352 453,184 (4,306) 2,670,230
Exercise of stock options
(Note 8) 16,758 12,828 - - 12,828
Issuance of common stock 6,604 17,861 - - 17,861
Net Loss - - (420,113) - (420,113)
---------------------------------------------------------------
Balances, December 31, 1996 3,238,952 $2,252,041 $ 33,071 $ (4,306) $2,280,806
===============================================================
</TABLE>
The accompanying notes are an integral part of the Financial Statements
INTELLIGENT CONTROLS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(420,113) $ 180,509
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 212,073 141,113
Deferred income taxes (71,000) (61,450)
Changes in assets and liabilities:
Accounts receivable (8,133) (637,637)
Inventories (620,819) (615,086)
Prepaid expenses and other current assets (16,516) (116,280)
Income tax Receivable (160,000) -
Accounts payable and accrued expenses 664,910 132,108
Accrued income taxes payable (51,068) (53,556)
Other (6,154) (3,948)
-------------------------
Net cash used by operating activities (476,820) (1,034,227)
-------------------------
Cash flows from investing activities:
Capital expenditures (204,402) (490,029)
-------------------------
Net cash used by investing activities (204,402) (490,029)
Cash flows from financing activities:
Net borrowings on note payable - bank 653,215 862,647
Issuance of long-term debt 104,770 483,970
Repayment of long-term debt (199,280) (131,923)
Issuance of common stock, net 30,689 20,851
Sale of treasury stock - 12,567
Increase in restricted cash balances (199,120) -
Increase in liability to shareholder 199,120 -
-------------------------
Net cash provided by financing activities 589,394 1,248,112
-------------------------
Net (decrease) in cash (91,828) (276,144)
Cash and cash equivalents at beginning of year 225,518 501,662
-------------------------
Cash and cash equivalents at end of year $ 133,690 $ 225,518
=========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 185,456 $ 95,347
Income taxes 30,276 213,656
</TABLE>
The accompanying notes are an integral part of the Financial Statements
INTELLIGENT CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
1. Summary of significant accounting policies
Organization and operations
---------------------------
The Company is engaged primarily in designing and manufacturing
microprocessor-based control devices and systems for industrial,
commercial and power utility applications.
Use of estimates
----------------
The preparation of financial statements in conforming with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
Cash and cash equivalents
-------------------------
The Company considers all highly liquid debt instruments purchased
with a maturity of three months of less to be cash equivalents.
Revenue recognition
-------------------
Substantially all revenue is related to the sale of products and is
recorded at the time of shipment to the customer.
Inventories
-----------
Inventories are stated at the lower of cost (average cost) or market
(net realizable value) on a first in first out basis.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is calculated
using straight-line and accelerated methods over estimated useful
lives of the equipment and computer equipment (three to ten years) and
the lease terms for the leasehold improvements for book and tax
purposes.
Expenditures for maintenance, repairs and minor replacements are
charged to operations while expenditures for major replacements and
betterment's are added to property, plant, and equipment accounts.
When fixed assets are sold, retired or otherwise disposed of, the
asset cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in income.
Net income per share
--------------------
Net income per share is computed on the weighted average number of
equivalent share of the Company's common stock outstanding during the
period, given effect to stock options considered to be dilutive.
Fully diluted net income per share is equivalent to the primary income
per share amounts.
Fair value of Financial Instruments
-----------------------------------
At December 31, 1996, the carrying amounts of the Company's financial
instruments included in current assets and current liabilities
approximate fair value of the short maturity of those instruments. The
carrying amounts of the Company's long-term debt also has approximate
their value as of December 31, 1996 based upon the borrowing rates
currently available to the Company for loans with similar terms and
maturities.
Impairment Accounting
---------------------
The Company adopted Financial accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for long-lived Assets to
be Disposed of," (SFAS No. 121) in 1996. The Company reviews the
recoverability of its Long-Lived assets, including goodwill and other
intangible assets, when events or changes in circumstances occur that
indicate that the carrying value of the assets may not be recoverable.
The measurement of possible impairment is based on the Company's
ability to recover the asset from expected future pre-tax cash flows
(undiscounted and without interest charges) of the related operations.
The measurement of impairment requires management to make estimates of
expected future cash flows related to Long-Lived assets. It is at
least reasonably possible that future events or circumstances could
cause these estimates to change.
New Accounting Pronouncements
-----------------------------
In February 1997, the Financial Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No.
128) and No. 129, "Disclosure of Information About Capital Structure"
(SFAS No. 129). SFAS No. 128 will require a change in how the Company
calculates earnings per share and SFAS No. 129 will require disclosure
of certain information about the Company's capital structure. The
requirements of these pronouncements are effective for the Company's
fiscal year ending December 31, 1997 and the impact of these
statements on the Company's financial statements has not yet been
determined.
2. Inventories
Inventories consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials and parts $1,930,834 $1,509,821
Work-in-progress 294,576 176,130
Finished goods 587,788 470,051
Supplies and other 50,137 86,514
------------------------
$2,863,335 $2,242,516
========================
</TABLE>
3. Property and equipment
Property and equipment consisted of the following at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Equipment $1,119,610 $ 933,658
Furniture and fixtures 120,087 118,966
Computer software 119,554 103,164
Leasehold improvements 105,442 104,503
------------------------
$1,464,693 $1,260,291
Less accumulated depreciation and amortization 613,612 401,539
------------------------
$ 851,081 $ 858,752
========================
</TABLE>
4. Note payable - bank
Note payable - bank represents amounts borrowed under a $3,000,000
working capital line of credit. Such borrowings are collateralized by
all assets of the Company and are subject to certain restrictions,
including those related to new borrowings, maximum debt to equity
ratio, and debt service coverage. Interest is variable at the bank's
base rate plus .25% (8.75% at December 31, 1996). At December 31,
1996, an additional $984,138 was available to be borrowed under the
line. The weighted average interest rate on outstanding borrowings
for 1996 was 8.83%.
5. Long-term debt
Long-term debt consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Term note payable, interest at 9.5%
payable monthly through December 1999 $ 102,644
Borrowing under a $1,000,000 revolving credit agreement
with a bank, interest at a variable rate (9.0%) at
December 31, 1996), with principal and interest payable
monthly through January 2000 499,023
---------
601,667
Less current portion (191,700)
---------
$ 409,967
=========
</TABLE>
The revolving credit agreement to a bank is collateralized in the same
manner and subject to the same conditions as the note payable
described in Note 4. The term note payable is collateralized by a
subordinated interest in Company assets is guaranteed by a stockholder
and contains restrictions with respect to dividends capital,
expenditures, and new borrowings.
At December 31, 1996, aggregate maturities of long-term debt are as
follows:
<TABLE>
<S> <C>
1997 $191,700
1998 194,800
1999 198,200
2000 16,967
</TABLE>
6. Income taxes
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current:
Federal $(125,000) $ 128,000
State (35,000) 32,100
-----------------------
(160,000) 160,100
-----------------------
Deferred:
Federal (55,000) (48,750)
State (16,000) (12,700)
-----------------------
(71,000) (61,450)
-----------------------
Total income tax expense (benefit) $(231,000) $ 98,650
=======================
</TABLE>
The actual income tax benefit differs from the expected tax computed
by applying the U.S. federal corporate tax rate of 34% to income
before income tax as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computed expected income tax expense (benefit) (34)% 34%
State income taxes, net of federal benefit (7) 7
Other 6 (6)
------------
Total income tax expense (benefit) rate (35)% 35%
============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities consist of the
following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Inventory $ 92,000 $ 59,000
Reserves 104,000 55,000
Compensation 14,000 12,300
--------------------
$210,000 $126,300
====================
Deferred tax liabilities:
Depreciation $ 58,450 $ 45,750
====================
</TABLE>
7. Common stock
The Company has granted stock options to employees, directors and
outside consultants and advisors under a 1984 Incentive Stock Option
Plan, a 1993 Directors Stock Option Plan, and an Advisory Board Stock
Option Plan. Options granted under the 1984 Incentive Stock Option
Plan vests at a rate of 20% per year while options granted under the
other two plans vest immediately. options granted under the 1984
Incentive Stock Option Plan expire after 10 years while options
granted under the other two plans expire after 5 years. As of December
31, 1996, 215,000 shares were available to be granted under these
plans in the future. A summary of changes of common stock options
during 1996 and 1995 is:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at January 1, 1995 418,968 $0.92
Issued during 1995 110,000 $3.92
Exercised during 1995 (30,767) $0.66
Outstanding December 31, 1995 498,201 $1.61
Issued during 1996 87,500 $3.42
Lapsed during 1996 (73,135) $3.90
Exercised during 1996 (17,058) $0.77
Outstanding at December 31, 1996 495,508 $1.69
Shares exercisable at December 31, 1995 383,200
=======
Shares exercisable at December 31, 1996 363,900
=======
</TABLE>
The weighted average fair value of options granted in 1996 and 1995
was $1.14 and $1.28, respectively and the range of exercise prices at
December 31, 1996 is $0.25 to $4.52.
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS No. 123). This statement requires a fair value
based method of accounting for employee stock options and would result
in expense recognition for the Company's employee stock plans. It also
permits a Company to continue to measure compensation expense for such
plans using value based method as prescribed by Accounting Principles
Board Opinion 25, " Accounting for Stock Issued to Employees" (APB No.
25). The Company has elected to follow APB No. 25 in accounting for
its employee stock plans, and accordingly, no compensation cost has
been recognized. Had compensation cost for the Company's stock plans
been determined based on the fair value requirements under SFAS No.
123, the Company's net income and earnings per share would have been
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------------------------ --------------------
As Pro As Pro
Reported Forma Reported Forma
<S> <C> <C> <C> <C>
Net income (loss) $(420,113) $(447,517) $180,509 $161,768
Net income (loss) per share $ (0.13) $ (0.14) $ 0.05 $ 0.05
</TABLE>
The fair value of stock options in the pro forma accounts for 1996 and
1995 is not necessarily indicative of the future effects on net income
and earnings per share. The fair value of each stock option grant has
been estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions
used for grants in 1996 and 1995, respectively: no dividend yield
expected volatility of 15% for both years; risk-free interest rates of
7% for 1996 and 6.5% for 1995; and expected life of 7 years for both
years.
8. Commitments
The company leases two facilities, including one from a related party,
and various computer and office equipment under non-cancelable
operating leases. The Company has an option to purchase one of the
facilities prior to August 1997. Minimum lease payments over the
fixed terms of these leases are as follows:
<TABLE>
<S> <C>
1997 $81,300
1998 6,300
</TABLE>
Rent expense was $112,900 and $114,300 in 1996 and 1995, respectively,
including $62,719 and $61,725 to a related party.
The company manufactures a certain product line under an exclusive
license agreement which requires the Company to make royalty payments
on such product sales through 2007. Royalty expense related to this
agreement was $14,531 and $10,000 in 1996 and 1995 respectfully.
9. Employee benefit plan
The Company has adopted a 401(k) plan which covers all eligible
employees and includes a matching contribution by the Company. In
1995, the Company's Board of Directors voted to increase the Company's
match from 40% of the first 5% of the employee's contribution, to 50%
of an employee's contribution up to 5% of the employee's salary.
Expenses associated with the plan were $29,500 and $17,400 in 1996 and
1995, respectively.
10. Litigation
On July 26, 1996 the Company received notice of the filing of an
action entitled John D. Knight v. Intelligent Controls, Inc. in Maine
Superior Court, Cumberland County. The action was brought by Mr.
Knight, a former director and executive officer of Intelligent
Controls, Inc. whose employment was terminated by the Company in June
1996. Management is vigorously contesting the case and the ultimate
outcome is unknown. Accordingly no amounts have been accrued for in
the financial statements relating to this litigation. Mr. Knight has
paid the Company $199,120 to exercise stock options. The funds are
being held in escrow and have been classified as restricted cash on
the balance sheet.
Exibit 10.6B
Intelligent Controls Inc.
Amendment No. 2 to
1984 Incentive stock option plan
The 1984 Incentive Stock Option Plan of Intelligent Controls, Inc., as
presently amended, is hereby further amended so as to delete the last
paragraph of subsection 5 (d) thereof, relating to sequential exercise of
options.
This amendment was approved by the Board of Directors on December 31,
1996, and is effective immediately.
Exibit 10.9
INTELLIGENT CONTROLS, INC.
1994 EMPLOYEE STOCK PURCHASE PLAN
(As amended January 1, 1996)
1. Purpose. The purpose of this Plan is to encourage eligible
employees to become shareholders in the Company and to afford them an
opportunity to share in the profits and growth of the Company.
2. Definitions. As used in this Plan, the following words and
phrases wherever capitalized shall have the following meanings, unless the
context clearly indicates that a different meaning is intended:
(a) "Acceptance Date" shall mean the date fixed by the Board by
which Employees may accept Options.
(b) "Board" shall mean the Board of Directors of the Company;
provided, however, that the Board may delegate any of its functions
under the Plan to a committee composed of members of the Board.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(d) "Common Stock" shall mean Common Stock, no par value, of
the Company.
(e) "Compensation" shall mean the base salary or wages,
exclusive of overtime pay, bonuses and incentive compensation paid to
an Employee of the Company.
(f) "Company" shall mean Intelligent Controls, Inc.
(g) "Employee" shall mean an individual employed by the
Company.
(h) "Employee Stock Purchase Plan" shall mean a plan described
in Section 423 of the Code.
(i) "Exercise Date" shall mean the date fixed by the Board on
which Options may be exercised.
(j) "Offering Date" shall mean the date fixed by the Board on
which Options are offered.
(k) "Option" shall mean a stock option granted under this Plan.
(l) "Option Agreement" shall mean a written instrument executed
by an Employee which specifies the terms and restrictions of an
Option.
(m) "Option Period" shall mean the period commencing on the
Withholding Date and ending on the Exercise Date with respect to any
Option.
(n) "Plan" shall mean the Intelligent Controls, Inc. 1994
Employee Stock Purchase Plan.
(o) "Share" shall mean a share of Common Stock of the Company,
as adjusted in accordance with Section 11.
(p) "Withholding Date" shall mean the date fixed by the Board
as of which withholding of an Employee's Compensation shall commence
under the Plan.
3. Administration. The Plan shall be administered by the Board. The
Board shall have the authority to administer the Plan, including the
following powers which shall be exercised in accordance with the terms of
the Plan:
(i) to determine from time to time the fair market value of the
Shares, taking into account such factors as the Board in good faith
finds to be appropriate, such determinations to be binding upon the
Company and Employees for purposes of the Plan;
(ii) to fix the Offering Date, Acceptance Date and Exercise
Date with respect to each offering of Options under the Plan;
(iii) to fix the aggregate number of Shares which may be issued
under Options offered as of each Offering Date, provided the maximum
number of Shares which may be issued under Options granted under the
Plan shall not exceed the limitation set forth in Section 4;
(iv) to determine the range of percentage of Compensation that
an Employee may have withheld during an Option Period;
(v) to determine which Employees have satisfied the eligibility
requirements set forth in Section 5;
(vi) to determine the terms and restrictions of each offering
of Options;
(vii) to make adjustments in accordance with Section 11;
(viii) to prescribe, amend and rescind rules and regulations
relating to the Plan;
(ix) to interpret the Plan and make all other determinations
deemed necessary or advisable for the administration of the Plan. Any
such determination made by the Board in good faith shall be binding on
the Company and each Employee.
The Board may authorize any member thereof to execute all instruments
required in the administration of the Plan and such instruments may be
executed by facsimile signature.
4. Stock Subject to the Plan. Subject to the provisions of Section
11, the maximum aggregate number of Shares which may be issued under Options
granted under the Plan shall be 75,000 Shares. In the event that any Option
granted under the Plan expires or terminates for any reason without having
been exercised in full, the Shares subject to, but not issued under, such
Option shall become available for other Options, unless the Plan shall have
been terminated.
5. Eligibility.
(a) Term of Employment. An Employee shall be eligible to
participate in an offering of Options only if such Employee has been
employed by the Company for a period of six months prior to the
Offering Date. Options shall be granted only to Employees who are
employed for more than twenty hours per week.
(b) Limitation on Stock Ownership. An Employee shall not be
granted an Option if such Employee, immediately after the Option is
granted, owns stock possessing five percent or more of the total
combined voting power or value of all classes of stock of the Company.
For purposes of applying the percentage limitation of the preceding
sentence, the rules of Section 425(d) of the Code shall apply in
determining the stock ownership of an individual, and stock which such
Employee may purchase under outstanding options shall be treated as
stock owned by such Employee.
(c) Limit on Grants. An Employee shall not be granted an
Option which permits his or her rights to purchase stock under all
Employee Stock Purchase Plans of the Company to accrue at a rate which
exceeds $25,000 of fair market value of such stock (determined at the
time such Option is granted) for each calendar year in which such
Option is outstanding at any time. For purposes of this subsection:
(i) The right to purchase stock under an option accrues
when the option (or any portion thereof) first becomes
exercisable during the calendar year;
(ii) The right to purchase stock under an option accrues
at the rate provided in the option, but in no case may such rate
exceed $25,000 of fair market value of such stock (determined at
the time such option is granted) for any one calendar year;
(iii) A right to purchase stock which has accrued under
one option granted pursuant to the Plan may not be carried over
to any other option.
6. Granting of Options.
(a) Employee Rights. All Employees granted Options shall have
the same rights and privileges, except that the amount of stock which
may be purchased by Employees under the Options may bear a uniform
relationship to Compensation.
(b) Offering Date. Following the effective date, the Board
shall fix an initial Offering Date. From time to time thereafter, but
not more frequently than once during any three month period, the Board
may fix additional Offering Dates.
(c) Offers. On each Offering Date, the Board shall offer
Options by furnishing each eligible Employee with an Option Agreement
and such other documents as it shall deem advisable. Each Option
Agreement shall include the following:
(i) the percentages of the Employee's Compensation which
may be withheld during the Option Period to be used to purchase
Shares upon the exercise of an Option;
(ii) the option price;
(iii) the Acceptance Date;
(iv) the Withholding Date;
(v) the Exercise Date;
(vi) the time and the manner in which an Option may be
exercised;
(vii) such other terms and restrictions, consistent with
the terms of the Plan, as may be determined by the Board.
(d) Option Price. The option price for Shares to be issued
under any Option shall be fixed by the Board, provided the option
price shall not be less than the lesser of (i) 85% of the fair market
value of the Shares at the time the Options are granted or (ii) an
amount which is not less than 85% of the fair market value of the
Shares on the Exercise Date. The fair market value of the Shares to
be issued under any Option shall be determined in accordance with the
requirements of Section 423(b)(6) of the Code and the regulations
issued thereunder. [amended January 1, 1996]
(e) Acceptance. Each Employee may accept an offer only in such
manner as the Board shall prescribe in the Option Agreement. Any
offer not accepted by the Acceptance Date shall expire thereon.
Each Employee who accepts an offer, as a condition thereof, shall
designate the percentage of his or her Compensation to be withheld each
payroll period during the Option Period, provided that the percentage
designated shall be consistent with the terms of the Option Agreement.
Amounts withheld from Employees shall be retained as general assets of the
Company, to be applied by it in accordance with the Plan. The Company shall
maintain records of the amounts withheld and shall credit such amounts with
interest, if any, at such rate as shall be prescribed in the Option
Agreements.
An Employee may not increase or decrease the percentage of
Compensation designated to be withheld, but may terminate withholding at
such time and in such manner as prescribed in the Option Agreement. An
Employee who terminates withholding may, subject to the provisions of
Sections 8 through 10, elect to have the Company either (i) retain some or
all of the amounts plus interest, if any, previously withheld, or (ii)
return such amounts plus interest, if any, to the Employee. Such election
shall be made when the Employee terminates withholding. If an Employee has
the Company retain amounts previously withheld, such Employee's Option shall
continue, but may be exercised only to the extent of such amounts, plus any
interest credited thereon. Alternatively, if an Employee elects to withdraw
all such amounts, such Employee's Option shall expire as of the date of such
election.
(f) Non-Transferability of Options. Options may not be sold,
pledged, assigned, hypothecated, transferred or disposed of in any
manner other than by will or by the laws of descent or distribution
and may be exercised, during the lifetime of the Employee, only by
such Employee.
7. Exercise of Options. Each Employee may exercise an Option at such
time and in such manner as the Board shall prescribe in the Option
Agreement, provided an Option cannot be exercised after the expiration of
twenty-seven months from the date such Option is granted. Any Option not
exercised by the Exercise Date shall expire thereon.
(a) Number of Shares Purchased. As of the Exercise Date, the
Board shall apply the amounts withheld from each Employee who
exercises an Option, plus any interest credited thereon, toward the
purchase of (i) the maximum number of whole Shares determined by
dividing such amounts, plus any interest, by the option price per
Share; or (ii) such lesser number of whole Shares specified by the
Employee at the time of exercise. Only amounts withheld during the
Option Period, plus any interest thereon, may be used to purchase
Shares. The amounts withheld, plus any interest, not used to purchase
Shares shall be paid to the Employee in a lump sum in accordance with
the Option Agreement.
(b) Limitation on Exercise. If as of any Exercise Date
Employees exercise Options for Shares the aggregate number of which
exceeds the aggregate number of Shares remaining which may be issued
under Options in accordance with the limitations contained in Section
3(iii) or 4, then each Employee shall receive that number of Shares
determined by multiplying the number of Shares for which such Employee
exercised an Option by a fraction, the numerator of which is the
aggregate number of Shares remaining which may be issued in accordance
with Section 3(iii) or 4 (as the case may be) and the denominator of
which is the aggregate number of Shares for which all Employees
exercised Options as of such Exercise Date. Employees shall not,
however, be permitted to purchase fractional Shares. The number of
Shares which each Employee may purchase shall be rounded down to the
nearest whole Share.
(c) Accrual of Shareholder Rights. Until the date of issuance
of Shares, as recorded on the books of the Company, no right to vote
or receive dividends or any other rights as a shareholder shall exist
with respect to Options, notwithstanding the exercise thereof. No
adjustment shall be made for a dividend or other shareholder rights if
the record date therefor is prior to the date Shares are issued,
except as provided in Section 11. Stock certificates for Shares
purchased by the exercise of Options shall be issued by the Company as
soon as practicable after the Exercise Date.
8. Termination of Employment. In the event an Employee ceases to be
employed by the Company, and is no longer employed by it, for any reason
other than disability or death, any Option granted to such Employee shall
expire on the date of termination. If an Option expires under this Section,
the amounts withheld, plus any interest, shall be paid to the Employee in a
lump sum as prescribed in the Option Agreement and the Employee shall have
no further rights under the Plan.
9. Disability. In the event an Employee who is disabled ceases to be
employed by the Company and is no longer employed by it, such Employee may
exercise an Option at any time within the three month period following
termination of employment, but not later than the Exercise Date, provided
such exercise shall be limited to the maximum number of whole Shares
determined by dividing the amounts withheld prior to termination, plus any
interest, by the option price per Share. The amounts withheld, plus any
interest, not used to purchase Shares shall be paid to the disabled Employee
in a lump sum in accordance with the Option Agreement. An Employee is
disabled if he or she is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than twelve
months. However, an Employee shall not be considered disabled unless he or
she furnishes proof of the existence thereof in such form and manner, and at
such times, as the Board may require.
10. Death. In the event an Employee dies while in the employ of the
Company, an Option granted to such Employee may be exercised on the Exercise
Date by such Employee's personal representative or by such other person or
persons to whom such Employee's rights pass by will or by the laws of
descent and distribution, provided such exercise shall not exceed the
maximum number of whole Shares determined by dividing the amounts withheld
prior to such Employee's death, plus any interest, by the option price per
Share. The amounts withheld, plus any interest, not used to purchase Shares
shall be paid in a lump sum to the Employee's personal representative or to
such person or persons to whom such Employee's rights pass by will or by the
laws of descent and distribution.
11. Adjustments. If the number of Shares outstanding changes as a
result of a stock split or stock dividend, the number of Shares to be issued
under Options and the option price per Share shall be proportionately
adjusted by the Board so as to comply with Section 423 of the Code. In the
event of a merger or consolidation in which the Company is the surviving
corporation, or the acquisition by the Company of property or stock of an
acquired corporation, or any reorganization, the number and class of Shares
to be issued under Options and the option price per Share shall be adjusted
by the Board so as to comply with Sections 423 and 425 of the Code. A
merger or consolidation in which the Company is not the surviving
corporation shall terminate all Options, provided that each Employee shall
have the right to exercise outstanding Options immediately prior to the
effective date of such merger or consolidation, provided such exercise shall
be limited to the maximum number of whole Shares determined by dividing the
amounts withheld prior to the record date therefor, plus any interest, by
the option price per Share.
12. Amendment and Termination.
(a) Amendment. The Board, without further approval of the
shareholders of the Company, may amend the Plan from time to time in
such respects as the Board may deem advisable, provided that no
amendment shall become effective prior to approval of the shareholders
of the Company which:
(i) increases the maximum number of Shares for which
Options may be granted; or
(ii) changes the provisions relating to Employees
eligible to receive Options under the Plan.
(b) Termination. The Board, without further approval of the
shareholders of the Company, may at any time terminate the Plan.
(c) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted, and
such Options shall remain in full force and effect as if the Plan had
not been amended or terminated.
13. Effective Date. The Plan shall be effective as of January 1,
1994, subject however to approval by the shareholders of the Company on or
before the first Exercise Date or December 31, 1994, whichever is earlier.
14. Miscellaneous.
(a) Employment. The granting of an Option to an Employee shall
not give the Employee any right to be retained in the employ of the
Company or any subsidiary thereof.
(b) Headings. The section headings are included solely for
convenience and shall in no event affect, or be used in connection
with, the interpretation of the Plan.
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