U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
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 27, 1997
[ ] 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:
Name of each exchange
Title of each class on which registered
--------------------------- -------------------------------
Common Stock, no par value American Stock Exchange
(Emerging Company Marketplace)
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.[ ]
Issuer's revenues for its most recent fiscal year: $13,005,184
The aggregate market value of the common stock held by non-affiliates as of
March 12, 1998 was $3,890,461.
There were 3,296,375 shares of Common Stock of the issuer outstanding as of
March 12, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Proxy Statement for the Annual Meeting of Shareholders to be held on
April 30, 1998
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. INCON develops, manufactures, and sells electronic measurement
systems to the petroleum and power utility industries and for general level
measurement and predictive maintenance applications. The Company's products,
including related applications and communication software, enable the users to
detect leaks, measure liquid levels, and to perform predictive maintenance
monitoring of equipment as an early indicator of wear and potential failure.
The table below shows sales for these product lines over the past three years.
NET SALES BY PRODUCT LINE
(Dollars In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Petroleum (ATG):
OEMs $ 655 5% $ 557 6% $ 264 3%
End Users 10,803 83% 7,881 79% 7,856 84%
-------- ------- -------
Total ATG: 11,458 8,438 8,120
Utility and Other
Power Utility 1,398 11% 1,198 12% 912 10%
General Instrument 149 1% 255 3% 244 3%
-------- ------- -------
Total Utility and Other 1,547 1,453 1,156
TOTAL NET SALES $ 13,005 100% $ 9,891 100% $ 9,276 100%
======== ======= =======
</TABLE>
Petroleum Equipment Segment
INCON manufactures a line of electronic instruments for use at retail gasoline
stations and gasoline/convenience stores. The products are also utilized in
other locations where petroleum fuels or chemicals are stored in underground
storage tanks ("USTs") and above ground tanks ("ASTs"), including large private
fleets, government agencies, municipalities, and fuel distribution companies.
The product line includes automatic tank gauges (some with remote
communications features), dedicated leak detectors, liquid level sensors, line
leak detectors, user interface software, and various accessories, all of which
can be used to meet UST monitoring regulations promulgated by the U.S.
Environmental Protection Agency (the "EPA"), and to provide information for the
tank owner to manage inventories. The manufacturing process for these and other
INCON products consists of basic mechanical and electronic assembly as well as
the integration of software into the overall system.
INCON's automatic tank gauge ("ATG") systems consist of wall-mounted electronic
consoles, tank-mounted liquid level sensors, leak sensors, user interface
software, and associated accessories. The systems provide very accurate
measurement of inventory (gasoline or other liquid) in a UST or AST. INCON tank
gauges also perform leak tests to determine whether product is escaping from
the tank. ATG systems can also monitor a wide variety of sensors which may be
located between the walls of double walled tanks, in sumps, under dispensers,
or in other locations where leaking product might collect.
In 1995 INCON field tested a new product for detecting leaks in the pipes
leading from tanks to the dispensers. The Company's electronic Line Leak
Detector ("LLD") monitors the pressurized pipe between the submersible pump
(located in the tank) and the dispenser (gas pump). The product meets pipeline
monitoring requirements imposed by EPA regulations and is an updated technology
which can replace mechanical line leak detectors. The LLD can interface with an
ATG or operate as a stand-alone device. The product design was further enhanced
in 1996 and a patent application has been filed. The LLD was fully released in
1997 with numerous commercially operating installations. INCON also offers
dedicated leak detection ("DLD") consoles which are similar to the ATG
console. Instead of measuring inventory levels, these products only monitor
leak detection, thereby offering certain customers 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 customize a
system for specific customer applications, allow the system to sense leaks and
inventory levels in many different locations, and simplify installation. Some
of these products and systems are assembled by the Company, while others are
fabricated by outside contractors to INCON specifications.
INCON has been producing its own liquid level probes since 1994. The Company's
liquid level sensors are based on magnetostrictive position measurement
technology which is widely proven in the industry. This capability of
manufacturing its own probes has given INCON control of product quality and
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. The average
retail gasoline station or gasoline/convenience store has three USTs.
In 1997 the Company designed and placed in beta site testing a new ATG product
line, the 1001 and 2001 models, marketed under the Company's Tank Sentinel
registered trademark. They are intended to be the new generation product
eventually replacing INCON's model 1000 and 2000 series. These units have
optional internal fax modem communications capability and were designed to be
easy to use and upgrade, providing greater flexibility for the operator. They
provide more overall capability than any other tank gauge in their price range
as well as upgraded display, printer, and keyboard functions. This contrasts to
some competitive models that cannot be upgraded, or require very expensive
additional modules to accommodate needed features. The 1001 model can
accommodate four liquid level sensor inputs and the 2001 model accommodates
eight. The 1001 and 2001 models are designed to be very cost-effective to
manufacture and incorporate a large number of common components.
In keeping with the trend toward digital technology, INCON manufactures, under
private label, 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
signal from the level and temperature sensing system and transmits the
processed data to a remote computer or other collection device. Data from many
sensors can be transmitted over a common cable in a manner similar to a
computer on a network. The product allows the ATG information to be read
directly by personal computers, cash registers, point of sale equipment, or
fuel management systems, both remotely and at the site. The Company has been
actively developing a software product capability which can be offered alone,
or in combination with INCON hardware products. This capability will allow
digital or traditional probe users to efficiently integrate an overall system
using equipment and software modules, which can interface with their
established or developing business information systems.
The demand for ATGs, DLDs and LLDs domestically has been strong and bolstered
by EPA and state regulations that require owners of USTs to monitor the tanks
and related lines for leaks. In addition to more sophisticated and automated
techniques (such as automatic tank gauging), the EPA regulations permit the use
of inventory reconciliation and manual (dip stick) testing as a means of
compliance. Although less expensive, these methods do not provide for accurate
inventory measurement and control and are also subject to personnel variables
affecting manual stick readings and data recording. INCON's management believes
that UST owners will continue to automate both inventory and leak detection
systems to insure accuracy and reduce dependence on trained personnel.
Moreover, 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 in 1998 and management anticipates that
this will favorably affect the market for ATGs, DLDs, and LLDs through 1998 and
beyond. Management also notes that new gasoline and convenience store expansion
is strong, due to growth in the economy, and upgrading of acquired sites by
larger, more aggressive marketers.
Internationally, many countries follow the lead of the United States, in terms
of both environmental regulations and measurement technologies. The demand for
ATGs, DLDs, and LLDs is expected to continue to grow in other parts of the
world and INCON will continue to aggressively seek such business. During 1997,
the Company shipped two thirds of a $2,000,000 ATG order received in 1996 from
Taiwan. The remainder is scheduled to ship in early 1998.
Power Utility and General Instrument Segment
INCON's Power Utility and Predictive Maintenance Instrument lines consist of
electronic instruments for measurement and control in the power utility and
general industrial markets. Typical customers include large publicly owned
electric power utilities, municipal utilities, and manufacturing customers.
Historically, regulation has insulated utilities in the United States and other
developed countries from competitive market forces, creating monopolies which
permitted utilities to remain profitable despite their use of inefficient or
outdated technology. In the deregulated environment being adopted across the
United States over the next five years, consumers will have greater freedom to
choose electricity suppliers, just as they now can choose among many long
distance telephone service providers. This will place significant pressure on
utility company management to reduce costs and increase plant efficiency. The
Company believes this overall business backdrop will provide a positive
environment for products that help utilities operate more efficiently and
perform predictive maintenance in advance of system failures.
INCON's power utility product line includes two instruments, the Model 1250 and
the Optimizer, offering 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" that regulate the
voltage on the power transmission and distribution grid. The voltage is
adjusted by switching to any one of approximately 32 "voltage taps." The Model
1250 allows utilities to use their system control and data acquisition system
(SCADA) to monitor from a central station which tap has been selected.
Utilities can then establish interactive control over tap changing through the
system and can adjust and regulate the voltage being produced by the
transformer. This product is also sold directly to transformer manufacturers
and is mounted on many new units sold. INCON's market share in this segment has
grown to nearly 50%.
The Optimizer is a microprocessor-based monitoring device used to predict life
and schedule preventive maintenance for high-voltage circuit breakers used by
electric 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 released in 1996 and a second generation version
was put into beta site testing in late 1997. A new product under development in
1997, dubbed the "Dry Guy," is a special filtration system product that
reconditions the fluids (oil) in circuit breakers and transformers. It can
interface with SCADA systems and is expected to further strengthen INCON's
position in the power utility market segment.
Software/Systems Products Segment
Consistent with an overall business trend, the petroleum market sector is
rapidly bringing electronic data interchange and the power of the computer and
networking to bear on its business activities. Remote communication, via modem
or RF, is becoming an important capability as multiple-site enterprises seek to
gather information and control their activities in a standardized and
centralized way. Petroleum product marketers, gasoline retailers,
gas/convenience store operators, and fuel wholesalers desire automated
information and the ability to monitor and plan their activities centrally with
less dependence on local management and employees. Modem communications as well
as local/host computer systems allow some companies to manage inventories of
liquid products, automatically order new product, and comply with environmental
monitoring and reporting requirements. In order to meet competitive business
pressures as well as regulatory requirements to monitor leaks, users are
pushing this market sector towards greater demand for multi-site systems.
INCON is already actively providing a software and systems capability to
complement its measurement and leak detection instruments. In 1997 the Company
was successful in working with a major convenience store chain to supply a
customized software and communication system which linked environmental and
business monitoring and reporting across a multiple site activity. As a result
of this successful experience and to take advantage of the market trends, INCON
began the development of a standardized software package in 1997 which can be
installed across a broad customer base. Select beta site testing has begun on
new ATG products (models 1001 and 2001) that facilitate efficient remote
communication to host computers or backroom PCs at the individual sites.
Management believes that this capability will be important, as the owners of
existing instrumentation expend considerable effort to link their sites
electronically and standardize monitoring and reporting.
Competition
The petroleum equipment market segment is very competitive, both for
instrumentation and software/system products. The Company's products compete
with similar offerings 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 which (a division of a large public company) is believed
to have approximately a 50 percent market share. These suppliers are generally
larger and have potentially greater resources than the Company. In addition
there are over ten other minor suppliers of ATGs, as well as additional
companies that sell software and other environmental and inventory monitoring
services. Several suppliers offer customers the option of contracting out all,
or part of, their measurement and compliance management activities. In such a
case a monthly service fee is charged and the products can be installed and
leased to the site owner. Based on observations to date, INCON's management
believes that this concept will not be adopted broadly, although it may be
beneficial to certain types of UST and ATG owners and operators.
INCON has a strong competitive position in the power utility market sector 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 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 certain Optimizer technology.
Interest in the concept of circuit breaker monitoring has resulted in several
competing models being offered by other companies. These competing products,
however, tend to be more expensive.
Customers
INCON's customer base is highly diversified, with no one customer accounting
for more than 10 percent of the Company's business in 1997. In the petroleum
equipment segment the Company's customers are principally petroleum equipment
distributors who purchase products from INCON and are responsible for
installation and after-sales service. These distributors range from very large,
regionally active organizations, to small organizations that focus on a narrow
customer segment or geography. The distributors usually handle other
complementary products sold to the same end-use customer base. Examples of such
products are gasoline dispensers, point-of-sale ("POS") systems, vapor recovery
systems, lighting, and canopies. Often the Company's products are specified by
end-users who choose to standardize their equipment for all their locations.
The distributors and end-use customers are serviced by INCON's factory-based
national selling and technical service organization as well as by
regionally-based manufacturer's representatives. In addition, the Company
supplies petroleum equipment products to a few OEM (original equipment
manufacturer) customers.
In the power utility and predicative maintenance instruments segment, INCON's
customers are equipment OEMs and various electric utilities or large private
system operators. These customers are serviced by the Company's factory-based
national selling organization as well as by regionally-based manufacturer's
representatives.
International sales are normally made to distributors, which are then
responsible for importing the product to their respective countries, as well as
sales, installation, and after-sales service.
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 electronic line leak detector (LLD) product. The Company
has copyrights on certain software products; and other key software is highly
technical and difficult to copy.
The Company has numerous trade secrets with regard to methods of detecting
leaks in tanks and pipelines. Among these are INCON's volumetric tank leak test
algorithm, its continuous automatic leak detection algorithm, and its method of
detecting leaks in pressurized piping. INCON's process for producing the
magnetostrictive wire required by the liquid level sensor is a Company trade
secret.
General
As of March 12, 1998 the Company employed 82 people, including 11 in sales and
marketing, 12 in research and development, 10 in administration (including 2
part-time clerks), and 49 in manufacturing operations.
In most of its products, INCON tries to utilize off-the-shelf electronic
components that are readily available from more than one distributor. There
are, however, some products which are designed around a particular
manufacturer, such as in the use of microprocessor chips and compact printers.
If one of these manufacturers were suddenly to cease production of a key
component, the Company might need to find an alternate source or redesign the
product. Stainless steel and brass are major components in two of the Company's
products. Both of these commodities can fluctuate in price due to supply and
demand, thereby affecting the Company's future costs.
INCON continuously invests in the development of new products and software as
well as adapting existing products to new applications. During 1995, 1996, and
1997, the expenditures relating to the development of new products and the
improvement of existing products were approximately $965,000, $983,000, and
$791,000 respectively. These expenditures represent an R&D spending rate of 6
to 9 percent of sales.
Government Regulation
The automatic tank gauge product line, used in gasoline stations and
convenience/gasoline stores, 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 ATG product line, including line leak
detectors, are presently listed by UL and CSA.
The Tank Sentinel 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 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 system, TS-1001
system, TS-2000 system, TS-2001 system, and TS-LLD have been tested by Ken
Wilcox Associates of Blue Springs, Missouri and are certified.
The Tank Sentinel ATG products also meet the much more stringent standards
for tank tightness testing. 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 performance requirements. The INCON TS-1000, 1001 and TS-2000, 2001
systems have been tested by Ken Wilcox Associates. In Canada the TS-1000,1001
system, TS-2000,2001 system, 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 Company's 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. One building serves as INCON's executive offices; the
other its manufacturing facility. The executive office building is leased from
a corporation owned in part by two principal INCON shareholders, Alan and Paul
Lukas. The other building is leased from an unrelated third party. The leases
on these buildings expire in August 1998 and October 1998, respectively, 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 for 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 effect on operations in
1998.
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
had 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 and Mr. Knight have each filed
motions for summary judgment. These motions have not yet been decided by the
court.
The Company is a defendant in Hasstech, Inc. v. Intelligent Controls, Inc., a
patent infringement action filed October 24, 1997 in the U.S. District Court,
Southern District of California. The Complaint alleges that INCON's line leak
detector infringes a certain patent held by Hasstech. The Complaint seeks
injunctive relief and treble damages in an unspecified amount. The Company has
filed an Answer, denying all material allegations and seeking an injunction to
prevent Hasstech from claiming that INCON has infringed its patent. INCON
believes that there are certain obvious and significant differences between its
LLD and the claims covered by Hasstech's patent, and management intends to
vigorously defend against this lawsuit. A mediation session between the parties
was held in early March 1998 and is scheduled to resume in late April 1998.
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 1997.
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, 1997 $2 1/2 $1 5/8
Quarter Ended June 30, 1997 $2 7/8 $1 7/8
Quarter Ended September 30, 1997 $2 7/8 $2 1/4
Quarter Ended December 27, 1997 $3 3/4 $2 3/8
</TABLE>
As of March 12, 1998 the Company had 499 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
- ---------------------
1997 Compared to 1996
Net sales totaled $13.0 million in 1997, an increase of $3.1 million or 31
percent from 1996. The increase was primarily a result of strong growth in the
petroleum market segment and the shipment of approximately two-thirds of the
$1.8 million Taiwan automatic tank gauge order received in late 1996.
Petroleum segment sales increased to $11.5 million, or 36 percent from $8.4
million for the comparable period in 1996. Sales, excluding the large shipments
to Taiwan, increased over 31 percent from 1996. The growth was attributable to
continued sales increases to key accounts as well as strong sales of the
electronic Line Leak Detector product.
The Utility and General Instruments segment grew 6 percent, from $1.4 million
in 1996 to $1.5 million in 1997. The Company continued to ship the Optimizer
product, originally released in 1996, and the acceptance of the product by
electric utility users has generally been good. Currently, however, further
sales of the product are on hold pending software and hardware changes to
improve reliability. The Company has already arranged the replacement of
several malfunctioning units in the field and will be implementing the updated
changes over the next six months.
Gross margins improved modestly in 1997, to 42 percent compared to 41 percent
for the comparable period in 1996. The 1996 adverse effects of product mix and
increases in scrap carried into early 1997 and resulted in lower gross margins
during the first quarter of 1997. Gross margins improved as the year progressed
and averaged 43 percent in the second half of 1997.
Operating expenses, managed aggressively following the operating loss in 1996,
increased slightly in 1997 (by $73,977) but declined sharply as a percentage
of sales (35.1% versus 45.4%). Operating expenses were favorably impacted by
reduced warranty costs and lower salaries resulting from the departure of
several senior management individuals. Research and development spending,
although still strong, was notably lower than in 1996 as the major development
effort for the electronic Line Leak Detector was completed. Interest expenses
declined by a small amount as the operating cash flow improved, particularly
in the second half of the year.
1997 operating profits, at $868,426 compare favorably to a 1996 loss of
$441,100. It should be noted that the Company was unprofitable in the first
quarter of 1997, and thus the improved profits were achieved during the April
to December 1997 period. The keys to the profit turnaround from the loss
experienced in 1996 were increased sales volume, improved gross margins, and
reduced operating spending as a percent of sales revenue.
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 slowdown 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 and General Instrument 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 Optimizers
compared to none in 1995. These were mostly evaluation units since utilities
budget their spending in the prior year. The performance of these units
generally was favorable and the Company received several commitments for 1997.
Gross margins in 1996 were adversely affected by the mix of product sold and
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, receive
special pricing. This resulted 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.
Liquidity and Capital Resources
- -------------------------------
In January of 1996, the Company changed banking relationships and increased its
working capital line of credit to $3 million dollars from $1.5 million in 1995,
and secured a special 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 slowdown 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 slowdown in payments to suppliers was rectified by
the end of the first quarter of 1997, and did not affect the Company's open
credit with suppliers.
In 1997 the Company utilized its working capital line of credit to fund the
growth in sales and accounts receivable and to accommodate the weak operating
results experienced early in the year. The Company increased the working
capital line of credit from $3 million to $3.5 million during the first half of
1997. As of December 27, 1997 the Company had $2,745,634 available to be
borrowed on the working capital line of credit. Total inventories, at
$1,884,000, compared favorably to $2,863,000 at year end 1996 and a meaningful
improvement in inventory turnover was achieved in 1997. The reduction in
inventory was attributable to shipment of two-thirds of the Taiwan automatic
tank gauge order and an overall improvement in material planning and
purchasing.
The Company has a $1 million equipment revolver, of which $505,000 was
available to be borrowed as of December 27, 1997. The Company funded $204,000
and $157,000 of capital additions with this equipment revolver in 1996 and
1997. The $4 million acquisition line of credit was not utilized in 1996 or
1997.
The Company feels that current funds and existing lines of credit are adequate
to fund existing operations for the foreseeable future. However, the Company
has been seeking additional capital in order to strengthen its competitive
position and fund possible future expansion.
The Company has recently executed an agreement with two venture capital funds,
Ampersand Specialty Materials and Chemicals III Limited Partnership and
Ampersand Specialty Materials and Chemicals III Companion Fund Limited
Partnership (collectively, "Ampersand"). Ampersand and one individual have
agreed to invest $5.25 million to purchase common stock from INCON in May
1998, subject to satisfaction of certain conditions. The Company would plan to
apply a portion of these proceeds as follows: (i) to fund a contemplated issuer
tender offer to INCON shareholders ($1.6 million) and (ii) to pay down the
existing line of credit and other indebtedness ($1.2 million). The remaining
proceeds would be available as additional working capital, and could be used to
fund future acquisitions by the Company. No such acquisitions are presently
planned.
Year 2000 Issues
- ----------------
In 1997 the Company began evaluating the extent to which its products and
operations may be adversely affected by Year 2000 problems. (Year 2000 problems
are software malfunctions that can arise from misinterpretation of two-digit
representations of years after 1999.) Based on its evaluation, the Company
currently anticipates that the cost of addressing these issues will not have a
material effect on future financial results.
Forward-Looking Statements
- --------------------------
The "Management's Discussion and Analysis" section and "Description of
Business" section of this report contain forward-looking statements, as defined
in Section 21E of the Securities Exchange Act of 1934. Examples of such
statements in this report include those concerning estimates of future market
demand for Petroleum and Utility segment products, statements concerning the
Company's expected future revenues and warranty costs, and statements
concerning the future adequacy of the Company's capital resources. The Company
cautions investors that numerous factors could cause actual results and
business conditions to differ materially from those reflected in such
forward-looking statements including, but not limited to, the following:
unanticipated shifts in market demand for ATG and LLD products or Utility
segment products, owing to competition, regulatory changes, or changes in the
overall economy; competitive pressures on sales margins for INCON products;
unanticipated warranty costs from existing products or newly introduced
products; and risks attendant to an intended expansion of the Company business,
through increased investment in product development and future acquisitions,
following receipt of new capital from Ampersand and intended changes in the
Company's management structure.
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 or disagreements with accountants on accounting and
financial disclosures in 1997.
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 Annual
Meeting of Shareholders, to be held on April 30, 1998.
Under the bylaws of the Company, all 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 47 Chief Executive Officer, Director, and
Chairman of the Board
Andrew B. Clement 28 Controller
</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.
Andrew B. Clement has been with INCON since November of 1997, in the position
of Controller. Previously he held positions as Controller at EDM, Inc. (1997),
Accountant at Portland Pipe Line Corp.(1996) and Cost Accountant at Aero Tech
Manufacturing, Inc.(1992-1995)
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference to
the Company's definitive proxy statement for the 1998 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 1998 Annual Meeting of
Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference to
the Company's definitive proxy statement for the 1998 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 27, 1997.
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/ Alan Lukas
------------------------------------
Alan Lukas, President and
Chief Executive Officer
Date:March 27, 1998
By: /s/ Andrew B. Clement
------------------------------------
Andrew B. Clement, Controller
(principal financial officer and
principal accounting officer)
Date: March 27, 1998
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 27, 1998
- --------------------------------------------
Alan Lukas, President, Chief
Executive Officer and Director
/s/ Andrew B. Clement Date: March 27, 1998
- --------------------------------------------
Andrew B. Clement, Controller
/s/ Charlton H. Ames Date: March 27, 1998
- --------------------------------------------
Charlton H. Ames, Director
/s/ George E. Hissong Date: March 27, 1998
- --------------------------------------------
George E. Hissong, Director
/s/ Henry M. Powers Date: March 27, 1998
- --------------------------------------------
Henry M. Powers, Director
/s/ Paul F. Walsh Date: March 27, 1998
- --------------------------------------------
Paul F. Walsh, Director
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <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
Exhibit 3 (ii) of the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1995 (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
10.3A Lease Extension Agreement, executed May 27, 1997, with Apollo
Development Corp.
10.4 Lease Agreement, dated June 21, 1994; incorporated by
reference to Exhibit 10.4 of the Registrant's Form 10-KSB for
the fiscal year ended December 31, 1994 (SEC File No.
1-13628)
10.4A Addendum to Lease, executed May 27, 1997, with BJB Associates
10.5 Employment Agreement, dated as of December 29, 1986, with
John Knight, a former executive officer; incorporated by
reference to Exhibit 6.9 of the Registrant's Form 1-A
Note: Compensatory plans and management contracts are filed as Exhibits 10.6
through 10.10 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 (SEC File No. 1-13628)
10.6B Amendment No. 2 to 1984 Incentive Stock Option Plan;
incorporated by reference to Exhibit 10.6B of the
Registrant's Form 10-KSB for the fiscal year ended December
31, 1996 (SEC File No. 1-13628)
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 6.7 of the Registrant's Form 1-A
10.9 1994 Employee Stock Purchase Plan, amended and restated as of
January 1, 1996; incorporated by reference to Exhibit 10.9 of
the Registrant's Form 10-KSB for the fiscal year ended
December 31, 1996 (SEC File No. 1-13628)
10.10 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
23 Consent of Accountants
27 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 of December 27, 1997 and December 31, 1996, 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 1997 and 1996 financial statements referred to above
present fairly, in all material respects, the financial position of Intelligent
Controls, Inc., as of December 27, 1997 and December 31, 1996, 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
February 13, 1998
INTELLIGENT CONTROLS, INC.
BALANCE SHEETS
December 27, 1997 and December 31, 1996
ASSETS
- ------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 300 $ 133,690
Accounts receivable, net of allowance for doubtful accounts
of $50,000 in 1997 and $60,000 in 1996 2,200,062 1,960,979
Inventories 1,884,328 2,863,335
Prepaid expenses and other 227,704 312,837
Income tax receivable 119,099 160,000
Deferred income taxes 192,464 210,000
--------------------------
Total current assets 4,623,957 5,640,841
Property and equipment, net 856,581 851,081
Other assets 27,176 19,979
Restricted cash -- 199,120
--------------------------
$ 5,507,714 $ 6,711,021
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Non-interest bearing overdraft $ 67,259 --
Note payable - bank 754,366 $ 2,015,862
Accounts payable 769,097 881,349
Accrued expenses 520,709 673,767
Current portion of long-term debt 194,700 191,700
--------------------------
Total current liabilities 2,306,131 3,762,678
Long-term debt, net of current portion 372,401 409,967
Deferred income taxes 67,295 58,450
Deposit from stockholder -- 199,120
--------------------------
Commitments
Stockholders' equity:
Common stock, no par value; 5,000,000 shares authorized;
3,274,306 shares issued in 1997 and 3,238,952 in 1996 2,293,841 2,252,041
Retained earnings 468,046 33,071
Treasury stock, 2,153 shares at cost in 1996 -- (4,306)
--------------------------
Total stockholders' equity 2,761,887 2,280,806
--------------------------
$ 5,507,714 $6,711,021
==========================
</TABLE>
The accompanying notes are an integral part of the financial statements
INTELLIGENT CONTROLS, INC.
STATEMENTS OF INCOME
For the Years Ended December 27, 1997 and December 31, 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Net sales $ 13,005,184 $ 9,890,728
Cost of sales 7,568,247 5,836,720
---------------------------
Gross profit 5,436,937 4,054,008
Operating expenses:
Selling, general and administrative 3,777,699 3,511,273
Research and development 790,812 983,261
---------------------------
4,568,511 4,494,534
---------------------------
Operating income (loss) 868,426 (440,526)
Other expense:
Interest expense (157,230) (186,734)
Other expense (30,221) (23,853)
---------------------------
(187,451) (210,587)
---------------------------
Income (loss) before income tax expense (benefit) 680,975 (651,113)
Income tax expense (benefit) 246,000 (231,000)
---------------------------
Net income (loss) $ 434,975 $ (420,113)
===========================
Net income (loss) per share basic and diluted $ .13 $ (.13)
===========================
Weighted average common shares outstanding 3,249,749 3,231,058
===========================
Weighted average common and common equivalent
shares outstanding 3,392,686 3,231,058
===========================
</TABLE>
The accompanying notes are an integral part of the financial statements
INTELLIGENT CONTROLS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 27, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Common Stock Total
---------------------- Retained Treasury Stockholders'
Shares Amount Earnings Stock Equity
--------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1996 3,215,590 $2,221,352 $ 453,184 $ (4,306) $2,670,230
Exercise of stock options 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
Exercise of stock options 25,050 20,312 -- -- 20,312
Issuance of common stock 12,457 25,794 -- -- 25,794
Retirement of 2,153 treasury
shares (2,153) (4,306) -- 4,306 0
Net Income -- -- 434,975 -- 434,975
-------------------------------------------------------------
Balances, December 27, 1997 3,274,306 $2,293,841 $468,046 $ 0 $2,761,887
=============================================================
</TABLE>
The accompanying notes are an integral part of the financial statements
INTELLIGENT CONTROLS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 27, 1997 and December 31, 1996
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 434,975 $ (420,113)
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization 242,430 212,073
Deferred income taxes 26,381 (71,000)
Changes in assets and liabilities:
Accounts receivable (239,083) (8,133)
Inventories 979,007 (620,819)
Prepaid expenses and other current assets 85,133 (16,516)
Income tax receivable 40,901 (160,000)
Accounts payable and accrued expenses (265,310) 664,910
Accrued income taxes payable -- (51,068)
Other (7,196) (6,154)
--------------------------
Net cash provided by (used by) operating activities 1,297,238 (476,820)
--------------------------
Cash flows from investing activities:
Capital expenditures (247,931) (204,402)
--------------------------
Net cash used by investing activities (247,931) (204,402)
--------------------------
Cash flows from financing activities:
Increase in non-interest bearing overdraft 67,259 --
Net borrowings on note payable - bank (1,261,496) 653,215
Issuance of long-term debt 157,000 104,770
Repayment of long-term debt (191,566) (199,280)
Issuance of common stock 46,106 30,689
Decrease (increase) in restricted cash balances 199,120 (199,120)
(Decrease) increase in liability to shareholder (199,120) 199,120
--------------------------
Net cash (used by) provided by financing activities (1,182,697) 589,394
--------------------------
Net decrease in cash (133,390) (91,828)
Cash and cash equivalents at beginning of year 133,690 225,518
--------------------------
Cash and cash equivalents at end of year $ 300 $ 133,690
==========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 160,624 $ 185,456
Income taxes $ 373,000 $ 30,276
Supplemental disclosure of noncash financing activity:
During 1997 treasury stock with a carrying cost of
$4,306 was retired.
</TABLE>
The accompanying notes are an integral part of the financial statements
INTELLIGENT CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS
December 27, 1997 and December 31, 1996
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.
During 1997 the Company changed its reporting year end from a calendar year
end used in prior years, to the last Saturday in December.
Use of Estimates
- ----------------
The preparation of financial statements in conformity 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 or 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 (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 betterments 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 (Loss) Per Share
- ---------------------------
Effective for the 1997 fiscal year, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128 - Earnings Per Share. The Statement
requires dual presentation of basic and diluted earnings per share of common
stock on the statements of income. 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 year. 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 fiscal years presented. Prior period earnings per share data
has been restated to conform to the provisions of this statement.
<TABLE>
<CAPTION>
Net Common Earnings
Income (Loss) Shares Per
(Numerator) (Denominator) Share
------------- ------------- --------
<S> <C> <C> <C>
December 27, 1997
- -----------------
Basic earnings per share $ 434,975 3,249,769 $ .13
Dilutive potential shares -- 142,917
--------------------------------------
Diluted earnings per share $ 434,975 3,392,686 $ .13
======================================
December 31, 1996
- -----------------
Basic earnings per share $ (420,113) 3,321,058 $(.13)
Dilutive potential shares -- --
--------------------------------------
Diluted earnings per share $ (420,113) 3,231,058 $(.13)
======================================
</TABLE>
Fair Value of Financial Instruments
- -----------------------------------
At December 27, 1997, 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 approximates their value as of December 27, 1997
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 June of 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130 - Reporting Comprehensive Income,
which requires the separate reporting of all changes to shareholders' equity,
and SFAS No. 131 - Disclosures About Segments of an Enterprise and Related
Information, which revises existing guidelines about the level of financial
disclosure of a Company's operations. Both Statements are effective for
financial statements issued for fiscal years beginning after December 27, 1997.
The impact of these statements on the Company's financial statements has not
yet been determined.
Reclassifications
- -----------------
Certain reclassifications have been made to the 1996 financial statements to
conform to the 1997 presentation.
2. Inventories
Inventories consisted of the following at December 27, 1997 and December 31,
1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Raw materials and parts $ 1,214,749 $ 1,870,834
Work-in-progress 229,824 294,576
Finished goods 356,974 647,788
Supplies and other 82,781 50,137
--------------------------
$ 1,884,328 $ 2,863,335
==========================
</TABLE>
3. Property and equipment
Property and equipment consisted of the following at December 27, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Equipment $ 1,139,210 $ 1,119,610
Furniture and fixtures 104,312 120,087
Computer software 154,560 119,554
Leasehold improvements 111,983 105,442
--------------------------
$ 1,510,065 $ 1,464,693
Less accumulated depreciation and amortization 653,484 613,612
--------------------------
$ 856,581 $ 851,081
==========================
</TABLE>
4. Note payable - bank
Note payable - bank represents amounts borrowed under a $3,500,000 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 minimum pretax income levels.
Interest is variable at the bank's base rate plus .25% (8.50% at December 27,
1997). At December 27, 1997, an additional $2,745,634 was available to be
borrowed under the line. The weighted average interest rate on all outstanding
borrowings at fiscal year ended December 27, 1997 was 8.55%.
As of December 27, 1997, the company was in violation of a certain debt
convenant. By letter dated March 25, 1998, the bank agreed to waive this
violation for the period under audit.
5. Long-term debt
<TABLE>
<S> <C>
Long-term debt consisted of the following at December 27, 1997:
Term note payable, interest at 9.5% payable monthly through
December 1999 $ 71,950
Borrowing under a $1,000,000 revolving credit agreement with
a bank, interest at a variable rate (8.5% at December 27,
1997), with principal and interest payable monthly through
January 2001 495,151
----------
567,101
Less current portion (194,700)
----------
$ 372,401
==========
</TABLE>
The revolving credit agreement 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 27, 1997, aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998 $ 194,700
1999 198,900
2000 160,900
2001 12,601
---------
$ 567,101
=========
</TABLE>
6. Income taxes
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Current:
Federal $ 197,000 $ (125,000)
State 57,000 (35,000)
-----------------------
254,000 (160,000)
-----------------------
Deferred:
Federal (6,200) (55,000)
State (1,800) (16,000)
-----------------------
(8,000) (71,000)
-----------------------
Total income tax expense (benefit) $ 246,000 $ (231,000)
=======================
</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>
1997 1996
---- -----
<S> <C> <C>
Computed expected income tax expense (benefit) 34% (34)%
State income taxes, net of federal benefit 6 (7)
Foreign Sales Corporation (5) --
Other 1 6
-------------
Total income tax expense (benefit) rate 36% (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
27, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
Deferred tax assets: 1997 1996
--------- ---------
<S> <C> <C>
Inventory $ 60,381 $ 92,000
Reserves 108,585 104,000
Compensation 23,498 14,000
-----------------------
$ 192,464 $ 210,000
=======================
Deferred tax liabilities:
Depreciation $ 67,295 $ 58,450
=======================
</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 vest 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 and the Advisory Board Stock
Option Plan expire after 10 years, while options granted under the 1993
Directors Stock Option Plan expire after 5 years. As of December 27, 1997,
97,000 shares were available to be granted under these plans in the future. A
summary of changes of common stock options during 1997 and 1996 is:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding January 1, 1996 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
Issued during 1997 118,000 $2.19
Lapsed during 1997 (40,500) $2.97
Exercised during 1997 (21,300) $0.73
Outstanding at December 27, 1997 551,708 $1.74
Shares exercisable at December 27, 1997 398,373
=======
Shares exercisable at December 31, 1996 363,900
=======
</TABLE>
The weighted average fair value of options granted in 1997 and 1996 was $1.26
and $1.14, respectively and the range of exercise prices at December 27, 1997
is $0.25 to $4.52. The weighted average remaining contractual life of these
options is approximately 3.4 years.
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 results 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>
1997 1996
-------------------- ------------------------
As Pro As Pro
Reported Forma Reported Forma
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $434,975 $399,519 $(420,113) $(459,848)
Basic net income (loss) per share $ 0.13 $ 0.12 $ (0.13) $ (0.14)
</TABLE>
The fair value of stock options in the pro forma accounts for 1997 and 1996 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 1997 and 1996, respectively: no
dividend yield; expected volatility of 50% for both years; risk-free interest
rates of 6% for both years; and expected life of 6 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
1998. Minimum lease payments over the fixed terms of these leases are as
follows:
1998 $84,179
1999 4,761
Rent expense was approximately $117,000 and $112,900 in 1997 and 1996,
respectively, including approximately $64,000 and $62,700 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 $9,377 and
$14,531 in 1997 and 1996 respectively.
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 approximately
$35,300 and $29,500 in 1997 and 1996, 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. In 1997 these funds, which were
held in a restricted escrow account in 1996, plus accrued interest, were
returned to Mr. Knight as part of a written agreement between the Company and
Mr. Knight dated April 21, 1997. The corresponding share certificates were
cancelled coincident with the written agreement.
11. Subsequent Event
The Company has executed an agreement with two venture capital funds, Ampersand
Specialty Materials and Chemicals III Limited Partnership and Ampersand
Specialty Materials and Chemicals III Companion Fund Limited Partnership
(collectively, "Ampersand"). Ampersand has agreed to purchase $5.0 million of
common stock from INCON, subject to satisfaction of certain conditions. The
Company would plan to apply a portion of these proceeds as follows: (i) to fund
a contemplated issuer tender offer to INCON shareholders ($1.6 million) and
(ii) to pay down the existing line of credit and other indebtedness ($1.2
million). The remaining proceeds would be available as additional working
capital.
Exhibit 10.3A
LEASE EXTENSION AGREEMENT
AGREEMENT made this ____ day of June, 1997, between APOLLO DEVELOPMENT
CORP. ("Landlord") and INTELLIGENT CONTROLS, INC. ("Tenant").
WHEREAS the parties have a lease between them currently in force,
covering property in the Saco, Maine, Industrial Park, which lease is dated
April 11, 1991, with a lease extension agreement dated June 28, 1994, with a
termination date of August 15, 1997, and
WHEREAS the parties desire to extend the term of said lease, as set forth
herein,
NOW THEREFORE in consideration of the mutual promises herein made, the
parties agree that the termination date of said lease shall be extended to
August 15, 1998. During the extension period the rent shall be $5,375.00 per
month, payable monthly in advance. The rent shall be prorated for the final
half month.
The option renewal right granted to Tenant shall be extended to August
15, 1999.
The period for exercise of the option to purchase the leased real
property (set forth in paragraph 20 of said original lease) is also extended to
the new lease termination date of August 15, 1998 (or August 15, 1999, if the
option to renew the lease is exercised). The 2% increase factor in the option
purchase price shall be computed over the entire period (including the
extension term) as applicable.
In all other respects the lease terms are ratified and confirmed.
Executed at Saco, Maine, on the above date.
Witnessed by: APOLLO DEVELOPMENT CORP.
/s/ Joyce T. Purvis /s/ Clifford A. Purvis
- -------------------------------- ----------------------------------
Treasurer
INTELLIGENT CONTROLS, INC.
/s/ Sharon L. Binette /s/ Alan Lukas
- -------------------------------- ----------------------------------
President Tenant
May 27, 1997
- --------------------------------
DATE
Exhibit 10.4A
ADDENDUM TO
LEASE BETWEEN BJB ASSOCIATES, LANDLORD and
INTELLIGENT CONTROLS, INC., TENANT
DATED JUNE 21, 1994
The lease is hereby revised as follows. All other terms and conditions to
remain the same.
1. First option term to be for a period of fourteen months commencing August
15, 1997 and expiring on October 14, 1998. Monthly lease payments for
this option term to be as follows:
First twelve months $4,580.00 per month
Thirteenth and fourteenth months $4,866.25 per month
By signing this ADDENDUM, Tenant hereby formally exercises the above option. By
signing this ADDENDUM, Landlord acknowledges receipt of tenant's notification
of its intent to extend on a timely basis.
2. Second option term to be for a period of twelve months commencing October
15, 1998 and expiring no later than April 15, 1999. Tenant to give
Landlord notice of its intention to extend no later than April 15, 1998.
Monthly lease rates for the second option term to be as follows:
First ten months $4,866.25 per month
Eleventh and Twelfth months $5,158.22 per month
LANDLORD: BJB ASSOCIATES:
/s/ L. McCabe /s/ Glenn Joziatis
- -------------------------------- ----------------------------------
Witness Partner
TENANT: INTELLIGENT CONTROLS, INC.
/s/ Sharon L. Binette /s/ Kenneth J. Burek
- -------------------------------- ----------------------------------
Witness Chief Financial Officer
May 27, 1997
- --------------------------------
DATE
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
INCON International, Inc. a Maine corporation
INCON International FSC, Inc. a Barbados corporation
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Intelligent Controls, Inc. on Form S-8 of our report dated February 13, 1998,
on our audits of the financial statements of Intelligent Controls, Inc. as of
December 27, 1998 and December 31, 1996, and for each of the two years in the
period ended December 27, 1997, which report is included in this Annual Report
on Form 10-KSB.
/s/ COOPERS & LYBRAND L.L.P.
Portland, Maine
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> DEC-27-1997
<CASH> 300
<SECURITIES> 0
<RECEIVABLES> 2,250,062
<ALLOWANCES> 50,000
<INVENTORY> 1,884,328
<CURRENT-ASSETS> 4,623,957
<PP&E> 1,510,065
<DEPRECIATION> 653,484
<TOTAL-ASSETS> 5,507,714
<CURRENT-LIABILITIES> 2,306,131
<BONDS> 372,401
0
0
<COMMON> 2,293,841
<OTHER-SE> 468,046
<TOTAL-LIABILITY-AND-EQUITY> 5,507,714
<SALES> 13,005,184
<TOTAL-REVENUES> 13,005,184
<CGS> 7,568,247
<TOTAL-COSTS> 4,568,511
<OTHER-EXPENSES> 30,221
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 157,230
<INCOME-PRETAX> 680,975
<INCOME-TAX> 246,000
<INCOME-CONTINUING> 434,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 434,975
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
