U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission File Number 1-13628
INTELLIGENT CONTROLS, INC.
(Exact name of small business issuer as
specified in its charter)
Maine 01-0354107
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
74 Industrial Park Road, Saco, Maine 04072
(Address of principal executive offices)
(207) 283-0156
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
There were 5,056,760 shares of Common Stock of the issuer outstanding as of
July 31, 1998.
Transitional Small Business Disclosure Format: Yes No X
----- -----
PART I
ITEM 1. FINANCIAL STATEMENTS.
Unaudited financial statements of the Company appear beginning at page F-1
below, and are incorporated herein by reference. These financial statements
include all adjustments which, in the opinion of management, are necessary
in order to make the financial statements not misleading.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations For Six Months Ended June 27, 1998:
For the six months ended June 27, 1998, sales grew 12% to $6.9 million as
compared to $6.2 million for the same period in 1997.
The Petroleum segment grew 16% in the first half of 1998 to $6.3 million, up
from $5.4 million for the first six months of 1997. The ongoing sales
growth in this market continues to be caused by strong new construction
activity and the EPA compliance requirement which has a deadline of December
22, 1998. Sales of a new generation of automatic tank gauges, the TS-
1001/2001, during the first half of 1998, have been received well in the
marketplace. Digital probe sales to a major OEM customer began to improve
in the second quarter, due to recently resumed shipments after completion of
design improvement. Sales to that customer are still $245,000 lower for the
year than during the first six months of 1997, with $180,000 of the decline
coming in the first quarter of 1998. Overall revenues for the first half of
1998 and 1997 were favorably affected by approximately $590,000 of shipments
in each of March 1998 and February 1997 under the recently completed China
Petroleum order.
Sales in the Power Utilities segment were down 20% for the first six months
of 1998. Sales continue to be adversely affected by deferred shipments of
the Optimizer product which is undergoing a software upgrade. Shipments of
upgraded units have subsequently begun in July.
Gross margins for the first half of 1998 were 46.4% as compared to 40.0% for
the same period in 1997. Purchased material cost reductions, manufacturing
volume efficiencies, and reduced warranty scrap were the major components of
this performance improvement.
Operating expenses were 52.2% of sales for the first half of 1998, as
compared to 35.5% for the same period in 1997. Operating expenses in the
second quarter of 1998 were significantly affected by added costs from
settling two lawsuits.
* The settlement of a 1996 lawsuit by John Knight (a former executive)
involved the repurchase of $607,660 in stock and options from him, on
terms equivalent to the recent tender offer to all Company
shareholders. Under generally accepted accounting principles, the
repurchase of stock and options from Mr. Knight must be expensed,
whereas the repurchase of stock from shareholders through the tender
offer is accounted for as an adjustment to shareholders' equity. The
settlement also involved the payment of an additional $40,000 to Mr.
Knight, by way of additional severance compensation.
* A tentative settlement of a patent infringement claim by Hasstech will
require INCON to pay Hasstech $100,000 in subsequent quarters. The
entire $100,000 has been accrued as an expense in the second quarter
of 1998.
(See "Legal Proceedings" below). Without the effect of these settlement
costs, operating expenses for the first six months of 1998 would be 41.4% of
sales. In addition to these settlement costs, operating expenses for 1998
grew from increased spending in marketing and sales, R & D, and corporate
management as compared to the first half of 1997. Expenses in 1998 have
also included approximately $50,000 in increased legal expense indirectly
related to an investment by Ampersand Ventures in the Company, and
approximately $80,000 of legal expense incurred in defending against the
Hasstech litigation.
The net loss for the first six months of 1998 was ($389,278) as compared to
net income of $91,205 for the same months in 1997. The onetime legal
charges for settling two lawsuits were the reason for the loss during this
otherwise profitable six month period. Income from operations, before legal
settlement costs, was $241,146 for the quarter ended June 27, 1998 and
$349,649 for the first half of 1998 as compared to $263,187 for the second
quarter of 1997 and $278,246 for the first half of 1997.
Liquidity and Capital Resources at June 27, 1998:
As of June 27, 1998 the Company had $2.5 million in cash and 100%
availability on its $3.5 million line of credit. The Company expects that
current resources will be sufficient to finance the Company's operating
needs for at least the next 12 months.
Capital was increased by nearly $5.6 million in May 1998 through (i) a
$5,325,001 purchase of Common Stock at $3.25 per share by two investment
funds affiliated with Ampersand Ventures, in Wellesley, Massachusetts and
(ii) a $250,000 purchase of Common Stock at $3.25 per share by Roger E.
Brooks (the Company's new President and Chief Executive Officer) as part of
a restricted stock arrangement with him.
The Company used more than $3.3 million of this capital to (i) fund the
Company's recent tender offer to repurchase 475,000 shares of Common Stock
from existing shareholders at $3.25 per share ($1,543,750), (ii) pay costs
associated with the Ampersand transaction and the tender offer ($143,974),
(iii) repay approximately $1 million of existing indebtedness, and (iv) fund
approximately $650,000 of litigation expense in settling the Knight lawsuit.
The Company plans to use the remaining capital primarily to help fund plans
for expanding its business, through increased marketing efforts, continued
development of new products, international expansion, and other means.
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company settled, in May, a long-standing legal dispute with John Knight,
a former executive who was terminated in June 1996. Mr. Knight alleged that
the Company owed him $287,100 in unpaid bonus payments over a six and one-
half year period under his 1986 Employment Agreement, plus $574,200 in
punitive damages. Mr. Knight had also challenged the Company's refusal to
allow his post-termination exercise of certain stock options for 248,240
shares.
The parties agreed to dismiss the lawsuit in return for a $40,000 payment by
the Company to Knight, plus an additional payment equivalent to a repurchase
of the 248,240 shares from him at $3.25 per share, minus the aggregate
exercise price for his options. The $3.25 per share is the same price the
Company offered to other shareholders in its recently completed tender
offer. As part of the terms, the Company acknowledged that Mr. Knight
validly exercised certain of his stock options.
The Company reached a tentative agreement, in early July, with Hasstech
which had brought suit in October 1997 claiming that INCON's line leak
detector infringed a certain Hasstech patent. A settlement reached in
mediation, and recorded in the court records, calls for an agreement between
the parties whereby INCON will pay Hasstech $100,000, part in September 1998
and the balance in the first quarter of 1999. In addition, the Company has
potential small ongoing payments in the event of sales to a specific market
segment, within which the Company is not currently active. Both parties
agreed to this settlement to avoid the expenditure of additional time,
effort and money required in a protracted litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
An index of the exhibits filed with this report appears beginning at page E-1
below, and is incorporated herein by reference.
On May 27, 1998, the Company filed a report on Form 8-K regarding settlement
of the Knight litigation. See "Legal Proceedings" above.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTELLIGENT CONTROLS, INC.
By: /s/ Andrew B. Clement
--------------------------------
Andrew B. Clement, Controller
(on behalf of the Company and as
Date: August 11, 1998 principal financial officer)
Index to Exhibits
Exhibit No. Description
- ----------- -----------
10.1 Settlement Agreement and Mutual Release, dated May 13, 1998,
with John Knight; incorporated herein by reference to
Exhibit 99.1 to the Company's report on Form 8-K filed on
May 27, 1998.
10.2 Employment Agreement dated as of May 1, 1998 with Alan Lukas
27 Financial Data Schedule
REPORT OF INDEPENDENT ACCOUNTANTS
July 24, 1998
To the Board of Directors and Shareholders of
INTELLIGENT CONTROLS, INC.
We have reviewed the accompanying balance sheet of Intelligent Controls, Inc.,
as of June 27, 1998 and the related statements of income and cash flows for the
three and six month periods ended June 27, 1998 and June 30, 1997. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding financial statements taken as a
whole. Accordingly, we do not express such an opinion. We previously audited
and expressed an unqualified opinion on the Company's consolidated financial
statements for the year ended December 27, 1997 (not presented herein). In our
opinion, the information set forth in the accompanying balance sheet as of
December 27, 1997, is fairly stated in all materials respects, in relation to
the statement of financial position from which it has been derived.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
/s PricewaterhouseCoopers L.L.P.
- -----------------------------------
INTELLIGENT CONTROLS, INC.
BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
(unaudited)
June 27 December 27
1998 1997
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,498,482 $ 300
Accounts receivable, net of allowance for doubtful
accounts of $84,459 in 1998 and $60,000 in 1997 2,644,480 2,200,062
Inventories 1,711,601 1,854,328
Prepaid expenses and other 162,298 257,704
Income taxes receivable 198,717 119,099
Deferred income taxes 192,464 192,464
-------------------------
Total current assets 7,408,042 4,623,957
Property, Plant, and Equipment, net 852,980 856,581
Other Assets 29,139 27,176
-------------------------
$ 8,290,161 $5,507,714
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Non-interest bearing overdraft 67,259
Note payable - bank 754,366
Accounts payable 600,090 769,097
Accrued expenses 908,242 520,709
Current portion long-term debt 138,200 194,700
-------------------------
Total current liabilities 1,646,532 2,306,131
Long-term debt, net of current portion 276,515 372,401
Deferred taxes 67,295 67,295
Stockholders equity:
Common Stock, no par value; 8,000,000 shares 7,578,979 2,293,841
authorized; 5,056,760 issued at June 27, 1998
and 3,274,306 issued at December 27, 1997
Retained Earnings 78,768 468,046
Less:
Shareholder note receivable (1,345,428)
Treasury Stock, 105,128 shares (12,500)
-------------------------
6,299,819 2,761,887
-------------------------
$ 8,290,161 $5,507,714
=========================
</TABLE>
See accompanying notes.
INTELLIGENT CONTROLS, INC.
STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 27 June 30 June 27 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $3,382,173 $3,164,323 $6,919,489 $6,197,986
Cost of sales 1,715,342 1,752,845 3,707,807 3,720,327
----------------------------------------------------
1,666,831 1,411,478 3,211,682 2,477,659
Operating expenses:
Selling, general and administrative 1,208,619 964,366 2,399,805 1,797,949
Research and development 217,066 183,926 462,228 401,464
Legal settlement charges 747,660 0 747,660 0
----------------------------------------------------
2,173,345 1,148,292 3,609,693 2,199,413
Operating income (loss) (506,514) 263,186 (398,011) 278,246
Other income (expense)
Interest (expense) (22,604) (48,390) (52,461) (101,208)
Other income (expense) 6,802 (17,319) (10,222) (30,325)
----------------------------------------------------
(15,802) (65,709) (62,683) (131,533)
Income (loss) before income tax (522,316) 197,478 (460,694) 146,714
Income tax (expense) benefit 96,066 (75,469) 71,416 (55,509)
----------------------------------------------------
Net income (loss) $ (426,250) $ 122,009 $ (389,278) $ 91,205
====================================================
Net income (loss) per share
basic and diluted $ (0.10) $ 0.04 $ (0.10) $ 0.03
Weighted average number of
common shares outstanding 4,386,547 3,435,191 3,835,378 3,435,191
Weighted average common and
common equivalent shares outstanding 4,437,719 3,435,191 3,912,133 3,435,191
</TABLE>
See accompanying notes.
INTELLIGENT CONTROLS, INC.
STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 27 June 30
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (389,278) $ 91,205
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 127,150 114,947
Changes in assets and liabilities
Accounts receivable (444,418) (141,665)
Inventories 142,727 555,009
Prepaid expenses and other current assets 95,406 83,960
Income tax receivable (79,618) 55,509
Accounts payable and accrued expenses 218,526 (229,175)
Other (1,963) (2,356)
-------------------------
Net cash created (used) by operating activities (331,468) 527,434
-------------------------
Cash flows from investing activities:
Purchases of property, plant, & equipment (132,844) (107,969)
Disposal of property, plant, & equipment 9,295
-------------------------
Net cash used by investing activities (123,549) (107,969)
Cash flows from financing activities:
Decrease in non-interest bearing overdraft (67,259)
Repayment of note payable (754,366) (387,326)
Issuance of long-term debt 61,503
Repayment of long-term debt (152,386)
Issuance of common stock, net 5,285,138 3,099
Acquisition of treasury stock (12,500)
Increase in shareholder note receivable (1,345,428)
Decrease in restricted cash balances (199,120)
Decrease in liability to shareholder 199,120
-------------------------
Net cash provided (used) by financing activities 2,953,199 (322,724)
-------------------------
Net increase in cash 2,498,182 96,741
Cash and cash equivalents at beginning of year 300 133,690
-------------------------
Cash and cash equivalents at end of period $ 2,498,482 $ 230,431
=========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 52,461 $ 101,208
</TABLE>
See accompanying notes.
INTELLIGENT CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not to be misleading. In
the opinion of management, the amounts shown reflect all adjustments
necessary to present fairly the financial position and results of
operations for the periods presented. All such adjustments are of a
normal recurring nature. The year-end condensed balance sheet was
derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
Certain reclassifications have been made to the December 27, 1997
financial statements to conform with the June 27, 1998 presentations.
It is suggested that the financial statements be read in conjunction
with the financial statements and notes thereto included in the
Company's 10-KSB.
2. Earnings Per Common Share
-------------------------
Basic earnings per share of common stock have been determined by
dividing net earnings by the weighted average number of shares of
common stock outstanding during the periods presented. Diluted
earnings per share reflect the potential dilution that would occur if
existing stock options were exercised. The effect of exercising
existing stock options is not taken into account where the results
would be anti-dilutive (i.e. in periods with net losses). Following
is a reconciliation of the dual presentations of earnings per share
for the periods presented.
<TABLE>
<CAPTION>
Net Income Common Shares Earnings
(Numerator) (Denominator) Per Share
----------- ------------- ---------
Quarter Ended June 27, 1998
---------------------------
<S> <C> <C> <C>
Basic earnings per share $(426,248) 4,386,547 $(0.10)
======
Dilutive potential shares 0
--------------------------
Diluted earnings per share $(426,248) 4,386,547 $(0.10)
=======================================
<CAPTION>
Six Months Ended June 27, 1998
------------------------------
<S> <C> <C> <C>
Basic earnings per share $(389,276) 3,835,378 $(0.10)
======
Dilutive potential shares 0
--------------------------
Diluted earnings per share $(389,276) 3,835,378 $(0.10)
=======================================
<CAPTION>
Quarter Ended June 30, 1997
---------------------------
<S> <C> <C> <C>
Basic earnings per share $ 122,009 3,435,191 $ 0.04
======
Dilutive potential shares 0
--------------------------
Diluted earnings per share $ 122,009 3,435,191 $ 0.04
=======================================
<CAPTION>
Six Months Ended June 30, 1997
------------------------------
<S> <C> <C> <C>
Basic earnings per share $ 91,205 3,435,191 $ 0.03
======
Dilutive potential shares 0
--------------------------
Diluted earnings per share $ 91,205 3,435,191 $ 0.03
=======================================
</TABLE>
3. Property, Plant, and Equipment
------------------------------
Property, plant, and equipment, at cost,
<TABLE>
<CAPTION>
(Unaudited)
June 27, December 27
1998 1997
<S> <C> <C>
Leasehold improvements $ 147,172 $ 111,983
Equipment 1,202,239 1,139,210
Computer software 179,891 154,560
Furniture and Fixtures 104,312 104,312
-------------------------
1,633,614 1,510,065
Less accumulated depreciation and amortization (780,634) (653,484)
-------------------------
$ 852,980 $ 856,581
=========================
</TABLE>
4. Inventories consisted of the following at June 27, 1998 and December
27, 1997.
<TABLE>
<CAPTION>
(Unaudited)
June 27 December 27
1998 1997
<S> <C> <C>
Raw Material $1,129,999 $1,214,749
Work in Progress 216,123 229,824
Finished Goods 305,536 356,974
Other 59,943 52,781
-------------------------
$1,711,601 $1,854,328
=========================
</TABLE>
5. New Accounting Pronouncements
-----------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130 - Reporting Comprehensive
Income, which requires the separate reporting of all changes to
shareholders' equity, and SFAS No. 131 - Disclosures about Segments of an
Enterprise and Related Information, which revises existing guidelines about
the level of financial disclosure of a company's operations. Both
statements are effective for financial statements issued for fiscal years
beginning after December 15, 1997. The Company has determined that the new
standard will not necessitate any changes to existing financial reporting.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
- -- Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
including certain derivatives embedded in other contracts, and for hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. The statement is effective January 1, 2000. The
Company has not yet determined what effect, if any, the statement will have
on the financial statements.
6. Litigation
----------
In May 1998, the Company settled a lawsuit with a former executive who had
filed suit alleging that the Company owed him $287,100 in unpaid bonus
payments over a six and one-half year period under his 1986 Employment
Agreement, plus $574,200 in punitive damages. The plaintiff also challenged
the Company's refusal to allow his post-termination exercise of certain
stock options for 248,240 shares. The case was settled by allowing the
plaintiff to exercise some of his options followed by a $647,660 cash
payment to the plaintiff, $607,660 to purchase back 100,000 shares and all
of his outstanding options, as well as $40,000 as additional severance. The
entire amount was expensed in the second quarter 1998.
The Company reached a tentative agreement, in early July, with Hasstech
which had brought suit in October 1997 claiming that INCON's line leak
detector infringed a certain Hasstech patent. A settlement reached in
mediation, and recorded in the court records, calls for an agreement between
the parties whereby INCON will pay Hasstech $100,000, part in September 1998
and the balance in the first quarter of 1999. The entire $100,000 obligation
was recognized as an operating expense in the second quarter of 1998.
7. Stockholders' Equity
--------------------
On May 1, 1998, the Company received $5,325,001 of proceeds from the sale of
1,638,462 shares of common stock to two investment funds affiliated with
Ampersand Ventures. In addition, on May 6, 1998, the company sold an
additional 486,923 shares of common stock as part of a restricted stock
arrangement with he new President and Chief Executive Officer. Proceeds on
this sale amounted to $250,000 cash and the acceptance of a $1,332,500
promissory note.
On May 1, 1998, the Company completed a tender offer to existing
shareholders, whereby the Company repurchased and canceled 475,000 shares of
common stock for approximately $1,544,000.
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made as of the 1st day of
May, 1998, is entered into by Intelligent Controls, Inc., a Maine
corporation with its principal place of business at 74 Industrial Park Road,
Saco, Maine 04072 (the "Company"), and Alan Lukas, an individual residing at
16 Stapleford Drive, Falmouth, Maine 04105 (the "Executive").
Recitals:
A. The Executive is the founder of the Company and has served as
President and Chief Executive Officer of the Company since 1978.
B. The Executive and other members of the Company's Board of
Directors have voted to appoint Roger E. Brooks as President and Chief
Executive Officer of the Company as of May 1, 1998 or thereabouts.
C. The Company and the Executive desire to define the Executive's
future roles and responsibilities and to set forth the terms of the
Company's continued employment of the Executive in these capacities.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, the
parties agree as follows:
1. Term of Employment/Retention. (a) The Company hereby agrees to
employ the Executive, and the Executive hereby accepts employment (his
"Employment") with the Company, commencing on May 1, 1998 (the "Commencement
Date") and ending on June 30, 2000; provided, however, that the term of his
Employment hereunder shall be automatically extended for periods of one (1)
year after such date, unless and until the Company or the Executive shall
have delivered to the other written notice of its or his election to
terminate this Agreement as of such date or the end of any one-year
extension period, such notice to be delivered at least ninety (90) days
prior to the date of termination. The period of time during which the
Executive is employed hereunder is hereafter referred to as the "Employment
Period".
(b) In addition, the Company hereby agrees to retain the Executive as
Chairman of the Board of Directors and/or a consultant through June 30, 2003
or the date of the Annual Meeting of Shareholders in such year, whichever
occurs first, and the Executive hereby accepts this retention (his
"Retention"). If the Employment Period (as defined above) ends before such
date, then the period of time between such date and the end of the
Employment Period shall be referred to herein as the "Supplemental Retention
Period". The Supplemental Retention Period may only be extended by written
agreement of the Company and the Executive.
2. Titles; Duties. (a) During the Employment Period, the Executive
shall serve as a Vice President of the Company, subject to the general
direction and control of the Chief Executive Officer of the Company.
Initially the Executive's title shall be Vice President for Product
Development, such title to be subject to appropriate adjustment if and when
the Executive's duties as a Vice President are revised by the Chief
Executive Officer or the Board of Directors (the "Board"). The Executive
hereby accepts such employment and agrees to undertake the duties and
responsibilities inherent in such position and such other executive duties
and responsibilities as the Chief Executive Officer shall from time to time
assign to him. The Executive agrees to devote his entire business time,
attention and energies to the business and interests of the Company during
the Employment Period; provided, however, that the Executive shall have the
right to serve as a director of up to one other company. The Executive
agrees to abide by the rules, regulations, instructions, personnel practices
and policies of the Company and any changes therein which may be adopted
from time to time by the Company.
(b) For at least two years from the date of this Agreement, the
Company shall use its best efforts to cause the Board to designate the
Executive as Chairman of the Board.
(c) During the Supplemental Retention Period, the Executive shall (i)
serve as Chairman of the Board if so designated by the Board and (ii) serve
as a consultant to the Company. The Executive shall be required during the
Supplemental Retention Period to make himself available for up to 400 hours
of services per year. Either the Board or the Company's chief executive
officer shall define the nature and timing of the Executive's services
during such period, subject however to the Executive's prior approval (which
shall not be unreasonably withheld).
3. Compensation and Benefits.
(a) Salary. During the Employment Period, the Company shall pay the
Executive, in equal bi-weekly installments, a base salary at the rate of
$120,000 per year, subject to annual increases in the discretion of the
Board based on the Executive's performance.
(b) Bonuses. During the Employment Period, the Executive shall be
eligible to receive an annual bonus of up to 25% of the Executive's annual
base salary, the first of such bonuses to accrue beginning on the date as of
which the Investment Agreement is executed. The Executive's eligibility to
receive such bonus shall be dependent on the achievement of financial and
operating objectives determined by the Board.
(c) Additional Retainer. During the Employment Period and the
Supplemental Retention Period, the Company shall also pay the Executive a
retainer at the rate of $30,000, to be paid in equal bi-weekly installments.
This retainer shall be for services to the Company as a Director and/or
consultant, and shall be in lieu of any other compensation to which the
Executive would otherwise be entitled as a Director of the Company or any of
its subsidiaries.
(d) Executive Benefit Plans. During the Employment Period, the
Executive shall be eligible to participate in any life insurance, medical,
retirement, pension or profit-sharing or other benefit plans or arrangements
now or hereafter generally made available by the Company to executive
officers of the Company (collectively, the "Benefits"). The Benefits
include, without limitation, participation in the Company's corporate
membership at the Woodlands Country Club or a comparable facility, on terms
equivalent to those in effect at the date of this Agreement. During the
Supplemental Retention Period, the Executive and his family shall be
entitled to participate in the Company's health insurance program, on the
same terms as were in effect for him at the end of the Employment Period;
provided that if the Executive and his family are ineligible to participate
in such program, then the Company may instead reimburse him for the
reasonable cost of obtaining comparable health insurance coverage.
(e) Vacation. During the Employment Period, the Executive shall be
entitled to vacations (taken consecutively or in segments), not to exceed an
aggregate of four (4) weeks per year.
(f) Expense Reimbursement. The Company shall reimburse the Executive
for all reasonable expenses properly incurred by him on behalf of the
Company in the performance of his duties hereunder and in accordance with
policies set by the Board; provided that proper vouchers are submitted to
the Company by the Executive evidencing such expenses and the purposes for
which the same were incurred.
(g) Future Stock Options. If and to the extent that the Company
grants its executive officers stock options or other stock-related
incentives, the Board shall in good faith consider whether the Executive
should be permitted to participate in such incentives. Provided, however,
that the Executive shall in no event be entitled to additional stock-related
incentives in respect of (i) the purchase of 486,923 shares of common stock
by Mr. Brooks pursuant to his restricted stock arrangement with the Company
or (ii) grants of options under the 1998 Stock Option Plan (or successor
plans) if the common stock underlying such options does not exceed 300,000
shares in the aggregate.
4. Termination of Employment and/or Retention. The Executive's
Employment and/or Retention shall terminate upon the occurrence of any of
the following:
(a) At the election of the Company, for cause, immediately upon
written notice by the Company to the Executive. For purposes of this
Agreement, "cause" shall be deemed to exist upon a good faith finding by the
Board that the Executive has (i) committed an act constituting fraud,
embezzlement or other felony, (ii) breached his fiduciary duties to the
Company or (iii) wilfully failed to perform his duties and responsibilities
hereunder. Provided, however, that during the Employment Period, the
Company may not terminate his Retention for cause unless it has terminated
his Employment for cause.
(b) At the election of the Company, without cause, immediately upon
written notice by the Company to the Executive, subject to the provisions of
Section 5(b).
(c) The death or disability of the Executive. For purposes of this
Agreement, "disability" shall mean the degree of incapacitation as a result
of illness or accident and whether physical or mental which, in the opinion
of an independent medical expert selected by the Company and approved by the
Executive (which approval shall not be unreasonably withheld), makes it
reasonably unlikely that the Executive will be able to perform his normal
duties for a period of one hundred twenty (120) days, whether or not
consecutive, during any 360-day period.
(d) At the election of the Executive, for any reason, upon at least
ninety (90) days prior written notice to the Company. Provided, however,
that during the Employment Period the Executive may not terminate his
Retention unless he has also offered to terminate his Employment.
5. Effect of Termination.
(a) Termination by the Company for Cause. In the event the
Executive's Employment (and/or Retention, as the case may be) is terminated
for cause pursuant to Section 4(a), the Company shall pay or provide to the
Executive the compensation and Benefits otherwise payable to him under
Section 3 through the last day of his actual Employment (and/or Retention,
as the case may be) by the Company, but shall have no responsibility for any
compensation or benefits to the Executive for any time period subsequent to
such termination.
(b) Termination by the Company without Cause. (1) In the event the
Executive's Employment is terminated without cause pursuant to Section 4(b),
the Company shall (i) continue to pay him, on a bi-weekly basis, his base
salary specified in Section 3(a), as in effect at the time of such
termination, for the twelve-month period commencing on the date of such
termination (the "Severance Period"), and (ii) continue to provide him,
through the Severance Period, with the Benefits to which he would otherwise
have been entitled hereunder had his Employment not been terminated;
provided, however, that if pursuant to terms of any plan or arrangement
under which Benefits are provided the Company is unable to continue to
provide those Benefits to the Executive for all or a portion of the
Severance Period at a cost comparable to that which would apply if the
Executive remained an employee of the Company, the Company shall have the
right to discontinue providing those Benefits to the Executive and in lieu
thereof to pay the Executive a cash amount equal to the cost to the Company
of continuing to provide those Benefits for the remainder of such period,
assuming the Executive remained an employee of the Company; and provided
further, that in the event Executive has secured full time employment in a
comparable position, the Severance Period shall be deemed to end as of the
later of the date Executive has secured such comparable employment, or six
(6) months from the date of termination of his Employment. The Executive
shall not have any obligation to seek or accept subsequent employment.
(2) In the event the Executive's Retention is terminated without cause
pursuant to Section 4(b), the Company through June 30, 2003 shall continue
to (i) pay him, on a bi-weekly basis, the retainer specified in Section
3(c), as in effect at the time of such termination, and (ii) make health
insurance benefits available to him and his family as specified in the last
sentence of Section 3(d).
(c) Termination due to Death. In the event the Executive's Employment
and Retention is terminated due to his death, the Company shall pay or
provide to the estate of the Executive the compensation and Benefits which
would otherwise be payable to the Executive under Section 3 through the date
of termination, but the Company shall have no responsibility for any
compensation or benefits to the Executive or his estate for any time period
subsequent to such termination.
(d) Termination due to Disability. In the event the Executive's
Employment and/or Retention is terminated due to his disability, the Company
shall for the twelve-month period commencing on the date of such termination
(i) continue to pay him, on a bi-weekly basis, an amount equal to the
difference between (A) his base salary under Section 3(a) plus (as the case
may be) his retainer under Section 3(c), in each case as in effect at the
time of such termination, and (B) the pre-tax equivalent amount received by
the Executive pursuant to any disability insurance provided to the Executive
by the Company and (ii) continue to provide him with the Benefits to which
he would otherwise have been entitled hereunder had his Employment and/or
Retention (as the case may be) not been terminated; provided, however, that
if pursuant to terms of any plan or arrangement under which Benefits are
provided the Company is unable to continue to provide those Benefits to the
Executive for all or a portion of such twelve-month period at a cost
comparable to that which would apply if the Executive remained an Executive
of the Company, the Company shall have the right to discontinue providing
those Benefits to the Executive and in lieu thereof to pay the Executive a
cash amount equal to the cost to the Company of continuing to provide those
Benefits for the remainder of such twelve-month period, assuming the
Executive remained an Executive of the Company.
(e) Voluntary Termination by the Executive. In the event the
Executive's Employment and/or Retention is terminated by the Executive
pursuant to Section 4(d), the Company shall pay or provide to the Executive
the compensation and Benefits otherwise payable to him under Section 3
through the last day of his actual Employment and/or Retention (as the case
may be) by the Company, but shall have no responsibility for any
compensation or benefits to the Executive for any time period subsequent to
such termination; provided, however, that upon such a termination by the
Executive by reason of a relocation of the Executive to an office more than
50 miles from the Company's present location or by reason of a material
breach of this Agreement by the Company, the Executive shall be entitled to
the same compensation and benefits as in the case of a termination by the
Company without cause pursuant to Section 4(b).
(f) Termination upon Nonrenewal. If the Executive's Employment
terminates on or before June 30, 2001 because the Company (but not the
Executive) has given notice of nonrenewal in accordance with Section 1(a)
above, then the Executive shall thereupon be entitled to the same severance
pay and Benefits as would be provided under Section 5(b) upon a termination
of his Employment by the Company without cause.
6. Confidential Information.
(a) Confidential Information. The Executive acknowledges and
understands that in the performance of his service as an employee under this
Agreement, he will obtain knowledge of Confidential Information. The
Executive agrees that he shall not, either during the Employment Period or
at any time thereafter, except as required in the performance of his
services for the Company, (i) use or disclose any Confidential Information
outside the Company, or (ii) remove or aid in the removal from the premises
of the Company any Confidential Information or any property or material
relating thereto.
(b) Delivery of Material. The Executive shall deliver promptly to the
Company on the termination of his Employment and/or Retention (as the case
may be), or at any other time the Company may so request, all memoranda,
notes, records, reports, manuals, computer disks, videotapes, drawings,
blueprints and other documents (and all copies thereof) which, and to the
extent they, embody Confidential Information which he may then possess or
have under his control.
(c) Customer Lists. The Executive acknowledges that (i) all existing
lists of customers, vendors and advertisers of the Company developed during
the course of the Executive's Employment and/or Retention (as the case may
be) by the Company are and shall be the sole and exclusive property of the
Company and that the Executive neither has nor shall have any right, title
or interest therein, (ii) such lists are and must continue to be
confidential, and (iii) such lists are not readily accessible to competitors
of the Company.
(d) Definitions. For the purposes of this Section 6, "Confidential
Information" shall mean any information, including, without limitation,
trade "know-how", trade secrets, subscriber, advertiser and customer lists,
pricing policies, operational methods, methods of doing business, technical
processes, formulae, designs and design projects, inventions, software
programs, business plans, projects, research projects, and other business
affairs of the Company which (i) is or is designed to be used in the
business of the Company or results from its research or development
activities, and (ii) is conceived, developed, discovered or received by, or
made available to, the Executive during the period that the Executive is
employed or retained by the Company, in the course of his employment with or
retention by the Company. Confidential Information does not include, and no
restriction of the Executive contained in this Agreement shall apply to, any
of the following information: (i) that at or prior to the time of its
availability, disclosure to or development, conception or discovery by the
Executive, was generally known by the public; (ii) was available to the
public on a non-confidential basis prior to its availability, disclosure to
or development, conception or discovery by the Executive; or (iii) is now or
subsequently becomes rightfully known in the industry of which the Company
is a part. The phrase "business of the Company" in Sections 6 and 7 shall
mean the business in which the Company is now engaged or which may hereafter
become engaged during the course of the Executive's Employment and/or
Retention (as the case may be) by the Company. The term "Company" in
Sections 6, 7 and 8 shall mean the Company and any subsidiary of the
Company.
7. Non-Competition Covenants.
(a) Non-Competition Covenants. The Executive agrees that he will not,
during the Non-Competition Period, compete directly or indirectly with the
business of the Company. The phrase "compete directly or indirectly with
the business of the Company" shall mean (1) engaging or having a material
interest, directly or indirectly, as owner, employee, officer, director,
partner, sales representative, stockholder, capital investor, lessor,
renderer of consultation services or advice, either alone or in association
with others, in the operation of any aspect of a business or enterprise
which is competitive with the business in which the Company is engaged
during the Employment Period; (2) soliciting any employee of the Company to
leave the employ of the Company; (3) soliciting any of the employees of the
Company to become employees of any other person or entity; or (4) soliciting
any customer of the Company with respect to the business of the Company.
(b) Non-Competition Period. For the purposes of this Section 7, "Non-
Competition Period" shall mean the period during which the Executive is
employed by the Company and the one-year period commencing on the last day
of the Executive's Employment and/or Retention (as the case may be) by the
Company.
8. Injunctive and Other Equitable Relief.
(a) The Executive acknowledges that the services to be rendered by him
under the terms of this Agreement are of a special, unique and extraordinary
character, which gives them a peculiar value, the loss of which cannot be
reasonably or adequately compensated in damages in any action at law. By
reason of this, the Executive consents and agrees that if he violates any of
the provisions of Section 6 and 7 hereof, the Company shall be entitled, in
addition to any other remedies it may have at law, to the remedies of
injunction, specific performance and other equitable relief for a breach by
the Executive of Sections 6 and 7 of this Agreement. This Section 8 shall
not, however, be construed as a waiver of any of the rights which the
Company may have for damages or otherwise.
(b) Any waiver by the Company of a breach of any provision of Section
6 and 7 hereof shall not operate or be construed as a waiver of any
subsequent breach of such provision or any other provision hereof.
(c) The Executive agrees that each provision of Section 6 and 7 shall
be treated as a separate and independent clause, and the unenforceability of
any one clause shall in no way impair the enforceability of the other
clauses herein. Moreover, if one or more of the provisions contained in
Section 6 and 7 shall for any reason be held to be excessively broad as to
scope, activity or subject so as to be unenforceable at law, such provision
or provisions shall be construed by the appropriate judicial body by
limiting and reducing it or them so as to be enforceable to the maximum
extent compatible with the applicable law as it shall then appear.
(d) The Executive's obligations under Section 6 and 7 shall survive
the termination of his Employment and/or Retention (as the case may be)
regardless of the manner of such termination and shall be binding upon his
heirs, executors, administrators and legal representatives.
9. Other Agreements. The Executive hereby represents and warrants
that he is not bound by the terms of any agreement with any previous
employer or other party to refrain from using or disclosing any trade secret
or confidential or proprietary information in the course of his employment
with the Company or to refrain from competing, directly or indirectly, with
the business of such previous employer or any other party. The Executive
further represents and warrants that his performance of all the terms of
this Agreement and as an Executive of the Company does not and will not
breach any agreement to keep in confidence proprietary information,
knowledge or data acquired by him in confidence or in trust prior to his
employment with the Company.
10. Entire Agreement; Amendments. This Agreement sets forth the
entire understanding of the parties with respect to the subject matter
hereof, and no statement, representation, warranty or covenant has been made
by any party except as expressly set forth herein. This Agreement
supersedes and cancels all prior agreements between the parties, whether
written or oral, relating to the employment of the Executive. No
alteration, amendment or modification of any of the terms and provisions
hereof shall be valid unless made pursuant to an instrument in writing
signed by all of the parties hereto.
11. Applicable Law. This Agreement shall be governed by, construed
and enforced in accordance with the laws of the State of Maine.
12. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally or mailed, first class, postage prepaid, certified
mail, return receipt requested, or sent by nationally recognized overnight
courier service, to each of the parties at its or his address as set forth
at the beginning of this Agreement or as any of the parties may designate in
conformity with the foregoing.
13. Headings. The Section headings set forth in this Agreement are
for reference purposes only and shall not be considered as part of this
Agreement in any respect nor shall they in any way affect the substance of
any provisions contained in this Agreement.
14. Successor and Assigns. This Agreement shall be binding upon and
inure to the benefit of the successors and assigns of the Company. In
addition, this Agreement shall be binding upon and inure to the benefit of
the Executive and his heirs, legal representatives and assigns; provided,
however, that the obligations of the Executive hereunder may not be assigned
without the prior written approval of the Board.
15. Severability. If at any time subsequent to the date hereof, any
provision of this Agreement shall be held by any court of competent
jurisdiction to be illegal, void or unenforceable, such provision shall be
of no force and effect, but the illegality or unenforceability of such
provision shall have no effect upon and shall not impair the enforceability
of any other provision of this Agreement.
16. Dispute Resolution. In the event of any controversy or claim
arising out of or relating to the Executive's Employment and/or Retention
(as the case may be), this Agreement or any act or omission of a party
hereunder (a "dispute"), either party (by written notice to the other) may
invoke the procedures of this Section. Promptly after such notice is given,
the Executive and one or more disinterested representatives of the Company's
Board of Directors will meet to attempt to negotiate a settlement of all
pending disputes. If for any reason the Executive and the Company have not
entered into a written settlement of the dispute(s) within 30 days after the
original notice, either party may within one year of the original notice
give notice demanding arbitration. Thereafter all pending disputes shall be
settled by arbitration before a panel of three arbitrators, in accordance
with the rules of the American Arbitration Association pertaining to
employment disputes (or such other rules and procedures as the parties may
hereafter consent to in writing). The arbitration shall occur in Portland,
Maine, or such other location as is mutually acceptable to the parties.
Except as the parties may hereafter consent in writing, the arbitrator(s)
shall be required to decide each claim in accordance with applicable law and
to set forth briefly in writing the award, the rationale of the decision,
and those facts considered by the arbitrator(s) to be material to such
decision. The arbitral award shall be deemed binding upon each party, and
judgment on the award may be entered in any court having jurisdiction
thereof. This agreement to arbitrate shall be enforceable under the Uniform
Arbitration Act. In any action to compel arbitration under this Section or
to enforce an arbitral award, the prevailing party shall be entitled to an
award of its reasonable expenses, including attorneys fees.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
INTELLIGENT CONTROLS, INC.
By: /s/ Roger E. Brooks
Title: President/CEO
EXECUTIVE:
/s/ Alan Lukas
ALAN LUKAS
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