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 September 26, 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
October 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 Nine Months Ended September 26, 1998:
For the nine months ended September 26, 1998, sales grew 13.8% to $11.4
million, up from $10 million for the same period in 1997.
Petroleum segment sales grew 17.6% to $10.4 million for the first nine
months of 1998, as compared to $8.8 million for the same period in 1997.
Sales growth continues due to a market driven by strong new construction and
a December 22, 1998 EPA compliance deadline for leak detection on
underground storage tanks. The TS-1001/2001 line of automatic tank gauges
has replaced its predecessor the TS-1000/2000 as the primary automatic tank
gauge sold by the Company. The Company also introduced a new software
product, System Sentinel, at the Petroleum Equipment exhibition in September
1998.
Sales in the Power Utilities and Predictive Maintenance segment declined
14.8% for the first nine months of 1998. During the third quarter of 1998,
the Company released the Optimizer Plus, an upgraded version of the older
generation Optimizer product.
Gross margins for the first nine months of 1998 improved to 49.2%, up from
41.6% for the same period in 1997. Purchased material cost reductions,
manufacturing volume efficiencies, reduced warranty scrap, and a favorable
product/features mix continue to be the major components of this performance
improvement. Another contributing factor to improved margins is the result
of the timing of shipments to complete a large lower margin order to the
Chinese Petroleum Corporation of Taiwan. In the first nine months of 1997,
there were two large shipments to Chinese Petroleum while during the first
nine months of 1998 there was only one shipment made.
Operating expenses were 46.4% of sales for the first nine months of 1998, as
compared to 34.1% for the same period in 1997. Operating expenses in the
second quarter of 1998 were significantly affected by added costs related to
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 second quarter 1998 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 settlement of a patent infringement claim by Hasstech was finalized
early in the third quarter. Terms of this settlement require INCON to
pay Hasstech $100,000, in which $50,000 has already been paid in the
third quarter of 1998 and $50,000 to be paid in the first quarter of
1999. The entire $100,000 was 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 nine months of 1998 would be 39.8%
of sales. In addition to these settlement costs, operating expenses for
1998 increased from added spending in marketing and sales, R & D, and
corporate management as compared to the first nine months of 1997. Expenses
in 1998 also included charges of approximately $50,000 in legal expense
indirectly related to an investment by Ampersand Ventures in the Company,
and approximately $135,000 of legal expense incurred in defending against
the Hasstech patent infringement claim.
Net income for the first nine months of 1998 was $45,089 as compared to net
income of $336,524 for the same months in 1997. The onetime legal charges
for settling two lawsuits were the reason for the reduced earnings during
this otherwise profitable nine month period. Income from operations, before
legal settlement costs, was $717,615 for the quarter ended September 26,
1998 as compared to $480,443 for the third quarter of 1997 and $1,067,259
for the first nine months of 1998 as compared to and $758,689 for the same
period in 1997.
Liquidity and Capital Resources at September 26, 1998:
As of September 26, 1998 the Company had $3.7 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 $700,000 expense to settle the Knight and Hasstech lawsuits.
The Company plans to use the remaining capital primarily for its plans to
expand its business through increased marketing and sales efforts, continued
development of new products, international expansion, and acquisitions.
Year 2000 Compliance:
Year 2000 (Y2K) issues arise from the inability of many computer-based
systems to properly recognize and handle information containing dates after
12/31/99.
Earlier this year, INCON initiated a Year 2000 compliance plan, consisting
of (1) evaluation of IT (information technology) systems including its
accounting, payroll, and inventory software and its desktop PCs and related
networks; (2) evaluation of non-IT systems including telephone, voicemail,
security, and heating, ventilation and cooling; (3) evaluation of INCON
products including ATGs, LLDs, and Power Utility Predictive Maintenance
Instruments; and (4) surveys of INCON's key vendors and to evaluate their
vulnerability to Y2K issues.
By the first quarter of 1999, INCON plans to have tested all IT and non-IT
systems deemed to be critical (accounting, payroll, telephone, and HVAC), by
running them under different Year 2000 scenarios. Based on the Company's
initial assessment of these systems (including information received from
vendors of those systems), management does not expect to find significant
Y2K compliance issues.
The subject receiving the greatest attention in the Company's Y2K compliance
program is testing of INCON's products. Failure of those products to
perform properly after the Year 2000 could undercut INCON's reputation for
quality products and for products previously sold as being Y2K compliant
could give rise to warranty expense. Based on current information, however,
management expects that INCON products in the field will not experience any
significant disruption due to Y2K issues. The Company has determined that
its Automatic Tank Gauge (ATG) Models TS-1001 and TS-2001 containing
firmware prior to version 1.1 will not handle Y2K dates following a power
outage. These units will need to have the internal clock reset following
power outages to handle dates after 1999. The Company will be sending
simple reprogramming instructions to the relevant customers and
distributors. The Company is also offering to replace the firmware with a
Y2K compliant version, as an alternative means for addressing this issue.
Management presently estimates that the cost of upgrading the firmware for
the ATG Models TS-1001 and TS-2001 will be approximately $75 a unit and that
there are approximately 750 units that may qualify for the upgrade. All
other INCON products sold after approximately September 14, 1998 are
believed to be Y2K compliant.
The Company has not yet adopted contingency plans for internal and external
Year 2000 issues, but intends to do so by the end of first quarter 1999.
The Company has spent approximately $5,500 on its Y2K compliance efforts to
date, which primarily consists of department manager and support personnel
time. Management presently estimates the future costs of these efforts at
approximately $40,000. All increased costs are being funded from operating
cash flow and are being expensed as incurred. Management does not
anticipate deferring any other technology-related projects as a result of
these costs.
This discussion of Y2K issues contains forward-looking statements, as
defined in Section 21E of the Securities Exchange Act of 1934. Examples of
such statements include estimates of completion dates for evaluation of
systems and estimates of costs associated with Y2K compliance efforts. The
Company cautions investors that numerous factors could cause actual results
to differ materially from those reflected in such forward-looking statements
including, but not limited to, the following: unanticipated problems with
IT systems that vendors have represented as Y2K compliant, unanticipated
customer or distributor resistance to INCON plans for addressing Y2K issues
on the Model TS-1001/2001 ATGs, or unanticipated problems in the field with
installed INCON products believed to be Y2K compliant.
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company reached a final settlement, early in the third quarter, with
Hasstech which had brought suit in October 1997 claiming that INCON's line
leak detector infringed a certain Hasstech patent. Under the settlement
INCON paid Hasstech $50,000 in September 1998 and will pay Hasstech and
additional $50,000 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.
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.
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:
--------------------------------
Andrew B. Clement, Controller
(on behalf of the Company and as
principal financial officer)
Date: November 10, 1998
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: November 10, 1998 principal financial officer)
Index to Exhibits
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
REPORT OF INDEPENDENT ACCOUNTANTS
October 16, 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 September 26, 1998 and the related statements of income and cash flows
for the three and nine month periods ended September 26, 1998 and September 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 LLP
- -------------------------------
INTELLIGENT CONTROLS, INC.
BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
(unaudited)
September 26 December 27
1998 1997
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $3,744,814 $ 300
Accounts receivable, net of allowance for doubtful
accounts of $101,986 in 1998 and $50,000 in 1997 2,912,260 2,200,062
Inventories 1,588,921 1,854,328
Prepaid expenses and other 152,664 257,704
Income taxes receivable 119,099
Deferred income taxes 192,464 192,464
-------------------------
Total current assets 8,591,123 4,623,957
Property, Plant, and Equipment, net 828,262 856,581
Other Assets 30,317 27,176
-------------------------
$9,449,702 $5,507,714
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Non-interest bearing overdraft 67,259
Note payable - bank 754,366
Income taxes payable 93,752
Accounts payable 993,555 769,097
Accrued expenses 1,180,415 520,709
Current portion long-term debt 138,200 194,700
-------------------------
Total current liabilities 2,405,922 2,306,131
Long-term debt, net of current portion 236,297 372,401
Deferred taxes 67,295 67,295
Stockholders' equity:
Common Stock, no par value; 8,000,000 shares 7,583,080 2,293,841
authorized; 5,056,760 issued at September 26, 1998
and 3,274,306 issued at December 27, 1997
Retained Earnings 513,135 468,046
Less:
Shareholder note receivable (1,332,500)
Treasury Stock, 108,521 shares (23,527)
-------------------------
6,740,188 2,761,887
-------------------------
$9,449,702 $5,507,714
=========================
</TABLE>
See accompanying notes.
INTELLIGENT CONTROLS, INC.
STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 26 September 30 September 26 September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 4,451,620 $ 3,796,604 $11,371,108 $9,994,590
Cost of sales 2,067,782 2,107,496 5,775,590 5,827,823
---------------------------------------------------------
2,383,838 1,689,108 5,595,518 4,166,767
Operating expenses:
Selling, general and administrative 1,423,595 1,019,025 3 823 402 2,816,974
Research and development 242,628 189,640 704,857 591,104
Legal settlement charges 747,660
---------------------------------------------------------
1,666,223 1,208,665 5,275,919 3,408,078
Operating income 717,615 480,443 319,599 758,689
Other income (expense)
Interest income (expense) 30,324 (40,461) (7,052) (141,669)
Other expense (21,100) (14,462) (46,407) (44,787)
---------------------------------------------------------
9,224 (54,923) (53,459) (186,456)
Income before income tax 726,839 425,520 266,140 572,233
Income tax expense (292,469) (180,200) (221,051) (235,709)
---------------------------------------------------------
Net income $ 434,370 $ 245,320 $ 45,089 $ 336,524
=========================================================
Net income per share
basic and diluted $ .09 $ 0.07 $ .01 $ 0.10
Weighted average number of
common shares outstanding 4,949,171 3,435,191 4,206,642 3,324,662
Weighted average common and
common equivalent shares outstanding 4,965,181 3,435,191 4,251,785 3,324,662
</TABLE>
See accompanying notes.
INTELLIGENT CONTROLS, INC.
STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 26 September 30
1998 1997
---------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income 45,089 336,524
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 194,868 175,831
Deferred taxes 36,333
Changes in assets and liabilities:
Accounts receivable (712,198) (465,225)
Inventories 265,407 976,612
Prepaid expenses and other current assets 105,040 79,631
Income tax receivable 119,099 160,000
Income tax payable 93,752 237,722
Accounts payable and accrued expenses 884,164 (94,859)
Other (3,141) (3,534)
--------------------------
Net cash created by operating activities 992,080 1,439,035
--------------------------
Cash flows from investing activities:
Capital expenditures (166,549) (150,283)
--------------------------
Net cash used by investing activities (166,549) (150,283)
Cash flows from financing activities:
Decrease in non-interest bearing overdraft (67,259)
Net payment on note payable - bank (754,366) (1,260,769)
Issuance of long-term debt 13,483
Repayment of long-term debt (192,604)
Issuance of common stock, net 3,956,739 20,487
Acquisition of treasury stock (23,527) 4,306
Decrease in restricted cash balances (199,120)
Decrease in liability to shareholder 199,120
--------------------------
Net cash provided (used) by financing activities 2,918,983 (1,222,493)
--------------------------
Net increase in cash 3,744,514 66,259
Cash and cash equivalents at beginning of year 300 133,690
--------------------------
Cash and cash equivalents at end of period 3,744,814 200,039
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 40,461 141,669
Income taxes 0 0
</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 September 26, 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 September 26, 1998
- --------------------------------
<S> <C> <C> <C>
Basic earnings per share $434,370 4,949,171 $ .09
=====
Dilutive potential shares 16,010
-------------------------
Diluted earnings per share $434,370 4,965,181 $ .09
======================================
Nine Months Ended September 26, 1998
- ------------------------------------
Basic earnings per share $ 45,089 4,206,642 $ .01
=====
Dilutive potential shares 45,143
-------------------------
Diluted earnings per share $ 45,089 4,251,785 $ .01
======================================
Quarter Ended September 30, 1997
- --------------------------------
Basic earnings per share $245,320 3,324,662 $0.07
=====
Dilutive potential shares 0
-------------------------
Diluted earnings per share $245,320 3,324,662 $0.07
======================================
Nine Months Ended September 30, 1997
- ------------------------------------
Basic earnings per share $336,524 3,324,662 $0.10
=====
Dilutive potential shares 0
-------------------------
Diluted earnings per share $336,524 3,324,662 $0.10
======================================
</TABLE>
3. Property, Plant, and Equipment
------------------------------
Property, plant, and equipment, at cost,
<TABLE>
<CAPTION>
(Unaudited)
September 26, December 27,
1998 1997
<S> <C> <C>
Leasehold improvements $ 153,904 $ 111,983
Equipment 1,236,025 1,139,210
Computer software 179,891 154,560
Furniture and Fixtures 106,792 104,312
--------------------------
1,676,612 1,510,065
Less accumulated depreciation and amortization (848,350) (653,484)
--------------------------
$ 828,262 $ 856,581
==========================
</TABLE>
4. Inventories consisted of the following at September 26, 1998 and
December 27, 1997.
<TABLE>
<CAPTION>
(Unaudited)
June 27, December 27,
1998 1997
<S> <C> <C>
Raw Material $ 911,738 $1,214,749
Work in Progress 271,016 229,824
Finished Goods 340,441 356,974
Other 65,726 52,781
------------------------
$1,588,921 $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 final agreement, early in the third quarter, 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, half in September 1998
and half 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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> SEP-26-1998
<CASH> 3,744,814
<SECURITIES> 0
<RECEIVABLES> 3,014,246
<ALLOWANCES> 101,986
<INVENTORY> 1,588,921
<CURRENT-ASSETS> 8,591,123
<PP&E> 1,676,612
<DEPRECIATION> 848,350
<TOTAL-ASSETS> 9,449,702
<CURRENT-LIABILITIES> 2,405,922
<BONDS> 0
0
0
<COMMON> 7,583,080
<OTHER-SE> (842,892)
<TOTAL-LIABILITY-AND-EQUITY> 9,449,702
<SALES> 11,371,108
<TOTAL-REVENUES> 11,371,108
<CGS> 5,775,590
<TOTAL-COSTS> 11,051,509
<OTHER-EXPENSES> 46,407
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,052
<INCOME-PRETAX> 266,140
<INCOME-TAX> 221,051
<INCOME-CONTINUING> 45,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,089
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
