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 25, 1999
[ ] 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 5,061,123 shares of Common Stock of the issuer outstanding as of
October 31, 1999.
Transitional Small Business Disclosure Format:
Yes [ ] No [X]
----- -----
PART I
ITEM 1. FINANCIAL STATEMENTS
Unaudited financial statements of the Intelligent Controls, Inc. (the
"Company" or "INCON") appear after the signature page hereto, and are
incorporated herein by reference. These financial statements include all
adjustments that, in the opinion of management, are necessary in order to
make the financial statements not misleading.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations for Nine Months Ended September 25, 1999:
For the nine months ended September 25, 1999, sales decreased 10% to
$10,225,390 compared to sales in the first nine months of 1998 of
$11,371,108.
Sales of fuel management systems (FMS) decreased 13% to $9,041,159 for the
first nine months of 1999, as compared to the same period in 1998. The
decrease is primarily caused by a slowdown in FMS distributor sales. As
previously reported, the robust business of the second half of 1998 came
from strong new construction activity, a successful new product (the
1001/2001 automatic tank gauge), and increased demand from customers seeking
to install automatic leak detection systems to meet the EPA-mandated
December 22, 1998 compliance deadline. 1999 FMS product sales have slowed to
a level more in line with Company experience in 1997.
Sales of power utility/predictive maintenance products increased 19% to
$1,184,232 for the first nine months of 1999, as compared to the first nine
months of 1998. A significant portion of the shipments in the first half of
1999 was from year-end 1998 backlog. The Company received a large new order
for PdM/Power instruments at the end of the third quarter 1999 that has
scheduled shipments over the next year.
Gross margins improved to 53% in the first nine months of 1999, as compared
to 49% for the same period in 1998. The improvement in gross margin was
primarily attributable to raw material purchase price reductions, gains in
manufacturing efficiency, and a favorable product mix. Margins for the first
half of 1998 were adversely affected by a $592,000 shipment to Chinese
Petroleum, at reduced margin; even without the effect of the Chinese
Petroleum shipment, gross margins showed significant improvement.
Operating expenses decreased 6.3 % overall in the first nine months of 1999,
compared to the same period in 1998. This decrease resulted from reduced
legal costs in 1999 compared to 1998 when the Company was forced to defend
itself in two separate lawsuits. The Company continues to invest in Sales
and Marketing, as well as the development of new products.
Net earnings increased from $45,089 in the first nine months of 1998, to
$802,884 in the first nine months of 1999. 1998 earnings where affected by
a second quarter $747,660 pretax charge to earnings for two legal
settlements. The other key operational reasons for the increase in
profitability for 1999 were stronger gross margins and moderated spending in
SG & A to correspond with slowing sales. As the result of a strong cash
balance and reduced debt as compared to 1998, the Company earned significant
interest income and had very small interest expense. The combined effect of
these working capital changes to net interest created an increase to pretax
income of $232,588.
Liquidity and Capital Resources at September 25, 1999:
As of September 25, 1999 the Company had $4.81 million in cash and 100%
availability on its $3.5 million dollar line of credit. The Company expects
that current resources will be sufficient to finance the Company's operating
needs for at least the next 12 months.
Year 2000 Issues
- ----------------
Except as stated below, the Company's Y2K compliance status remains
essentially unchanged from that reported in our Form 10-KSB for the fiscal
year ended December 26, 1998.
The Company completed all verification and validation tests on all
identified mission-critical systems. There were no mission-critical systems
that did not prove to be Y2K compliant. The Company has determined that the
possibility of business interruptions caused by Y2K issues is unlikely and
therefore contingency plans have not been developed to replace specific day-
to-day activities.
In 1998 the Company spent approximately $50,000 upgrading all major IT
systems including accounting, manufacturing, and sales processing software
and hardware. Although helpful to the Y2K compliance effort, these upgrades
were made in the normal course of business to replace outmoded systems.
The total cost specifically attributable to the Company's Y2K compliance
efforts through September 25, 1999 is estimated at $25,000. The aggregate
projected costs for 1999 (including costs incurred in the first nine months)
are $30,000.
This discussion of Y2K issues contains forward-looking statements, as
defined in Section 21E of the Securities Exchange Act of 1934. The Company
cautions investors that numerous factors could cause actual results to
differ materially from those reflected in such forward-looking statements
including, but not limited to, the following: unanticipated problems with
IT systems that vendors have represented as Y2K compliant; unanticipated
customer or distributor resistance to INCON plans for addressing Y2K issues
on the Model TS-1001/2001 ATGs; or unanticipated problems in the field with
installed INCON products believed to be Y2K compliant.
PART II
ITEM 1. LEGAL PROCEEDINGS
On April 21, 1999 the Company received notice of the filing of an action
entitled Omega Environmental, Inc. v. INCON International, Inc. in United
States Bankruptcy Court for the Western District of Washington. The action
was brought by Omega Environmental, Inc. for avoidance and recovery of
approximately $60,000 of payments that Omega had made to the Company for
INCON products, as alleged preferential transfers. The Company is contesting
the validity of this claim.
Q&E LLC (a convenience store/retail petroleum operator) has filed suit
against the Company and PEMCO Service Company, Inc. for damages allegedly
arising in connection with a gasoline spill. The damages claimed are
$1,000,000. The Company's insurance carrier has assumed defense of the
claim, and is proceeding with the needed legal actions.
ITEM 5. OTHER INFORMATION
As previously reported, the Company's board of directors has authorized
INCON to repurchase shares of its common stock in the open market and
through privately negotiated transactions. The board recently increased the
total authorized purchases to $600,000. To date, the Company has
repurchased 156,812 shares at a cost of approximately $436,000. Unless
further extended or reinstated by the board, the repurchase program is
scheduled to terminate as of December 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
An index of the exhibits filed with this report appears below, and is
incorporated herein by reference. No reports on Form 8-K were filed during
the prior fiscal quarter.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTELLIGENT CONTROLS, INC.
Date: November 10, 1999 By: /s/ Andrew B. Clement
---------------------
Andrew B. Clement,
Controller
(on behalf of the Company
and as principal financial
officer)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
INTELLIGENT CONTROLS, INC.
We have reviewed the accompanying balance sheet of Intelligent Controls,
Inc. as of September 25, 1999, and the related statements of income for each
of the three-month and nine-month periods ended September 25, 1999 and
September 26, 1998 and the statement of cash flows for the nine-month
periods ended September 25, 1999 and September 26, 1998. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying interim financial statements for them to
be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing
standards, the balance sheet as of December 26, 1998, and the related
statement of income, and of cash flows for the year then ended (not
presented herein), and in our report dated February 5, 1999 we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed balance sheet as of
September 25, 1999, is fairly stated in all material respects in relation to
the balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Portland, Maine
October 14, 1999
INTELLIGENT CONTROLS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
(unaudited)
September 25 December 26
1999 1998
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,810,558 $ 4,202,084
Accounts receivable, net of allowance
of $216,000 in 1999 and $170,000 in 1998 1,605,439 3,253,477
Inventories (Note 4) 1,346,300 1,320,913
Prepaid expenses and other 112,416 127,425
Deferred income taxes 343,520 343,520
----------------------------
Total current assets 8,218,233 9,247,419
Property and equipment, net (Note 3) 801,910 889,748
Other assets 34,870 31,611
----------------------------
$ 9,055,013 $10,168,778
============================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Income taxes payable $ 18,998 $ 299,269
Accounts payable 530,647 1,007,400
Accrued expenses 542,034 1,144,682
Current portion of long-term debt 160,872 194,000
----------------------------
Total current liabilities 1,252,551 2,645,351
Long-term debt, net of current portion 52,753 140,279
Deferred taxes 76,740 76,740
Stockholders' equity:
Common stock, no par value; 8,000,000
shares authorized; 5,061,123 issued in
1999 and 5,060,760 in 1998 7,585,534 7,585,080
Retained earnings 1,942,080 1,139,196
Receivable from stockholder (1,442,504) (1,376,728)
Treasury stock, 242,617 shares in 1999
and 115,951 shares in 1998 (412,141) (41,140)
----------------------------
7,672,968 7,306,408
----------------------------
$ 9,055,013 $10,168,778
============================
</TABLE>
The accompanying notes are an integral part of the financial statements
INTELLIGENT CONTROLS, INC.
STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 25 September 26 September 25 September 26
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 2,583,901 $ 4,451,620 $10,225,390 $11,371,108
Cost of sales 1,273,252 2,067,782 4,787,279 5,775,590
-----------------------------------------------------------
1,310,649 2,383,838 5,438,111 5,595,518
Operating expenses:
Selling, general and administrative 891,096 1,423,595 3,386,851 3,823,402
Research and development 324,457 242,628 857,214 704,857
Legal settlement charges - - 747,660
-----------------------------------------------------------
1,215,553 1,666,223 4,244,065 5,275,919
Operating income 95,096 717,615 1,194,046 319,599
Other income (expense):
Interest income (expense) 81,526 30,324 225,536 (7,052)
Other expense (31,647) (21,100) (81,598) (46,407)
-----------------------------------------------------------
49,879 9,224 143,938 (53,459)
Income before income tax expense 144,975 726,839 1,337,984 266,140
Income tax expense 57,000 292,469 535,100 (221,051)
-----------------------------------------------------------
Net income $ 87,975 $ 434,370 $ 802,884 $ 45,089
===========================================================
Net income per share basic: $ .02 $ 0.09 $ .16 $ 0.01
Net income per share diluted: $ .02 $ 0.09 $ .16 $ 0.01
Weighted average number of
Common shares outstanding 4,904,397 4,949,171 4,887,513 4,206,642
Weighted average common and
Common equivalent shares outstanding 4,939,520 4,965,181 4,930,385 4,251,785
</TABLE>
The accompanying notes are an integral part of the financial statements
INTELLIGENT CONTROLS, INC.
STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 25 September 26
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 802,884 $ 45,089
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 222,898 194,868
Changes in assets and liabilities:
Accounts receivable 1,648,038 (712,198)
Inventories (25,387) 265,407
Prepaid expenses and other current assets 15,009 105,040
Income taxes payable (280,271) 93,752
Income taxes receivable - 119,099
Accounts payable and accrued expenses (1,079,401) 884,164
Other assets (3,259) (3,141)
--------------------------
Net cash provided by operating activities 1,300,511 992,080
Cash flows from investing activities:
Purchases of equipment and leasehold
improvements, net (135,060) (166,549)
Net cash (used) by investing activities (135,060) (166,549)
Cash flows from financing activities:
Decrease in non-interest bearing overdraft - (67,259)
Repayment of note payable - (754,366)
Repayment of long-term debt (120,654) (192,604)
Issuance of common stock 454 3,956,739
Acquisition of treasury stock (371,001) (23,527)
Increase in receivable from stockholder (65,776) -
--------------------------
Net cash (used) provided by financing activities (556,977) 2,918,983
--------------------------
Net increase in cash and cash equivalents 608,474 3,744,514
Cash and cash equivalents at beginning of year 4,202,084 300
--------------------------
Cash and cash equivalents at end of period $ 4,810,558 $3,744,814
==========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 16,705 $ 61,532
==========================
Income taxes $ 916,000 $ -
==========================
</TABLE>
The accompanying notes are an integral part of the financial statements
INTELLIGENT CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. General
The financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not to be misleading. In the opinion of
management, the amounts shown reflect all adjustments necessary to
present fairly the financial position and results of operations for
the periods presented. All such adjustments are of a normal recurring
nature. The year-end balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
It is suggested that the financial statements be read in conjunction
with the financial statements and notes thereto included in the
Company's Form 10-KSB for the fiscal year ended December 26, 1998.
2. Earnings Per Common Share
Basic earnings per share of common stock have been determined by
dividing net earnings by the weighted average number of shares of
common stock outstanding during the periods presented. Diluted
earnings per share reflect the potential dilution that would occur if
existing stock options were exercised. Following is a reconciliation
of the dual presentations of earnings per share for the periods
presented.
<TABLE>
<CAPTION>
Net Income Common Shares Earnings
(Numerator) (Denominator) Per Share
---------- ------------- ---------
Quarter Ended September 25, 1999
- --------------------------------
<S> <C> <C> <C>
Basic earnings per share $ 87,975 4,904,397 $0.02
=====
Dilutive potential shares - 35,123
-------------------------
Diluted earnings per share $ 87,975 4,939,520 $0.02
=========================================
Nine Months Ended September 25, 1999
- ------------------------------------
Basic earnings per share $802,884 4,887,513 $0.16
=====
Dilutive potential shares - 42,871
-------------------------
Diluted earnings per share $802,884 4,930,385 $0.16
=========================================
Quarter Ended September 26, 1998
- --------------------------------
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
=========================================
</TABLE>
3. Property and Equipment
----------------------
Property and equipment, at cost:
<TABLE>
<CAPTION>
(Unaudited)
September 25 December 26
1999 1998
<S> <C> <C>
Leasehold improvements $ 154,344 $ 109,512
Equipment 1,299,787 1,217,932
Computer software 192,655 169,176
Furniture and fixtures 179,909 102,874
Construction in progress 13,672 105,813
-----------------------------
1,840,367 1,705,307
Less accumulated depreciation and amortization 1,038,457 815,559
-----------------------------
$ 801,910 $ 889,748
=============================
</TABLE>
4. Inventories
-----------
Inventories consisted of the following:
<TABLE>
<CAPTION>
(Unaudited)
September 25 December 26
1999 1998
<S> <C> <C>
Raw Material $ 751,003 $ 960,552
Work in Progress 206,678 167,512
Finished Goods 383,619 187,849
Other 5,000 5,000
--------------------------
$1,346,300 $1,320,913
==========================
</TABLE>
5. Legal Proceedings
-----------------
On April 21, 1999 the Company received notice of the filing of an action
entitled Omega Environmental, Inc. v. INCON International, Inc. in United
States Bankruptcy Court for the Western District of Washington. The action
was brought by Omega Environmental, Inc. for avoidance and recovery of
approximately $60,000 of payments that Omega had made to the Company for
INCON products, as alleged preferential transfers. The Company is contesting
the validity of this claim.
Q&E LLC (a convenience store/retail petroleum operator) has filed suit
against the Company and PEMCO Service Company, Inc. for damages allegedly
arising in connection with a petroleum spill. The damages claimed are
$1,000,000. The Company's insurance carrier has assumed defense of the
claim, and is in the process of evaluating the claim.
Index to Exhibits
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> SEP-25-1999
<CASH> 4,810,556
<SECURITIES> 0
<RECEIVABLES> 1,812,777
<ALLOWANCES> 216,338
<INVENTORY> 1,346,300
<CURRENT-ASSETS> 8,218,233
<PP&E> 801,910
<DEPRECIATION> 1,038,457
<TOTAL-ASSETS> 9,055,013
<CURRENT-LIABILITIES> 1,252,551
<BONDS> 52,753
0
0
<COMMON> 7,585,534
<OTHER-SE> 87,434
<TOTAL-LIABILITY-AND-EQUITY> 9,055,013
<SALES> 10,225,390
<TOTAL-REVENUES> 10,225,390
<CGS> 4,787,279
<TOTAL-COSTS> 9,031,344
<OTHER-EXPENSES> 127,233
<LOSS-PROVISION> 70,000
<INTEREST-EXPENSE> 16,705
<INCOME-PRETAX> 1,337,984
<INCOME-TAX> 535,100
<INCOME-CONTINUING> 802,884
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 802,884
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
