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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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 No.
1-13628
INTELLIGENT CONTROLS, INC.
(Name of small business issuer in its charter)
Maine 01-0354107
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
74 Industrial Park Road, Saco, Maine 04072
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (207) 283-0156
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange On Which Registered
------------------- -----------------------------------------
Common Stock, American Stock Exchange (Emerging Company
no par value Marketplace)
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[ ]
Issuer's revenues for its most recent fiscal year: $16,198,385
The aggregate market value of Common Stock held by non-affiliates as of March
15, 1999 was $3,576,000
There were 5,061,123 shares of Common Stock of the issuer outstanding as of
March 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Proxy Statement for the Annual Meeting of Shareholders to be held on
June 10, 1999
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Intelligent Controls, Inc. ("INCON" or the "Company") is a Maine corporation
founded in 1978. INCON develops, manufactures, and sells electronic measurement
systems to the petroleum and power utility industries and for general level
measurement and predictive maintenance applications. The Company's products,
including related applications and communication software, enable the users to
detect leaks, measure liquid levels, and to perform predictive maintenance
monitoring of equipment as an early indicator of wear and potential failure. The
table below summarizes sales for these product lines over the past three years.
NET SALES BY PRODUCT LINE
(Dollars In Thousands)
1998 1997 1996
-------------- ------------- --------------
Petroleum (ATG):
OEMs 451 3% $ 655 5% $ 557 6%
End Users 14,409 89% 10,803 83% 7,881 79%
Total ATG: 14,860 11,458 8,438
Utility and Other
Power Utility 1,237 7% 1,398 11% 1,198 12%
General Instrument 101 1% 149 1% 255 3%
------- ------- ------
Total Utility and Other 1,338 1,547 1,453
TOTAL NET SALES $16,198 100% $13,005 100% $9,891 100%
======= ======= ======
PETROLEUM EQUIPMENT PRODUCTS
INCON manufactures a line of electronic instruments for use at retail gasoline
stations and gasoline/convenience stores. The products are also utilized in
other locations where petroleum fuels or chemicals are stored in underground
storage tanks ("USTs") and above ground storage tanks ("ASTs"), including large
private fleets, government agencies, municipalities, and fuel distribution
companies. The product line includes automatic tank gauges (some with remote
communications features), dedicated leak detectors, liquid level sensors, line
leak detectors, user interface software, and various accessories, all of which
can be used to meet UST monitoring regulations promulgated by the U.S.
Environmental Protection Agency (the "EPA"), and to provide information for the
tank owner to manage inventories. The manufacturing process for these and other
INCON products consists of basic mechanical and electronic assembly as well as
the integration of software into the overall system.
INCON's automatic tank gauge ("ATG") systems consist of wall-mounted electronic
consoles, tank-mounted liquid level sensors, leak sensors, user interface
software, and associated accessories. The systems provide very accurate
measurement of inventory (gasoline or other liquid) in a UST or AST. INCON tank
gauges also perform leak tests to determine whether product is escaping from the
tank. ATG systems can also monitor a wide variety of sensors which may be
located between the walls of double walled tanks, in sumps, under dispensers, or
in other locations where leaking product might collect.
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The Company's electronic Line Leak Detector ("LLD") monitors the pressurized
pipe between the submersible pump (located in the tank) and the dispenser (gas
pump). The product meets pipeline monitoring requirements imposed by EPA
regulations and is an updated technology which can replace mechanical line leak
detectors. The LLD can interface with an ATG or operate as a stand-alone device.
The product design has been enhanced since its original 1995 introduction, and
the Company received notice recently of patent allowance. In 1997 and 1998
enhanced LLDs have been operating successfully in numerous commercial locations
and customer response has been favorable. INCON also offers dedicated leak
detection ("DLD") consoles which are similar to the ATG console. Instead of
measuring inventory levels, these products only monitor leak detection, thereby
offering certain customers an inexpensive alternative for achieving regulatory
compliance. In addition to the ATG consoles, line leak detectors and liquid
level sensors, INCON offers a wide variety of accessories, software, and leak
detection sensors. These provide the ability to customize a system for specific
customer applications, allow the system to sense leaks and inventory levels in
many different locations, and simplify installation. Some of these products and
systems are assembled by the Company, while others are fabricated by outside
contractors to INCON specifications.
INCON first produced its own liquid level probes in 1994. The Company's liquid
level sensors are based on magnetostrictive position measurement technology
which is widely proven in the industry. This capability of manufacturing its own
probes has given INCON control of product quality and significantly reduced the
overall cost of this component to the Company. In most cases, each UST or AST
requires a liquid level sensor. INCON's ATG consoles will support from one to
eight liquid level sensors. The average North American retail gasoline station
or gasoline/convenience store has three USTs, while sites overseas may have five
to eight tanks.
In 1997 the Company designed and placed in beta site testing a new ATG product
line, the 1001 and 2001 models, marketed under the Company's Tank Sentinel
registered trademark. They were designed as the new generation product to
replace INCON's model 1000 and 2000 series. This product line was fully
introduced in the Spring of 1998. These units have optional internal fax modem
communications capability and were designed to be easy to use and upgrade,
providing greater flexibility for the operator. They provide more overall
capability than any other tank gauge in their price range as well as upgraded
display, printer, and keyboard functions. This contrasts to some competitive
models that cannot be upgraded, or require very expensive additional modules to
accommodate needed features. The 1001 model can accommodate four liquid level
sensor inputs and the 2001 model accommodates eight. The 1001 and 2001 models
are designed to be very cost-effective to manufacture and incorporate a large
number of common components.
In keeping with the trend toward digital technology, INCON manufactures, under
private label, a Digital Liquid Level Sensor ("DLP"). This device integrates
microcomputer functions of the automatic tank gauge console into the
tank-mounted liquid level sensor. The microprocessor in the DLP interprets the
signal from the level and temperature sensing system and transmits the processed
data to a remote computer or other collection device. Data from many sensors can
be transmitted over a common cable in a manner similar to a computer on a
network. The product allows the ATG information to be read directly by personal
computers, cash registers, point of sale equipment, or fuel management systems,
both remotely and at the site. The Company has been actively developing a
software product capability which can be offered alone, or in combination with
INCON hardware products. This capability will allow digital or traditional probe
users to efficiently integrate an overall system using equipment and software
modules, which can interface with their established or developing business
information systems. This software, called System Sentinel was released to beta
sites starting in September 1998 and has been officially made available to the
market in February 1999.
The demand for ATGs, DLDs and LLDs domestically has been strong and bolstered by
EPA and state regulations that require owners of USTs to monitor the tanks and
related lines for leaks. In addition to more sophisticated and automated
techniques (such as automatic tank gauging), the EPA regulations permit the use
of inventory reconciliation and manual (dip stick) testing as a means of
compliance. Although less expensive, these methods do
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not provide for accurate inventory measurement and control and are also subject
to personnel variables affecting manual stick readings and data recording.
INCON's management believes that UST owners will continue to automate both
inventory and leak detection systems to insure accuracy and reduce dependence on
trained personnel. Moreover, leak detection requirements will become more
stringent. After December 22, 1998, inventory reconciliation and manual testing
will be permissible only (i) during the first ten years after a tank is newly
installed or upgraded in accordance with EPA performance standards or (ii) in
the case of small tanks having less than 550 gallons of capacity. In addition
all tanks must meet EPA performance standards in 1998 and management anticipates
that this will favorably affect the market for ATGs, DLDs, and LLDs through 1998
and beyond. Management also notes that new gasoline and convenience store
expansion is strong, due to growth in the economy, and upgrading of acquired
sites by larger, more aggressive marketers.
Internationally, many countries follow the lead of the United States, in terms
of both environmental regulations and measurement technologies. The demand for
ATGs, DLDs, and LLDs is expected to continue to grow in other parts of the world
and INCON will continue to aggressively seek such business. During 1997, the
Company shipped two thirds of a $1,800,000 ATG order received in 1996 from
Taiwan. The final third of this large order was shipped in March 1998.
POWER UTILITY AND GENERAL INSTRUMENT PRODUCTS
INCON's Power Utility and Predictive Maintenance Instrument lines consist of
electronic instruments for measurement and control in the power utility and
general industrial markets. Typical customers include large publicly owned
electric power utilities, municipal utilities, and manufacturing customers.
Historically, regulation has insulated utilities in the United States and other
developed countries from competitive market forces, creating monopolies that
permitted utilities to remain profitable despite their use of inefficient or
outdated technology. In the deregulated environment being adopted across the
United States over the next five years, consumers will have greater freedom to
choose electricity suppliers, just as they now can choose among many long
distance telephone service providers. This will place significant pressure on
utility company management to reduce costs and increase plant efficiency. The
Company believes this overall business backdrop will provide a positive
environment for products that help utilities operate more efficiently and
perform predictive maintenance in advance of system failures.
INCON's power utility product line includes two instruments, the Model 1250 and
the Optimizer, offering automated control and data collection for electrical
substations. Two other power utility products, the Model 1255 and Model 1810,
are offered for use in automating hydroelectric generating plants. The Model
1250 Tap Position Monitor is used on large high-voltage transformers. These
transformers are typically equipped with "tap changers" that regulate the
voltage on the power transmission and distribution grid. The voltage is adjusted
by switching to any one of approximately 32 "voltage taps." The Model 1250
allows utilities to use their system control and data acquisition system (SCADA)
to monitor from a central station which tap has been selected. Utilities can
then establish interactive control over tap changing through the system and can
adjust and regulate the voltage being produced by the transformer. This product
is also sold directly to transformer manufacturers and is mounted on many new
units sold.
The Optimizer is a microprocessor-based monitoring device used to predict life
and schedule preventive maintenance for high-voltage circuit breakers used by
electric utilities. It measures the energy dissipated by the contacts in large
circuit breakers as they operate. The Optimizer product can help power utilities
reduce the cost of breaker maintenance and avoid service interruptions. The
product was originally released in 1996 and a second generation version, the
Optimizer+ was introduced in September 1998. A new product under development in
1997,
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dubbed the "Dry Guy," is a special filtration system product that reconditions
the fluids (oil) in circuit breakers and transformers. After further market
study in 1998, this product development effort was discontinued.
SOFTWARE/SYSTEMS PRODUCTS
Consistent with an overall business trend, the petroleum market sector is
rapidly bringing electronic data interchange and the power of the computer and
networking to bear on its business activities. Remote communication, via modem
or RF, is becoming an important capability as multiple-site enterprises seek to
gather information and control their activities in a standardized and
centralized way. Petroleum product marketers, gasoline retailers,
gas/convenience store operators, and fuel wholesalers desire automated
information and the ability to monitor and plan their activities centrally with
less dependence on local management and employees. Modem communications as well
as local/host computer systems allow some companies to manage inventories of
liquid products, automatically order new product, and comply with environmental
monitoring and reporting requirements. In order to meet competitive business
pressures as well as regulatory requirements to monitor leaks, users are pushing
this market sector towards greater demand for multi-site systems.
INCON is already actively providing a software and systems capability to
complement its measurement and leak detection instruments. In 1997 the Company
was successful in working with a major convenience store chain to supply a
customized software and communication system which linked environmental and
business monitoring and reporting across a multiple site activity. As a result
of this successful experience and to take advantage of the market trends, INCON
began the development of a standardized software package in 1997 which can be
installed across a broad customer base. Beta site testing of a new Windows based
client/server remote software monitoring package, System Sentinel, began in
September 1998. The product was formally introduced in February 1999. Management
believes that interconnectivity will be increasingly important, as the owners of
existing instrumentation expend considerable effort to link their sites
electronically and standardize monitoring and reporting.
COMPETITION
The petroleum equipment market segment is very competitive, both for
instrumentation and software/system products. The Company's products compete
with similar offerings from other manufacturers in the industry. In addition to
INCON, there are at least four other significant suppliers of automatic tank
gauge systems, one of which (a division of a large public company) is believed
to have approximately a 50 percent market share. These suppliers are generally
larger and have potentially greater resources than the Company. In addition
there are over ten other minor suppliers of ATGs, as well as additional
companies that sell software and other environmental and inventory monitoring
services. Several suppliers offer customers the option of contracting out all,
or part of, their measurement and compliance management activities. In such a
case a monthly service fee is charged and the products can be installed and
leased to the site owner. Based on observations to date, INCON's management
believes that this concept is slowly being adopted, and may be beneficial to
certain types of UST and ATG owners and operators. Although the Company has not
provided this outsource service directly, one of its largest customers is active
in this area and the Company has benefited from this trend through increased
hardware, communications, and software sales.
INCON has a strong competitive position in the power utility market sector for
its particular product niche. The Company is the only supplier of programmable
tap position monitoring systems in the United States, and competes only with
older technologies. The competing products tend to be lower in price, but are
more difficult to install, are not programmable, and have more parts that are
subject to wear and replacement. There are many types of
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transformers and tap changers in service in the United States today that operate
with the Model 1250, and the 1250's programmability gives it a major advantage
over non-programmable products.
INCON owns exclusive rights to the U.S. patent on certain Optimizer technology.
Interest in the concept of circuit breaker monitoring has resulted in several
competing models being offered by other companies. These competitive products,
however, tend to be more expensive.
CUSTOMERS
INCON's customer base is highly diversified, with no one customer accounting for
more than 10 percent of the Company's business in 1998. In the petroleum
equipment segment the Company's customers are principally petroleum equipment
distributors who purchase products from INCON and are responsible for
installation and after-sales service. These distributors range from very large,
regionally active organizations, to small organizations that focus on a narrow
customer segment or geography. The distributors usually handle other
complementary products sold to the same end-use customer base. Examples of such
products are gasoline dispensers, point-of-sale ("POS") systems, vapor recovery
systems, lighting, and canopies. Often the Company's products are specified by
end-users who choose to standardize their equipment for all their locations. The
distributors and end-use customers are serviced by INCON's factory-based
national selling and technical service organization as well as by
regionally-based manufacturer's representatives. In addition, the Company
supplies petroleum equipment products to a few OEM (original equipment
manufacturer) customers and has developed several large direct national accounts
during 1998.
In the power utility and predictive maintenance instruments segment, INCON's
customers are equipment OEMs and various electric utilities or large private
system operators. These customers are serviced by the Company's factory-based
national selling organization as well as by regionally-based manufacturer's
representatives.
International sales are normally made to distributors, which are then
responsible for importing the product to their respective countries, as well as
sales, installation, and after-sales service.
INTELLECTUAL PROPERTY
INCON markets its petroleum equipment products under the registered trademark
"Tank Sentinel." INCON holds two patents for its electrical instruments and has
been advised a patent will be allowed on its electronic line leak detector (LLD)
product. The Company has copyrights on certain software products; and other key
software is highly technical and difficult to copy.
The Company has numerous trade secrets with regard to methods of detecting leaks
in tanks and pipelines. Among these are INCON's volumetric tank leak test
algorithm, its continuous automatic leak detection algorithm, and its method of
detecting leaks in pressurized piping. INCON's process for producing the
magnetostrictive wire required by the liquid level sensor is a Company trade
secret.
GENERAL
As of March 12, 1999 the Company employed 95 people, including 16 in sales,
marketing and technical service, 12 in research and product development, 11 in
administration, and 56 in manufacturing operations.
In most of its products, INCON tries to utilize off-the-shelf electronic
components that are readily available from more than one distributor. There are,
however, some products which are designed around a particular manufacturer,
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such as in the use of microprocessor chips and compact printers. If one of these
manufacturers were suddenly to cease production of a key component, the Company
might need to find an alternate source or redesign the product. Stainless steel
and brass are major components in two of the Company's products. Both of these
commodities can fluctuate in price due to supply and demand, thereby affecting
the Company's future costs.
INCON continuously invests in the development of new products and software as
well as adapting existing products to new applications. During 1996, 1997, and
1998 the expenditures relating to the development of new products and the
improvement of existing products were approximately $983,000, $791,000, and
$997,000 respectively. These expenditures represent a Research and Product
Development spending rate of 6 to 10 percent of sales.
GOVERNMENT REGULATION/OTHER CERTIFICATIONS
The automatic tank gauge product line, used in gasoline stations and
convenience/gasoline stores, requires listing by Underwriters Laboratory (UL) in
the United States and by the Canadian Standards Association (CSA) in Canada. All
major portions of the Tank Sentinel ATG product line, including line leak
detectors, are presently listed by UL and CSA.
The Tank Sentinel ATG products perform leak detection in accordance with EPA
regulation 40 CFR Part 280, Subpart D. To prove compliance with the federal and
state regulations for tank tightness tests, the ATG system must be tested by an
independent laboratory in accordance with EPA/530/UST-90/006 and certified to
meet the EPA performance requirements. The INCON TS-1000 system, TS-1001 system,
TS-2000 system, TS-2001 system, and TS-LLD have been tested by Ken Wilcox
Associates of Blue Springs, Missouri and are certified.
The Tank Sentinel ATG products also meet the much more stringent standards for
tank tightness testing . To prove compliance with the federal and state
regulations for tank tightness test, the ATG system must be tested by an
independent laboratory in accordance with EPA/530/UST-90/006 and certified to
meet the performance requirements. The INCON TS-1000, 1001 and TS-2000, 2001
systems have been tested by Ken Wilcox Associates. In Canada the TS-1000,1001
system, TS-2000,2001 system, and TS-LLD are certified by Underwriters Laboratory
of Canada in accordance with ULC/ORD-C58.12-1992, "Leak Detection Devices
(Volumetric Type) For Underground Flammable Liquid Storage Tanks." This standard
is very similar to EPA/530/UST-90/006.
With regard to INCON's own operations, the Company's cost of compliance with
federal, state, and local environmental laws does not materially affect the
Company's financial condition.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases two modern 13,000 square foot facilities in an industrial
park in Saco, Maine. One building serves as INCON's executive offices; the other
its manufacturing facility. The executive office building is leased from a
corporation owned in part by two principal INCON shareholders, Alan and Paul
Lukas. The other building is leased from an unrelated third party. The leases on
these buildings expire in October 2000 and the executive office building
includes an option to purchase at the then fair market value, subject to certain
minimum purchase prices. The Company is currently evaluating whether to lease
the current facilities for another year or lease a larger building in the same
industrial park. The Company believes it will renew these leases or lease
alternate facilities, without any material adverse effect on operations in 2000.
The Company maintains no other direct or indirect investments in real estate and
has no current intentions to do so.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending litigation or other legal proceedings,
other than routine litigation that is incidental to the business and which is
not expected to have a material adverse effect on the Company. The Company is
not aware of any contemplated legal proceedings against it by any governmental
authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the shareholders of the Company during the fourth
quarter of 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On February 15, 1995 the Company's common stock was accepted for listing and
began trading on the Emerging Company Marketplace of the American Stock
Exchange. The trading symbol for INCON common stock is ITC.
Prior to listing on the Emerging Company Marketplace, there was no trading
market for the Company's common stock on any exchange or organized
over-the-counter market. The high-low prices for the Company's stock for the
last four quarters were as follows:
HIGH LOW
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Quarter Ended March 28, 1998 $ 2 3/4 $ 2 3/16
Quarter Ended June 27, 1998 $ 3 1/8 $ 1 7/8
Quarter Ended September 26, 1998 $ 2 1/2 $ 1 13/16
Quarter Ended December 26, 1998 $ 2 7/8 $ 1 7/8
As of March 15, 1999 the Company had 440 shareholders of record.
It has been INCON's policy to reinvest all earnings in the business, and the
Company has never paid dividends on its Common Stock. Also, under credit
agreements with its bank, the Company may not declare or pay dividends to
shareholders without the prior consent of the bank.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Net sales totaled $16.2 million in fiscal 1998, an increase of $3.2 million or
24.5 percent from 1997. The increase was primarily due to a strong petroleum
market segment fueled by new construction and compliance deadlines for leak
detection mandated by the EPA.
Petroleum segment sales increased 30 percent during 1998 to $14.9 million from
$11.5 in 1997. Sales through the petroleum distributors (the Company's primary
sales channel) increased by 44 percent over 1997. The increase in sales was
primarily due to a strong EPA compliance driven market, strong new construction,
success with the new ATG 1001/2001 products, as well as general market share
gains. The Company completed shipping a $1.8 million order to Taiwan in 1998, of
which $1.2 million was shipped in 1997.
The Utility and Predictive Maintenance segment sales fell in 1998 by $209,000, a
13% decline from 1997. The decline in sales was primarily attributable to design
changes in Optimizer circuit breaker monitor. During the first half of 1998, all
Optimizer shipments were deferred pending completion of the upgrade. Optimizer
units recalled from the field were modified to incorporate several improvements,
or for a small charge, to replace them with the new model. This latest model
(Optimizer+) was released for sale in September 1998 and preliminary customer
feedback has been positive.
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Gross margins improved markedly to 49 percent in 1998, as compared to 42 percent
for the year 1997. Purchased material cost reductions, manufacturing volume
efficiencies, reduced warranty scrap, and a favorable product/features mix were
the major components of this performance improvement. Another notable factor was
the timing of shipments of a large low margin order to Taiwan. In 1997 the
Company shipped two thirds of the Chinese Petroleum order with the final
one-third shipping in March 1998. Gross margins improved as the year progressed
and averaged 52 percent for the second half.
Operating expenses increased as a percentage of sales from 35.1 percent in 1997
to 41.8 percent in 1998. Included in this $2.2 million increase were substantial
onetime charges incurred in completing an investment transaction with an outside
venture capital firm, legal and settlement costs in two significant lawsuits,
and recruiting costs along with the ongoing expenses associated with building a
stronger sales/marketing and senior management team. The company also increased
its investment in R&D to almost $1 million in 1998 as compared to $790,000 in
1997. Interest expense declined due to strong operating cash flow and cash
proceeds from an investment by an outside venture capital firm. The Company
recognized $148,809 in interest income for the last 8 months of 1998.
1998 operating profits increased to $1,223,000, or 7.6 percent of sales, from
$868,000, or 6.7 percent, in 1997. Even though the Company incurred substantial
one-time operating expenses and a higher ongoing operating cost, the combined
effect of increased sales, improved gross margins, reduction of interest
expense, and the addition of interest income resulted in $355,000 of profit
improvement.
1997 COMPARED TO 1996
Net sales totaled $13.0 million in 1997, an increase of $3.1 million or 31
percent from 1996. The increase was primarily a result of strong growth in the
petroleum market segment and the shipment of approximately two-thirds of the
$1.8 million Taiwan automatic tank gauge order received in late 1996.
Petroleum segment sales increased to $11.5 million, or 36 percent from $8.4
million for the comparable period in 1996. Sales, excluding the large shipments
to Taiwan, increased over 31 percent from 1996. The growth was attributable to
continued sales increases to key accounts as well as strong sales of the
electronic Line Leak Detector product.
The Utility and General Instruments segment grew 6 percent, from $1.4 million in
1996 to $1.5 million in 1997. The Company continued to ship the Optimizer
product, originally released in 1996. In 1997, however, further sales of the
product were suspended, pending software and hardware changes to improve
reliability. The Company began to arrange for the replacement of several
malfunctioning units in the field, as it prepared to implement product changes.
Gross margins improved modestly in 1997, to 42 percent compared to 41 percent
for the comparable period in 1996. The 1996 adverse effects of product mix and
increases in scrap carried into early 1997 and resulted in lower gross margins
during the first quarter of 1997. Gross margins improved as the year progressed
and averaged 43 percent in the second half of 1997.
Operating expenses, managed aggressively following the operating loss in 1996,
increased slightly in 1997 (by $73,977) but declined sharply as a percentage of
sales (35.1% versus 45.4%). Operating expenses were favorably impacted by
reduced warranty costs and lower salaries resulting from the departure of
several senior management individuals. Research and development spending,
although still strong, was notably lower than in 1996 as the major development
effort for the electronic Line Leak Detector was completed. Interest expenses
declined by a small amount as the operating cash flow improved, particularly in
the second half of the year.
1997 operating profits, at $868,426, compared favorably to a 1996 loss of
$441,100. It should be noted that the Company was unprofitable in the first
quarter of 1997, and thus the improved profits were achieved during the April to
December 1997 period. The keys to the profit turnaround from the loss
experienced in 1996 were increased sales volume, improved gross margins, and
reduced operating spending as a percent of sales revenue.
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LIQUIDITY AND CAPITAL RESOURCES
In 1997 the Company utilized its working capital line of credit to fund the
growth in sales and accounts receivable and to accommodate the weak operating
results experienced early in the year. The Company increased the working capital
line of credit from $3 million to $3.5 million during the first half of 1997. As
of December 27, 1997 the Company had $2,745,634 available to be borrowed on the
working capital line of credit. Total inventories, at $1,884,000, compared
favorably to $2,863,000 at year end 1996 and a meaningful improvement in
inventory turnover was achieved in 1997. The reduction in inventory was
attributable to shipment of two-thirds of the Taiwan automatic tank gauge order
and an overall improvement in material planning and purchasing.
The Company continued to utilize its $3.5 million working capital line of credit
to fund operations and growth through the first four months of 1998. On May 1,
1998 the Company completed an investment by Roger E. Brooks and two venture
capital funds, Ampersand Specialty Materials and Chemicals III Limited
Partnership and Ampersand Specialty Materials and Chemicals III Companion Fund
Limited Partnership (collectively, "Ampersand"). Ampersand and Roger E. Brooks
invested $5.6 million to purchase common stock from INCON. The proceeds from
these funds were utilized to pay off the working capital line of credit ($1
million), complete a Company tender offer to its own shareholders ($1.6 million)
and pay legal settlement costs ($500,000). The remainder of the investment is
available as additional working capital, and could be used to fund future
acquisitions by the Company. Although the Company has completed no acquisitions
to date, it continues to explore growth opportunities through acquisition. As of
December 26, 1998, the Company had $3.5 million available to be borrowed on its
working capital line of credit, as well as a cash balance of $4,202,084.
Total year end inventories valued at $1,321,000, down from $1,854,000, primarily
due to continued improvement in materials management and purchasing. Accounts
receivable grew from $2,200,000 at year end 1997 to $3,253,000 at year end 1998
due to an exceptionally strong fourth quarter 1998.
The Company has a $1 million equipment revolver, of which $666,000 was available
to be borrowed as of December 26, 1998. The Company funded $157,000 of capital
additions with this equipment revolver in 1997. In 1998 the Company did not
borrow against the equipment revolver.
On September 18, 1998 the Company announced its Board of Directors had
authorized the repurchase of up to $250,000 of its Common Stock in a stock
buyback program which would end after March 1999. The Board of Directors
increased and extended this program on December 14, 1998 to allow up to $500,000
of the Company's Common Stock to be repurchased through September 1999. As of
December 26, 1998, the Company was able to repurchase $17,956 of its Common
Stock at an average price of $2.36 per share. The shares purchased under this
program will be held for issuance under the employee stock option plan and other
compensation plans, or for other proper corporate purposes.
The Company feels that current funds and existing lines of credit are adequate
to fund existing operations for the foreseeable future.
YEAR 2000 ISSUES
Year 2000 (Y2K) issues arise from the inability of some computer-based systems
to properly recognize and process dates after December 31, 1999. The Company is
dependent on computer hardware and software ("IT Systems") and non-IT systems,
such as telephones, HVAC, and other equipment containing embedded microprocessor
technology. Most of the Company's key business processes utilize this equipment
either directly or indirectly.
STATE OF READINESS
The readiness effort by the Company is proceeding on schedule. All IT hardware
and software systems have been inventoried. These systems and equipment have
been ranked according to their criticality to individual core business
operations. Lists of non-IT systems, such as telephone, security systems, etc.,
including those identified as potentially having embedded time-dependant
computer chips, have been inventoried and ranked similarly. All significant
business partners including service providers such as banks, financial
consultants, etc., vendors of material for production, and sales-channel
partners including independent representatives and distributors, were included
in the inventory process.
11
<PAGE>
The Company believes it is highly unlikely that there will be significant
internal Y2K problems, as all major IT systems have had extensive upgrades in
1998, including accounting, manufacturing, and sales processing software and
hardware, some with the assistance of system vendor support. Although helpful to
the Y2K compliance effort, theses upgrades were made in the normal course of
business to replace outmoded systems. All INCON products that require
date-related computations have been thoroughly tested for Y2K compliance. Most
INCON products have no date-dependencies in either operation or computation. The
Company believes that all INCON products are Y2K compliant, and information to
that effect has been distributed widely to customers, investors, and government
agencies, and is available on the Company web site.
COSTS TO ADDRESS Y2K ISSUES
The Company began incurring costs to address Y2K issues in 1998. These costs are
primarily the costs of current employees' time to do the appropriate planning,
testing, and investigation of the many areas of the business potentially
affected by this issue. The total cost of this compliance effort through
December 26, 1998 was approximately $10,000. The costs have not been, and are
not forecasted to be, material to the operating results of the Company. All
expenses will continue to be expensed as incurred, except those capitalized as
normal costs of doing business. The Company estimates that its total remaining
costs to address Y2K issues forecasted for 1999 are approximately $20,000.
RISKS OF Y2K ISSUES
With the completion of major internal systems upgrades in 1998, and with
thorough product testing completed in first quarter 1999, it is now believed
that the most reasonably likely Y2K risk would be the loss of a major business
partner or other external system. One such scenario would be the inability of a
major (high-sales volume) distributor or representative to carry on its core
business function, resulting in interrupted cash flow and customer service.
Means to identify and protect the Company in the case of these and other
uncontrollable scenarios will be fully considered in the contingency planning
phase.
CONTINGENCY PLANS
Remediation efforts on internal systems and products, including verification and
validation tests, will continue until all identified mission-critical, high-risk
systems are tested, by July 1,1999. It is possible that remedial efforts will
include contacting outside parties and agencies to identify and evaluate their
Y2K issues, and working cooperatively with them when possible to correct and
test deficiencies. Work will continue thereafter to test secondary, low-impact
systems. For Y2K issues that have a significant probability of not being
remediated by the time of the changeover to 2000, and to plan for unlikely but
possible business disruptions from undiscovered Y2K issues, contingency plans
will be developed and completed by October 1, 1999.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June of 1997, the Financial Accounting Standards Board issued STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 130 - REPORTING COMPREHENSIVE INCOME,
which requires the separate reporting of all changes to shareholders' equity,
and SFAS NO. 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, which revises existing guidelines about the level of financial
disclosure of a Company's operations. Both Statements are effective for
financial statements issued for fiscal years beginning after December 15, 1997.
The Company has determined that these new reporting standards do not necessitate
any changes to existing financial reporting.
12
<PAGE>
In June 1998, the Financial Accounting Standards Board issued STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 133 - ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which requires entities to report all
derivatives at fair value as assets or liabilities in their statements of
financial position. This statement is effective for financial statements issued
for fiscal periods beginning after June 15, 1999. The Company does not currently
have any derivative instruments or hedging activities to report under this
standard.
FORWARD-LOOKING STATEMENTS
The "Management's Discussion and Analysis" section and "Description of Business"
section of this report contain forward-looking statements, as defined in Section
21E of the Securities Exchange Act of 1934. Examples of such statements in this
report include those relating to estimates of future market demand and trends
regarding Petroleum and Utility/Predictive Maintenance segment products,
expected future efforts with regard to foreign markets for Company products,
expected lease renewals and associated costs, expected future revenues and
warranty costs, future adequacy of the Company's capital resources, and expected
completion dates and forecasted costs of Y2K compliance efforts. The Company
cautions investors that numerous factors could cause actual results and business
conditions to differ materially from those reflected in such forward-looking
statements including, but not limited to, the following: unanticipated shifts in
market demand for ATG and LLD products or Utility/Predictive Maintenance segment
products, owing to competition, regulatory changes, or changes in the overall
economy; competitive pressures on sales margins for INCON products;
unanticipated warranty costs from existing products or newly introduced
products; unexpected costs associated with Y2K issues; and risks attendant to
expansion of the Company's business through increased investment in product
development, increased marketing and sales efforts, and future acquisitions.
ITEM 7. FINANCIAL STATEMENTS.
Audited financial statements of the Company appear beginning at page F-1 below,
and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants on accounting and
financial disclosures in 1998.
13
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Certain information with respect to the executive officers of the Company is set
forth below. All other information required by this Item is incorporated herein
by reference to the Company's definitive proxy statement for the Annual Meeting
of Shareholders, to be held on June 10, 1999.
Under the bylaws of the Company, all officers hold office until the next Annual
Meeting of Directors and until their successors are chosen and have qualified,
or until their earlier resignation or removal from office.
There are no family relationships among any executive officers or directors.
The executive officers of the Company are as follows:
NAME AGE POSITIONS WITH COMPANY
Roger E. Brooks 54 Chief Executive Officer and Director
Alan Lukas 48 Vice President Product Development,
Director, and Chairman of the Board
Andrew B. Clement 29 Controller and Assistant Treasurer
Enrique Sales 35 Vice President Sales & Marketing
Roger E. Brooks served as a consultant to INCON from February 5, 1998 until he
became President/CEO and a Director on May 1, 1998. Previously he was
President/CEO and a Director of Dynisco, Inc. (1984-1996), a Director, Executive
Vice President/Chief Operating Officer and VP Marketing & Sales for Thermo
Electric Co. Inc. (1977-1984), and Marketing Manager for General Cable
Corporation (1970-1977). Currently he is a Director of American MSI Corporation,
and Moldflow Corporation.
Alan Lukas founded INCON in 1978. Previously he had held positions as Project
Engineer at GenRad (1972-1973), Applications Engineer at Analog Devices, Inc.
(1973), Product Marketing Manager at Teledyne Philbrick (1974), Engineering
Manager at Process Development Corp., Division of Honeycomb Systems (1975-1978)
and President/CEO and Chairman of INCON (1978-1998). He currently is a member of
the Advisory Board of the School of Engineering Science at the University of
Southern Maine. He has been a director of INCON since 1978.
Andrew B. Clement has been with INCON since November of 1997, in the position of
Controller. Previously he held positions as Controller at EDM, Inc. (1997),
Accountant at Portland Pipe Line Corp. (1996) and Cost Accountant at Aero Tech
Manufacturing, Inc. (1992-1995)
Enrique ( Rick) Sales joined INCON in December 1998 as the company's Vice
President of Sales & Marketing. Previously, he was Director of Sales & Marketing
for LMI, Inc. (1998), Vice President of Sales & Markeitng for Lan Technologies,
Inc. (1992-1998), Sales Manager, Latin America and Product Manager for BASF
Corporation (1987-1989), and Sales Representative for International Paper, Co.
(1985-1987). He is a Trustee of the Renssalaer Alumni Association.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference to the
Company's definitive proxy statement for the 1999 Annual Meeting of
Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference to the
Company's definitive proxy statement for the 1999 Annual Meeting of
Shareholders.
14
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference to the
Company's definitive proxy statement for the 1999 Annual Meeting of
Shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
An index of the exhibits filed with this report appears beginning at page E-1
below, and is incorporated herein by reference.
During the forth quarter of 1998 the Company filed one report on Form 8-K. The
report was filed on December 14, 1998 and related to an increase in the
Company's stock buyback program.
15
<PAGE>
SIGNATURES
In accordance with Section 13 of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTELLIGENT CONTROLS, INC.
By: /s/ ROGER E. BROOKS
---------------------------------
Roger E. Brooks, President and
Chief Executive Officer
Date: March 26, 1999
By: /s/ ANDREW B. CLEMENT
---------------------------------
Andrew B. Clement, Controller
(principal financial officer and
principal accounting officer)
Date: March 26, 1999
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.
/s/ ROGER E. BROOKS Date: March 26, 1999
- --------------------------------
Roger E. Brooks, President, Chief
Executive Officer and Director
/s/ ANDREW B. CLEMENT Date: March 26, 1999
- --------------------------------
Andrew B. Clement, Controller
/s/ GEORGE E. HISSONG Date: March 26, 1999
- --------------------------------
George E. Hissong, Director
/s/ ALAN LUKAS Date: March 26, 1999
- --------------------------------
Alan Lukas, Director
/s/ PAUL F. WALSH Date: March 26, 1999
- --------------------------------
Paul F. Walsh, Director
/s/ CHARLES D. YIE Date: March 26, 1999
- --------------------------------
Charles Yie, Director
16
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3(i) Conformed copy of Articles of Incorporation, as amended to
date
3(ii) Bylaws of the Company, as amended to date
4 See Exhibits 3(i) and 3(ii)
10.1 Investment Agreement, dated March 26, 1998, among the
Company, Ampersand Specialty Materials and Chemicals III
Limited Partnership, Ampersand Specialty Materials and
Chemicals III Companion Fund Limited Partnership, and Roger
E. Brooks; incorporated by reference to Exhibit 99.c(1) to
the Company's Schedule 13E-4 Issuer Tender Offer Statement
filed March 30, 1998
10.1A Amendment No. 1 to Investment Agreement, dated as of May 1,
1998, among the Company, Ampersand Specialty Materials and
Chemicals III Limited Partnership, Ampersand Specialty
Materials and Chemicals III Companion Fund Limited
Partnership, and Roger E. Brooks; incorporated by reference
to Exhibit 10.1A to the Company's Form 10-QSB for the quarter
ended March 28, 1998
10.2 Stockholders Agreement, dated as of May 1, 1998, among the
Company, Ampersand Specialty Materials and Chemicals III
Limited Partnership, Ampersand Specialty Materials and
Chemicals III Companion Fund Limited Partnership, Roger E.
Brooks, Alan Lukas, Paul E. Lukas, and certain related
parties; incorporated by reference to Exhibit 99.c(2) to the
Company's Schedule 13E-4 Issuer Tender Offer Statement filed
March 30, 1998
Note: Compensatory plans and management contracts are filed as Exhibits 10.3
through 10.10 below.
10.3 Employment Agreement between the Company and Roger E. Brooks;
incorporated by reference to Exhibit 10.3 to the Company's
Form 10-QSB for the fiscal quarter ended March 28, 1998
10.3A Employee Stock Restriction Agreement between the Company and
Roger E. Brooks and related promissory note, pledge agreement
and form of 83(b) election; incorporated by reference to
Exhibit 10.3A to the Company's Form 10-QSB for the fiscal
quarter ended March 28, 1998
10.4 Employment Agreement dated as of May 1, 1998 with Alan Lukas;
incorporated by reference to Exhibit 10.2 to the Company's
Form 10-QSB for the fiscal quarter ended June 27, 1998
10.5 1998 Employee Stock Option Plan; incorporated by reference to
Exhibit 10.4 to the Company's Form 10-QSB for the quarter
ended March 28, 1998
10.6 1984 Incentive Stock Option Plan; incorporated by reference
to Exhibit 6.5 of the Company's Form 1-A, filed June 19,
1993, as amended, SEC File No.
24B-3429 ("Company's Form 1-A")
E-1
<PAGE>
10.6A Amendment No. 1 to 1984 Incentive Stock Option Plan;
incorporated by reference to Exhibit 10.5A of the Company's
Form 10-SB, filed February 2, 1995
10.6B Amendment No. 2 to 1984 Incentive Stock Option Plan;
incorporated by reference to Exhibit 10.6B of the Company's
Form 10-KSB for the fiscal year ended December 31, 1996
10.7 1993 Director Stock Option Plan; incorporated by reference to
Exhibit 6.7 of the Company's Form 1-A
10.8 1994 Employee Stock Purchase Plan, amended and restated as of
January 1, 1996; incorporated by reference to Exhibit 10.9 of
the Company's Form 10-KSB for the fiscal year ended December
31, 1996
10.9 Advisory Board Stock Option Plan; incorporated by reference
to Exhibit 6.6 of the Company's Form 1-A
10.10 Form of Confidentiality and Nondisclosure Agreement;
incorporated by reference to Exhibit 6.11 of the Company's
Form 1-A
10.11 Settlement Agreement and Mutual Release, dated May 13, 1998,
with John Knight; incorporated herein by reference to Exhibit
99.1 to the Company's Form 8-K filed May 27, 1998
10.12 Settlement Agreement, dated August 25, 1998, between the
Company and Hasstech, Inc.
10.15 Lease Agreement with Apollo Development Corp., dated as of
April 11, 1991; incorporated by reference to Exhibit 6.4 of
the Company's Form 1-A
10.15A Lease Extension Agreement, executed May 27, 1997, with Apollo
Development Corp.; incorporated by reference to Exhibit 10.3A
to the Company's Form 10-KSB for the fiscal year ended
December 27, 1997
10.15B Lease Extension Agreement, executed March 27, 1998 with
Appollo Development Corp.; incorporated by reference to
Exhibit 10.5 to the Company's Form 10-QSB for the fiscal
quarter ended March 28, 1998
10.15C Lease Extension Agreement, executed January 4, 1999 with
Appollo Development Corp.
10.16 Lease Agreement with BJB Associates, dated June 21, 1994;
incorporated by reference to Exhibit 10.4 of the Company's
Form 10-KSB for the fiscal year ended December 31, 1994
10.16B Addendum to Lease, executed May 27, 1997, with BJB
Associates; incorporated by reference to Exhibit 10.4A to the
Company's Form 10-KSB for the fiscal year ended December 27,
1997
E-2
<PAGE>
10.16C Addendum to Lease, executed April 28, 1998 with BJB
Associates, and Letter dated April 3, 1998 from BJB
Associates regarding reimbursement of utility cost by
landlord; incorporated by reference to Exhibit 10.6 to the
Company's Form 10-QSB for the fiscal quarter ended March 28,
1998
21 Subsidiaries of the Company
23 Consent of Accountants
27 Financial Data Schedule
E-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
BOARD OF DIRECTORS AND STOCKHOLDERS OF INTELLIGENT CONTROLS, INC.
In our opinion, the accompanying balance sheets and the related statements of
income, stockholders' equity, and cash flows present fairly, in all material
respects, the financial position of Intelligent Controls, Inc. at December 26,
1998 and December 27, 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/S PRICEWATERHOUSECOOPERS L.L.P.
- -------------------------------------
Portland, Maine
February 5, 1999
<PAGE>
INTELLIGENT CONTROLS, INC.
BALANCE SHEETS
December 26, 1998 and December 27, 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,202,084 $ 300
Accounts receivable, net of allowances of $170,000
in 1998 and $50,000 in 1997 3,253,477 2,200,062
Inventories 1,320,913 1,854,328
Prepaid expenses and other 127,425 257,704
Income tax receivable - 119,099
Deferred income taxes 343,520 192,464
------------ -----------
Total current assets 9,247,419 4,623,957
Property and equipment, net 889,748 856,581
Other assets 31,611 27,176
------------ -----------
$ 10,168,778 $ 5,507,714
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Non-interest bearing overdraft $ - $ 67,259
Note payable - bank - 754,366
Income taxes payable 299,269 -
Accounts payable 1,007,400 769,097
Accrued expenses 1,144,682 520,709
Current portion of long-term debt 194,000 194,700
------------ -----------
Total current liabilities 2,645,351 2,306,131
Long-term debt, net of current portion 140,279 372,401
Deferred income taxes 76,740 67,295
Stockholders' equity:
Common stock, no par value; 8,000,000 shares authorized;
5,060,760 shares issued in 1998 and 3,274,306 in 1997 7,585,080 2,293,841
Retained earnings 1,139,196 468,046
Receivable from stockholder (1,376,728) -
Treasury stock, 115,951 shares in 1998 (41,140) -
------------ -----------
Total stockholders' equity 7,306,408 2,761,887
------------ -----------
$ 10,168,778 $ 5,507,714
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-1
<PAGE>
INTELLIGENT CONTROLS, INC.
STATEMENTS OF INCOME
For the Years Ended December 26, 1998 and December 27, 1997
1998 1997
------------ ------------
Net sales $ 16,198,385 $ 13,005,184
Cost of sales 8,198,641 7,568,247
------------ ------------
Gross profit 7,999,744 5,436,937
Operating expenses:
Selling, general and administrative 5,032,227 3,777,699
Research and development 996,933 790,812
Legal settlement charges 747,660 --
6,776,820 4,568,511
Operating income 1,222,924 868,426
Other income (expense):
Interest income (expense) 82,517 (157,230)
Other (expense) (67,291) (30,221)
------------ ------------
15,226 (187,451)
Income before income tax expense 1,238,150 680,975
Income tax expense 567,000 246,000
------------ ------------
Net income $ 671,150 $ 434,975
============ ============
Net income per share basic and diluted $ .15 $ .13
============ ============
Weighted average common shares outstanding 4,391,305 3,249,769
============ ============
Weighted average common
and common equivalent shares outstanding 4,455,635 3,392,686
============ ============
The accompanying notes are an integral part of the financial statements
F-2
<PAGE>
INTELLIGENT CONTROLS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 26, 1998 and December 27, 1997
<TABLE>
<CAPTION>
OUTSTANDING TOTAL
COMMON STOCK RETAINED RECEIVABLE TO TREASURY STOCKHOLDERS'
SHARES AMOUNT EARNINGS SHAREHOLDERS STOCK EQUITY
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997 3,238,952 $ 2,252,041 $ 33,071 $ -- ($ 4,306) $ 2,280,806
Exercise of stock options 25,050 20,312 -- -- -- 20,312
Issuance of common stock 12,457 25,794 -- -- -- 25,794
Retirement of 2,153 (2,153) (4,306) -- -- 4,306 0
treasury shares
Net Income -- -- 434,975 -- -- 434,975
---------- ----------- ----------- ----------- ----------- -----------
Balances, December 27, 1997 3,274,306 2,293,841 468,046 -- 0 $ 2,761,887
Exercise of stock options 125,141 44,012 -- -- -- 44,012
Issuance of common stock 2,136,313 6,850,494 -- -- -- 6,850,494
Retirement of common stock (475,000) (1,603,267) -- -- -- (1,603,267)
Acquisition of treasury shares (116,121) -- -- -- (41,483) (41,483)
Issuance of treasury shares 170 -- -- -- 343 343
Receivable from stockholder -- -- -- (1,376,728) -- (1,376,728)
Net Income -- -- 671,150 -- -- 671,150
---------- ----------- ----------- ----------- ----------- -----------
Balances, December 26, 1998 4,944,809 $ 7,585,080 $ 1,139,196 ($1,376,728) ($ 41,140) $ 7,306,408
========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
INTELLIGENT CONTROLS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 26, 1998 and December 27, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 671,150 $ 434,975
Adjustments to reconcile net income to net cash
Provided (used) by operating activities:
Depreciation and amortization 267,605 242,430
Loss on disposal of property and equipment 13,426 --
Deferred income taxes (141,611) 26,381
Changes in assets and liabilities:
Accounts receivable (1,053,415) (239,083)
Inventories 533,415 979,007
Prepaid expenses and other current assets 130,279 85,133
Income tax receivable 119,099 40,901
Income tax payable 299,269 --
Accounts payable and accrued expenses 862,276 (265,310)
Other (4,435) (7,196)
----------- -----------
Net cash provided by operating activities 1,697,058 1,297,238
----------- -----------
Cash flows from investing activities:
Capital expenditures (314,198) (247,931)
----------- -----------
Net cash used by investing activities (314,198) (247,931)
----------- -----------
Cash flows from financing activities:
(Decrease) increase in non-interest bearing overdraft (67,259) 67,259
Repayment of note payable - bank (754,366) (1,261,496)
Issuance of long-term debt -- 157,000
Repayment of long-term debt (232,822) (191,566)
Issuance of common stock, net 5,517,778 46,106
Retirement of common stock (1,603,267) --
Acquisition of treasury stock (41,140) --
Decrease in restricted cash balances -- 199,120
Decrease in liability to shareholder -- (199,120)
----------- -----------
Net cash (used by) provided by financing activities 2,818,924 (1,182,697)
----------- -----------
Net decrease in cash 4,201,784 (133,390)
Cash and cash equivalents at beginning of year 300 133,690
----------- -----------
Cash and cash equivalents at end of year $ 4,202,084 $ 300
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 66,292 $ 160,624
Income taxes $ 320,000 $ 373,000
</TABLE>
Supplemental disclosure of noncash financing activity:
During 1998 common stock amounting to $1,376,728 was issued for a
receivable from stockholder During 1997 treasury stock with a carrying cost
of $4,306 was retired.
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
INTELLIGENT CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS
December 26, 1998 and December 27, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
The Company is engaged primarily in designing and manufacturing
microprocessor-based control devices and systems for industrial, commercial and
power utility applications.
During 1997 the Company changed its reporting year end from a calendar year end
used in prior years, to the last Saturday in December.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reported period. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION
Substantially all revenue is related to the sale of products and is recorded at
the time of shipment to the customer.
INVENTORIES
Inventories are stated at the lower of cost (average cost) or market (net
realizable value) on a first in first out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
straight-line and accelerated methods over estimated useful lives of the
equipment (three to ten years) and the lease terms for the leasehold
improvements for book and tax purposes.
Expenditures for maintenance, repairs and minor replacements are charged to
operations while expenditures for major replacements and betterments are added
to property and equipment accounts. When fixed assets are sold, retired or
otherwise disposed of, the asset cost and accumulated depreciation are removed
from the accounts and any resulting gain or loss is reflected in income.
F-5
<PAGE>
INTELLIGENT CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS
December 26, 1998 and December 27, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
NET INCOME (LOSS) PER SHARE
The net income (loss) per common share has been computed in accordance with
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 128 - EARNINGS PER SHARE.
The Statement requires dual presentation of basic and diluted earnings per share
of common stock on the statements of income. Basic earnings per share of common
stock have been determined by dividing net earnings by the weighted average
number of shares of common stock outstanding during the year. Diluted earnings
per share reflect the potential dilution that would occur if existing stock
options were exercised. Following is a reconciliation of the dual presentations
of earnings per share for the fiscal years presented.
Net Common Earnings
Income Shares Per
(Numerator) (Denominator) Share
----------- ------------- --------
DECEMBER 26, 1998
Basic earnings per share $ 671,150 4,391,305 $ .15
=====
Dilutive potential shares -- 64,330
----------- ---------
Diluted earnings per share $ 671,150 4,455,635 $ .15
=========== ========= =====
DECEMBER 27, 1997
Basic earnings per share $ 434,975 3,249,769 $ .13
=====
Dilutive potential shares -- 142,917
----------- ---------
Diluted earnings per share $ 434,975 3,392,686 $ .13
=========== ========= =====
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 27, 1997, the carrying amounts of the Company's financial
instruments included in current assets and current liabilities approximate fair
value of the short maturity of those instruments. The carrying amounts of the
Company's long-term debt also approximates their value as of December 26, 1998
based upon the borrowing rates currently available to the Company for loans with
similar terms and maturities.
IMPAIRMENT ACCOUNTING
The Company adopted FINANCIAL ACCOUNTING STANDARD NO. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
(SFAS No. 121) in 1996. The Company reviews the recoverability of its long-lived
assets, including goodwill and other intangible assets, when events or changes
in circumstances occur that indicate that the carrying value of the assets may
not be recoverable. The measurement of possible impairment is based on the
Company's ability to recover the asset from expected future pre-tax cash flows
(undiscounted and without interest charges) of the related operations. The
measurement of impairment requires management to make estimates of expected
future cash flows related to long-lived assets. It is at least reasonably
possible that future events or circumstances could cause these estimates to
change.
F-6
<PAGE>
INTELLIGENT CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS
December 26, 1998 and December 27, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
NEW ACCOUNTING PRONOUNCEMENTS
In June of 1997, the Financial Accounting Standards Board issued STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 130 - REPORTING COMPREHENSIVE INCOME,
which requires the separate reporting of all changes to shareholders' equity,
and SFAS NO. 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, which revises existing guidelines about the level of financial
disclosure of a Company's operations. Both Statements are effective for
financial statements issued for fiscal years beginning after December 15, 1997.
The Company has determined that these new reporting standards do not necessitate
any changes to existing financial reporting.
In June 1998, the Financial Accounting Standards Board issued STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 133 - ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which requires entities to report all
derivatives at fair value as assets or liabilities in their statements of
financial position. This statement is effective for financial statements issued
for fiscal periods beginning after June 15, 1999. The Company does not currently
have any derivative instruments or hedging activities to report under this
standard.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements to
conform to the 1998 presentation.
2. INVENTORIES
Inventories consisted of the following at December 26, 1998 and December 27,
1997:
1998 1997
------------ -----------
Raw materials and parts $ 960,552 $ 1,214,749
Work-in-progress 167,512 229,824
Finished goods 187,849 356,974
Supplies and other 5,000 52,781
------------ -----------
$ 1,320,913 $ 1,854,328
============ ===========
F-7
<PAGE>
INTELLIGENT CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS
December 26, 1998 and December 27, 1997
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 26, 1998 and
December 27, 1997:
1998 1997
----------- -----------
Equipment $ 1,217,932 $ 1,139,210
Furniture and fixtures 102,874 104,312
Computer software 169,176 154,560
Leasehold improvements 109,512 111,983
Construction in progress 105,813 --
----------- -----------
$ 1,705,307 $ 1,510,065
Less accumulated depreciation and amortization 815,559 653,484
----------- -----------
$ 889,748 $ 856,581
=========== ===========
4. NOTE PAYABLE - BANK
Note payable - bank represents amounts borrowed under a $3,500,000 working
capital line of credit. Such borrowings are collateralized by all assets of the
Company and are subject to certain restrictions, including those related to new
borrowings, maximum debt to equity ratio, and minimum pretax income levels.
Interest is variable at the bank's base rate plus .25% (7.75% at December 26,
1998 and 8.5% at December 27, 1997). At December 26, 1998, the line was not
being utilized and all $3.5 million was available to be borrowed. Amounts
borrowed at December 27, 1997 were $754,366. The weighted average interest rate
on all outstanding borrowings at fiscal year ended December 26, 1998 was 7.75%
and 8.55% for fiscal year ended December 27, 1997.
5. LONG-TERM DEBT
Long-term debt consisted of the following at December 26, 1998 and December 27,
1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Term note payable, interest at 9.5%
Payable monthly through December 1999 $ -- $ 71,950
Borrowing under a $1,000,000 revolving credit agreement with a bank,
interest at a variable rate (7.75% at December 26, 1998 and 8.5%
at December 27, 1997), with principal and interest payable
monthly through December 2000 334,279 495,151
--------- ---------
334,279 567,101
Less current portion (194,000) (194,700)
--------- ---------
Long-term portion $ 140,279 $ 372,401
========= =========
</TABLE>
The revolving credit agreement is collateralized in the same manner and subject
to the same conditions as the note payable described in Note 4. The term note
payable is collateralized by a subordinated interest in Company assets and
contains restrictions with respect to dividends capital, expenditures, and new
borrowings.
F-8
<PAGE>
INTELLIGENT CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS
December 26, 1998 and December 27, 1997
5. LONG-TERM DEBT (CONT'D)
At December 26, 1998, aggregate maturities of long-term debt are as follows:
1999 194,000
2000 140,279
--------
$334,279
========
6. INCOME TAXES
Income tax expense (benefit) consists of the following:
1998 1997
--------- ---------
Current:
Federal $ 544,000 $ 197,000
State 165,000 57,000
--------- ---------
709,000 254,000
--------- ---------
Deferred:
Federal (110,000) (6,200)
State (32,000) (1,800)
--------- ---------
(142,000) (8,000)
--------- ---------
Total income tax expense $ 567,000 $ 246,000
========= =========
The actual income tax benefit differs from the expected tax computed by applying
the U.S. federal corporate tax rate of 34% to income before income tax as
follows:
1998 1997
----- -----
Computed expected income tax expense (benefit) 34% 34%
State income taxes, net of federal benefit 6 6
Foreign Sales Corporation -- (5)
Legal Settlement 5
Other 1 1
----- -----
Total income tax expense rate 46% 36%
===== =====
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities consist of the following at December
26, 1998 and December 27, 1997:
F-9
<PAGE>
INTELLIGENT CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS
December 26, 1998 and December 27, 1997
6. INCOME TAXES (CONT'D)
Deferred tax assets: 1998 1997
--------- ---------
Inventory $ 109,212 $ 60,381
Reserves 207,660 108,585
Compensation 26,648 23,498
--------- ---------
$ 343,520 $ 192,464
========= =========
Deferred tax liabilities:
Depreciation $ 76,740 $ 67,295
========= =========
7. COMMON STOCK
The Company has granted stock options to employees, directors and outside
consultants and advisors under a 1984 Incentive Stock Option Plan, a 1993
Directors Stock Option Plan, an Advisory Board Stock Option Plan, and a 1998
Employee Stock Option Plan. Options granted under the 1984 Incentive Stock
Option Plan vest at a rate of 20% per year, options granted under the 1998
Employee Stock Option Plan vest at a rate of 25% per year, and options granted
under the other two plans vest immediately. Options granted under the 1984
Incentive Stock Option Plan, the Advisory Board Stock Option Plan, and the 1998
Employee Stock Option Plan expire after 10 years, while options granted under
the 1993 Directors Stock Option Plan expire after 5 years. As of December 26,
1998, 227,500 shares were available to be granted under these plans in the
future. A summary of changes of common stock options during 1998 and 1997 is:
Number of Weighted Average
Shares Exercise Price
Outstanding at January 1, 1997 495,508 $1.69
Issued during 1997 118,000 $2.19
Lapsed during 1997 (40,500) $2.97
Exercised during 1997 (21,300) $0.73
--------
Outstanding at December 27, 1997 551,708 $1.74
Issued during 1998 181,000 $2.28
Lapsed during 1998 (223,072) $1.36
Exercised during 1998 (125,668) $1.30
--------
Outstanding at December 26, 1998 383,968 $2.36
========
Shares exercisable at December 26, 1998 157,454
========
Shares exercisable at December 27, 1997 398,373
========
The weighted average fair value of options granted in 1998 and 1997 was $1.28
and $1.26, respectively and the range of exercise prices at December 26, 1998 is
$0.50 to $4.52. The weighted average remaining contractual life of these options
is approximately 6.4 years.
F-10
<PAGE>
INTELLIGENT CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS
December 26, 1998 and December 27, 1997
7. COMMON STOCK (CONT'D)
On January 1, 1996, the Company adopted STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 123, ACCOUNTING FOR STOCK BASED COMPENSATION (SFAS No. 123). This
statement requires a fair value based method of accounting for employee stock
options and results in expense recognition for the Company's employee stock
plans. It also permits a Company to continue to measure compensation expense for
such plans using value based method as prescribed by Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" (APB No. 25). The Company
has elected to follow APB No. 25 in accounting for its employee stock plans, and
accordingly, no compensation cost has been recognized. Had compensation cost for
the Company's stock plans been determined based on the fair value requirements
under SFAS No. 123, the Company's net income and earnings per share would have
been to the pro forma amounts indicated below:
1998 1997
----------------------- ---------------------
As Pro As Pro
Reported Forma Reported Forma
Net income $ 671,150 $ 596,630 $ 434,975 $ 399,519
Basic net income per share $ 0.15 $ 0.14 $ 0.13 $ 0.12
The fair value of stock options in the pro forma accounts for 1998 and 1997 is
not necessarily indicative of the future effects on net income and earnings per
share. The fair value of each stock option grant has been estimated on the date
of the grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1997, respectively: no
dividend yield; expected volatility of 50% for both years; risk-free interest
rates of 6% for both years; and expected life of 6 years for both years.
8. COMMITMENTS
The Company leases two facilities, including one from a related party, and
various computer and office equipment under non-cancelable operating leases. The
Company has an option to purchase one of the facilities prior to October 2000.
Minimum lease payments over the fixed terms of these leases are as follows:
1999 $148,348
2000 110,623
2001 7,447
2002 2,960
Rent expense was approximately $118,000 and $117,000 in 1998 and 1997,
respectively, including approximately $65,000 and $64,000 to a related party.
The Company manufactures a certain product line under an exclusive license
agreement which requires the Company to make royalty payments on such product
sales through 2007. Royalty expense related to this agreement was $5,690 and
$9,377 in 1998 and 1997 respectively.
9. EMPLOYEE BENEFIT PLAN
The Company has adopted a 401(k) plan, which covers all eligible employees and
includes a matching contribution by the Company. In 1995, the Company's Board of
Directors voted to increase the Company's match from 40% of the first 5% of the
employee's contribution, to 50% of an employee's contribution up to 5% of the
employee's salary. Expenses associated with the plan were approximately $40,700
and $35,300 in 1998 and 1997, respectively.
F-11
<PAGE>
INTELLIGENT CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS
December 26, 1998 and December 27, 1997
10. LITIGATION
On July 26, 1996 the Company received notice of the filing of an action entitled
John D. Knight v. Intelligent Controls, Inc. in Maine Superior Court, Cumberland
County. The action was brought by Mr. Knight, a former director and executive
officer of Intelligent Controls, Inc. whose employment was terminated by the
Company in June 1996. In May 1998 the Company settled the lawsuit with Mr.
Knight. The financial statements reflect a $40,000 cash payment, recognition of
$200,000 for the disqualifying disposition of incentive stock options and
$407,660 for exercise of non-qualified stock options. The company was able to
realize a tax benefit on $447,660 of these charges, $200,000 was not deductible
for tax purposes.
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.
F-12
EXHIBIT 3(i)
INTELLIGENT CONTROLS, INC.
CONFORMED ARTICLES OF INCORPORATION
Note: These conformed Articles of Incorporation have been prepared based on
the original Articles of Incorporation of Intelligent Controls, Inc. as
filed on February 23, 1978 with the Maine Secretary of State, and all
amendments thereto. Reference is made to the originals for the complete
text of the Articles of Incorporation, as amended.
///////////////////////////////////////////////////////////////////////////////
STATE OF MAINE
------
ARTICLES OF INCORPORATION
OF
INTELLIGENT CONTROLS, INC.
FIRST: The name of the corporation is INTELLIGENT CONTROLS, INC. and it is
located in Maine, at . . . Saco.
SECOND: The name of its clerk and the registered office shall be:
Gregory S. Fryer
One Portland Square
Portland, ME 04112
THIRD: The number of directors constituting the initial board of directors of
the corporation is 3.
FOURTH: The board of directors is authorized to increase or decrease the number
of directors.
[T]he minimum number . . . shall be 3 directors, . . . and the maximum
number . . . shall be 9 directors.
FIFTH: There shall be only one class of shares, viz, Common Stock.
Par value of each share is: none.
Number of shares authorized: 8,000,000.
<PAGE>
SUMMARY
The aggregate par value of all authorized shares (of all classes)
having a par value is: $0.
The total number of authorized shares (of all classes) without par
value is: 8,000,000 shares.
SIXTH: Meetings of shareholders may be held outside the State of Maine.
SEVENTH: There are no preemptive rights.
EIGHT: Other provisions of these articles . . ., including any provisions for
the regulation of the internal affairs of the corporation, are [as
follows:]
Pursuant to Section 524 of the Maine Business Corporation Act, the
Corporation may issue debentures convertible into shares of any class
of stock, within such periods and upon such terms as the Board of
Directors shall fix and determine.
Section 910 of the Maine Business Corporation Act shall be inapplicable
to the Corporation.
The Corporation may purchase its own shares from capital surplus.
Exhibit 3(ii)
BYLAWS
OF
INTELLIGENT CONTROLS, INC.
ARTICLE I
DEFINITIONS
When used in these Bylaws, the terms defined below shall have the meanings
specified:
The "Articles" shall mean the Articles of Incorporation of the
Corporation, including any and all amendments thereto, as then in
effect.
The "Board" shall mean the Board of Directors of the Corporation.
The "Corporation" shall mean Intelligent Controls, Inc., a Maine
corporation.
The "Corporation Act" or the "Act" shall mean the Maine Business
Corporation Act, Title 13-A of the Revised Maine Statutes Annotated, as
then in effect.
The "State" shall mean the State of Maine.
ARTICLE II
CORPORATE OFFICES
SECTION 2.1 Principal Office. The principal office of the Corporation shall be
located at 74 Industrial Park Road, P.O. Box 638, Saco, ME 04072 or such other
place as the Board may designate from time to time.
SECTION 2.2 Registered Office. The registered office of the Corporation shall be
at One Portland Square, P.O. Box 586, Portland, Maine 04112 or at such other
address as the Clerk of the Corporation shall maintain.
SECTION 2.3 Other Offices. The Corporation may have offices at such other places
either within or without the State as the Board may determine or as the business
may require.
<PAGE>
ARTICLE III
MEETINGS OF SHAREHOLDERS
SECTION 3.1 Annual Meetings. The President or the Board each year shall call
an annual meeting of shareholders for the election of directors and the
transaction of any other proper business. Commencing in 1995, the annual meeting
shall be held on the first Thursday in June of each year at such date and hour
as the President or the Board shall determine.
SECTION 3.2 Special Meetings. Except as otherwise provided by the Corporation
Act, special meetings of shareholders may be called only by the President, the
Board, or the holders of more than fifteen percent (15%) of the shares entitled
to vote at the meeting.
SECTION 3.3 Place of Meetings. All meetings of shareholders shall be held at
the registered office of the Corporation or at such other place within or
without the State as the President or the Board shall designate.
SECTION 3.4 Notice of Meetings. Written notice of each annual or special
meeting of shareholders shall be delivered to each shareholder of record
entitled to vote at such meeting, not less than ten (10) days nor more than
sixty (60) days before the meeting. Such notice shall state the place, date, and
hour of the meeting. In the case of a special meeting, or to the extent
otherwise required by the Corporation Act, the Articles, or these Bylaws, such
notice shall also state the purpose or purposes for which the meeting is called.
If mailed, such notice shall be deemed delivered when deposited with postage
prepaid in the United States mail, addressed to the shareholder at his or her
address as it appears in the stock transfer books of the Corporation. Defects in
notice shall be deemed waived to the extent provided in the Act.
SECTION 3.5 Record Date. For the purpose of determining shareholders entitled
to notice of and to vote at any meeting of shareholders, the Board may fix in
advance a record date, which date shall not be more than sixty (60) days, nor
less than ten (10) full days, prior to the date of the meeting of shareholders.
If the Board does not fix a record date for a meeting of shareholders, the day
next preceding the date on which notice of the meeting is first given to
shareholders shall be deemed to be the record date for such meeting.
SECTION 3.6 List of Shareholders. In advance of each meeting of shareholders,
the Corporation shall prepare a complete list of the shareholders entitled to
vote at that meeting. Such list shall be available at the meeting for inspection
by any shareholder entitled to vote at the meeting.
SECTION 3.7 Quorum. At each meeting of shareholders, the holders of a
majority of the shares entitled to vote thereat, present in person or by proxy,
shall constitute a quorum for the transaction of business.
SECTION 3.8 Conduct of Meetings. (a) Each meeting of shareholders shall be
presided over by the President or by a person designated by the President to act
as chairman of the meeting. The chairman of the meeting shall determine the
order of business at the meeting and shall have full authority to set reasonable
rules of procedure by which the meeting is to be governed. Rulings of the
chairman of the meeting on the order of business and other procedural matters
may be overturned only by the affirmative vote of two-thirds of the shares
present in person or by proxy at the meeting.
<PAGE>
(b) The Clerk shall act as secretary of each meeting of shareholders
and shall keep a record of all actions taken by the shareholders at the meeting.
In the absence of the Clerk, the chairman of the meeting may appoint any person
present to act as secretary of the meeting. Minutes of the meeting shall be
filed with the Clerk as part of the corporate records.
(c) At or before each meeting of shareholders, the President or other
chairman of the meeting shall appoint two individuals to act as voting
inspectors at the meeting. The inspectors shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum and the authenticity, validity and effect of proxies.
The inspectors shall receive all written votes, hear and determine all
challenges and questions arising in connection with the right to vote, count and
tabulate all votes, determine the result and otherwise see that the vote or
election is conducted with fairness to all shareholders. In case of disagreement
between the inspectors on any question, the chairman of the meeting shall
determine the matter at issue.
SECTION 3.9 Proxies. A shareholder may vote either in person or by a written
proxy executed by the shareholder or by his or her duly authorized
attorney-in-fact. Proxies shall not be given effect unless delivered to the
President, Secretary, or Clerk in a timely manner.
SECTION 3.10 Special Approval by Shareholders. Unless approved by vote or
written consent of all directors then in office, each of the matters described
below will require approval by shareholders at a duly called meeting at which a
quorum is present. The vote required by this Section shall be in addition to any
greater or different shareholder vote required by the Act, the Articles, or
these Bylaws.
(a) any merger or consolidation of the Corporation with any
person; any sale, lease, or other disposition by the
Corporation of all or substantially all of its assets to any
person; any reorganization or recapitalization of the
Corporation; or any joint venture, partnership, or similar
arrangement to which the Corporation is a party and under
which the Corporation is or may become liable for payments
exceeding $50,000 in any fiscal year;
(b) any sale or other disposition by the Corporation of any of
its capital stock, except pursuant to a stock option or stock
appreciation right granted by the Board (or a committee
thereof) under a stock option plan approved by shareholders;
(c) any activity by the Corporation to engage in any line of
business other than the development, manufacture, and sale of
electronic measurement systems and related products, if such
activity involves or may involve the expenditure by the
Corporation of more than $50,000 in any fiscal year;
(d) any purchase or other acquisition by the Corporation of
stock, limited liability company interests, partnership
interests, or other securities issued by any other person;
any loan or advance to any person, or any investment in or
with any other person, other than in the ordinary course of
the Corporation's business; or any purchase or other
acquisition by the Corporation of the assets of any other
person, other than in the ordinary course of the
Corporation's business and other than incidental transactions
involving payment by the Corporation of less than $50,000;
(e) any amendment of the Articles or Bylaws;
(f) any loan agreement, capital lease, installment purchase,
guarantee, or other contract (or series of related
contracts), and any amendment to any such contract, under
which the Corporation is or may become liable for payments
exceeding $5,000,000;
<PAGE>
(g) any purchase, redemption, or other acquisition by the
Corporation of any shares of its capital stock (or of any
option, warrant, or other right to acquire shares of its
capital stock), except for repurchases of capital stock from
Corporation employees in connection with termination of their
employment or in connection with exercises of employee stock
options or stock appreciation rights granted by the Board (or
a committee thereof), in each case at a price per share not
exceeding the then fair market value of the reacquired stock;
(h) any transaction or contract of the Corporation involving or
requiring the liquidation of the Corporation;
(i) any related-party transaction in which the Corporation is or
may become liable for payments, except (1) any transaction
expressly contemplated by that certain Investment Agreement,
dated as of March 26, 1998, among the Corporation, Ampersand
Specialty Materials and Chemicals III Limited Partnership,
and Ampersand Specialty Materials and Chemicals III Companion
Fund Limited Partnership, (2) any transaction approved by
vote or written consent of all disinterested directors after
all material facts as to each related party's interest and as
to the transaction are disclosed or known to the Board, or
(3) any employment or retention of a related party as an
employee, director, or consultant of the Corporation, and any
compensatory contract or arrangement relating thereto, if
approved by vote of the Board or a duly authorized committee
of the Board.
For purposes hereof, "approval by shareholders" shall mean approval by a
majority of the votes cast by the holders of shares entitled to vote on the
subject matter; "person" shall mean and include any individual, entity, or
group; "related party" shall mean any director or officer of the Corporation,
any beneficial owner of more than five percent of the outstanding common stock
of the Corporation, and any person (other than the Corporation or any subsidiary
thereof) who is an associate, affiliate, or immediate family member of any such
director, officer, or owner; "related-party transaction" means a sale or
purchase of assets, sale or purchase of securities, loan, or other contract or
transaction with a related party, other than a bona fide employment arrangement
in the ordinary course of the Corporation's business; "affiliate" and
"associate" shall have the meanings ascribed to those terms in Rule 12b-2 of the
Securities Exchange Act of 1934, as amended; "beneficial owner" and "immediate
family" shall have the meanings ascribed to those terms in Rule 16a-1 of such
act.
<PAGE>
ARTICLE IV
DIRECTORS
SECTION 4.1 General Powers. Except to the extent expressly reserved to the
shareholders by the Corporation Act, the Articles, or these Bylaws, the Board
shall have full authority to manage and direct the management of the business
and affairs of the Corporation.
SECTION 4.2 Number. The number of directors constituting the Board shall be
set from time to time by the shareholders or the Board within the limits fixed
by the Articles.
SECTION 4.3 Qualifications. Directors must have attained the age of
twenty-one (21) years.
SECTION 4.4 Election and Term. Unless otherwise provided by the Articles and
except as hereinafter provided, the directors shall be elected each year at the
annual meeting of shareholders. Each director shall hold office until the
expiration of the term for which he or she is elected and until his or her
successor has been elected and qualified, or until his or her earlier
resignation, removal from office, death, or incapacity.
SECTION 4.5 Vacancies. Vacancies in the Board, including those created by an
increase in the number of directors or by removal, may be filled by a majority
of the directors then in office, even if less than a quorum, or by a sole
remaining director. Any director elected to fill any vacancy shall be elected
for the unexpired term of his or her predecessor.
SECTION 4.6 Meetings and Notice. An annual meeting of the Board may be held
at the place of and immediately following the annual meeting of shareholders,
and no notice of such meeting shall be required. Other regular meetings of the
Board may be held without notice at such place, date, and hour as the Board may
fix by resolution. Special meetings of the Board may be called by the President,
any two (2) directors, or such other persons as are specifically permitted by
the Corporation Act to call special meetings of directors. Notice of the place,
date, and hour of each special meeting (i) shall be mailed to each director,
addressed to his or her residence or usual place of business, at least three (3)
business days before the meeting or (ii) shall have been sent to him or her at
such place by telegram or cable, or received by him or her in person or by
telephone or fax, at least twenty-four (24) hours before the meeting. Except as
otherwise expressly required by the Act, the Articles, or these Bylaws, notices
of meetings need not describe the purposes of or business to be transacted at
the meeting. Notice of any meeting of the Board need not be given to any
director who is present at such meeting or who signs a written waiver of notice,
either before or after the meeting. Notice of adjournment of any meeting need
not be given if the time and place to which it is adjourned are fixed and
announced at such meeting. Notwithstanding any provision of these Bylaws,
defects in the calling or notice of a meeting of directors shall be deemed
waived to the extent provided by the Act.
SECTION 4.7 Quorum; Voting. At each meeting of the Board, a majority of the
directors then in office shall constitute a quorum for the transaction of
business. Except as otherwise provided by the Corporation Act, the Articles, or
these Bylaws, the vote of a majority of the directors present shall constitute
the act of the Board.
SECTION 4.8 Conduct of Meetings. The Board may designate a chairman to
preside at meetings of directors and may otherwise adopt rules governing the
conduct of such meetings. At each such meeting the Secretary (or, in the absence
of the Secretary, another person designated by the chairman of the meeting)
shall keep minutes of all actions taken by the directors. Such minutes shall be
filed with the Clerk as part of the corporate records.
<PAGE>
SECTION 4.9 Committees. By resolution adopted by a majority of the directors
then in office, the Board may designate from among its members one or more
committees, each consisting of two (2) or more directors. The Board may delegate
to any such committee all or any portion of the authority of the Board, except
to the extent prohibited by the Corporation Act. Each committee shall keep
regular minutes of its meetings and shall report its actions to the Board when
so requested.
SECTION 4.10 Telephonic Meetings. Members of the Board or any committee
thereof may participate in a meeting of the Board or such committee by means of
a conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other. Participation in a
meeting pursuant to this section shall constitute presence in person at such
meeting.
SECTION 4.11 Consent of Directors. Any action required or permitted to be
taken at a meeting of the Board or of any committee thereof may be taken without
a meeting if written consents, setting forth the action taken, are signed (at
any time before or after the intended effective date of such action) by all
members of the Board or committee, as the case may be. Such consents shall be
filed with the Clerk as part of the corporate records.
SECTION 4.12 Compensation of Directors. Directors shall receive reasonable
compensation for their services, which compensation shall be from time to time
determined by the Board. Directors may be reimbursed for reasonable expenses
incurred in the performance of their duties.
ARTICLE V
OFFICERS
SECTION 5.1 Officers. The Board shall elect a President, Secretary,
Treasurer, and Clerk of the Corporation and such other officers as the Board
from time to time deems appropriate (including without limitation one or more
Vice Presidents). Any two or more offices may be held by the same person.
SECTION 5.2 Term of Office; Removal. Officers other than the Clerk shall hold
office until the next annual meeting of the Board and until their successors are
chosen and have qualified, or until their earlier resignation or removal from
office. All officers serve at the pleasure of the Board and may be removed at
any time by the Board, with or without cause. Removal from office, however
effected, shall not prejudice the contract rights, if any, of the officer
removed, nor shall election or appointment of an officer of itself create
contract rights.
<PAGE>
SECTION 5.3 Resignations. Any officer may resign by giving written notice to
the President or Clerk. Unless otherwise specified therein, a resignation shall
take effect upon receipt of such notice, and the acceptance of such resignation
shall not be necessary to make it effective.
SECTION 5.4 Vacancies. A vacancy in any office, however occurring, shall be
filled in the manner prescribed by these Bylaws for regular election or
appointment to such office.
SECTION 5.5 Powers and Duties. Except as hereinafter provided and subject to
the control of the Board, each officer shall have such powers and duties as are
customarily incident to his or her office or as the Board may otherwise
prescribe.
(a) President. The President shall be the chief executive officer of
the Corporation, shall preside at all meetings of shareholders and (unless the
Board shall have otherwise appointed a chairman) all meetings of the Board,
shall supervise and direct all officers of the Corporation, and shall see that
all orders and resolutions of the Board are carried into effect. The President
shall have authority to appoint and remove agents and employees and to prescribe
their powers and duties and may authorize any other officer or officers to do
so. He or she shall have authority to institute or defend legal proceedings
whenever the directors or shareholders are deadlocked.
(b) Vice President. The Board may elect one or more Vice Presidents,
who shall have such powers and duties as the Board shall designate. In the
absence or disability of the President, the Vice President (or, in case there
shall be more than one, the Vice Presidents in such order as the Board shall
designate) shall perform the duties and exercise the powers of the President.
(c) Secretary. The Secretary shall attend meetings of the Board and
record its proceedings. He or she may give, or cause to be given, notice of all
meetings of shareholders and directors of the Corporation. The Secretary may
certify all votes, resolutions, and actions of the shareholders, the Board, and
committees of the Board, and may attest all documents executed on behalf of the
Corporation.
(d) Treasurer. The Treasurer shall have charge of, and be responsible
for, all funds and securities of the Corporation, shall maintain full and
accurate accounts of the Corporation's disbursements and receipts, shall report
to the Board from time to time on the financial condition of the Corporation,
and shall otherwise exercise the powers and perform the duties incident to the
office of Treasurer. The Treasurer may certify or attest documents executed on
behalf of the Corporation.
(e) Clerk. As required by the Corporation Act, the Corporation shall
have and continuously maintain a Clerk, who shall be a resident of the State.
The office of Clerk shall be ministerial in nature, and the Clerk, in his or her
capacity as such, shall have no authority to engage in any policymaking function
on behalf of the Corporation, or to enter into contracts or incur debts on
behalf of the Corporation. The Clerk shall keep the stock transfer books and
records of the meetings of shareholders and directors, and shall perform such
other duties as are expressly prescribed by law. The Clerk may certify all
votes, resolutions, and actions of the shareholders, the Board, and committees
of the Board, and may attest all documents executed on behalf of the
Corporation.
<PAGE>
(f) Assistant Officers. Assistant Secretaries, Assistant Treasurers,
and Assistant Clerks shall perform such duties as from time to time may be
assigned to them by the Board or by (respectively) the Secretary, the Treasurer,
or the Clerk. At the request of the Secretary, Treasurer, or Clerk, or in case
of his or her absence or inability to act, any Assistant Secretary, Assistant
Treasurer, or Assistant Clerk (respectively) may act in his or her place.
SECTION 5.6 Compensation. The Board or a duly authorized committee thereof
may fix the compensation of each officer.
ARTICLE VI
INDEMNIFICATION
SECTION 6.1 Mandatory Indemnification of Directors and Officers. Except the
extent expressly prohibited by law or by the Articles or these Bylaws, the
Corporation shall in all cases indemnify any existing or former director or
officer of the Corporation who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action, suit, or other
proceeding, whether civil, criminal, administrative, or investigative, by reason
of the fact that he or she is or was a director, officer, employee, or agent of
the Corporation or is or was serving at the request of the Board as a director,
officer, trustee, partner, manager, fiduciary, employee, or agent of another
corporation, partnership, limited liability company, joint venture, trust,
pension or other employee benefit plan, or other enterprise, or by reason of his
or her conduct in any such capacity, against expenses (including, without
limitation, costs of investigation and attorneys' fees, judgments, fines,
penalties, and amounts paid in settlement) actually and reasonably incurred by
him or her in connection with such action, suit, or proceeding. Provided,
however, that indemnification shall not be mandatory in respect of (i) any
action or claim by such person against the Corporation, or against one or more
directors or officers of the Corporation in their capacities as such, or (ii)
any action or claim by or in the right of the Corporation against such person if
such action or claim was approved, prior to the filing thereof, by the
affirmative vote of at least two-thirds of the directors of the Corporation then
in office.
<PAGE>
SECTION 6.2 Permissive Indemnification. Except to the extent that
indemnification is mandatory under Section 6.1 above, the Corporation may, but
shall not be required to, indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or other proceeding, whether civil, criminal, administrative, or
investigative, by reason of the fact that he or she is or was a director,
officer, employee, or agent of the Corporation or is or was serving at the
request of the Corporation as a director, officer, trustee, employee, partner,
manager, fiduciary, or agent of another corporation, partnership, limited
liability company, joint venture, trust, pension or other employee benefit plan,
or other enterprise, or by reason of his or her conduct in any such capacity,
against expenses (including, without limitation, costs of investigation and
attorneys' fees, judgments, fines, penalties, and amounts paid in settlement)
actually and reasonably incurred by him or her in connection with such action,
suit, or proceeding. Such indemnification shall be subject to any restrictions
imposed by applicable law or by the Board in its discretion.
SECTION 6.3 Advance Payment of Expenses. (a) With respect to any claim for
which indemnification is mandatory under Section 6.1 above, all expenses
reasonably incurred by any existing or former director or officer in connection
with such claim shall promptly be paid by the Corporation, even in advance of
the final disposition of the action, suit, or proceeding in which such claim is
asserted or threatened.
(b) With respect to any claim for which indemnification is permitted
under Section 6.2 above but not mandatory under Section 6.1, expenses reasonably
incurred by a person in connection with such claim may, in the discretion of the
Board, be paid by the Corporation in advance of the final disposition of the
action, suit, or proceeding in which such claim is asserted or threatened. The
Board, in its sole discretion, may impose such conditions as it deems
appropriate on any advance payment of expenses under this paragraph (b).
(c) Notwithstanding paragraphs (a) and (b) of this Section, no
advance payment of Expenses shall be made hereunder unless the Corporation shall
be in receipt of:
(i) A written undertaking by or on behalf of the indemnified
person to repay that amount if such person is finally
adjudicated not to be entitled to indemnification by the
Corporation; and
(ii) A written affirmation by the indemnified person that he or she
(a) acted honestly and in the reasonable belief that his or
her action was in or not opposed to the best interests of the
Corporation or its shareholders (or, in the case of a person
serving as a fiduciary of an employee benefit plan or trust,
in or not opposed to the best interests of that plan or trust
or its participants or beneficiaries) and (b) with respect to
any criminal action or proceeding, that he or she did not have
reasonable cause to believe that his or her conduct was
unlawful.
The undertaking required by clause (i) of this paragraph (c) shall be an
unlimited general obligation of the person seeking the advance, but (except to
the extent otherwise provided by the Board pursuant to paragraph (b) of this
Section) shall not be secured and shall be accepted without reference to
financial ability to make the repayment.
SECTION 6.4 Nonexclusive Remedy; Benefit. The rights provided by this Article
shall not be deemed exclusive of any other right of indemnification or payment
provided by contract, the Articles, vote of shareholders or directors, or
otherwise. Any right of indemnity or payment arising under this Article shall
continue as to a person who has ceased to hold the office or position in which
such right arose; shall inure to the benefit of his or her heirs, executors, and
administrators; and shall survive any subsequent amendment of this Article.
<PAGE>
SECTION 6.5 Insurance. The Corporation may purchase and maintain insurance on
behalf of itself and any person who is or was a director, officer, employee, or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, trustee, partner, manager, fiduciary, employee, or agent
of another corporation, partnership, limited liability company, joint venture,
trust, pension or other employee benefit plan, or other enterprise, against any
liability asserted against such person and incurred by him or her in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under the
Corporation Act.
ARTICLE VII
CONTRACTS, BANK ACCOUNTS, ETC.
SECTION 7.1 Execution of Documents. Except as limited by law, the Articles,
or these Bylaws, and unless otherwise expressly provided by any resolution of
the Board, the President, acting singly, shall have authority to execute and
deliver, in the name and on behalf of the Corporation, any contract, bill, note,
check, deed, mortgage, bill of sale, or other instrument.
SECTION 7.2 Bank Accounts. Unless otherwise expressly provided by any
resolution of the Board, the President or Treasurer, acting singly, may open,
close, and maintain deposit, checking, money market, and similar accounts with
banks, trust companies, and other depositories in the name of the Corporation
and may purchase and sell certificates of deposit and similar instruments on
behalf of the Corporation. The Board may make such special rules and regulations
with respect to such activities as it deems expedient.
SECTION 7.3 Authority to Vote Shares. Unless otherwise provided by resolution
of the Board, the President, any Vice President, the Secretary, and the
Treasurer (in that order) shall have authority to vote (either in person or by
proxy) any shares of other corporations standing in the name of the Corporation.
ARTICLE VIII
CAPITAL STOCK; CERTIFICATES
SECTION 8.1 Issuance of Shares. No officer shall have authority to cause the
Corporation to issue, or to agree to issue, any shares of the Corporation, any
rights or options to acquire such shares, or any instruments or indebtedness
convertible into such shares, without the express authorization of the Board,
which authorization shall be limited to transactions or classes of transactions
specified by the Board.
<PAGE>
SECTION 8.2 Share Certificates. Each shareholder, upon payment in full for
his or her shares, shall be entitled to a certificate certifying the number of
shares owned by him or her in the Corporation. No certificate shall be issued
for any share until such share is fully paid. Each such certificate shall be
signed in the name of the Corporation by any two officers of the Corporation. If
countersigned by the Clerk, a transfer agent, or any assistant transfer agent,
or if registered by a registrar, any other signature on the certificate may be a
facsimile. Share certificates of the Corporation shall conform to all
requirements imposed thereon by the Corporation Act or these Bylaws and shall
bear such legends, if any, as the Clerk shall consider appropriate to reflect
applicable restrictions on transfer.
SECTION 8.3 Lost Certificates. The Board may direct that a new certificate be
issued in place of any certificate previously issued by the Corporation and
alleged to have been lost, stolen, or destroyed, upon the making of an affidavit
of that fact by the record or beneficial owner of such certificate. The Board
may require such owner, or his or her legal representative, to give the
Corporation a bond or otherwise to indemnify the Corporation against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost, stolen, or destroyed.
SECTION 8.4 Stock Transfer Procedures. Each transfer of shares of stock of
the Corporation shall be made only on the stock transfer books of the
Corporation and only by the record holder thereof, or by his or her duly
authorized attorney-in-fact, upon surrender of the certificate or certificates
of such shares properly endorsed and the payment of all taxes thereon. The
person in whose name shares of stock stand on the stock transfer books of the
Corporation shall be deemed the owner thereof for all purposes as regards the
Corporation, and the Corporation shall not be bound to recognize any equitable
or other claim to or interest in such shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by law; provided that whenever any transfer of shares is made
for collateral security and not absolutely, such fact shall be so expressed in
the entry of transfer if so requested by a written notice to the Clerk which has
been executed by both the transferor and transferee.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 Fiscal Year. The fiscal year of the Corporation shall end on
December 31 of each year, except as otherwise fixed by resolution of the Board.
SECTION 9.2 Corporate Seal. The Corporation may have a seal in such form as
the Board or the Clerk may approve. Whenever it is inconvenient to use the
corporate seal, a facsimile thereof may be used. Any officer of the Corporation
shall have authority to affix the corporate seal, and it may be attested by his
or her signature.
<PAGE>
SECTION 9.3 Facsimile Signatures. Facsimile signatures of any officer of the
Corporation may be used whenever authorized by the Board or the President. The
Corporation may rely upon the facsimile signature of any person if delivered by
or on behalf of such person in a manner evidencing an intention to permit such
reliance.
SECTION 9.4 Inspection of Records. Except as otherwise required by law, the
President and the Board shall have authority to determine the extent to which,
and the manner in which, books and records of account, minutes of meetings,
shareholder lists, and other documents of the Corporation shall be open to
inspection by shareholders. Any such right of inspection shall be subject to
such reasonable confidentiality restrictions as the President or the Board deems
appropriate to protect the Corporation and its business.
SECTION 9.5 Amendment of Bylaws. Except as the Articles or these Bylaws
otherwise provide, these Bylaws may be amended or repealed, and new Bylaws may
be adopted, by vote of the shareholders or the Board. For any meeting at which
Bylaws are to be adopted, amended, or repealed, specific notice of such proposed
action shall be given, either setting out the text of the proposed new or
amended Bylaw or Bylaw to be repealed, or summarizing the changes to be effected
by such adoption, amendment, or repeal.
SECTION 9.6 Interpretation. Headings and captions used herein are inserted
for convenience only and shall not be used to construe the scope or content of
any provision. Whenever used herein, the masculine gender shall include the
feminine and neuter genders, as the context requires. In the case of any
conflict between the provisions of the Articles and these Bylaws, the Articles
shall control. In the case of any ambiguity or other question concerning
interpretation of these Bylaws, the good faith interpretation of the Board shall
be binding on the Corporation and its shareholders.
Exhibit 10.12
CONFIDENTIAL SETTLEMENT AGREEMENT AND COVENANT NOT TO SUE
This Settlement Agreement ("Agreement") is effective this 25th day of
August, 1998 and is entered into by and between Hasstech, Inc., having a place
of business at 6985 Flanders Drive, San Diego, California 92121 (hereinafter
"Hasstech"), and Intelligent Controls, Inc., having a place of business at 74
Industrial Park Road, Saco, Maine 04072 (hereinafter "INCON").
Hasstech and INCON (collectively the "Parties") intend that this Agreement
shall be the full and final settlement of all claims described herein. In mutual
consideration of such settlement and release of all claims relating to all the
matters in the below referenced case, the Parties agree as follows:
I. BACKGROUND
1. This dispute involves Hasstech's U.S. Patent No. 5,072,621 entitled
PIPELINE LEAK DETECTOR APPARATUS AND METHOD (hereafter the "621 Patent"). On
October 24, 1997, Hasstech commenced a civil action against INCON in the United
States District Court for the Southern District of California, Civil Action No.
97 CV 1916B (hereinafter "the Action"), in which Hasstech sought an injunction
and damages for willful infringement of the "621 Patent" by INCON's manufacture,
use, offer for sale and sale of its TS-LLD Electronic Line Leak Detector
products.
2. In its Answer to the Complaint in the Action, INCON counterclaimed
for a declaratory judgment of non-infringement and invalidity of the "621
Patent".
3. The Parties are desirous of resolving the Action at this time, and
to thereby avoid the expenditure of additional time, effort and money required
in protracted litigation.
<PAGE>
II. SETTLEMENT PROVISIONS
4. INCON represents and warrants that all of its electronic line leak
detector products are sold under the TS-LLD designation, and the parties agree
that the TS-LLD products are the only INCON products at issue in the present
litigation. As used herein, "INCON Products" will mean the existing TS-LLD
electronic line leak detectors which are the subject of the Action, and nay
modifications, improvements of future versions of such products, whether sold
under the TS-LLD designation or any other designation.
5. For the purposes of this Agreement, an "OEM" shall mean any entity
which integrates line leak detectors into a dispensing, tank monitoring, and/or
line monitoring assembly for sale as a remote detector system, whether private
labeled or not. For clarity, but not intended to provide an exclusive listing of
all OEM's, the term OEM shall include EBW, Environ, PetroVend, AZI, FE Petro and
Red Jacket. Hasstech represents and warrants that it is not aware of any current
INCON customers or distributors that would fall under the OEM definition or
which would be considered an OEM customer hereunder.
6. As part of the consideration hereunder, INCON shall pay to Hasstech
the total sum of One Hundred Thousand Dollars ($1000,000.00), with Fifty
Thousand Dollars ($50,000.00) of that total being due immediately upon execution
of this Agreement, and the remaining of Fifty Thousand Dollars ($50,000.00) due
on or before February 15, 1999 (the "Second Installment"). All such payments to
be made to Hasstech, Inc., by certified check, direct wire transfer, or as
otherwise agreed by the Parties.
<PAGE>
In order to provide additional security to Hasstech for the timely
payment of the Second Installment, and presuming there has been no breach of any
material obligation of this Agreement by Hasstech, INCON hereby separately
promises that the Stipulation of Dismissal submitted by the parties and Ordered
by the Court herein shall include the stipulated authority of the Court, and
particularly Magistrate Judge Stiven, to impose penalties and interest for
non-payment of late payment thereof.
7. INCON further agrees that, for a period of two years from the date
of its execution of this Agreement, it shall not solicit sales or otherwise make
sales of INCON Products, directly or indirectly through any subsidiary,
affiliated or other entity over whom INCON has control or in which INCON has any
ownership interest or profit sharing arrangement, to Hasstech's current Original
Equipment Manufacturer (OEM) customer AZI.
8. INCON further agrees that if it sells, directly or indirectly as
described in Paragraph 7, INCON Products to any OEM customer prior to the
earlier of June 25, 2010 or the expiration date of the "621 Patent", it will pay
to Hasstech additional sums equal to Three Percent (3%) of net sales of any and
all such INCON Products sold to such OEM customers as further compensation
hereunder. Net sales shall be calculated on the basis of only the electronic
line leak detector component of any such INCON Products, and shall be
apportioned when necessary so as not to include any ancillary system components.
In order for the parties to police this provision, INCON agrees to report in
writing to Hasstech on each anniversary of the Agreement if it has sold no INCON
Products to OEM accounts, and will provide quarterly written reports and
payments within 30 days of the end of each calendar quarter in which any INCON
Product has been sold directly or indirectly to an OEM account. Hasstech shall
have the right to audit, at Hasstech's own expense, via independent auditors
subject to confidentiality and nondisclosure agreements, INCON's records should
it have a reasonable concern that payments are due under this section and/or
that payments or records provided by INCON are incomplete, inaccurate or
missing. Any such audit shall be conducted during normal business hours and no
more than once annually unless Hasstech provides evidence of problematic
payments which justify additional auditing.
9. It is agreed that INCON's obligation to pay additional fees under
Paragraph 8 hereof shall cease if a final determination of invalidity or
unenforceability of the "621 Patent" is rendered and no appeal is made or no
further appeal can be made from such decision, although there will be no refund
or any payments already made or payable hereunder prior to that time.
<PAGE>
10. During the Term of this Agreement, INCON agrees not to contest or
otherwise challenge the existence, validity, enforceability or scope of the "621
Patent" including specifically taking part in any reexamination, or assisting
others in doing so in any way or in any forum, except as required under the law
and upon prior notice to Hasstech. Notwithstanding the foregoing, INCON shall
have the right to challenge the existence, validity, enforceability, or scope of
the "621 Patent" as a defense to any charge of infringement under that patent or
in connection with any dispute that might arise under the patent as to products
other than the INCON Products.
11. As consideration hereunder, Hasstech grants to INCON a covenant not
to sue under the "621 Patent" with the respect to the INCON Products, INCON,
and/or its customers, insurers or successors in interest, officers, directors,
employees, and/or agents thereof, for making, using, offering for sale, and/or
selling and for having made, used, sold, and/or offered for sale, any invention
described or claimed in the "621 Patent".
12. This Agreement, including the covenant not to sue with respect to
the INCON Products, is not transferrable by INCON except to a successor of the
business or assets to which the INCON Products pertain. INCON agrees to notify
Hasstech of any such sale of the business, and to insure that any purchaser
specifically agrees to be bound by all of the obligations and provisions hereof.
It is also understood that no such sale shall operate to expand the scope of the
covenant not to sue, and that such covenant shall in no circumstances extend to
or cover any third party products.
13. The parties agree that upon execution of this Agreement, payment as
provided for in paragraph 6 hereof, they will execute and file the attached
Stipulation of Dismissal with Prejudice to resolve the Action.
14. Hasstech hereby represents and warrants that it has the exclusive
right to grant the present covenant not to sue under the "621 Patent, and that
it controls all rights to bring suit for any and all infringements of the "621
Patent" which have occurred since the issue date of the "621 Patent" or which
may occur at any time. Hasstech further represents and warrants that it has not
transferred or assigned and will not, except as part of the sale of the business
or assets which pertain to its rights under the "621 Patent", transfer or assign
any claim whatsoever against INCON and/or its customer, insurers or successors
in interest including officers, directors, employees, and agents thereof in
regard to the "621 Patent". Hasstech agrees to notify INCON of any such sale of
the business, and to insure that nay purchaser specifically agrees to be bound
by all of the obligations and provisions hereof. Hasstech further represents and
warrants that it neither owns nor has rights under any patents or patent
applications worldwide, other than the "621 Patent", that would be infringed by
the TS-LLD Electronic Line Leak Detectors.
<PAGE>
15. The obligations, terms and provisions of this Agreement shall be
maintained as CONFIDENTIAL by the parties, and no public announcements or other
discussions or descriptions of this arrangement shall be made other than
reference to the Stipulated Dismissal and/or a statement that "the parties have
amicably resolved the dispute in the form of a confidential settlement
arrangement, terms of which cannot be discussed". Should either party have a
legal need to issue any additional statement concerning this matter (including,
for example, annual reports or other SEC filings and any press releases related
to such filings), it is agreed that the exact text and particulars of the
disclosure will be provided to the other party in advance.
16. Nothing in this Agreement shall be construed as either an admission
by INCON of any liability, or as an admission by INCON of infringement, or as an
admission by INCON that any allegation of any pleading by Hasstech in the Action
is true. It is specifically understood by the Parties that the payment of
consideration herein does not constitute an admission of any wrongdoing by INCON
and/or its customers or insurers, including officers, directors, employees and
agents thereof. Similarly, nothing in this Agreement shall be construed as
either an admission by Hasstech of no liability of INCON, or as an admission by
Hasstech of noninfringement, or as an admission by Hasstech that any allegation
of any pleading by INCON in the Action is true.
17. The Parties hereby completely release and forever discharge each
other and their respective officers, directors, agents, employees, attorney,
insurers, successors, and assigns, from all claims, rights, demands, actions,
obligations, liabilities and cause of action of any and every kind, nature or
character, known or unknown, that they may now have or have ever had arising
form, or in any way related to, the Action or any fact, transaction event,
occurrence, act, failure to act, omission, misrepresentation, or other matter
alleged, referenced underlying, or that could or might have been alleged in the
Action or that arises out of settlement of the Action from the beginning of time
to and including the effective date hereof.
18. The preceding section is a full and final release covering all
known as well as unknown and unanticipated injuries, debts, claims or damages
for events, transactions or occurrences prior to the date of this Settlement
Agreement that arose from or are in any way related to the Action. With respect
to unknown claims related to the Action, the Parties expressly waive any and all
rights or benefits they may now have, or in the future may have, under any law
relating to the release of unknown claims, including without limitation Section
1542 of the California Civil Code, which provides:
<PAGE>
A general release does not extend to claims which the creditor
does not know or suspect to exist in its favor at the time of
executing the release, which if known by him must have
materially affected his settlement with the debtor.
19. All notices shall be sent to the Parties at the addresses first
written above. If sent to Hasstech, attention Mr. Jonathan Young, or other agent
of Hasstech as he shall so appoint; if to INCON, attention to Mr. Roger Brooks,
or other agent of INCON as he shall so appoint.
20. This agreement shall be governed by and interpreted in accordance
with the laws of the State of California.
21. This Agreement represents the complete and entire agreement and
understanding of the Parties, and there are no other agreements, warranties,
inducements, promises, obligations, representations or understandings, oral or
otherwise, relating to the subject matter hereof. This Agreement cannot be
modified or otherwise changed except by further written agreement of the
Parties.
22. The Parties agree that the representation and warranties made by
them in this Agreement shall be true as to the date of execution of the
Agreement with the same effect as tough made on such date.
23. Each Party shall bear its own costs and attorneys' fees in this
matter.
24. This Agreement may be executed with one or more separate
counterparts and by mail or facsimile, each of which when so executed, shall
together constitute and be one and the same instrument.
The undersigned warrant that they have full authority to enter into
this Agreement and by their signatures bind the party on whose behalf they have
signed and its respective successors and assigns to the terms of this Agreement.
IN WITNESS WHEREOF, The Parties hereto intending to be bound hereby
cause this Agreement to be duly executed by their duly appointed officers on the
dates set forth below.
Intelligent Controls, Inc. Hasstech, Inc.
By: /s/ ROGER E. BROOKS By: /s/ JONATHAN YOUNG
---------------------------- ----------------------------
Roger E. Brooks Jonathan Young
Title: President & CEO Title: President
------------------------- --------------------------
Date: 9/3/98 Date: August 31, 1998
-------------------------- --------------------------
Exhibit 10.15C
LEASE EXTENSION AGREEMENT
AGREEMENT made this 4TH DAY of January, 1999 between APOLLO DEVELOPMENT
CORP. ("Landlord") and INTELLIGENT CONTROLS, INC. ("Tenant")
WHEREAS the parties have a lease between them currently in force,
covering property in the Saco, Maine Industrial Park, which lease is dated April
11, 1991, with a lease extension agreement dated March 27, 1998, with a
termination date of August 15, 1999, and
WHEREAS the parties desire to extend the term of said lease, as set
forth herein,
NOW THEREFORE in consideration of the mutual promises herein made, the
parties agree that the termination date of said lease shall be extended to
October 31, 2000. During the extension period the rent shall be $5,590.00 per
month, payable monthly in advance.
The period for exercise of the option to purchase the leased property
(set forth in paragraph 20 of said original lease) is also extended to the new
lease termination date of October 31, 2000. The 2% increase factor in the option
purchase price shall be computed over the entire period (including the extension
term) as applicable.
In all other respects the lease terms are ratified and confirmed.
Executed at Saco, Maine, on the above date.
Witnessed by: APOLLO DEVLEOPMENT CORP.
/s/ SHARON BINETTE by: /s/ CLIFFORD A. PURVIS
- -------------------------- ---------------------------
Its Treasurer Landlord
INTELLIGENT CONTROLS, INC.
/s/SHARON BINETTE by: /s/ ROGER E. BROOKS
- -------------------------- --------------------------
Its President Tenant
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
INCON International, Inc. a Maine corporation
INCON International FSC, Inc. a Barbados corporation
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Intelligent Controls, Inc. on Form S-8 of our report dated February 5, 1999, on
our audits of the financial statements of Intelligent Controls, Inc. as of
December 26, 1998 and December 27, 1997, and for the years then ended, which
report is included in this Annual Report on Form 10-KSB.
/s/ PRICEWATERHOUSECOOPERS L.L.P.
- ---------------------------------------
Portland, Maine
March 26, 1999
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<NAME> INTELLIGENT CONTROLS INC.
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